SAN 20-F DEF-14A Report Dec. 31, 2009 | Alphaminr
Banco Santander, S.A.
ALPHAMINR

SAN 20-F Report ended Dec. 31, 2009

Balance Sheet
Cash Flow
Income Statement
Debt
20-F 1 c02105e20vf.htm FORM 20-F Form 20-F
Table of Contents

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
o 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 þ No o
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 o No þ
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 þ No o
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 o No o
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 þ Accelerated filer o Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP o International Financial Reporting Standards as issued by the International Accounting Standards Board þ Other o
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 o Item 18 þ
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 o No þ
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.
8,228,826,135 shares

Table of Contents

BANCO SANTANDER, S.A.
TABLE OF CONTENTS
Page
3
4
6
6
6
6
10
10
11
18
18
30
86
86
86
86
92
122
123
123
124
125
126
128
128
136
157
165
167
168
168
169
170

Table of Contents

Page
170
170
178
179
179
181
181
186
186
186
186
186
186
195
195
196
200
200
201
201
202
202
202
204
205
207
235
241
243
244
247
248

Table of Contents

Page
275
275
275
275
275
277
277
277
280
280
280
281
282
282
282
282
286
286
286
Exhibit 1.1
Exhibit 1.2
Exhibit 4.1
Exhibit 12.1
Exhibit 12.2
Exhibit 12.3
Exhibit 13.1
Exhibit 15.1

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, 2009 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 for the periods subsequent to 2005. Therefore, we assert that the financial information contained in this annual report on Form 20-F complies with IFRS-IASB.
IFRS 8, Operating Segments, came into force in 2009, replacing IAS 14, and implemented a new approach to the financial reporting for business segments. Pursuant to IFRS 8, the segment information must be presented in the same format as that information is used internally by management to assess the performance of such segments and to allocate resources among them. Pursuant to IFRS 8, segment information for prior years that is reported as comparative information, must be restated in the initial year of application. Therefore, segment income statements for the years 2008 and 2007 contained herein differ from those presented in our previous annual reports on Form 20-F.
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. 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, 2009, 2008 and 2007 in accordance with IFRS-IASB. See page F-1 to our consolidated financial statements for the 2009, 2008 and 2007 report prepared by Deloitte, S.L.

3

Table of Contents

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 1,000 million.
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.
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 general allowance for credit losses including any allowances for country-risk. See “Item 4. Information on the Company—B. Business Overview—Classified Assets—Bank of Spain 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.
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,” “DCaR,” “ACaR,” “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 Market Risk” 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.
You should understand that adverse changes in 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:

4

Table of Contents

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 United Kingdom, the United States, other European countries, Latin America and the other areas in which we have significant business activities or investments;
•
the sovereign debt rating for Spain and the other countries where we operate;
•
continued deterioration in the global economy or in the economies of Spain, the United Kingdom, other European countries, Latin America, and the United States, and continued volatility in the capital markets;
•
the effects of a continued decline in real estate prices, particularly in Spain, the UK and the US;
•
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/DCaR/ACaR 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 US;
•
changes in Spanish, UK, EU, Latin American, US or foreign laws, regulations or taxes, 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
•
technical difficulties and the development and use of new technologies by us and our competitors;
•
the occurrence of force majeure, such as natural disasters, that impact our operations or impair the asset quality of our loan portfolio;
•
the impact of changes in the composition of our balance sheet on future net interest income; and
•
potential losses associated with an increase in the level of substandard loans or non-performance by counterparties to other types of financial instruments.
The forward-looking statements contained in this annual report speak only as of the date of this annual 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.

5

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. Auditor
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 Form 20-F, the audited financial statements for the years 2009, 2008 and 2007 are presented. The audited financial statements for 2006 and 2005 are not included in this document, but they can be found in our previous annual reports on Form 20-F. However, in annual reports on Form 20-F for years previous to 2008, the financial statements for 2005 were prepared under the EU-IFRS and Bank of Spain’s Circular 4/2004, and thus are not comparable to the financial data presented for that year in this Form 20-F.
Under IFRS-IASB, revenues and expenses of discontinued businesses 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).
In addition, our consolidated income statement for the year ended December 31, 2009 is not entirely comparable to the income statement for the year ended December 31, 2008 due to the fact that the income statement for the year ended December 31, 2009 reflects the impact of the consolidation of Banco Real, Alliance & Leicester, Bradford & Bingley, Sovereign (since February 2009) and the consumer businesses acquired.

6

Table of Contents

Year Ended December 31,
2009 2008 2007 2006 2005
(in thousands of euros, except percentages and per share data)
Interest and similar income
53,173,004 55,043,546 45,512,258 36,669,337 33,343,659
Interest expense and similar charges
(26,874,462 ) (37,505,084 ) (31,069,486 ) (24,879,598 ) (23,258,149 )
Interest income / (charges)
26,298,542 17,538,462 14,442,772 11,789,739 10,085,510
Income from equity instruments
436,474 552,757 419,997 412,554 335,257
Income from companies accounting for by the equity method
(520 ) 791,754 438,049 423,875 615,607
Fee and commission income
10,726,368 9,741,400 9,290,043 8,147,164 7,051,487
Fee and commission expense
(1,646,234 ) (1,475,105 ) (1,421,538 ) (1,251,132 ) (1,080,662 )
Gains/losses on financial assets and liabilities (net)
3,801,645 2,892,249 2,306,384 2,048,725 1,435,370
Exchange differences (net)
444,127 582,215 648,528 95,936 54,257
Other operating income
7,928,538 9,436,308 6,739,670 6,075,564 3,353,935
Other operating expenses
(7,784,621 ) (9,164,487 ) (6,449,120 ) (5,800,019 ) (3,025,586 )
Total income
40,204,319 30,895,553 26,414,785 21,942,406 18,825,175
Administrative expenses
(14,824,605 ) (11,665,857 ) (10,776,670 ) (9,783,902 ) (9,207,125 )
Personnel expenses
(8,450,283 ) (6,813,351 ) (6,434,343 ) (5,886,871 ) (5,542,192 )
Other general expenses
(6,374,322 ) (4,852,506 ) (4,342,327 ) (3,897,031 ) (3,664,933 )
Depreciation and amortization
(1,596,445 ) (1,239,590 ) (1,247,207 ) (1,130,159 ) (1,000,050 )
Provisions (net)
(1,792,123 ) (1,640,561 ) (895,552 ) (1,007,037 ) (1,791,355 )
Impairment losses on financial assets (net)
(11,578,322 ) (6,283,052 ) (3,430,122 ) (2,454,985 ) (1,913,890 )
Impairment losses on other assets (net)
(164,630 ) (1,049,226 ) (1,548,218 ) (20,066 ) (154,475 )
Gains/(loss) on disposal of assets not classified as non-current assets held for sale
1,565,013 101,156 1,810,428 348,199 1,373,508
Gains/(loss) on disposal of non-current assets held for sale not classified as discontinued operations
(1,225,407 ) 1,730,902 643,050 959,318 1,063,606
Operating profit/(loss) before tax
10,587,800 10,849,325 10,970,494 8,853,774 7,195,394
Income tax
(1,206,610 ) (1,836,052 ) (2,322,107 ) (2,255,585 ) (1,132,220 )
Profit from continuing operations
9,381,190 9,013,273 8,648,387 6,598,189 6,063,174
Profit/(loss) from discontinued operations (net)
30,870 319,141 987,763 1,647,564 490,275
Consolidated profit for the year
9,412,060 9,332,414 9,636,150 8,245,753 6,553,449
Profit attributable to the Parent
8,942,538 8,876,414 9,060,258 7,595,947 6,023,783
Profit attributable to minority interests
469,522 456,000 575,892 649,806 529,666
Per share information:
Average number of shares (thousands) (1)
8,554,224 7,271,470 6,801,899 6,701,728 6,693,400
Basic earnings per share (in euros)
1.0454 1.2207 1.3320 1.1334 0.9000
Basic earnings per share continuing operation (in euros)
1.0422 1.1780 1.2003 0.9233 0.8422
Diluted earnings per share (in euros)
1.0382 1.2133 1.3191 1.1277 0.8968
Diluted earnings per share continuing operation (in euros)
1.0350 1.1709 1.1887 0.9186 0.8393
Dividends paid (in euros) (2)
0.6000 0.6325 0.6068 0.4854 0.3883
Dividends paid (in US$) (2)
0.8644 0.8802 0.8932 0.6393 0.4581

7

Table of Contents

Year Ended December 31,
2009 2008 2007 2006 2005
(in thousands of euros, except percentages and per share data)
Total assets
1,110,529,458 1,049,631,550 912,914,971 833,872,715 809,961,664
Loans and advances to credit institutions (net) (3)
79,836,607 78,792,277 57,642,604 69,757,056 66,127,043
Loans and advances to customers (net) (3)
682,550,926 626,888,435 571,098,513 527,035,514 439,964,442
Investment Securities (net) (4)
173,990,918 124,673,342 132,035,268 136,760,433 203,938,360
Investments: Associates
164,473 1,323,453 15,689,127 5,006,109 3,031,482
Contingent liabilities (net)
59,256,076 65,323,194 76,216,585 58,769,309 48,453,575
Liabilities
Deposits from central banks and credit institutions (5)
142,091,587 129,877,370 112,897,308 113,038,061 148,624,811
Customer deposits (5)
506,976,237 420,229,450 355,406,519 330,947,770 305,631,794
Debt securities (5)
211,963,173 236,403,290 233,286,688 203,742,817 148,829,300
Capitalization
Guaranteed Subordinated debt excluding preferred securities and preferred shares (6)
13,866,889 15,747,915 16,742,134 11,186,480 8,973,699
Secured Subordinated debt
— — — — —
Other Subordinated debt
15,192,269 14,452,488 11,666,663 12,399,771 13,016,989
Preferred securities (6)
7,315,291 7,621,575 7,261,382 6,836,570 6,772,768
Preferred shares (6)
430,152 1,051,272 522,558 668,328 1,308,847
Minority interest (including net income of the period)
5,204,058 2,414,606 2,358,269 2,220,743 2,848,223
Stockholders’ equity (7)
68,666,584 57,586,886 55,199,882 44,851,559 40,334,064
Total capitalization
110,675,243 98,874,742 93,750,888 78,163,451 73,254,590
Stockholders’ Equity per Share (7)
8.03 7.92 8.12 6.69 6.03
Other managed funds
Mutual funds
105,216,486 90,305,714 119,210,503 119,838,418 109,480,095
Pension funds
11,309,649 11,127,918 11,952,437 29,450,103 28,619,183
Managed portfolio
18,364,168 17,289,448 19,814,340 17,835,031 14,746,329
Savings -insurance policies
9,422,386 12,338,405 9,008,968 6,384,994 15,145,607
Total other managed funds
144,312,689 131,061,485 159,986,248 173,508,546 167,991,214
Consolidated Ratios
Profitability Ratios:
Net Yield (8)
2.62 % 2.05 % 1.80 % 1.68 % 1.63 %
Return on average total assets (ROA)
0.86 % 1.00 % 1.10 % 1.01 % 0.89 %
Return on average stockholders’ equity (ROE)
13.90 % 17.07 % 21.91 % 21.39 % 18.84 %
Capital Ratio:
Average stockholders’ equity to average total assets
5.85 % 5.55 % 4.71 % 4.36 % 4.32 %
Ratio of earnings to fixed charges (9)
Excluding interest on deposits
2.01 % 1.57 % 1.67 % 1.78 % 1.75 %
Including interest on deposits
1.40 % 1.27 % 1.35 % 1.36 % 1.30 %
Credit Quality Data (excluding country risk)
Allowances for impaired balances (*) (excluding country risk)
18,497,070 12,862,981 9,302,230 8,626,937 7,047,475
Allowances for impaired balances (*) as a percentage of total loans and contingent liabilities
2.44 % 1.83 % 1.42 % 1.45 % 1.43 %
Impaired balances (*) (10)
24,553,624 14,190,813 6,178,655 4,607,547 4,341,500
Impaired balances (*) as a percentage of total loans and contingent liabilities
3.24 % 2.02 % 0.94 % 0.78 % 0.88 %
Allowances for impaired balances (*) as a percentage of impaired balances (*)
75.33 % 90.64 % 150.55 % 187.23 % 162.33 %
Balances (*) charged-off as a percentage of total loans and contingent liabilities
1.17 % 0.55 % 0.41 % 0.31 % 0.21 %

8

Table of Contents

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,
2009 2008 2007 2006 2005
(in thousands of euros)
Allowances refers to:
Allowances for impaired balances (*) (excluding country risk)
18,497,070 12,862,981 9,302,230 8,626,937 7,047,475
Allowances for contingent liabilities (excluding country risk)
(573,836 ) (603,372 ) (571,957 ) (541,519 ) (475,519 )
Allowances for Balances of Loans:
17,923,234 12,259,609 8,730,273 8,085,418 6,571,956
Allowances referred to country risk and other
142,120 641,192 157,851 293,032 409,969
Allowances for impaired balances (excluding contingent liabilities)
18,065,354 12,900,801 8,888,124 8,378,450 6,981,925
Of which:
Allowances for customers and Credit institutions and other financial assets:
17,898,632 12,719,623 8,796,371 8,288,128 6,901,925
Allowances for Customers
17,873,096 12,466,056 8,695,204 8,163,444 6,755,175
Allowances for Credit institutions and other financial assets
25,536 253,567 101,167 124,684 146,750
Allowances for investment securities
166,722 181,178 91,753 90,322 80,000
(*)
Balances of loans and contingent liabilities
(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 dividend of € 0.6508 per share to be paid out of our profits for 2008. In accordance with IAS 33, for comparative purposes, dividends per share paid, as disclosed in the table above, take into account the adjustment arising from the capital increase with pre-emptive subscription rights carried out in December 2008. As a result of this adjustment, the dividend per share for 2008 amounts to € 0.6325. The shareholders also approved a new remuneration scheme (scrip dividend), whereby the Bank offered the shareholders the possibility to opt to receive an amount equivalent to the second interim dividend on account of the 2009 financial year in cash or new shares. The dividend per share for 2009 disclosed above, € 0.60, is calculated assuming that the four dividends for the year were paid in cash.
(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 “Other 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)
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”.
(9)
For the purpose of calculating the ratio of earnings to fixed charges, earnings consist of income from continuing operations before taxation and minority interests plus fixed charges and after deduction of the unremitted pre-tax income of companies accounted for by the equity method. Fixed charges consist of total interest expense, including or excluding interest on deposits as appropriate, and the proportion of rental expense deemed representative of the interest factor. Fixed charges include dividends and interest paid on preferred shares.
(10)
Impaired loans reflect Bank of Spain classifications. Such 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 Classification Requirements”.

9

Table of Contents

Exchange Rates
Fluctuations in the exchange rate between euros and dollars have affected the dollar equivalent of the share prices on Spanish stock exchanges and, as a result, are likely to affect the dollar market price of our American Depositary Shares, or ADSs, in the United States. In addition, dividends paid to the depositary of the ADSs are denominated in euros and fluctuations in the exchange rate affect the dollar conversion by the depositary of cash dividends paid on the shares to the holders of the ADSs. Fluctuations in the exchange rate of euros against other currencies may also affect the euro value of our non-euro denominated assets, liabilities, earnings and expenses.
The following tables set forth, for the periods and dates indicated, certain information concerning the exchange rate for euros and dollars (expressed in dollars per euro), based on the Noon Buying Rate as announced by the Federal Reserve Bank of New York for the dates and periods indicated.
The New York Federal Reserve Bank announced its decision to discontinue the publication of foreign exchange rates on December 31, 2008. From that date, the exchange rates shown 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. ECB time.
Rate During Period
Period End Average Rate(1)
Calendar Period ($) ($)
2005
1.1842 1.2449
2006
1.3197 1.2661
2007
1.4603 1.3797
2008
1.3919 1.4695
2009
1.4406 1.3948
(1)
The average of the Noon Buying Rates for euros on the last day of each month during the period.
Rate During Period
Last six months High $ Low $
2009
December
1.5120 1.4276
2010
January
1.4563 1.3966
February
1.3984 1.3489
March
1.3765 1.3338
April
1.3615 1.3245
May
1.3238 1.2223
June (through June 4)
1.2268 1.2060
On June 4, 2010, the exchange rate for euros and dollars (expressed in dollars per euro), as published by the ECB, was $1.206.
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.
B. Capitalization and indebtedness
Not Applicable.
C. Reasons for the offer and use of proceeds
Not Applicable.

10

Table of Contents

D. Risk factors
Risks Relating to Our Operations
Since our loan portfolio is concentrated in Continental Europe, the United Kingdom and Latin America, adverse changes affecting the Continental European, the United Kingdom or certain Latin American economies 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, 2009, Continental Europe accounted for approximately 47% of our total loan portfolio (Spain accounted for 33% of our total loan portfolio), while the United Kingdom and Latin America accounted for 33% and 14%, respectively. Therefore, adverse changes affecting the economies of Continental Europe (in particular, Spain), the United Kingdom or the Latin American countries where 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.”
Some of our business is cyclical and our income may decrease when demand for certain products or services is in a down cycle.
The level of income we derive from certain of our products and services depends on the strength of the economies in the regions where we operate and certain market trends prevailing in those areas. Therefore, negative cycles may adversely affect our income in the future.
Our business could be affected if our capital is not managed effectively.
Effective management of our capital position is important to our ability to operate our business, to continue to grow organically and to pursue our strategy. Any future change that limits our ability to manage our balance sheet and capital resources effectively or to access funding on commercially acceptable terms could have a material adverse effect on our financial condition and regulatory capital position.
A sudden shortage of funds could increase our cost of funding and have an adverse effect on our liquidity and funding.
Historically, our principal source of funds has been customer deposits (demand, time and notice deposits). At December 31, 2009, 21.4% of these customer deposits were time deposits in amounts greater than $100,000. Total time deposits represented 46.8%, 48.8% and 48.9% of total customer deposits at the end of 2009, 2008 and 2007, respectively. Large-denomination time deposits may be a less stable source of deposits than other type of deposits. The loss of market liquidity, triggered by the deterioration of the US sub-prime credit market, affected the supply and cost of liquidity and funding. The effects of the downturn spread to the global economy, in particular to issuances in wholesale markets (principally asset-backed securities) and to availability of liquid resources via the interbank markets. Although recent months have seen an improvement in market conditions, there can be no assurance that we will not incur materially higher funding costs or be required to liquidate certain assets.
We are vulnerable to disruptions and volatility in the global financial markets as well as to government action intended to alleviate the effects of the financial crisis .
Commencing in August 2007, the global financial system 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. In September 2008, global financial markets deteriorated sharply following the bankruptcy filing by Lehman Brothers Holdings Inc. In the days that followed, it became apparent that a number of other major financial institutions, including some of the largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies, were experiencing significant difficulties.
Following the bankruptcy filing by Lehman Brothers Holdings Inc., there were runs on deposits at several financial institutions and numerous institutions sought additional capital. Central banks around the world coordinated efforts to increase liquidity in the financial markets by taking measures such as increasing the amounts they lend directly to financial institutions, lowering interest rates and significantly increasing temporary reciprocal currency arrangements (or “swap lines”).

11

Table of Contents

In an attempt to prevent the failure of the financial system, the United States and European governments intervened on an unprecedented scale. In the United States, the federal government took equity stakes in several financial institutions, implemented a program to guarantee the short-term and certain medium-term debt of financial institutions, increased consumer deposit guarantees, and brokered the acquisitions of certain struggling financial institutions, among other measures. In the United Kingdom, the government effectively nationalized some of the country’s largest banks, provided a preferred equity program open to all financial institutions and a program to guarantee short-term and certain medium-term debt of financial institutions, among other measures. In Spain, the government increased consumer deposit guarantees, made available a program to guarantee the debt of certain financial institutions, created a fund to purchase assets from financial institutions and the Spanish Ministry of Economy and Finance was authorized, on an exceptional basis and until December 31, 2009, to acquire, at the request of credit institutions resident in Spain, shares and other capital instruments (including preferred shares) issued by such institutions.
Despite the extent of the aforementioned intervention, global investor confidence remains cautious. In addition, the world’s largest developed economies, including the United States and United Kingdom, although improving in recent months, ended 2009 under economic recessions. In addition, recent downgrades of the sovereign debt of Greece, Portugal and Spain have caused volatility in the capital markets. 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, 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. Any such increase in capital markets funding costs or deposit rates would entail a repricing of loans, which would result in a reduction of volumes, and may also have an adverse effect on our interest margins. A further economic downturn, especially in Spain, the United Kingdom, other European countries, the United States and certain Latin American countries, could also result in a further reduction in business activity and a consequent loss of income for us.
Risks concerning borrower credit quality and general economic conditions are inherent in our business.
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in Spanish, United Kingdom, Latin American, United States or global economic conditions, or arising from systemic risks in the financial systems, could reduce the recoverability and value of our assets and require an increase in our level of allowances for credit losses. Deterioration in the economies in which we operate could reduce the profit margins for our banking and financial services businesses.
The financial problems faced by our customers could adversely affect us.
Market turmoil and economic recession, especially in Spain, the United Kingdom, the United States and certain Latin American countries, 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 the context of continued market turmoil, economic recession and increasing unemployment coupled with declining consumer spending, the value of assets collateralizing our secured loans, including homes and other real estate, could decline significantly, which could result in the impairment of the value of our loan assets. Moreover, in 2009 we experienced an increase in our non-performing ratios and a deterioration in asset quality as compared to 2008. 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.
We are exposed to risks faced by other financial institutions.
We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and 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. These liquidity concerns have had, and may continue to have, a chilling effect on inter-institutional financial transactions in general. 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. A default by a significant financial counterparty, or liquidity problems in the financial services industry in general, could have a material adverse effect on our business, financial condition and results of operations.

12

Table of Contents

Our exposure to Spanish and UK real estate markets makes us more vulnerable to adverse developments in these markets.
As mortgage loans are one of our principal assets, comprising 53% of our loan portfolio as of December 31, 2009, we are currently highly exposed to developments in real estate markets, especially in Spain and the United Kingdom. In addition, we currently have exposure to certain 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 experienced a similar 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 came to a halt in Spain and the United Kingdom, housing oversupply has persisted, unemployment has continued to increase, housing demand has continued to decrease and home prices have declined while mortgage delinquencies increased. As a result, our non-performing loan ratio increased from 0.94% at December 31, 2007, to 2.02% at December 31, 2008 and to 3.24% at December 31, 2009. 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.
Portions of our loan portfolio are subject to risks relating to force majeure and any such event could materially adversely affect our operating results.
Our financial and operating performance may be adversely affected by force majeure, 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 or could have an adverse impact on the economy of the affected region.
In particular, our operations in Chile were adversely affected by the 8.8 magnitude earthquake that struck central Chile on February 27, 2010. Certain government officials have stated publicly that the Chilean gross domestic product may decline by approximately 1.5% in 2010 as a result of the earthquake. In addition, the earthquake has adversely affected many of our corporate and retail customers. Although it is premature to assess the extent of the adverse effect of the recent earthquake on the Chilean economy, our customers and our loan portfolio, it is likely that these events will adversely affect the asset quality of our Chilean loan portfolio and our results of operations in Chile.
We may generate lower revenues from brokerage and other commission- and fee-based businesses.
Market downturns are likely to lead to declines in the volume of transactions that we execute for our customers and, therefore, to declines in our non-interest revenues. In addition, because the fees that we charge for managing our clients’ portfolios are in many cases based on the value or performance of those portfolios, a market downturn that reduces the value of the our clients’ portfolios or increases the amount of withdrawals would reduce the revenues we receive from our asset management and private banking and custody businesses.
Even in the absence of a market downturn, below-market performance by our mutual funds may result in increased withdrawals and reduced inflows, which would reduce the revenue we receive from our asset management business.
Market risks associated with fluctuations in bond and equity prices and other market factors are inherent in our business. Protracted market declines can reduce liquidity in the markets, making it harder to sell assets and leading to material losses.
The performance of financial markets may cause changes in the value of our investment and trading portfolios. In some of our business, protracted adverse market movements, particularly asset price decline, can reduce the level of activity in the market or reduce market liquidity. These developments can lead to material losses if we cannot close out deteriorating positions in a timely way. This may especially be the case for assets of the Group for which there are less liquid markets to begin with. Assets that are not traded on stock exchanges or other public trading markets, such as derivative contracts between banks, may have values that we calculate using models other than publicly quoted prices. Monitoring the deterioration of prices of assets like these is difficult and could lead to losses that we did not anticipate.

13

Table of Contents

The increasing volatility of world equity markets due to the recent economic uncertainty is having a particular impact on the financial sector. This 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.
Volatility in interest rates may negatively affect our net interest income and increase our non-performing loan portfolio.
Changes in market interest rates could affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income leading to a reduction in our net interest income. Income from treasury operations is particularly vulnerable to interest rate volatility. Since the majority of our loan portfolio reprices in less than one year, rising interest rates may also bring about an increasing non-performing loan portfolio. Interest rates are highly sensitive to many factors beyond our control, including deregulation of the financial sector, monetary policies, domestic and international economic and political conditions and other factors.
As of December 31, 2009, our interest rate risk measured in daily Value at Risk (“VaRD”) terms amounted to € 211.4 million.
Foreign exchange rate fluctuations may negatively affect our earnings and the value of our assets and shares.
Fluctuations in the exchange rate between the euro and the US dollar will affect the US dollar equivalent of the price of our securities on the stock exchanges in which our shares and ADSs are traded. These fluctuations will also affect the conversion to US dollars of cash dividends paid in euros on our ADSs.
In the ordinary course of our business, we have a percentage of our assets and liabilities denominated in currencies other than the euro. Fluctuations in the value of the euro against other currencies may adversely affect our profitability. For example, the appreciation of the euro against some Latin American currencies and the US dollar will depress earnings from our Latin American and US operations, and the appreciation of the euro against the sterling will depress earnings from our UK operations. Additionally, while most of the governments of the countries in which we operate have not imposed prohibitions on the repatriation of dividends, capital investment or other distributions, no assurance can be given that these governments will not institute restrictive exchange control policies in the future. Moreover, fluctuations among the currencies in which our shares and ADSs trade could reduce the value of your investment.
As of December 31, 2009, our largest exposures on temporary positions (with a potential impact on the income statement) were concentrated, in descending order, on the pound sterling and the Chilean peso. On that day, our largest exposures on permanent positions (with a potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso and the Chilean peso.
Despite our risk management policies, procedures and methods, we may nonetheless be exposed to unidentified or unanticipated risks.
Our risk management 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 harm our reputation as well as our revenues and profits.

14

Table of Contents

Our recent and future acquisitions may not be successful and may be disruptive to our business.
We have acquired controlling interests in various companies and have engaged in other strategic partnerships. See “Item 4. Information on the Company — A. History and development of the Company.” Additionally, we may consider other strategic acquisitions and partnerships from time to time. While we are optimistic about the acquisitions we have made, there can be no assurances that we will be successful in our plans regarding the operation of these or other acquisitions and strategic partnerships.
We can give no assurance that our recent and any future acquisition and partnership activities will perform in accordance with our expectations. We base our assessment of potential acquisitions and partnerships on limited and potentially inexact information and on assumptions with respect to operations, profitability and other matters that may prove to be incorrect. We can give no assurances that our expectations with regards to integration and synergies will materialize.
Increased competition in the countries where we operate may adversely affect our growth prospects and operations.
Most of the financial systems in which we operate are highly competitive. Financial sector reforms in the markets in which we operate have increased competition among both local and foreign financial institutions, and we believe that this trend will continue. In particular, price competition in Europe, Latin America and the US has increased recently. Our success in the European, Latin American and US markets will depend on our ability to remain competitive with other financial institutions. 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.
Changes in the regulatory framework in the jurisdictions where we operate could adversely affect our business.
As a result of the current financial crisis and ensuing government intervention, it is widely anticipated that there will be a substantial increase in government regulation of the financial services industry, including the imposition of higher capital requirements, heightened disclosure standards and restrictions on certain types of transaction structures. In addition, novel proposals for new regulatory initiatives, abound in the current environment. If enacted, new regulations could require us to inject further capital into our business as well as in businesses we acquire, restrict the type or volume of transactions we enter into, or set limits on or require the modification of rates or fees that we charge on certain loan or other products, any of which could lower the return on our investments, assets and equity. We may also face increased compliance costs and limitations on our ability to pursue certain business opportunities. Changes in regulations, which are beyond our control, may have a material effect on our business and operations. 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, 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 affect on our business.
Operational risks are inherent in our business.
Our businesses depend on the ability to process a large number of transactions efficiently and accurately. 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. We have suffered losses from operational risk in the past and there can be no assurance that we will not suffer material losses from operational risk in the future.
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 our operations appropriately or loses one or more of our 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. Likewise, if we fail to attract and appropriately train, motivate and retain qualified professionals, our business may also be affected.

15

Table of Contents

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 our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, litigation or regulatory outcomes, failing 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 has damaged the reputation of the industry as a whole.
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. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.
Different disclosure and accounting principles between Spain and the US may provide you with different or less information about us than you expect.
There may be less publicly available information about us than is regularly published about companies in the United States. While we are subject to the periodic reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), the disclosure required from foreign private issuers under the Exchange Act is more limited than the disclosure required from US issuers. Additionally, we present our financial statements under IFRS-IASB which differs from U.S. GAAP.
We are exposed to risk of loss from legal and regulatory proceedings.
We face various issues that may give rise to risk of loss from legal and regulatory proceedings. These issues include appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, and conduct by companies in which we hold strategic investments or joint venture partners, could increase the number of litigation claims and the amount of damages asserted against the Group or subject the Group to regulatory enforcement actions, fines and penalties. Currently, the Bank and its subsidiaries are the subject of a number of legal proceedings and regulatory actions. An adverse result in one or more of these proceedings could have a material adverse effect on our operating results for any particular period. For information relating to the legal proceedings involving our businesses, see “Item 8. Financial Information—A. Consolidated statements and other financial information—Legal proceedings”.
Credit, market and liquidity risks may have an adverse effect on our credit ratings and our cost of funds. Any reduction in our credit rating could increase our cost of funding and adversely affect our interest margins.
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 long-term debt are based on a number of factors, including our financial strength as well as conditions affecting the financial services industry generally.
Any downgrade in our ratings could increase our borrowing costs, limit our access to capital markets and adversely affect the ability of our business to sell or market their products, engage in business transactions—particularly longer-term and derivatives transactions—and retain our customers. This, in turn, could reduce our liquidity and have an adverse effect on our operating results and financial condition.

16

Table of Contents

The Group’s long-term debt is currently rated investment grade by the major rating agencies (Aa2 by Moody’s Investors Service España, S.A. and AA by each of Standard & Poor’s Ratings Services and Fitch Ratings Ltd., respectively). Standard & Poor’s maintains our outlook at negative reflecting continued and increased credit deterioration in most economies in which we are present. The downgrade of our rating by Moody’s expresses their concerns about the broad deterioration of the Spanish economy, to which we remain heavily exposed, as well as our recently increased exposure to the UK and the US, which both also faced severe economic disruptions, including decreased economic activity and increased unemployment. Moody’s expects that we will continue to face further asset quality pressures both from Sovereign and Alliance & Leicester as well as from our home market, and believes that this will lead to significant future provisioning requirements, which in turn would affect our earning power and ability to strengthen our capital levels internally. 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 their current ratings or outlooks, or with regard to those rating agencies who have a negative outlook on the Group, there can be no assurances that such agencies will revise such outlooks upward. The Group’s failure to maintain favorable ratings and outlooks could increase the cost of its funding and adversely affect the Group’s interest margins.
Our Latin American subsidiaries’ growth, asset quality and profitability may be adversely affected by volatile macroeconomic and political conditions.
The economies of the eight Latin American countries where we operate have experienced significant volatility in recent decades, characterized, in some cases, by slow or regressive growth, declining investment and hyperinflation. This volatility has resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economies to which we lend. Latin American banking activities (including Retail Banking, Global Wholesale Banking, Asset Management and Private Banking) accounted for € 3,834 million of our profit attributable to the Parent for the year ended December 31, 2009 (an increase of 6% from € 3,609 million for the year ended December 31, 2008). 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 some Latin American countries 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 several Latin American countries in which we operate.
In addition, revenues from our Latin American subsidiaries 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 in the Latin American countries in which we operate.
Latin American economies can be directly and negatively affected by adverse developments in other countries.
Financial and securities markets in the Latin American countries where we operate are, to varying degrees, influenced by economic and market conditions in other countries in Latin America and beyond. Negative developments in the economy or securities markets in one country, particularly in an emerging market, may have a negative impact on other emerging market economies. These developments may adversely affect the business, financial condition and operating results of our subsidiaries in Latin America.

17

Table of Contents

Item 4. Information on the Company
A. History and development of the company
Introduction
Banco Santander, S.A. (“Santander”, the “Bank” or “Parent”) 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.
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 2009, 2008 and 2007 are as follows:
Metrovacesa, S.A. (“Metrovacesa”)
On February 20, 2009, certain credit institutions, including Banco Santander, S.A. and Banco Español de Crédito, S.A., entered into an agreement for the restructuring of the debt of the Sanahuja Group, whereby they received shares representing 54.75% of the share capital of Metrovacesa in consideration for payment of the Sanahuja Group’s debt.
The agreement also included the acquisition by the creditor entities of an additional 10.77% of the share capital of Metrovacesa (shares for which the Sanahuja family was granted a call option for four years), which gave rise to an additional disbursement of € 214 million for the Group, and other conditions concerning the administration of this company.
Following the execution of the agreement, Grupo Santander had an ownership interest of 23.63% in Metrovacesa, S.A., and 5.38% of the share capital was subject to the call option described above.
At June 30, 2009, the Group’s investment in Metrovacesa totaled € 744 million, net of the impairment recognized under “Impairment losses on financial assets” amounting to € 195 million.
At 2009 year-end, the Group measured this investment at € 25 per share, which gave rise to additional write-downs and impairment losses of € 269 million net of tax.

18

Table of Contents

Acquisition of Real Tokio Marine Vida e Previdencia
In March 2009, the Santander Brazil Group acquired the 50% of the insurance company Real Tokio Marine Vida e Previdencia that it did not already own from Tokio Marine for R$678 million ( € 225 million).
CEPSA
On March 31, 2009, we announced that we had reached an agreement with the International Petroleum Investment Company (“IPIC”) of the Emirate of Abu Dhabi for the sale of our 32.5% stake in CEPSA to IPIC, at a price of € 33 per share, which would be reduced by the amount of any dividends paid, prior to the closing of the transaction, charged to the 2009 fiscal year. With this transaction, our historical annual return derived from our investment in CEPSA was of 13%. The sale had no impact on Grupo Santander’s earnings.
On July 30, 2009, we announced that we had transferred to IPIC our 32.5% stake in CEPSA at the agreed price of € 33 per share. The acquirer applied to the National Securities Market Commission for exemption from the obligation to launch a tender offer, in accordance with the provisions of article 4.2 of Royal Decree 1066/2007, owing to the existence of a shareholder with a higher stake in the share capital, the denial of which would be cause for termination of the contract. On September 15, 2009, the National Securities Market Commission granted this exemption.
France Telecom España, S.A. (“France Telecom”)
On April 29, 2009, we announced that we had reached an agreement with the company Atlas Services Nederland BV (a 100%-owned affiliate of France Telecom) on the sale of the 5.01% share package held by Grupo Santander in France Telecom España, S.A. for an amount of € 377.6 million. The sale had a negative impact on Grupo Santander’s earnings for an amount of € 14 million.
Triad Financial Corporation
In June 2008, Banco Santander’s executive committee authorized the acquisition by Santander Consumer USA Inc. of the vehicle purchase loan portfolio and an internet-based direct loan platform (www.roadloans.com) belonging to the US group Triad Financial Corporation. The acquisition price, US$615 million, was determined on the basis of an analysis of each individual loan. In July 2009, Banco Santander’s executive committee authorized Santander Consumer USA Inc. to acquire Triad Financial SM LLC with its remaining portfolio for US$260 million.
Banco de Venezuela
On July 6, 2009, we announced that we had closed the sale of our stake in Banco de Venezuela to Bank for Economic and Social Development of Venezuela (Banco de Desarrollo Económico y Social de Venezuela), a public institution of the Bolivarian Republic of Venezuela for 1,050 million dollars, of which 630 million dollars were paid on that date, 210 million dollars were paid in October 2009 and the remainder was paid in December 2009. This sale did not have a material impact on the Group’s income statement.
Offers to exchange perpetual issues for other financial instruments
On July 9, 2009, Banco Santander S.A. and its subsidiary Santander Financial Exchanges Limited launched various offers to exchange 30 issues of securities eligible to be included in capital for a total nominal amount of approximately € 9,100 million for securities to be issued by Santander and its subsidiaries. The exchange envisaged the delivery of new securities that meet the current market standards and regulatory requirements to be classified as equity at the consolidated Group level.
The purpose of these offers was to improve the efficiency of the Group’s capital structure and to strengthen Grupo Santander’s balance sheet. The Group’s annual borrowing costs were not increased as a result of exchange offers.
The acceptance level of the exchange offers reached 49.8% and the nominal amount of the new securities issued was € 3,210 million.

19

Table of Contents

The capital gains generated by this transaction amounted to € 724 million which were used to strengthen the Group’s balance sheet.
Purchase of securitizations
On August 24, 2009, Banco Santander invited holders of certain securitization bonds for a total nominal amount of € 25,273 million to tender any or all of the bonds for purchase by Banco Santander for cash.
The aggregate outstanding nominal amount of securities accepted for purchase was € 609 million. The capital gains generated amounted to € 97 million which were used to strengthen the Group’s balance sheet.
Conversion of “Valores Santander”
With regard to the currently outstanding “ Valores Santander ”, which are securities mandatorily convertible into newly-issued ordinary shares of the Bank issued in 2007 to partially finance the takeover bid of ABN AMRO, on October 14, 2009, conversion of 754 of such “ Valores Santander ” was requested in the ordinary conversion period that ended on October 5, 2009. Pursuant to the terms of such securities, Banco Santander has issued 257,647 new shares in exchange for those “ Valores Santander ”. The public deed formalizing the capital increase was registered with the Commercial Registry of Cantabria on October 14, 2009.
After this increase, Banco Santander’s share capital was 4,077,931,685 euros, represented by 8,155,863,370 shares, par value € 0.50 each.
Initial Public Offering of Banco Santander (Brasil) S.A.
On October 13, 2009, our subsidiary Banco Santander (Brasil) S.A. (“Santander Brasil”) closed its initial public offering of 525,000,000 units, each unit representing 55 common shares and 50 preferred shares, each without par value, of Santander Brasil. The units were offered in a global offering, which consisted of an international offering of units, including in the form of American depositary shares (“ADSs”), each of which represents one unit, in the United States and other countries outside of Brazil, and a concurrent offering of units in Brazil.
The initial public offering price in the global offering was R$23.50 per unit and U.S.$13.4033 per ADS.
The underwriters participating in the international offering were granted an option by Santander Brasil to purchase an additional 42,750,000 ADSs, exercisable by November 6, 2009, to cover over-allotments, if any, in connection with the international offering. The underwriters participating in the Brazilian offering were also granted an option by Santander Brasil to purchase up to an additional 32,250,000 units, exercisable within the same period, to cover over-allotments, if any, in connection with the Brazilian offering.
Following the global offering and after the exercise in full of the underwriters’ over-allotment options, the capital increase amounted to R$13,182 million ( € 5,092 million). Santander Brasil’s public float represents approximately 16.45% of its outstanding capital (an increase from approximately 2.0% prior to the offering). In connection with Santander Brasil’s listing on Level 2 of the BM&FBOVESPA S.A. — Bolsa de Valores, Mercadorias e Futuros (“BM&FBOVESPA”), Santander Brasil has agreed to meet the Level 2 minimum public float requirement of at least 25% of its outstanding capital stock within three years of the date of the offering in order to maintain its listing on such level of the BM&FBOVESPA. The ADSs are listed on the New York Stock Exchange.
The capital gain generated by this transaction for Grupo Santander amounted to € 1,499 million.
Prior to the offering, on August 14, 2009, as a result of a series of share exchange transactions, 100% of the share capital of certain Brazilian asset management, insurance and banking companies (including Santander Seguros S.A. and Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A.), which were previously beneficially owned by Grupo Santander and certain minority shareholders, was transferred to Santander Brasil. The combined shareholders’ equity of the transferred businesses was R$2.5 billion. The purpose of these transactions was to consolidate Grupo Santander’s investments in Brazil, to simplify the current corporate structure and to consolidate Grupo Santander’s and the minority shareholders’ interests in such entities in Santander Brasil. As a result of these transactions, Santander Brasil’s capital stock was increased by approximately R$2.5 billion through the issuance of 14,410,886,181 shares, comprised of 7,710,342,899 common shares and 6,700,543,282 preferred shares. In addition, on September 17, 2009, Banco Santander sold to Santander Brasil a loan portfolio consisting of credits to Brazilian companies and their offshore affiliates for a purchase price of US$806.3 million.

20

Table of Contents

Santander Brasil has agreed with the underwriters, subject to certain exceptions, not to offer, sell or dispose of any shares of their share capital or securities convertible into or exchangeable or exercisable for any shares of their share capital during the 180-day period following the date of the prospectus of the offering. Banco Santander, members of Santander Brasil board of directors and its executive officers have agreed to substantially similar lock-up provisions, subject to certain exceptions.
Santander Brasil intends to use the net proceeds from the global offering to expand its business in Brazil by growing the bank’s physical presence and increasing its capital base. Santander Brasil also intends to improve its funding structure and, along with its traditional funding sources, increase its current credit transactions. In particular, Santander Brasil estimates that it will use (1) 70% of the net proceeds to expand its physical infrastructure, including by opening new branches and installing additional ATM’s and to fund increased credit transactions in the Commercial Banking and Global Wholesale Banking segments more effectively than it could do with ordinary funding sources; (2) 20% of the net proceeds to improve its funding structure; and (3) 10% of the net proceeds to increase its capital base, improving its Basel capital adequacy ratio.
Santander Brasil is the third largest non government-owned bank, the largest bank controlled by a major global financial group and the fourth largest bank overall in Brazil with a 10.2% market share in terms of assets, at March 31, 2009. Santander Brasil operations are located across the country and strategically concentrated in the South and Southeast, an area that accounted for approximately 73.1% of Brazil’s GDP in 2006, and where they have one of the largest branch networks of any Brazilian bank, according to the Central Bank. According to the consolidated financial statements prepared in accordance with IFRS, for the six months ended June 30, 2009, Santander Brasil generated profit before taxes of R$3.8 billion, and at that date had total assets of R$288.9 billion and shareholders’ equity of R$51.1 billion. Santander Brasil’s Basel II capital adequacy ratio was 17.0% as of June 30, 2009.
In August 2008, Santander Brasil acquired Banco Real which at the time was the fourth largest non government-owned Brazilian bank as measured by assets. At the time of the acquisition, Santander Brasil was the fifth largest non government-owned bank in Brazil as measured by assets. As a result of the acquisition of Banco Real and organic growth, Santander Brasil’s net credit portfolio increased from R$44.6 billion at June 30, 2008 to R$132.3 billion at December 31, 2008, and its total deposits increased from R$46.9 billion at June 30, 2008 to R$124.0 billion at December 31, 2008, in each case as reported in Santander Brasil’s Brazilian GAAP financial statements. In the same period, Santander Brasil’s active current account holder base increased from approximately 3.5 million to approximately 7.7 million and the distribution network of branches and on-site service units increased from 1,546 to 3,603. Banco Real’s operations are highly complementary to Santander Brasil’s pre-acquisition operations. Santander Brasil’s believes that the acquisition offers significant opportunities for the creation of operating, commercial and technological synergies by preserving the best practices of each bank. Banco Real’s strong presence in the states of Rio de Janeiro and Minas Gerais has further strengthened Santander Brasil’s position in the South and Southeast, complementing Santander Brasil’s strong footprint in the region, particularly in the state of São Paulo. The acquisition of Banco Real has further consolidated Santander Brasil’s position as a full-service bank with nationwide coverage and scale to compete effectively in Santander Brasil’s target markets.
Santander Brasil’s businesses consist of three operating segments:
•
Commercial Banking: in which Santander Brasil provides a broad range of products and services and centralize banking transactions of its customers in order to increase the number of products used per customer. Deposit-taking activities, credit operations, retail lending, personal loans, credit card, account overdraft loans, consumer finance, mortgages, corporate lending, BNDES On-lending, agricultural lending, leasing and private banking are the main areas of this segment.

21

Table of Contents

•
Global Wholesale Banking: Santander Brasil leads wholesale banking in Brazil and offer financial services and sophisticated and structured solutions to its customers. Santander Brasil maintains focus on four core pillars: (1) strengthening customer relationships, (2) emphasizing performance and productivity to ensure growth, (3) managing risk profiles and (4) solidifying the recognition of its global brand for product distribution. Santander Brasil’s wholesale business provides its customers with a wide range of domestic and international services, and seeks to provide solutions specifically tailored to the needs of each customer. The Global Wholesale Banking segment’s products and services are available not only to GB&M clients, but also to corporate and small and medium enterprise (“SME”) customers. Global transaction banking, credit markets, corporate finance, equities, rates, market making, proprietary trading and correspondent banking are the main areas of this segment.
•
Asset Management and Insurance: Santander Brasil manages and administers third-party funds on a discretionary and non-discretionary basis, by means of mutual funds, pension funds and individual and corporate investment portfolios. In addition, it offers to its retail and SME customers various insurance products, including life and personal injury insurance, homeowner’s insurance, credit life insurance, credit card loss and theft insurance and private retirement plans.
Santander Brasil’s distribution network provides integrated financial services and products to its customers through a variety of channels, including branches and on-site service units (postos de atendimento bancário or PABs) and complementary distribution channels such as ATMs, call centers and other alternative direct sales distribution channels such as Internet banking. As a result of the acquisition of Banco Real, Santander Brasil expanded its distribution network.
Santander Brasil is from time to time subject to certain claims and party to certain legal proceedings incidental to the normal course of its business, including in connection with its lending activities, relationships with its employees and other commercial or tax matters. The main categories of lawsuits and administrative proceedings to which they are subject include: administrative and judicial actions relating to taxes; class actions involving agreements and settlement of debts with the public sector; suits brought by employees, former employees and unions relating to alleged labor rights violations; and civil suits, including from depositors relating to the alleged effects of their implementation of various government economic plans (seeking differences for monetary adjustments on remuneration of bank deposit certificates) and consumer law (i.e., breach of contract and foreign currency indexation, including administrative proceedings) and to the privatization of Banespa.
When there is a probable risk of loss, Santander Brasil usually settles. In such cases and where they litigate a claim, they record a provision for their estimate of the probable loss based on historical data for similar claims. They record provisions: (1) on a case-by-case basis based on the analysis and legal opinion of internal and external counsel and / or (2) considering the historical average amount of loss of such category of lawsuits. Due to the established provisions and the legal opinions provided, Santander Brasil believes that any future liabilities related to such lawsuits or proceedings will not have a material adverse effect on their financial condition or results of operations.
Santander Brasil does not record contingency provisions when the risk of loss is remote. In this connection, in December 2008, the Federal Revenue Service issued an infraction notice against Santander Brasil in the total amount of R$3,950.2 million (approximately € 1,200 million at the exchange rate then prevailing) with respect to IRPJ and CSL related to 2002 and 2004. The tax authorities assert that Santander Brasil did not meet the legal requirements for deducting amortization of the goodwill arising from the acquisition of Banespa. Santander Brasil has filed an appeal to the Administrative Counsel of Tax Appeals ( Conselho Administrativo de Recursos Fiscais ) and a ruling is expected within approximately one year. Santander Brasil believes, in accordance with the advice of its external legal counsel, that the Federal Revenue Service’s position is incorrect, that the grounds to contest this claim are well-founded, and that the risk of loss is remote. Accordingly, they have not recorded any provisions for this matter since this issue should not have an impact on their financial statements.
Santander Brasil believes that they have made adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings and believe that liabilities related to such claims and proceedings should not have, in the aggregate, a material adverse effect on their business, financial condition, or results of operations. However, 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 them; as a result, the outcome of a particular matter may be material to their operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and their level of income for that period.
Santander Brasil share capital consisted of 158,154,602,751 preferred shares and 181,989,171,114 common shares. Santander Brasil did not have any shares in treasury. Immediately after the global offering, Santander Brasil had 212,841,731,754 common shares and 186,202,385,151 preferred shares outstanding. Following the offering, Banco Santander, owned, indirectly, 84.2% of Santander Brasil common shares, 82.8% of Santander Brasil preferred shares and 83.5% of Santander Brasil total capital.

22

Table of Contents

Santander Brasil intends to recommend to its shareholders a policy to distribute 50% of its yearly adjusted net income as dividends and/or interest attributed to shareholders’ equity, as required by the Brazilian corporate law and their bylaws. The amount of any distributions will depend on many factors, such as the results of operations, cash flow, financial condition (including capital position), cash requirements, investment plans, prospects, legal requirements, economic climate and other factors deemed relevant by the board of directors and shareholders.
Santander Brasil prospective investors had been advised on the risks and other matters before deciding to purchase Santander Brasil units and ADSs, including among others, risks related to Brazil, risks related to Santander Brasil and the Brazilian Financial Services Industry and risks relating to Santander Brasil units and ADSs, since one or more of these matters could negatively impact Santander Brasil business or financial performance and its ability to implement its business strategy successfully.
Sale of 10% of the share capital of Attijariwafa Bank
On December 28, 2009, we announced that we had sold to the Moroccan Société Nationale d’Investissement (SNI) 10% of the share capital of Attijariwafa Bank, at a price of Dirhams 4,149.4 million (approximately € 367 million at the exchange rate on such date). The transaction generated for Grupo Santander a capital gain of approximately € 218 million, which was recognized under Gains/(losses) on disposal of non-current assets held for sale in the consolidated income statement. Following the sale, Grupo Santander holds 4.55% of Attijariwafa Bank.
Acquisition of Sovereign
On October 13, 2008, we and Sovereign announced that we would acquire Sovereign through a share exchange. At the date of the announcement, we held 24.35% of the outstanding ordinary shares of Sovereign. The capital and finance committee of Sovereign, composed of independent directors, requested that Santander consider acquiring the 75.65% of the company that it did not own. The committee assessed the transaction and recommended it to the company’s board of directors.
Under the terms of the definitive transaction agreement, which was unanimously approved by the non-Santander directors of Sovereign and by the executive committee of Santander, Sovereign shareholders received 0.2924 Banco Santander American Depository Shares (ADSs) for every 1 ordinary Sovereign share they owned (or 1 Banco Santander ADS for every 3.42 Sovereign shares).
On January 26, 2009, Banco Santander held an extraordinary general meeting at which the shareholders approved the capital increase for the acquisition of 75.65% of Sovereign Bancorp Inc.
On January 28, 2009, the shareholders at the general meeting of Sovereign approved the acquisition.
On January 30, 2009, the acquisition of Sovereign was completed and Sovereign became a wholly-owned subsidiary of Grupo Santander. The transaction involved the issuance of 0.3206 ordinary shares of Banco Santander for each ordinary share of Sovereign (equivalent to the approved exchange of 0.2924 ADSs adjusted for the dilution arising from the capital increase carried out in December 2008). To this end, 161,546,320 ordinary shares were issued by Banco Santander for a cash amount (par value plus share premium) of € 1.3 billion.
Acquisition of Alliance & Leicester plc
On July 14, 2008, Banco Santander, S.A. and Alliance & Leicester plc reached an agreement in relation to the terms of a recommended acquisition by Banco Santander, S.A. of the entire share capital of Alliance & Leicester plc.
As part of the transaction, the shareholders of Alliance & Leicester plc received a Banco Santander share for each three shares of Alliance & Leicester plc. Prior to the share exchange date, Alliance & Leicester plc approved (and paid) an interim dividend in cash amounting to 18 pence per share. The shareholders of the Bank, acting at the general shareholders’ meeting held on September 22, 2008, agreed to increase the Bank’s capital up to a nominal amount of € 71,688,495 through the issuance of a maximum of 143,376,990 shares par value € 0.50 in order to consummate the acquisition of Alliance & Leicester.

23

Table of Contents

The acquisition, which was completed by means of a scheme of arrangement, was approved by the shareholders of Banco Santander, S.A. (in relation to the capital increase) and of Alliance & Leicester plc. In addition, the scheme of arrangement was approved by the UK courts and was granted the relevant permits by the UK and Spanish regulatory bodies and the relevant anti-trust authorities.
The acquisition was completed on October 10, 2008. As of that date we issued 140,950,944 new shares of Banco Santander par value € 0.50 each, with a share premium of € 10.73 per share. The consideration for such shares was 422,852,832 shares of Alliance & Leicester plc, par value £0.50 each, representing all of its issued ordinary capital. The new shares represent 2.2% of the total share capital of the Bank after the capital increase.
Acquisition of Bradford & Bingley’s branch network and retail deposits
In September 2008, following the announcement by the UK’s HM Treasury (on September 29, 2008) to take Bradford & Bingley plc into public ownership, the retail deposits and branch network were transferred, under the provisions of the Banking (Special Provisions) Act 2008, to Santander UK.
As outlined in the HM Treasury statement, all of Bradford & Bingley’s customer loans and treasury assets, which included the £41 billion of mortgage assets, were placed under public ownership and were not transferred to Santander.
The transfer to Santander UK consisted of £20 billion retail deposit base with 2.7 million customers and Bradford & Bingley’s branch network, including 197 retail branches, 141 agencies (distribution outlets in third party premises) and related employees.
The acquisition price was £612 million, including the transfer of £208 million worth of capital relating to off-shore companies. The transaction was financed with the cash generated by the Group’s ordinary operations. Goodwill generated by this acquisition was £160 million (equivalent to € 202 million at the exchange rate of the date of the transaction).
ABN AMRO Holding N.V. (“ABN AMRO”)
On July 20, 2007, having obtained the regulatory authorizations required to publish the documentation on the takeover bid for ABN AMRO, the Bank, together with the Royal Bank of Scotland Group plc, Fortis N.V. and Fortis S.A./N.V. (together, the “Banks”) formally launched, through RFS Holdings B.V., the offer for all the ordinary shares, ADSs and previously convertible preference shares of ABN AMRO. The initial acceptance period of this offer (the “Offer”) ended on October 5, 2007.
On October 10, 2007, the Banks declared the Offer to be unconditional. On that date, the owners of 86% of the ordinary share capital of ABN AMRO had accepted the Offer (including certain shares that the Banks already owned and had undertaken to contribute to RFS Holdings B.V.).
On the same date, the commencement of an additional offer period was announced, during which the holders of ordinary shares and ADSs of ABN AMRO could tender them, under the same terms and conditions as those of the Offer, until October 31, 2007.
Once the aforementioned additional offer period ended, the owners of 98.8% of the ordinary share capital of ABN AMRO (excluding its treasury shares) definitively accepted the Offer.
At December 31, 2007, the investment made by the Bank in ABN AMRO amounted to € 20.6 billion and consisted of the Bank’s 27.9% ownership interest in the share capital of RFS Holdings B.V., the holding entity of the shares of ABN AMRO.

24

Table of Contents

Following all of these actions, the business lines were spun off from ABN AMRO with a view to subsequently integrate them into each of the Banks. The following business lines corresponded to Banco Santander: the Latin American Business Unit of ABN AMRO, which primarily consists of Banco ABN AMRO Real S.A. (“Banco Real”) in Brazil and the Banca Antoniana Popolare Veneta Spa Banking Group (“Antonveneta”), the cash relating to the sale of the consumer banking unit of ABN AMRO in the Netherlands, Interbank and DMC Consumer Finance, plus 27.9% of the assets that were not allocated to any of the Banks of the consortium and which we intend to dispose of. The spin-off process continued in 2008.
Accordingly, on March 4, 2008, the Dutch Central Bank expressed its acceptance of the overall spin-off plan, and in July 2008, it approved the individual spin-off plan for Banco Real and the business activities in Brazil. Subsequently, the Central Bank of Brazil approved the acquisition of Banco Real by Banco Santander, whereby it became effective.
The Group’s assets in Brazil also comprise those corresponding to the asset management business of ABN AMRO in Brazil, which were initially allocated to Fortis in the process of spinning off and integrating the assets of ABN AMRO, and which were acquired therefrom by the Bank in the first half of 2008 for € 209 million.
As part of the assets that were spun off, in December 2008, Banco Santander Uruguay acquired the assets and liabilities of the Montevideo branch of ABN AMRO, and subsequently proceeded to merge the businesses.
Also, on May 30, 2008, Banco Santander and Banca Monte dei Paschi di Siena announced the completion of the purchase and sale of Antonveneta (excluding Interbank, its corporate banking subsidiary) for € 9 billion and executed the agreement announced on November 8, 2007, which was only subject to approval by the competent authorities.
On June 2, 2008, Banco Santander entered into a definitive agreement with General Electric whereby a General Electric Group company would acquire Interbanca, and various Grupo Santander entities would acquire the GE Money units in Germany, Finland and Austria, GE’s card units in the UK and Ireland and its car finance unit in the UK. The base price agreed for the two transactions is € 1 billion each, subject to various adjustments. These transactions were completed with the acquisition of GE Germany in the fourth quarter of 2008, and the acquisition of the remaining General Electric units and the sale of Interbanca in the first quarter of 2009.
In the third quarter of 2008, the Group sold 45% of ABN Amro Asset Management Italy SGR S.p.A. to Banca Monte di Paschi di Siena for € 35 million as Banca Monte di Paschi di Siena had already acquired the remaining 55% through the acquisition of Antonveneta.
The businesses shared by the members of the consortium included subordinated liabilities issued by ABN AMRO. The portion of these liabilities relating to Santander was transferred to RBS and Fortis at market prices, giving rise to gains for Santander amounting to € 741 million, which were recognized under “Gains/losses on financial assets and liabilities (net)” in the income statement for 2008.
On September 22, 2008, RFS Holdings B.V. completed the squeeze-out of the minority shareholders of ABN AMRO through the payment of € 712 million to these shareholders. From that date onwards, RFS Holdings B.V. has been the sole shareholder of ABN AMRO. Banco Santander had to pay € 200 million to complete this process, on the basis of its ownership interest in RFS. The Dutch State replaced Fortis’s position as a shareholder of RFS Holding B.V. in December 2008.
Banco Real was fully consolidated in the Group’s financial statements in the fourth quarter of 2008. Previously, it had been accounted for by the equity method through the ownership interest in RFS Holding. Accordingly, the Group’s income statement includes all the results contributed to the Group by this entity since January 1, 2008. The volume of assets that Banco Real contributed to the Group amounted to approximately € 44 billion, based on the exchange rate at year-end. The amount of the assets, liabilities and contingent liabilities contributed to the Group by this entity are detailed in the related notes to our consolidated financial statements.
The goodwill at the date of acquisition assigned to Banco Real following all the aforementioned transactions amounted to € 8 billion (which was equivalent to € 6,446 million at the exchange rate prevailing at the end of 2008).

25

Table of Contents

In April 2009, ABN AMRO sold its branch in Asunción (Paraguay), after its conversion into a subsidiary, to Banco Regional (40% owned by the Rabobank group) for € 42.2 million. This sale gave rise to a net gain of approximately € 5 million.
On April 1, 2010, ABN AMRO was renamed The Royal Bank of Scotland Holding N.V.
On the same date, ABN AMRO Bank N.V., a newly established company with the purpose of holding most of the assets and liabilities belonging to the Dutch State became a wholly owned entity of The Royal Bank of Scotland Holding N.V. On the same date, we entered into a Restated Consortium and Shareholders Agreement, among the Royal Bank of Scotland Group plc, Banco Santander, S.A., The State of the Netherlands and RFS Holdings B.V.
At the date of this report on Form 20-F, Banco Santander still has a reduced economic interest in RFS Holdings B.V. as it owns a residual amount of the assets and liabilities shared with The Royal Bank of Scotland Group plc and the Dutch State.
Agreement between Santander and RBS’s European consumer finance unit
On April 4, 2008, Santander reached a preliminary agreement with RBS to acquire its continental European consumer finance business. The package includes activities in Germany, the Netherlands, Belgium and Austria. The acquisition was carried out by Santander Consumer Finance Germany GmbH.
The RBS European consumer finance business (RBS ECF) has 861 employees serving 2.3 million customers in Germany, the Netherlands, Belgium and Austria. Assets in 2007 averaged € 2.2 billion. RBS ECF makes installment loans both directly and via partners. It has a strong presence in the credit card business both in terms of private and corporate customers, and provides consumer finance via retail chains.
The acquisition closed on July 1, 2008 for € 306 million and gave rise to goodwill of € 85 million.
Sale and leaseback of real estate assets
On November 14, 2007, we announced that we had sold ten real estate properties to two companies of Grupo Pontegadea for € 458 million, obtaining a capital gain of € 216 million. At the same time, we entered into a 40-year long lease contract in connection with these properties, with an option to repurchase those properties.
On November 23, 2007, we concluded the sale of 1,152 properties to a company belonging to the Pearl Group, whose main shareholder is Sun Capital. Simultaneously, Grupo Santander entered into a lease agreement for these properties for a period between 45 to 47 years, with an option to repurchase those properties. The transaction amounted to € 2,040 million, generating an approximate net capital gain of € 860 million for Grupo Santander.
On September 12, 2008, we announced that we had completed a transaction with the consortium led by the United Kingdom property investor Propinvest for the sale of Ciudad Grupo Santander (our principal executive offices in Madrid, Spain) and its simultaneous lease-back for a period of 40 years, with a right to repurchase this property at the end of such period.
The amount of the sale transaction was € 1.9 billion, as initially contemplated. The capital gains obtained by Santander from this sale were close to € 600 million.
With this transaction, Banco Santander concluded the process involving the sale of its own buildings in Spain which commenced in 2007 within the framework of the ABN AMRO acquisition. The amount of assets sold was € 4.4 billion, with capital gains of approximately € 1.7 billion.

26

Table of Contents

Sale of Porterbrook Leasing Company
In October 2008, Santander UK reached an agreement to sell 100% of Porterbrook Leasing Company to a consortium of investors including Antin Infrastructure Partners (the BNP Paribas sponsored infrastructure fund), Deutsche Bank and Lloyds TSB, which was completed on December 8, 2008. Santander UK received approximately £1.6 billion in cash. This sale gave rise to a gain of € 50 million (£40 million) recognized under “Gains on disposal of assets not classified as non-current assets held for sale” in our consolidated income statement for 2008.
Banco BPI, S.A. (“BPI”)
Grupo Santander announced in January 2007 that it had entered into a firm agreement with Banco Comercial Portugués (“BCP”) for the sale to this bank of 44.6 million shares of Portuguese bank BPI, representing 5.87% of BPI’s share capital, at a price of € 5.70 per share. The price is equal to that offered by BCP in the tender offer launched by it for BPI, or at a higher price should BCP revise its public offer bid upwards. The agreement was subject to regulatory approvals.
In May 2007, the tender offer failed since it did not obtain the minimum required support by BPI’s shareholders on which the bid was conditioned. The Bank of Portugal had set out a maximum level of ownership by BCP in BPI in the event that the tender offer did not succeed. Grupo Santander sold to BCP 35.5 million shares of BPI, with capital gains of € 107 million. The ownership interest in BPI at December 31, 2009 was 1.7%.
Santander Consumer Chile, S.A.
Santander Consumer Finance and the Bergé Group, through its Chilean subsidiary SKBergé, a company formed by Sigdo Koppers and Bergé (“SKB”), reached a strategic agreement to set up a finance company in Chile. SKB will have an ownership interest of between 10% and 49%, with the remaining 90% to 51% to be held by Santander Consumer Finance. The new company, which will operate under the name of Santander Consumer Chile, will engage in consumer finance, focusing on both car and other durable consumer goods and credit cards. As of December 31, 2007, Santander Consumer Finance had acquired 89% of the capital stock of Santander Consumer Chile (at a cost of € 13 million) and SKBergé the remaining 11%.
Financiera Alcanza S.A. de C.V. SOFOL (“Alcanza”)
On June 13, 2007, Santander Consumer Finance signed an agreement with the main shareholders of Alcanza to acquire and increase the capital base of Alcanza. As in its other markets, Santander Consumer’s business in Mexico focuses on consumer finance and auto financing as part of its growth strategy. Alcanza has 160 employees in 15 branches in Mexico. The total value of the acquisition together with the capital increase was US$39.5 million. The deal was closed in December 2007. At December 31, 2009, the Group controlled 85% of Alcanza.
Bolsas y Mercados Españoles, S.A. (“BME”)
On July 16, 2007, Santander Investment Bolsa, S.V., S.A. announced that it had carried out a private placement of shares in BME, for the account of Grupo Santander, among other institutional investors. A total of 2,842,929 shares of BME, representing 3.4% of the share capital of BME were placed, at a price of € 42.90 per share. The transaction generated capital gains of € 111 million for the Group.
Sale of Latin American pension fund management companies
In 2007, we sold our Latin American mandatory pension fund management companies (“AFPs”) to ING Group for US$1,314 million ( € 906 million), generating a capital gain of € 747 million. The sale included fund management companies in Mexico (Afore Santander), Chile (AFP Bansander), Colombia (AFP and Cesantía Santander) and Uruguay (Afinidad AFAP).
During the fourth quarter 2007, we sold to ING Groep NV our stake in the pension fund manager Orígenes AFJP and in the annuity provider Orígenes Seguros de Retiro, in Argentina, for a total consideration of US$166 million ( € 112 million), generating a capital gain of € 84 million for the Group.
CB Extrobank. (“Extrobank”)
In 2007, we acquired 100% of the Russian bank Extrobank for € 48 million and generated goodwill of € 37 million.

27

Table of Contents

Intesa Sanpaolo
On June 19, 2007, we announced that we had sold the final stake of 1.79% that we held in the share capital of the Italian bank Intesa Sanpaolo (the entity resulting from the merger of San Paolo-IMI and Intesa), for a total consideration of € 1,206 million. The transaction generated a capital gain of € 566 million for the Group.
Interbanco S.A. (“Interbanco”)
On September 14, 2005, we reached an agreement with Soluções Automóvel Globlais (“SAG”) of Portugal to form an alliance that will conduct consumer and vehicle financing operations in Portugal, as well as operational car leasing in Spain and Portugal. In January 2006, we paid € 118 million to acquire 50.001% of Interbanco’s capital stock. At the close of this transaction, we combined our consumer and vehicle finance businesses in Portugal with those of SAG through the merger of Interbanco and Hispamer Portugal. Santander owns 60% of the capital stock of the combined company and SAG owns the remaining 40%.
In 2007, we acquired an additional 9.999% stake in Interbanco through Interbanco’s absorption of the branches in Portugal of Santander Consumer E.F.C, S.A. and Santander Consumer Finance, S.A. and consequently Interbanco changed its name to “Banco Santander Consumer Portugal, S.A.”. After this transaction, and subject to the original agreements, we acquired the remaining 40% for € 138 million. These transactions generated goodwill of € 74 million. Since December 31, 2007, we have owned 100% of Banco Santander Consumer Portugal.
Other Events
Lehman Brothers, Inc. (“Lehman”)
For information about the legal proceedings related to Lehman, see “Item 8. Financial Information—A. Consolidated statements and other financial information—Legal proceedings.”
Bernard L. Madoff Investment Securities (“Madoff Securities”)
For information about legal proceedings related to Madoff Securities, see “Item 8. Financial Information—A. Consolidated statements and other financial information—Legal proceedings.”
Capital Increases
As of December 31, 2006 and 2007, our capital stock consisted of 6,254,296,579 fully subscribed and paid shares of € 0.50 par value each.
As of December 31, 2008, our capital had increased by 1,739,762,824 shares, or 27.82% of our total capital as of December 31, 2007, to 7,994,059,403 shares as a result of the following transactions:
•
Alliance & Leicester plc acquisition: There was a capital increase of 140,950,944 new shares of € 0.50 par value each in accordance with the resolutions adopted by the Bank’s extraordinary shareholder general meeting held on September 22, 2008. One new Santander share was issued for every three Alliance & Leicester plc shares. These shares were issued on October 10, 2008.
•
Banco Santander rights offering: There was a capital increase of 1,598,811,880 new shares of € 0.50 par value each at an issue price of € 4.50 per share, which was fully paid on December 3, 2008, in connection with a right offering conducted by Banco Santander. The total amount of the issue was € 7,194,653,460.

28

Table of Contents

As of December 31, 2009, our capital had increased by 234,766,732 shares, or 2.94% of our total capital as of December 31, 2008, to 8,228,826,135 shares as a result of the following transactions:
•
Sovereign acquisition: The acquisition of Sovereign involved the issuance, on January 30, 2009, of 0.3206 ordinary shares of Banco Santander for each ordinary share of Sovereign. To this end, 161,546,320 ordinary shares were issued by Santander for a cash amount (par value plus share premium) of € 1.3 billion.
•
“Valores Santander ”: Conversion of 754 “Valores Santander” was requested in the ordinary conversion period that ended on October 5, 2009. Pursuant to the terms of such securities, we issued 257,647 new shares in exchange for those “Valores Santander” which commenced trading in the Spanish Stock Exchanges on October 15, 2009.
•
“Scrip Dividend Scheme”: On November 2, 2009 we issued 72,962,765 ordinary shares par value € 0.5 in the free-of-charge capital increase, corresponding to 0.89% of our share capital. The amount of the capital increase was € 36,481,382.50.
Recent Events
Tender offer for subordinated notes
On January 11, 2010, Banco Santander, S.A. offered to purchase for cash 13 series of subordinated notes issued by several entities of Grupo Santander for an aggregate nominal amount of € 3.3 billion.
The acceptance level of the exchange offers reached 60% and the nominal amount of the securities accepted for purchase was approximately € 2 billion.
Also, on February 17, 2010, Banco Santander, S.A. offered to purchase for cash perpetual subordinated notes issued by Santander Perpetual, S.A.U. for a total nominal amount of US$1.5 billion (of which Santander holds approximately US$350 million). The aggregate nominal amount of securities accepted for purchase was US$1,092.55 million, representing 95% of the outstanding notes not held by Santander.
Bolsas y Mercados Españoles (“BME”)
On February 22, 2010, we sold to institutional investors a stake of 2,099,762 shares of BME representing approximately 2.5% of its share capital, at a price of € 20.0 per share, which amounts to a total of approximately € 42 million. The capital gain for Grupo Santander was of € 30.4 million. Grupo Santander maintains a stake of 2.5% in the capital of BME and will continue to be represented in its board of directors.
James Hay Holdings Limited
On March 10, 2010, Santander Private Banking UK Limited completed the sale of James Hay Holdings Limited (including its five subsidiaries) through the transfer of all the shares of James Hay Holdings Limited to IFG UK Holdings Limited, a subsidiary of the IFG Group, for a total of £39 million.
Companhia Brasileira de Soluções e Serviços (“CBSS”) and Cielo S.A.
On April 25, 2010, we announced that we had reached an agreement with Banco do Brasil S.A. and Banco Bradesco S.A. for the sale of the entire stake held by Grupo Santander in the companies Companhia Brasileira de Soluções e Serviços (15.33% of the capital), and Cielo S.A. – formerly Visanet – (7.20% of the capital).
The total sale price agreed was R$200 million (approximately € 85.3 million) for the 15.33% of CBSS and R$1,464 million (approximately € 624.3 million) for the 7.20% of Cielo.
The net capital gain generated for Grupo Santander is approximately € 233 million.
The closing of the transactions is subject to final documentation.

29

Table of Contents

Downgrade of Greek and Spanish Sovereign Debt Ratings
On April 27, 2010, the Standard and Poor’s rating agency downgraded Greece’s long-term sovereign credit rating by three grades to “BB+”, or non-investment-grade status, and maintained its negative outlook. Greece is the first European country to fall below investment grade, and the downgrade set off a series of reactions including declines in European stock markets as well as in the value of the euro. The following day, the Standard and Poor’s rating agency downgraded Spain’s long-term sovereign credit rating by one grade to “AA”, down from “AA+”. As a result of the downgrade, Spanish stock markets and, in particular, Spanish banking stocks dropped sharply. On May 28, 2010, Fitch downgraded Spain’s rating to “AA+” from “AAA”, reflecting Fitch’s assessment that Spain’s adjustments would materially reduce the rate of growth of the economy. Moody’s Investors Service has maintained their “AAA” rating and stable outlook for the country’s sovereign debt. In addition, on May 5, 2010 Moody’s Investor Services warned it may downgrade Portugal’s “Aa2” sovereign debt rating within the following three months, a week after Standard & Poor’s cut its rating and a month and a half after Fitch downgraded Portugal’s credit rating from “AA” to “AA-”.
Although the Bank has negligible direct exposure to Greek sovereign or bank debt (0.6% of total country risk), the ratings downgrade of, and a possible default on, Greece’s sovereign debt heightened the market’s fears concerning Europe’s fiscal condition. The downgrade of the sovereign ratings for Spain and Portugal may (i) negatively impact the mark to market value of the Bank’s Spanish and Portuguese sovereign debt holdings, (ii) increase the Bank’s funding costs as the spread between Spanish and Portuguese sovereign debt and German sovereign debt (the benchmark for the eurozone) increased, although this would be partially offset by the related increase in mark to market value of the Bank’s German sovereign debt holdings, and (iii) negatively impact the trading price of the Bank’s common shares as a result of the increased risk premium and the related increase in the Bank’s cost of capital.
In response to the ratings downgrades of Greece and Spain, in addition to recent downgrades of Portugal and Ireland, and market fears of a widening sovereign debt crisis throughout the Eurozone, on May 10, 2010 the European Central Bank (“ECB”) announced the creation of a € 750 billion fund to bail out countries in the Eurozone in debt trouble and to act in both government and corporate bond markets as a buyer of last resort. The ECB’s fund had an immediate positive impact as European stock exchanges and the euro rebounded from recent declines and market fears eased slightly, but questions remain as to the fund’s ultimate impact and implementation. No assurance can be given that the fund will prevent future downgrades in these or other European countries’ sovereign debt ratings, improve the Eurozone’s financial condition or improve the market’s perception of the Eurozone’s fiscal condition.
Acquisition of 24.9% of Banco Santander Mexico
On June 9, 2010, we announced that Banco Santander had reached an agreement with Bank of America to acquire the 24.9% stake held by the latter in Grupo Financiero Santander (“Banco Santander Mexico”) for an amount of 2,500 million dollars. Following this transaction, our holding in Banco Santander Mexico will amount to 99.9%.
In 2003, Bank of America acquired this 24.9% stake from Santander for an amount of 1,600 million dollars.
The transaction is subject to regulatory authorization and is expected to be completed in the third quarter of 2010.
B. Business overview
At December 31, 2009 we had a market capitalization of € 95.0 billion, stockholders’ equity of € 68.7 billion and total assets of € 1,110.5 billion. We had an additional € 134.9 billion in mutual funds, pension funds and other assets under management at that date. As of December 31, 2009, we had 49,870 employees and 5,871 branch offices in Continental Europe, 22,949 employees and 1,322 branches in the United Kingdom, 85,974 employees and 5,745 branches in Latin America, 8,847 employees and 722 branches in the United States (Sovereign Bancorp) and 1,820 employees in other geographic regions (for a full breakdown of employees by country, see Item 6 of Part I, “Directors, Senior Management and Employees—D. Employees”).
We are a financial group operating principally in Spain, the United Kingdom, Portugal, other European countries, Brazil and other Latin American countries and the United States, offering a wide range of financial products.
In Latin America, we have majority shareholdings in banks in Argentina, Brazil, Chile, Colombia, Mexico, Puerto Rico and Uruguay.
In accordance with the criteria established by the IFRS-IASB, the structure of the 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 (including Banco Banif, S.A. (“Banif”), our specialized private bank), wholesale banking and asset management and insurance conducted in Europe, with the exception of the United Kingdom. This segment includes the following units: the Santander Branch Network, Banco Español de Crédito, S.A. (“Banesto”), Santander Consumer Finance (including Santander Consumer USA) and Portugal.

30

Table of Contents

•
United Kingdom . This includes retail and wholesale banking, asset management and insurance conducted by the various units and branches of the Group in the UK.
•
Latin America . This embraces all the financial activities conducted via our subsidiary banks and other subsidiaries in Latin America. It also includes the specialized units in Santander Private Banking, as an independent globally managed unit. Santander’s business in New York is also managed in this area.
•
Sovereign . Sovereign’s figures are recorded on their own. Sovereign began to be consolidated in the first quarter of 2009, after its acquisition became effective.
Second (or business) level . This segments the activity of our operating units by type of business. The reported segments are:
•
Retail Banking . This covers all customer banking businesses (except those of Corporate Banking, which are managed globally throughout the world).
•
Global Wholesale Banking . This business reflects the returns from Global Corporate Banking, Investment Banking and Markets worldwide, including all treasury activities under global management, as well as our equities business.
•
Asset Management and Insurance . This includes our units that design and manage mutual and pension funds and insurance.
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 industrial and financial companies, financial management of the structural exchange rate position and of the Parent Bank’s structural interest rate risk, as well as management of liquidity and of stockholders’ equity through issues and securitizations. As the Group’s holding entity, it manages all capital and reserves and allocations of capital and liquidity.
Except for the addition of Sovereign, which is disclosed as separate reporting segment in 2009, Grupo Santander maintained the same primary and secondary operating segments as it had in 2008.
In addition, and in line with the criteria established by IFRS-IASB, the results of businesses discontinued in 2009 (Banco de Venezuela) and 2007 (our Latin American pension management companies) which were consolidated by global integration, were eliminated from various lines of the income statement and included in “net profit from discontinued operations.”
First level (or geographic) :
Continental Europe
This area covers the banking activities of the different networks and specialized units in Europe, principally with individual clients and SMEs, as well as private and public institutions. During 2009, there were four main units within this area: the Santander Branch Network, Banesto, Santander Consumer Finance and Portugal including retail banking, global wholesale banking and asset management and insurance.
Continental Europe is the largest business area of Grupo Santander. At the end of 2009, it accounted for 40.4% of total customer funds under management, 47.2% of total loans and credits and 46.4% of profit attributed to the Group of the Group’s main business areas.
The area had 5,871 branches and 49,870 employees (direct and assigned) at the end of 2009.

31

Table of Contents

In 2009, the Continental Europe segment’s profit attributable to the Parent increased 2.7% to € 4,793 million. Return on equity (“ROE”) in 2009 was 17.9%, a 2.2% decrease from 2008.
The Santander Branch Network
Our retail banking activity in Spain is carried out mainly through the branch network of Santander, with support from an increasing number of automated cash dispensers, savings books updaters, telephone banking services, electronic and internet banking.
At the end of 2009, we had 2,934 branches and a total of 19,064 employees (direct and assigned), of which two employees were hired on a temporary basis, dedicated to retail banking in Spain. Compared to 2008, there was a net increase of one branch and a net decrease of 383 employees.
In 2009, profit attributable to the Parent from the Santander Branch Network was € 2,012 million, 5.5% higher than 2008, while the ROE reached 26.6% (as compared to 23.0% in 2008).
In 2009, the Santander Branch Network decreased by approximately 5% in lending, customer funds under management grew by 4%, deposits increased 25%, mutual funds fell 16% and pension funds decreased 2%. The 5% decrease in lending in 2009 versus 2008 reflects that demand from individuals and companies was lower than normal because of the recession in Spain. The ratio of non-performing loans (“NPL”) grew to 3.4% from 1.9% in 2008.
Banesto
At the end of 2009, Banesto had 1,773 branches and 9,727 employees (direct and assigned), of which nine employees were temporary, a decrease of 142 branches and 713 employees as compared to the end of 2008.
For purposes of our financial statements and this annual report on Form 20-F, we have calculated Banesto’s results of operations using the criteria described before in this annual report on Form 20-F. As a result, the data set forth herein may not coincide with the data published independently by Banesto.
In 2009, profit attributable to the Parent from Banesto was € 500 million, a 28.0% decrease from 2008, while the ROE reached 11.7% as compared to 17.3% in 2008.
At the end of 2009, the balance of loans was 2% lower than a year earlier, while customer funds increased 5% and off-balance sheet funds built on the recovery started in June 2009 to increase 12.5%. NPL grew to 3.0% in 2009, up 1.3 percentage points from 2008.
Santander Consumer Finance
Our consumer financing activities are conducted through our subsidiary Santander Consumer Finance and its group of companies. Most of the activity of Santander Consumer Finance relates to auto financing, personal loans, credit cards, insurance, and customer deposits. These consumer financing activities are mainly focused on Germany, Spain, Italy, Norway, Finland, Sweden and the US. We also conduct business in Poland, the UK, Portugal, Austria and the Netherlands, among others.
At the end of 2009, this unit had 311 branches (as compared to 290 at the end of 2008) and 9,362 employees (direct and assigned) (as compared to 8,052 employees at the end of 2008), of which 569 employees were temporary.
In 2009, this unit generated € 632 million in profit attributable to the Parent, a 9.2% decrease from 2008, while the ROE reached 9.0% (as compared to 17.0% in 2008).
The results differed from country to country. Of note was Germany, which generated the largest profits, whose contribution to the Group was 9% higher than in 2008 because of the new acquisitions and good management of revenues and costs, which offset the higher provisions in the new entities. Santander Consumer USA registered the largest rise in attributable profit (41.2% in dollars) and became the unit’s second largest contributor due to an increase in revenues as a result of new commercial agreements, better cost control and experience and agility in recoveries of past-due loans. The Nordic countries’ contribution to the Group increased 12% in euros, and the UK, after quickly integrating the unit acquired from GE, became profitable and the second largest independent auto finance company in the country. Of note among the other countries was the weak performance of Spain, affected by the sector’s deterioration, which led to large provisions and flat revenues that could not be offset by lower costs.

32

Table of Contents

At the end of 2009, total lending at this unit amounted to € 57 billion (a 5.6% increase as compared to 2008). New lending was 4% less than in 2008 due to the consumer downturn in the countries where we operate, the rigorous admission processes and the need to balance organic growth and acquisition of portfolios. NPL grew to 5.4% in 2009 from 4.2% a year earlier.
Customer funds under management increased 8.3% during 2009. Of note was the solid rise in customer deposits, particularly in Germany (32%) and the contribution of new units.
Portugal
Our main Portuguese operations are conducted by Banco Santander Totta, S.A. (“Santander Totta”), and our Portuguese investment banking operations are conducted by Banco Santander de Negocios Portugal, S.A.
At the end of 2009, Portugal operated 763 branches (as compared to 770 branches at the end of 2008) and had 6,294 employees (direct and assigned) (as compared to 6,584 employees at the end of 2008), of which 163 employees were temporary.
In 2009, profit attributable to the Parent was € 531 million, a 0.1% increase from 2008, while ROE was 25.4%, as compared to 27.0% in 2008.
Against a backdrop of a sharp slowdown in lending, particularly mortgages, Santander Totta maintained a selective underwriting policy while continuing to support the country’s business sector. Lending was almost flat (-0.9%), but was 9% higher to businesses and SMEs. NPL increased in 2009 to 2.3% from 1.7% a year earlier.
After rising strongly in the first half of the year, deposit growth slowed in the second half and closed the year with a reduction of 3.6% due to the pressure on spreads from strong competition. Mutual funds and savings insurance, on the other hand, grew 31% and 29%, respectively.
Others
The rest of our businesses in the Continental Europe segment (Banif, Asset Management, Insurance and Global Wholesale Banking) generated profit attributable to the Parent of € 1,118 million, 33.1% more than in 2008. This increase was mainly due to the strong increase in revenues from Wholesale Banking spurred by net interest income as a result of the improvement in spreads and the good evolution of costs.
United Kingdom
As of December 31, 2009, the United Kingdom accounted for 30.8% of the Group’s total customer funds under management, 33.4% of total loans and credits and 16.7% of profit attributed to the Group of the Group’s main business areas.
Grupo Santander’s UK businesses include Abbey (since 2004), the deposits and branches of Bradford & Bingley (acquired in September 2008) and Alliance & Leicester (acquired in October 2008). They are referred to as Santander UK.
Santander UK is a significant financial services provider in the United Kingdom, being the country’s second largest residential mortgage lender and the third largest savings brand measured by outstanding balances. Santander UK also provides a wide range of retail savings accounts, and operates across the full range of personal financial services.
At the end of 2009, the Group had 1,322 branches and a total of 22,949 employees (direct and assigned) of which 473 employees were temporary, in the United Kingdom. Compared to 2008, there was a net increase of 19 branches and a decrease of 1,430 employees due mainly to the acquisitions described above.
For purposes of our financial statements and this annual report on Form 20-F, we have calculated Santander UK’s results of operations using the criteria described before in this annual report on Form 20-F. As a result, the data set forth herein may not coincide with the data published independently by Santander UK.

33

Table of Contents

In 2009, Santander UK contributed € 1,726 million profit attributable to the Parent (a 38.4% increase from 2008) which represents 16.7% of the Group’s total operating areas. Loans and advances increased by 12.4% and customer funds under management increased 7.2% during the same period. ROE was 29.6% (as compared to 28.6% in 2008). NPL at the end of 2009 increased to 1.7% from 1.0% at the end of 2008.
In January 2010, we completed the rebranding of Abbey and Bradford & Bingley’s savings businesses to Santander, and our customers in the UK are already benefiting from the increased number of Santander branches (now around 1,000). In addition, we have extended the range of our value-for-money products and services available to customers of Bradford & Bingley’s savings business.
The integration of Alliance & Leicester is on track and we expect to complete the transfer of its branches and customers onto Santander’s IT system by the end of 2010, which will coincide with the rebranding of Alliance & Leicester to Santander. By the end of the year our customers in the UK will have access to approximately 1,300 branches.
Latin America
At December 31, 2009, we had 5,745 offices and 85,974 employees (direct and assigned) in Latin America (as compared to 6,089 offices and 96,405 employees, respectively, at December 31, 2008), of which 78 were temporary employees. On that date, Latin America accounted for 23.2% of the total customer funds under management, 14.3% of total loans and credits and 37.1% of profit attributed to the Group of the Group’s main business areas.
Profit attributable to the Parent from Latin America was € 3,834 million in 2009, a 6.2% increase from 2008, while the ROE reached 23.7% (as compared to 24.6% in 2008).
Our Latin American banking business is principally conducted by the following banking subsidiaries:
Percentage Held
at December 31, 2009
Banco Santander (Brasil), S.A.
83.55
Banco Santander Chile
76.74
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander
74.95
Banco Santander Río, S.A. (Argentina)
99.30
Banco Santander, S.A. (Uruguay) 100.00
Banco Santander Colombia, S.A. 97.85
Banco Santander Puerto Rico 90.59
Banco Santander Perú, S.A. 100.00
We engage in a full range of retail banking activities in Latin America, although the range of our activities varies from country to country. We seek to take advantage of whatever particular business opportunities local conditions present.
Our significant position in Latin America is attributable to our financial strength, high degree of diversification (by countries, businesses, products, etc.), and the breadth and depth of our franchise.
Detailed below are the performance highlights of the main Latin American countries in which we operate (1):
Brazil. Santander Brazil Group, made up by Banco Santander in Brazil and Banco Real, is the third largest private financial institution in this country as of December 31, 2009. Santander Brazil Group had 3,593 branches, 50,961 employees and 22.5 million individual customers.
In 2009, total lending declined 5%, although performance varied by market segment. Loans to individuals increased 11% while those to companies declined 4%. Of note by product was the 21% growth in lending via credit cards, the 33% rise in payroll checks paid into accounts and the 31% increase in mortgages (all percentages are based on values in local currency).
Savings rose 1% in 2009, with demand deposits and mutual funds up 14% and 12% respectively, while the balance of time deposits dropped 14% (all variations in local currency).
(1)
When we indicate “variations in local currency”, we calculate the variation of the balance sheet data in the currency of the country that is being described, eliminating the effect of exchange rates from the local currency to euros.

34

Table of Contents

Profit attributable to the Parent from Brazil in 2009 was € 2,167 million, a 22.5% increase when compared with 2008 (+27.1% in local currency). For 2009 ROE was 25.6% and at the end of 2009, the NPL ratio was 5.3% and the NPL coverage ratio was 99%.
Mexico. Banco Santander (Mexico), S.A., Institución de Banca Múltiple, Grupo Financiero Santander, is one of the leading financial services companies in Mexico.  It leads the third largest banking group in Mexico in terms of business volume. As of December 31, 2009, the Group had a network of 1,093 branches, 12,466 employees and 8.7 million customers in Mexico.
During 2009, lending declined 11%. Consumer credit and credit cards declined 30%, in line with the market and more demanding risk admission policies. Mortgages, on the other hand, increased 7%. Savings rose 6%, as the drop in time deposits balances was offset by the increase in demand deposits and the strong rise (19%) in mutual funds (all variations in local currency).
Profit attributable to the Parent from Mexico in 2009 decreased 17.6% to € 495 million (-4.8% in local currency). For 2009, ROE was 18.4% and at the end of 2009, the NPL ratio was 1.8% and the NPL coverage ratio was 264%.
Chile. Banco Santander Chile is the principal component of the largest financial group in Chile in terms of the number of customers, business and results with substantial business in loans, deposits and mutual funds and pension funds. As of December 31, 2009, the Group had 498 branches, 11,751 employees and 3.2 million customers.
During 2009, lending declined 6%, due to the fall in commercial credit in line with the market’s situation. Consumer credit and credit cards, after several years of expansion, remained virtually unchanged and lending to SMEs was also stagnant. Loans to individuals increased 6% (market share of 24.4%) and mortgage lending grew 5%. Savings declined 3%, with a differing performance by products: demand deposits increased 24% and mutual funds increased 43% while time deposits fell 24%.(All variations in local currency).
Profit attributable to the Parent from Chile increased 3.4% in 2009 to € 563 million (a 5.9% increase as compared to 2008, in local currency). For 2009, ROE was 32.3% and at the end of 2009, the NPL ratio was 3.2% and the NPL coverage ratio was 89%.
Argentina . Banco Santander Río S.A. is one of Argentina’s leading banks, with 298 branches, 5,780 employees and 2.0 million banking customers as of December 31, 2009.
The Group’s strategy in 2009 was focused on lifting the return on its business franchise, with greater importance attached to customer linkage and transaction banking, selective growth in lending and carefully managing the entire risk cycle. Compared to 2008, in 2009 lending increased 2%, savings increased 13%,deposits grew 15% (+32% demand deposits and +2% time deposits) and mutual funds increased 1% (all variations in local currency).
Banco Santander Río made a positive contribution to the Group’s earnings, with profit attributable to the Parent of € 226 million in 2009, a 4.9% increase as compared to 2008 (a 16.9% increase in local currency). At the end of 2009, the NPL ratio was 2.6% and the NPL coverage ratio was 141%.
Uruguay. After the consolidation of the acquired ABN businesses, Santander became the largest non government-owned bank in the country in terms of profits ( € 51 million), number of branches (42) and business (market share of 17.0% in lending and 17.4% in savings). The Group in Uruguay has 815 employees and 0.3 million banking customers.
Profit attributable to the Parent in 2009 was € 51 million and the NPL ratio was 0.6% as of December 31, 2009.
Colombia . As of December 31, 2009, Banco Santander Colombia, S.A. had 77 branches, 1,330 employees and 0.4 million banking customers.
The Group focused on credit risk management, selective growth in lending, preserving adequate levels of liquidity, strengthening transactional businesses and, in particular, containment of costs.
Profit attributable to the Parent from Colombia was € 33 million in 2009, 23.9% higher than in 2008 (a 29.0% increase in local currency). At the end of 2009, the NPL ratio was 1.8% and the NPL coverage ratio was 188%.

35

Table of Contents

Puerto Rico . Banco Santander Puerto Rico is among the three largest financial institutions in Puerto Rico in terms of lending, deposits and mutual funds. As of December 31, 2009, Banco Santander Puerto Rico had 130 branches, 1,809 employees and 0.5 million customers.
Profit attributable to the Parent from Puerto Rico in 2009 was € 33 million, compared to a loss of € 19 million obtained in 2008. At the end of 2009, the NPL ratio stood at 9.6% and the NPL coverage ratio was 53%.
Peru . As of December 31, 2009, Banco Santander Colombia, S.A. had 1 branch, 33 employees and 0.1 million banking customers. The activity is focused on companies and on attending the Group’s global customers.
Profit attributable to the Parent from Perú was € 4 million in 2009, 394% higher than in 2008 (a 384% increase in local currency).
Sovereign
On January 30, 2009, Banco Santander completed the acquisition of the 75.65% of Sovereign that it did not already own, making it a fully-owned subsidiary of Grupo Santander. Sovereign improves Grupo Santander’s geographic diversification as it enables it to operate in the US and specifically in the Northeast, one of the most attractive and stable areas, which is less prone to cyclical changes and where six of the 26 largest US cities are located.
At December 31, 2009, Sovereign had 722 branches, 2,359 ATMs, 8,847 employees and 1.7 million clients. On that date, Sovereign accounted for 5.6% of the total customer funds under management, and 5.1% of total loans and credits.
For purposes of our financial statements and this annual report on Form 20-F, we have calculated Sovereign’s results of operations using the criteria described before in this annual report on Form 20-F. As a result, the data set forth herein may not coincide with the data published independently by Sovereign.
In 2009, Sovereign contributed € 25 million loss attributable to the Parent which represents -0.2% of the Group’s total operating areas profit. Loans and advances were € 34.6 billion and customer funds under management € 44.6 billion. Non-performing loans at the end of 2009 were 5.3% and NPL coverage was 62%.
The priorities for Sovereign in 2010 are to complete the restructuring and integration plan and continue to implement the Santander model both in operations, technology and systems as well as in the commercial sphere, while maintaining strict management of risk.
Second (or business) level:
Retail Banking
The Group’s Retail Banking business generated 85% of the operating areas’ total income in 2009 and 69% of profit attributable to the Parent. In 2009, Retail Banking generated total income of € 34,828 million, 32.4% higher than in 2008. Profit attributable to the Parent by Retail Banking was € 7,159 million, 2.1% lower than in 2008. The year-on-year variations were positively impacted by the change in the scope of consolidation and negatively by the reduced volume of activity, the big increase in net loan-loss provisions and the impact of exchange rate fluctuations. This segment had 163,184 employees at the end of 2009.
Retail Banking in Continental Europe increased its net interest income by 23.3% and total income 12.1% while attributable profit decreased by 3.7%. The main drivers were moderate business volumes, good management of spreads in an environment of lower interest rates and control of costs (flat on a like-for-like basis).
The profit of Retail Banking in the United Kingdom was 34.0% higher, due to the good performance of Santander UK and the consolidation of Alliance & Leicester and Bradford & Bingley. The drivers were the same as for other units: higher revenues spurred by net interest income, lower growth in costs and higher loan-loss provisions.
The results of Retail Banking in Latin America were driven by growth in customer business, the good performance of net interest income given the region’s environment of lower economic growth, control of expenses compatible with our business development efforts and savings from synergies in Brazil. Net interest income rose 54.3%, total income was 37.8% higher and operating expenses grew 32.9% compared to 2008.

36

Table of Contents

Global Private Banking includes institutions that specialize in financial advisory and asset management for high income clients (Banif in Spain, Santander Private Banking UK and Abbey International in the UK and Santander Private Banking in Latin America and Italy), as well as the units of domestic private banking in Portugal and Latin America, jointly managed with local retail banks. Allfunds Bank, a leading bank specialized in multi-brand distribution of investment funds to clients, is present in Spain, Italy, the UK and Latin America.
Private banking activity was lower in the first half of 2009 because of the developments in the second half of 2008. Total income declined 6.9%, due to the reduction in average volumes managed and the shift in customer preferences towards a more conservative mix of products. This was mitigated to some extent by the 9.9% decline in personnel and general administrative costs. Attributable profit was 1.6% higher at € 330 million.
Global Wholesale Banking
This area covers our corporate banking, treasury and investment banking activities throughout the world.
This segment, managed by Santander Global Banking & Markets, contributed 12% of the operating areas’ total income and 27% of profit attributable to the Parent in 2009. Profit attributable to the Parent in 2009 by Global Wholesale Banking amounted to € 2,765 million, a 58.8% increase from 2008. This segment had 2,898 employees as of December 31, 2009.
This performance was backed by a customer-focused business model, the area’s global reach and its connection with local units, and strict control of expenses and risks. Another important factor was the strength of the Group’s capital and liquidity positions which, within rigorous control of both variables, enabled us to maintain a high level of unrestricted activity and take on new operations.
The business model and the strong balance sheet were combined with a more favorable environment, higher spreads and volatility than in 2008 and many competitors focused on other aspects of their businesses. All of this enabled Santander to penetrate attractive business segments profitably and occupy spaces left by others without increasing risk levels.
The growth rates were achieved with strict management of volumes and risks. The area’s risk weighted asset levels at the end of 2009 were lower than in 2008.
Santander is present in global transaction banking (which includes cash management, trade finance and basic financing), in corporate finance (comprising mergers and acquisitions and asset and capital structuring), in credit markets (which include origination activities, risk management, distribution of structured products and debt), in rates (comprised of structuring and trading activities in financial markets of interest rate and exchange rate instruments) and in global equities (activities relating to the equity markets).
Asset Management and Insurance
This segment comprises all of our companies whose activity is the management of mutual and pension funds and insurance. At December 31, 2009, this segment accounted for 2.5% of total income and 3.9% of profit attributable to the Parent. Profit attributable to the Parent by Asset Management and Insurance was € 404 million in 2009 or 14.2% lower than in 2008. This segment had 1,558 employees at the end of 2009.
Asset Management
Santander Asset Management generated total revenues of € 1,178 million, 23.6% lower because of the preference for liquidity and deposits by financial agents and the impact of the market on portfolios, which led to lower average volumes under management as well as changes in their composition (more conservative and lower return).
Of note, however, was the trend of stabilization in revenues as of the second quarter, in contrast to the double digit falls at the end of 2008 and the start of 2009. This was due to the gradual recovery of mutual fund markets, first in Latin America and later spreading to Europe, which improved volumes.
Total managed assets stood at € 116,500 million at the end of 2009, 15% more than a year earlier but still 6% below the average volume of 2008.

37

Table of Contents

Attributable profit was € 54 million, a 65.9% decrease from 2008, after deducting operating expenses and fees paid to the commercial networks (16.9 percentage points of the decrease resulted from structural adjustments).
Insurance
Santander Insurance generated attributable profit of € 350 million, 12.2% more than in 2008. Higher net interest income and insurance activity, coupled with lower operating expenses, offset lower net fee income.
Total fees and commission income was € 1,861 million in 2009, 6.0% higher as compared to 2008.
Santander Insurance continued to progress in its global business model and foster the development of new products via its distribution channels. It also consolidated its position with the acquisition of 50% of the insurer Real Tokio Marine Vida e Previdencia in Brazil and the integration of the insurance businesses of Alliance & Leicester, GE Money and Sovereign.
Premium income was 14% lower than in 2008, eroded by the Group’s reduced lending (which affected insurance products related to credits) and customers’ greater preference for liquidity, which reduced the demand for savings insurance.
Corporate Activities
At the end of 2009, this area had 1,820 employees (direct and assigned) (as compared to 1,710 employees at the end of 2008), of which 253 were temporary.
This area is responsible for a series of centralized activities and acts as the Group’s holding entity, managing all capital and reserves and assigning capital and liquidity to the other businesses. The cost of liquidity, via the transfer of funds to various businesses, is done at the short-term market rate.
The area had a loss of € 1,385 million in 2009 due to the following:
• Dividends dropped from € 229 million to € 121 million, including those from the stakes in RBS and Fortis.
• Operating expenses increased by € 177 million, mainly because of higher general expenses which were partly offset by lower amortizations. The sale of buildings and of Grupo Santander City in Spain meant greater spending on rentals and lower amortizations.
• Income accounted for by the equity method was € 96 million in 2008 compared to a loss of € 15 million in 2009. The difference was largely due to the sale of the stake in Cepsa.
With respect to the area’s sub segments:
• Equity Stakes: this sub-segment centralizes the management of equity stakes in financial and industrial companies.
In 2008 and 2009, the Equity Stakes line recorded a sharp fall to almost zero because of the full consolidation of Banco Real and Sovereign and the exit from CEPSA, all of which were previously accounted for in this sub-segment.
• Financial Management: this sub-segment carries out the global functions of managing the structural exchange rate position, the structural interest rate risk and the liquidity risk. The latter is conducted through issues and securitizations. It also manages the Group’s shareholders’ equity.
This sub-segment includes the cost of hedging the capital of the Group’s non-euro denominated subsidiaries, in the face of exchange-rate fluctuations. With respect to the book value, the current policy is aimed at covering the excess capital of each subsidiary on 7% of their risk weighted assets, either through direct term positions in most cases or through a strategy of option “tunnels” that limit the losses in scenarios of significant currency depreciation.
The year’s results in currencies other than the euro are also hedged, using in each case the aforementioned strategies. In 2008 and 2009, the main units with exchange-rate risk remained hedged.

38

Table of Contents

The results of interest rate risk management, which is actively conducted by taking positions in the market, are also reflected. This management seeks to cushion the impact of changes in market interest rates on the bank’s net interest income and value, and is done via bonds and derivatives of high credit quality, high liquidity and low capital consumption.
With respect to liquidity risk, liquidity needs are below those in previous years, because in the current environment of decreased leverage, and in light of retail deposit growth outpacing that of loans, there was less need for recourse to the medium and long-term debt markets.
This sub-segment also manages shareholders’ equity, the allocation of capital to each business unit, and the cost of financing investments. As a result, the sub-segment contribution to earnings is usually negative.
Total Revenues by Activity and Geographic Location
For a breakdown of our total revenues by category of activity and geographic market, please see Note 52 to our consolidated financial statements.
Selected Statistical Information
The following tables show our selected statistical information.
Average Balance Sheets and Interest Rates
The following tables show, by domicile of customer, our average balances and interest rates for each of the past three years.
You should read the following tables and the tables included under “—Changes in Net Interest Income—Volume and Rate Analysis” and “—Assets—Earning Assets—Yield Spread” in conjunction with the following:
•
We have included interest received on non-accruing assets in interest income only if we received such interest during the period in which it was due;
•
We have included loan fees in interest income;
•
We have not recalculated tax-exempt income on a tax-equivalent basis because the effect of doing so would not be significant;
•
We have included income and expenses from interest-rate hedging transactions as a separate line item under interest income and expenses if these transactions qualify for hedge accounting under IFRS. If these transactions did not qualify for such treatment, we have included income and expenses on these transactions elsewhere in our income statement. See Note 2 to our consolidated financial statements for a discussion of our accounting policies for hedging activities;
•
We have stated average balances on a gross basis, before netting our allowances for credit losses, except for the total average asset figures, which includes such netting; and
•
All average data have been calculated using month-end balances, which is not significantly different from having used daily averages.
As stated above under “Presentation of Financial Information”, we have prepared our financial statements for 2005, 2006, 2007, 2008 and 2009 under IFRS.

39

Table of Contents

Average Balance Sheet—Assets and Interest Income
2009 2008 2007
ASSETS Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate
(in thousand of euros, except percentages)
Cash and due from central banks
Domestic
7,916,042 86,918 1.10 % 7,629,805 242,954 3.18 % 3,502,564 123,432 3.52 %
International
25,933,209 268,921 1.04 % 21,224,830 514,997 2.43 % 14,745,386 415,071 2.81 %
33,849,251 355,839 1.05 % 28,854,635 757,951 2.63 % 18,247,950 538,503 2.95 %
Due from credit entities
Domestic
20,934,738 366,521 1.75 % 14,858,817 726,287 4.89 % 10,040,530 574,735 5.72 %
International
58,290,277 2,155,515 3.70 % 61,173,074 3,095,167 5.06 % 59,125,638 2,265,509 3.83 %
79,225,015 2,522,036 3.18 % 76,031,891 3,821,454 5.03 % 69,166,168 2,840,244 4.11 %
Loans and credits
Domestic
230,641,779 10,297,581 4.46 % 235,002,141 13,968,547 5.94 % 215,521,349 11,437,122 5.31 %
International
436,857,260 31,784,344 7.28 % 340,938,627 27,397,524 8.04 % 330,253,241 23,144,396 7.01 %
667,499,039 42,081,925 6.30 % 575,940,768 41,366,071 7.18 % 545,774,590 34,581,518 6.34 %
Debt securities
Domestic
40,146,418 1,157,953 2.88 % 24,948,203 951,353 3.81 % 20,222,647 747,248 3.70 %
International
92,776,382 4,428,624 4.77 % 73,645,946 3,555,521 4.83 % 91,880,249 3,259,557 3.55 %
132,922,800 5,586,577 4.20 % 98,594,149 4,506,874 4.57 % 112,102,896 4,006,805 3.57 %
Income from hedging operations
Domestic
304,669 695,086 580,530
International
586,600 2,548,537 2,010,890
891,269 3,243,623 2,591,420
Other interest-earning assets
Domestic
29,389,475 609,652 2.07 % 23,577,214 618,246 2.62 % 29,729,778 692,339 2.33 %
International
60,208,919 1,125,706 1.87 % 41,486,705 729,327 1.76 % 18,454,627 261,428 1.42 %
89,598,394 1,735,358 1.94 % 65,063,919 1,347,573 2.07 % 48,184,405 953,767 1.98 %
Total interest-earning assets
Domestic
329,028,452 12,823,294 3.90 % 306,016,180 17,202,473 5.62 % 279,016,868 14,155,406 5.07 %
International
674,066,047 40,349,710 5.99 % 538,469,182 37,841,073 7.03 % 514,459,141 31,356,851 6.10 %
1,003,094,499 53,173,004 5.30 % 844,485,362 55,043,546 6.52 % 793,476,009 45,512,257 5.74 %
Investments in affiliated companies
Domestic
152,893 — 0.00 % 2,576,136 — 0.00 % 2,547,829 — 0.00 %
International
708,988 — 0.00 % 10,044,991 — 0.00 % 6,194,828 — 0.00 %
861,881 — 0.00 % 12,621,127 — 0.00 % 8,742,657 — 0.00 %
Total earning assets
Domestic
329,181,345 12,823,294 3.90 % 308,592,316 17,202,473 5.57 % 281,564,697 14,155,406 5.03 %
International
674,775,035 40,349,710 5.98 % 548,514,173 37,841,073 6.90 % 520,653,969 31,356,851 6.02 %
1,003,956,380 53,173,004 5.30 % 857,106,489 55,043,546 6.42 % 802,218,666 45,512,257 5.67 %
Other assets
90,198,410 75,975,026 70,466,632
Assets from discontinued operations
4,980,696 8,024,216 4,996,980
Total average assets
1,099,135,486 53,173,004 941,105,731 55,043,546 877,682,278 45,512,257

40

Table of Contents

Average Balance Sheet—Liabilities and Interest Expense
Year Ended December 31,
2009 2008 2007
LIABILITIES AND STOCKHOLDERS EQUITY Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate
(in thousands of euros, except percentages)
Due to credit entities
Domestic
21,713,054 424,084 1.95 % 18,468,695 830,324 4.50 % 16,252,861 713,579 4.39 %
International
120,217,372 2,861,280 2.38 % 95,892,266 2,858,266 2.98 % 95,716,945 3,140,863 3.28 %
141,930,426 3,285,364 2.31 % 114,360,961 3,688,590 3.23 % 111,969,806 3,854,442 3.44 %
Customers deposits
Domestic
130,580,883 2,694,867 2.06 % 119,381,247 3,830,610 3.21 % 111,160,325 2,974,509 2.68 %
International
333,021,416 9,115,847 2.74 % 234,812,668 11,169,783 4.76 % 221,517,887 9,097,691 4.11 %
463,602,299 11,810,714 2.55 % 354,193,915 15,000,393 4.24 % 332,678,212 12,072,200 3.63 %
Marketable debt securities
Domestic
125,931,287 3,598,181 2.86 % 145,061,770 6,487,367 4.47 % 119,274,612 5,231,367 4.39 %
International
95,298,804 2,638,566 2.77 % 92,762,877 4,330,281 4.67 % 108,172,479 4,120,238 3.81 %
221,230,091 6,236,747 2.82 % 237,824,647 10,817,648 4.55 % 227,447,091 9,351,605 4.11 %
Subordinated debt
Domestic
21,704,442 1,028,748 4.74 % 20,532,672 1,111,241 5.41 % 16,649,935 846,949 5.09 %
International
17,304,105 1,325,301 7.66 % 15,724,436 1,303,801 8.29 % 16,862,344 1,253,049 7.43 %
39,008,547 2,354,049 6.03 % 36,257,108 2,415,042 6.66 % 33,512,279 2,099,998 6.27 %
Other interest-bearing liabilities
Domestic
37,347,808 1,128,882 3.02 % 36,605,703 876,041 2.39 % 28,510,083 1,001,797 3.51 %
International
70,461,483 1,241,760 1.76 % 52,981,507 573,773 1.08 % 47,882,027 197,244 0.41 %
107,809,291 2,370,642 2.20 % 89,587,210 1,449,814 1.62 % 76,392,110 1,199,041 1.57 %
Expenses from hedging operations
Domestic
(622,758 ) 1,402,069 480,014
International
1,439,704 2,731,528 2,012,186
816,946 4,133,597 2,492,200
Total interest-bearing liabilities
Domestic
337,277,474 8,252,004 2.45 % 340,050,087 14,537,652 4.28 % 291,847,816 11,248,215 3.85 %
International
636,303,180 18,622,458 2.93 % 492,173,754 22,967,432 4.67 % 490,151,682 19,821,271 4.04 %
973,580,654 26,874,462 2.76 % 832,223,841 37,505,084 4.51 % 781,999,498 31,069,486 3.97 %
Other liabilities
54,382,807 44,784,845 41,501,911
Minority interest
3,191,835 2,432,563 2,239,676
Stockholders’ Equity
63,393,172 54,149,565 47,147,854
Liabilities from discontinued operations
4,587,018 7,514,918 4,793,339
Total average Liabilities and Stockholders’ Equity
1,099,135,486 26,874,462 941,105,732 37,505,084 877,682,278 31,069,486

41

Table of Contents

Changes in Net Interest Income—Volume and Rate Analysis
The following tables allocate, by domicile of customer, changes in our net interest income between changes in average volume and changes in average rate for 2009 compared to 2008 and 2008 compared to 2007. We have calculated volume variances based on movements in average balances over the period and rate variance based on changes in interest rates on average interest-earning assets and average interest-bearing liabilities. We have allocated variances caused by changes in both volume and rate to volume. You should read the following tables and the footnotes thereto in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.
Volume and rate analysis
IFRS-IASB
2009/2008
Increase (Decrease) due to changes in
Volume Rate Net change
(in thousands of euros)
Interest income
Cash and due from central banks
Domestic
2,664 (158,700 ) (156,036 )
International
48,949 (295,025 ) (246,076 )
51,613 (453,725 ) (402,112 )
Due from credit entities
Domestic
106,801 (466,567 ) (359,766 )
International
(107,698 ) (831,954 ) (939,652 )
(897 ) (1,298,521 ) (1,299,418 )
Loans and credits
Domestic
(192,934 ) (3,478,032 ) (3,670,966 )
International
6,977,954 (2,591,134 ) 4,386,820
6,785,020 (6,069,166 ) 715,854
Debt securities
Domestic
438,618 (232,018 ) 206,600
International
917,291 (44,188 ) 873,103
1,355,909 (276,206 ) 1,079,703
Other interest-earning assets
Domestic
121,081 (129,675 ) (8,594 )
International
350,744 45,635 396,379
471,825 (84,040 ) 387,785
Total interest-earning assets without hedging operations
Domestic
476,230 (4,464,992 ) (3,988,762 )
International
8,187,240 (3,716,666 ) 4,470,574
8,663,470 (8,181,658 ) 481,812
Income from hedging operations
Domestic
(390,417 ) — (390,417 )
International
(1,961,937 ) — (1,961,937 )
(2,352,354 ) — (2,352,354 )
Total interest-earning assets
Domestic
85,813 (4,464,992 ) (4,379,179 )
International
6,225,303 (3,716,666 ) 2,508,637
6,311,116 (8,181,658 ) (1,870,542 )

42

Table of Contents

Volume and rate analysis
IFRS-IASB
2008/2007
Increase (Decrease) due to changes in
Volume Rate Net change
(in thousands of euros)
Interest income
Cash and due from central banks
Domestic
131,431 (11,909 ) 119,522
International
155,958 (56,032 ) 99,926
287,389 (67,941 ) 219,448
Due from credit entities
Domestic
234,888 (83,336 ) 151,552
International
102,413 727,245 829,658
337,301 643,909 981,210
Loans and credits
Domestic
1,173,641 1,357,784 2,531,425
International
851,520 3,401,608 4,253,128
2,025,161 4,759,392 6,784,553
Debt securities
Domestic
181,860 22,245 204,105
International
(880,103 ) 1,176,067 295,964
(698,243 ) 1,198,312 500,069
Other interest-earning assets
Domestic
(160,309 ) 86,216 (74,093 )
International
405,153 62,746 467,899
244,844 148,962 393,806
Total interest-earning assets without hedging operations
Domestic
1,561,511 1,371,000 2,932,511
International
634,941 5,311,634 5,946,575
2,196,452 6,682,634 8,879,086
Income from hedging operations
Domestic
114,556 — 114,556
International
537,647 — 537,647
652,203 — 652,203
Total interest-earning assets
Domestic
1,676,067 1,371,000 3,047,067
International
1,172,588 5,311,634 6,484,222
2,848,655 6,682,634 9,531,289

43

Table of Contents

Volume and rate analysis
IFRS-IASB
2009/2008
Increase (Decrease) due to changes in
Volume Rate Net change
(in thousands of euros)
Interest charges
Due to credit entities
Domestic
64,712 (470,952 ) (406,240 )
International
578,368 (575,354 ) 3,014
643,080 (1,046,306 ) (403,226 )
Customers deposits
Domestic
237,141 (1,372,884 ) (1,135,743 )
International
2,689,280 (4,743,216 ) (2,053,936 )
2,926,421 (6,116,100 ) (3,189,679 )
Marketable debt securities
Domestic
(553,692 ) (2,335,494 ) (2,889,186 )
International
70,780 (1,762,495 ) (1,691,715 )
(482,912 ) (4,097,989 ) (4,580,901 )
Subordinated debt
Domestic
55,076 (137,569 ) (82,493 )
International
120,564 (99,064 ) 21,500
175,640 (236,633 ) (60,993 )
Other interest-bearing liabilities
Domestic
22,225 230,616 252,841
International
307,713 360,274 667,987
329,938 590,890 920,828
Total interest-bearing liabilities without hedging operations
Domestic
(174,538 ) (4,086,283 ) (4,260,821 )
International
3,766,705 (6,819,855 ) (3,053,150 )
3,592,167 (10,906,138 ) (7,313,971 )
Expenses from hedging operations
Domestic
(2,024,827 ) — (2,024,827 )
International
(1,291,824 ) — (1,291,824 )
(3,316,651 ) — (3,316,651 )
Total interest-bearing liabilities
Domestic
(2,199,365 ) (4,086,283 ) (6,285,648 )
International
2,474,881 (6,819,855 ) (4,344,974 )
275,516 (10,906,138 ) (10,630,622 )

44

Table of Contents

IFRS-IASB
2008/2007
Increase (Decrease) due to changes in
Volume Rate Net change
(in thousands of euros)
Interest charges
Due to credit entities
Domestic
98,867 17,878 116,745
International
4,554 (287,151 ) (282,597 )
103,421 (269,273 ) (165,852 )
Customers deposits
Domestic
266,951 589,150 856,101
International
632,226 1,439,866 2,072,092
899,177 2,029,016 2,928,193
Marketable debt securities
Domestic
1,160,580 95,420 1,256,000
International
(720,240 ) 930,283 210,043
440,340 1,025,703 1,466,043
Subordinated debt
Domestic
211,012 53,280 264,292
International
(94,264 ) 145,016 50,752
116,748 198,296 315,044
Other interest-bearing liabilities
Domestic
193,557 (319,313 ) (125,756 )
International
55,719 320,810 376,529
249,276 1,497 250,773
Total interest-bearing liabilities without hedging operations
Domestic
1,930,967 436,415 2,367,382
International
(122,005 ) 2,548,824 2,426,819
1,808,962 2,985,239 4,794,201
Expenses from hedging operations
Domestic
922,055 — 922,055
International
719,342 — 719,342
1,641,397 — 1,641,397
Total interest-bearing liabilities
Domestic
2,853,022 436,415 3,289,437
International
597,337 2,548,824 3,146,161
3,450,359 2,985,239 6,435,598

45

Table of Contents

Assets
Earning Assets—Yield Spread
The following table analyzes, by domicile of customer, our average earning assets, interest income and dividends on equity securities and net interest income and shows gross yields, net yields and yield spread for each of the years indicated. You should read this table and the footnotes thereto in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.
Earning Assets — Yield Spread
IFRS-IASB
Year Ended December 31,
2009 2008 2007
(in thousands of euros, except percentages)
Average earning assets
Domestic
329,181,345 308,592,316 281,564,697
International
674,775,035 548,514,173 520,653,969
1,003,956,380 857,106,489 802,218,666
Interest
Domestic
12,823,294 17,202,473 14,155,406
International
40,349,710 37,841,073 31,356,851
53,173,004 55,043,546 45,512,257
Net interest income
Domestic
4,571,290 2,664,821 2,907,192
International
21,727,252 14,873,641 11,535,580
26,298,542 17,538,462 14,442,772
Gross yield (1)
Domestic
3.90 % 5.57 % 5.03 %
International
5.98 % 6.90 % 6.02 %
5.30 % 6.42 % 5.67 %
Net yield (2)
Domestic
1.39 % 0.86 % 1.03 %
International
3.22 % 2.71 % 2.22 %
2.62 % 2.05 % 1.80 %
Yield spread (3)
Domestic
1.45 % 1.29 % 1.18 %
International
3.05 % 2.23 % 1.98 %
2.54 % 1.91 % 1.70 %
(1)
Gross yield is the quotient of interest on equity securities divided by average earning assets.
(2)
Net yield is the quotient of net interest income divided by average earning assets.
(3)
Yield spread is the difference between gross yield on earning assets and the average cost of interest-bearing liabilities. For a discussion of the changes in yield spread over the periods presented, see “Item 5. Operating and Financial Review and Prospects—A. Operating results—Results of Operations for Santander—Interest Income / (Charges)”.

46

Table of Contents

Return on Equity and Assets
The following table presents our selected financial ratios for the years indicated.
Year Ended December 31,
2009 2008 2007
ROA: Return on average total assets
0.86 % 1.00 % 1.10 %
ROE: Return on average stockholders’ equity
13.90 % 17.07 % 21.91 %
PAY-OUT: Dividends per average share as a percentage of net attributable income per average share
55.00 % 54.21 % 44.92 %
Average stockholders’ equity as a percentage of average total assets
5.85 % 5.55 % 4.71 %
Interest-Earning Assets
The following table shows, by domicile of customer, the percentage mix of our average interest-earning assets for the years indicated. You should read this table in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.
Interest-earning assets
IFRS-IASB
Year Ended December 31,
2009 2008 2007
Cash and due from Central Banks
Domestic
0.79 % 0.92 % 0.43 %
International
2.59 % 2.51 % 1.86 %
3.38 % 3.43 % 2.29 %
Due from credit entities
Domestic
2.09 % 1.76 % 1.27 %
International
5.81 % 7.24 % 7.45 %
7.90 % 9.00 % 8.72 %
Loans and credits
Domestic
22.99 % 27.83 % 27.16 %
International
43.55 % 40.37 % 41.62 %
66.54 % 68.20 % 68.78 %
Debt securities
Domestic
4.00 % 2.95 % 2.55 %
International
9.25 % 8.72 % 11.58 %
13.25 % 11.67 % 14.13 %
Other interest-earning assets
Domestic
2.93 % 2.79 % 3.75 %
International
6.00 % 4.91 % 2.33 %
8.93 % 7.70 % 6.08 %
Total interest-earning assets
Domestic
32.80 % 36.25 % 35.16 %
International
67.20 % 63.75 % 64.84 %
100.00 % 100.00 % 100.00 %

47

Table of Contents

Loans and Advances to Credit Institutions
The Group’s financial information included in this annual report on Form 20-F has been prepared since 2008 under IFRS-IASB. In prior years, it was prepared according to the EU-IFRS required to be applied under Bank of Spain’s Circular 4/2004. The financial information disclosed in this section of our annual report under IFRS-IASB, only differs from the financial information previously presented under EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 for 2005, since the differences are not material for subsequent periods. See “Item 3. Key information – A. Selected Financial Data” in our 2008 Form 20-F for additional information.
The following tables show our short-term funds deposited with other banks at each of the dates indicated.
IFRS-IASB
At December 31,
2009 2008 2007 2006 2005
(in thousands of euros)
Reciprocal accounts
712,503 663,230 417,438 503,299 345,104
Time deposits
21,382,542 25,455,903 13,569,362 16,842,601 21,962,477
Reverse repurchase agreements
29,489,895 18,568,747 30,276,080 37,010,008 33,634,326
Other accounts
28,251,667 34,104,397 13,379,724 15,401,148 10,185,136
79,836,607 78,792,277 57,642,604 69,757,056 66,127,043
Of which Impairment allowances
(25,536 ) (253,567 ) (18,487 ) (12,727 ) (36,046 )
Investment Securities
At December 31, 2009, the book value of our investment securities was € 174.0 billion (representing 15.7% of our total assets). These investment securities had a yield of 3.94% in 2009, compared with a yield of 4.31% in 2008, and a yield of 3.29% in 2007. Approximately € 37.8 billion, or 21.7%, of our investment securities at December 31, 2009 consisted of Spanish Government and government agency securities. For a discussion of how we value our investment securities, see Note 2 to our consolidated financial statements.

48

Table of Contents

The following tables show the book values of our investment securities by type and domicile of counterparty at each of the dates indicated.
IFRS-IASB
At December 31,
2009 2008 2007
(in thousands of euros)
Debt securities
Domestic-
Spanish Government
37,770,101 20,267,964 14,471,176
Other domestic issuer:
Public authorities
542,577 231,529 904,382
Other domestic issuer
8,124,835 9,076,564 9,988,780
Total domestic
46,437,513 29,576,057 25,364,338
International-
United States:
U.S. Treasury and other U.S. Government agencies
1,183,550 881,579 1,870,152
States and political subdivisions
1,714,940 1,260,494 281,453
Other securities
12,964,869 6,155,609 9,717,624
Total United States
15,863,359 8,297,682 11,869,229
Other:
Governments
41,108,209 20,990,003 19,465,853
Other securities
48,292,040 50,567,953 52,650,983
Total Other
89,400,249 71,557,956 72,116,836
Total International
105,263,608 79,855,638 83,986,065
Less- Allowance for credit losses
(166,722 ) (181,178 ) (91,753 )
Less- Price fluctuation allowance
— — —
Total Debt Securities
151,534,399 109,250,517 109,258,650
Equity securities
Domestic
6,070,228 4,447,197 8,283,198
International-
United States
1,489,681 938,265 1,629,755
Other
14,896,610 10,046,522 12,874,902
Total international
16,386,291 10,984,787 14,504,658
Less- Price fluctuation allowance
— (9,159 ) (11,238 )
Total Equity Securities
22,456,519 15,422,825 22,776,618
Total Investment Securities
173,990,918 124,673,342 132,035,268

49

Table of Contents

The following table analyzes the aggregate book value and aggregate market value of the securities of single issuers, other than the Government of the United States, which exceeded 10% of our stockholders’ equity as of December 31, 2009 (and other debt securities with aggregate values near to 10% of our stockholders’ equity).
Aggregate as of December 31, 2009
Book value Market value
(in thousands of euros)
Debt securities:
Exceed 10% of stockholders’ equity:
Spanish Government
38,312,678 38,312,678
Near 10% of stockholders’ equity:
Telefónica
4,940,425 4,940,425
República Federal do Brasil
4,621,989 4,621,989
ACS — Dragados
4,295,266 4,295,266
The following table analyzes the maturities and weighted average yields of our debt investment securities (before impairment allowances) at December 31, 2009. Yields on tax-exempt obligations have not been calculated on a tax-equivalent basis because we do not believe the effect of such a calculation would be material.
At December 31, 2009
Maturing Maturing
Maturing Between Between Maturing
Within 1 and 5 and After
1 Year 5 Years 10 Years 10 Years Total
(in thousands of euros)
DEBT SECURITIES
Domestic:
Spanish Government
8,761,922 14,342,993 10,814,302 3,850,884 37,770,101
Other domestic issuer:
Public authorities
4,588 155,103 270,547 112,339 542,577
Other domestic issuer
1,134,551 3,502,215 961,475 2,526,594 8,124,835
Total domestic
9,901,061 18,000,311 12,046,324 6,489,817 46,437,513
International:
United States:
U.S. Treasury and other U.S. Government agencies
546,799 337,297 269,200 30,253 1,183,550
States and political subdivisions
77,104 113,801 112,804 1,411,231 1,714,940
Other securities
2,265,756 5,228,793 2,969,823 2,500,498 12,964,869
Total United States
2,889,659 5,679,891 3,351,827 3,941,982 15,863,359
Other:
Governments
12,868,462 23,589,516 2,504,733 2,145,498 41,108,209
Other securities
13,401,128 22,901,979 4,029,869 7,959,064 48,292,040
Total Other
26,269,590 46,491,495 6,534,602 10,104,562 89,400,249
Total International
29,159,249 52,171,386 9,886,429 14,046,544 105,263,608
Total debt investment securities
39,060,310 70,171,697 21,932,753 20,536,361 151,701,121

50

Table of Contents

Loan Portfolio
At December 31, 2009, our total loans and advances to customers equaled € 700.4 billion (63.1% of our total assets). Net of allowances for credit losses, loans and advances to customers equaled € 682.6 billion at December 31, 2009 (61.4% of our total assets). In addition to loans, we had outstanding at December 31, 2005, 2006, 2007, 2008 and 2009 € 77.7 billion, € 91.7 billion, € 102.2 billion, € 123.3 billion and € 150.6 billion, respectively, of undrawn balances available to third parties.
Loans by Geographic Area and Type of Customer
The following tables analyze our loans and advances to customers (including securities purchased under agreement to resell), by domicile and type of customer, at each of the dates indicated.
IFRS-IASB
At December 31,
2009 2008 2007 2006 2005
(in thousands of euros)
Borrowers in Spain:
Spanish Government
9,802,511 7,668,408 5,633,422 5,328,526 5,242,938
Commercial, financial, agricultural and industrial
70,136,946 56,289,775 45,169,824 71,412,545 54,799,113
Real estate and construction
42,514,809 48,098,886 46,837,281 12,391,306 7,834,447
Other mortgages
68,865,914 59,784,116 59,268,463 81,718,186 65,940,697
Installment loans to individuals
20,070,626 21,505,725 21,533,074 20,058,666 14,343,281
Lease financing
7,533,857 9,252,949 9,643,516 8,668,599 7,276,200
Other
11,420,172 37,647,241 49,995,313 9,357,884 5,388,149
Total
230,344,835 240,247,100 238,080,893 208,935,712 160,824,825
Borrowers outside Spain (*):
Governments
2,860,902 3,029,373 2,295,763 4,969,713 6,608,103
Commercial and industrial
174,763,552 127,838,494 143,045,869 128,438,265 108,145,797
Mortgage loans
249,065,126 201,112,142 179,163,680 177,631,731 161,147,496
Other
43,389,607 67,127,381 17,207,512 15,223,537 9,993,396
Total
470,079,187 399,107,390 341,712,824 326,263,246 285,894,792
Total loans and leases, gross
700,424,022 639,354,490 579,793,717 535,198,958 446,719,617
Allowance for possible loan losses (**)
(17,873,096 ) (12,466,055 ) (8,695,204 ) (8,163,444 ) (6,755,175 )
Loans and leases, net of allowances
682,550,926 626,888,435 571,098,513 527,035,514 439,964,442
(*)
Credit of any nature in the name of credit institutions is included in the “Loans and advances to credit institutions” caption of our balance sheet.
(**)
Refers to loan losses of “Loans and Advances to customers”, excluding balances to credit institutions. See “Item 3. Key information — A. Selected Financial Data”.
At December 31, 2009, our loans and advances to associated companies and jointly controlled entities amounted to € 149 million (see “Item 7. Major Shareholders and Related Party Transactions—B. Related party transactions”). Excluding government-related loans and advances, the largest outstanding exposure to a single counterparty at December 31, 2009 was € 2.9 billion (0.4% of total loans and advances, including government-related loans), and the five next largest exposures totaled € 11.2 billion (1.6% of total loans, including government-related loans).

51

Table of Contents

Maturity
The following table sets forth an analysis by maturity of our loans and advances to customers by domicile and type of customer at December 31, 2009.
Maturity
Less than One to five Over five
one year years years Total
Balance % of Total Balance % of Total Balance % of Total Balance % of Total
(in thousands of euros, except percentages)
Loans to borrowers in Spain:
Spanish Government
3,520,801 2.08 % 1,812,281 1.10 % 4,469,429 1.22 % 9,802,511 1.40 %
Commercial, financial, agriculture and industrial
32,292,736 19.12 % 21,750,921 13.22 % 16,093,289 4.39 % 70,136,946 10.01 %
Real estate and construction
1,628,732 0.96 % 3,728,295 2.27 % 37,157,782 10.12 % 42,514,809 6.07 %
Other mortgages
3,403,341 2.01 % 6,723,164 4.09 % 58,739,409 16.01 % 68,865,914 9.83 %
Installment loans to individuals
8,444,238 5.00 % 8,065,868 4.90 % 3,560,520 0.97 % 20,070,626 2.87 %
Lease financing
1,158,716 0.69 % 4,044,102 2.46 % 2,331,039 0.64 % 7,533,857 1.08 %
Other
2,101,010 1.24 % 2,326,763 1.41 % 6,992,399 1.91 % 11,420,172 1.63 %
Total borrowers in Spain
52,549,574 31.11 % 48,451,394 29.45 % 129,343,867 35.24 % 230,344,835 32.89 %
Loans to borrowers outside Spain (*)
Other Governments
1,196,193 0.71 % 941,372 0.57 % 723,337 0.20 % 2,860,902 0.41 %
Commercial and Industrial
73,658,231 43.61 % 76,907,628 46.74 % 24,197,693 6.59 % 174,763,552 24.95 %
Mortgage loans
14,115,583 8.36 % 30,753,706 18.69 % 204,195,837 55.64 % 249,065,126 35.56 %
Other
27,383,600 16.21 % 7,474,075 4.54 % 8,531,932 2.32 % 43,389,607 6.19 %
Total loans to borrowers outside Spain
116,353,607 68.89 % 116,076,781 70.55 % 237,648,799 64.76 % 470,079,187 67.11 %
Total loans and leases, gross
168,903,181 100.00 % 164,528,175 100.00 % 366,992,666 100.00 % 700,424,022 100.00 %
(*)
Credit of any nature in the name of credit institutions is included in the “Loans and advances to credit institutions” caption of our balance sheet.
Fixed and Variable Rate Loans
The following table sets forth a breakdown of our fixed and variable rate loans having a maturity of more than one year at December 31, 2009.
Fixed and variable rate loans
having a maturity of more than one year
Domestic International Total
(in thousands of euros, except percentages)
Fixed rate
32,675,335 164,169,475 196,844,810
Variable rate
145,119,926 189,556,104 334,676,030
Total
177,795,261 353,725,579 531,520,840

52

Table of Contents

Cross-Border Outstandings
The following table sets forth, as of the end of the years indicated, the aggregate amount of our cross-border outstandings (which consist of loans, interest-bearing deposits with other banks, acceptances and other monetary assets denominated in a currency other than the home-country currency of the office where the item is booked) where outstandings in the borrower’s country exceeded 0.75% of our total assets. Cross-border outstandings do not include local currency loans made by subsidiary banks in other countries to the extent that such loans are funded in the local currency or hedged. As a result, they do not include the vast majority of the loans by Santander UK or our Latin American subsidiaries.
IFRS-IASB
2009 2008 2007
% of % of % of
total total total
assets assets assets
(in thousands of euros, except percentages)
OECD (1) Countries:
United Kingdom
3,119,719 0.28 % 3,546,946 0.34 % 10,553,863 1.16 %
Other OECD Countries (2)
11,207,465 1.01 % 9,384,789 0.90 % 13,371,250 1.46 %
Total OECD
14,327,184 1.29 % 12,931,735 1.24 % 23,925,113 2.62 %
Non-OECD Countries
Brazil
5,316,717 0.48 % 10,169,495 0.97 % 3,732,687 0.41 %
Other Latin American Countries (2) (3)
8,297,908 0.75 % 7,728,016 0.74 % 4,488,341 0.49 %
Other (2)
6,600,333 0.59 % 5,847,896 0.56 % 2,379,944 0.26 %
Total Non-OECD
20,214,958 1.82 % 23,745,407 2.27 % 10,600,972 1.16 %
Total
34,542,142 3.11 % 36,677,142 3.50 % 34,526,085 3.78 %
(1)
The Organization for Economic Cooperation and Development.
(2)
Aggregate outstandings in any single country in this category do not exceed 0.75% of our total assets.
(3)
With regards to these cross-border outstandings, at December 31, 2007, 2008 and 2009, we had allowances for country-risk equal to € 105.0 million, € 555.5 million and € 30.3 million, respectively. Such allowances for country-risk exceeded the Bank of Spain’s minimum requirements at such dates.
The following table sets forth, as of December 31, 2009, 2008 and 2007, the amounts of our cross-border outstandings by type of borrower where outstandings in the borrower’s country exceeded 0.75% of total assets.
Banks and other
Financial Commercial and
Government Institutions Industrial Total
(in thousands of euros)
2007
United Kingdom
616 3,870,351 6,682,896 10,553,863
Total
616 3,870,351 6,682,896 10,553,863
2008
Brazil
193,734 3,939,252 6,036,509 10,169,495
Total
193,734 3,939,252 6,036,509 10,169,495
2009
N/A
— — — —
Total
— — — —

53

Table of Contents

Classified Assets
In the following pages, we describe Bank of Spain requirements for classification of non-performing assets. The Group establishes a credit loss recognition process that is independent of the process for balance sheet classification and removal of impaired loans from the balance sheet.
The description below sets forth the minimum requirements that are followed and applied by all of our subsidiaries. Nevertheless, if the regulatory authority of the country where a particular subsidiary is located imposes stricter or more conservative requirements for classification of the non performing balances, the more strict or conservative requirements are followed for classification purposes.
The classification described below applies to all debt instruments not measured at fair value through profit or loss, and to contingent liabilities.
Bank of Spain Classification Requirements
a) Standard Assets
Standard assets include loans, fixed-income securities, guarantees and certain other extensions of credit that are not classified in any other category. Under this category, assets that require special watch must be identified, including restructured loans and standard assets with clients that have other outstanding risks classified as Non-performing Past Due. Standard assets are subdivided as follows:
(i) Negligible risk
• All types of credits made to, or guaranteed by, any European Union country or certain other specified public entities of the countries classified in category 1 of the country-risk categories;
• Advance payments for pensions or payrolls for the following month, when paid by any public entity and deposited at Santander;
• Those credits guaranteed by public entities of the countries classified in category 1 of the country-risk categories whose principal activity is to provide guarantees;
• Credits made to banks;
• Credits personally, jointly and unconditionally guaranteed by banks or mutual guaranty companies payable on first demand;
• Credits guaranteed under the name of the Fondo de Garantía de Depósitos if their credit risk quality is comparable with that of the European Union; or
• All credits collateralized by cash or by money market and treasury funds or securities issued by the central administrations or credit entities of countries listed in category 1 for country-risk purposes when the outstanding exposure is 90% or less than the redemption value of the money market and treasury funds and of the market value of the securities given as collateral.
(ii) Low risk
Assets in this category include:
• assets qualified as collateral for monetary policy transactions in the European System of Central Banks, except those included in (i) above;
• fully-secured mortgages and financial leases on finished residential properties when outstanding risk is less than 80% of the appraised value of such property;
• ordinary mortgage backed securities;

54

Table of Contents

• assets from entities whose long term debt is rated “A” or better by a qualified rating agency; and
• securities denominated in local currency and issued by government entities in countries other than those classified in category 1 of the country-risk categories, when such securities are registered in the books of the bank’s branch located in the issuer country.
(iii) Medium-low risk
Assets in this category include financial leases and mortgages and pledges on tangible assets that are not included in other categories, provided that the estimated value of the financial leases and the collateral totally covers the outstanding risk.
(iv) Medium risk
Assets in this category include those with Spanish residents or residents of countries classified in categories 1 or 2, provided that such assets are not included in other categories.
(v) Medium-high risk
Assets in this category include (unless these assets qualify as “high risk” assets) loans to individuals for the acquisition of durable consumption goods, other goods or current services not for professional use, except those registered in the Registry of Sales of Movable Assets ( Registro de Ventas de Bienes Muebles ); and risks with residents of countries classified in categories 3 to 6, to the extent not covered by country-risk allowances.
(vi) High risk
Assets in this category include credit card balances; current account overdrafts and excesses in credit accounts (except those included in categories (i) and (ii)).
b) Sub-standard Assets
This category includes all types of credits and off-balance sheet risks that cannot be classified as non performing or charged-off assets but that have certain weaknesses that may result in losses for the bank higher than those described in the previous category. Credits and off-balance sheet risks with insufficient documentation must also be classified under this category.
c) Non-Performing Past-Due Assets
The Bank of Spain requires Spanish banks to classify as non-performing the entire outstanding principal amount and accrued interest on any loan, fixed-income security, guarantee and certain other extensions of credit on which any payment of principal or interest or agreed cost is 90 days or more past due (“non-performing past-due assets”).
In relation to the aggregate risk exposure (including off-balance sheet risks) to a single obligor, if the amount of non-performing balances exceeds 25% of the total outstanding risks (excluding non-accrued interest on loans to such borrower), then the bank must classify all outstanding risks to such borrower as non-performing.
Once any portion of a loan is classified as non-performing, the entire loan is placed on a non-accrual status. Accordingly, even the portion of any such a loan which may still be identified as performing will be recorded on non-accrual status.
d) Other Non-Performing Assets
The Bank of Spain requires Spanish banks to classify any loan, fixed-income security, guarantee and certain other extensions of credit as non-performing if they have a reasonable doubt that these extensions of credit will be collected (“other non-performing assets”), even if any past due payments have been outstanding for less than 90 days or the asset is otherwise performing. When a bank classifies an asset as non-performing on this basis, it must classify the entire principal amount of the asset as non-performing.

55

Table of Contents

Once any such asset is classified as non-performing, it is placed on a non-accrual status.
e) Charged-off assets
Credit losses are generally recognized through provisions for allowances for credit losses, well before they are removed from the balance sheet. Under certain unusual circumstances (such as bankruptcy, insolvency, etc.), the loss is directly recognized through write-offs.
The Bank of Spain requires Spanish banks to charge-off immediately those non-performing assets that management believes will never be repaid. Otherwise, the Bank of Spain requires Spanish banks to charge-off non-performing assets four years after they were classified as non-performing. Accordingly, even if allowances have been established equal to 100% of a non-performing asset, the Spanish bank may maintain that non-performing asset, fully provisioned, on its balance sheet for the full four-year period if management believes based on objective factors that there is some possibility of recoverability of that asset.
Because the Bank of Spain does not permit partial write-offs of impaired loans, when a loan is deemed partially uncollectible, the credit loss is charged against earnings through provisions to credit allowances instead of through partial write-offs of the loan. If a loan becomes entirely uncollectible, its allowance is increased until it reaches 100% of the loan balance. The credit loss recognition process is independent of the process for the removal of impaired loans from the balance sheet. The entire loan balance is kept on the balance sheet until any portion of it has been classified as non-performing for 4 years, or up to 6 years for some secured mortgage loans (maximum period established in the Bank of Spain’s Circular 4/2004 depending on our management’s view as to the recoverability of the loan). After that period the loan balance and its 100% specific allowance are removed from the balance sheet and recorded in off-balance sheet accounts, with no resulting impact on net income at that time.
f) Country-Risk Outstandings
The Bank of Spain requires Spanish banks to classify as country-risk outstandings all loans, fixed-income securities and other outstandings to any countries, or residents of countries, that the Bank of Spain has identified as being subject to transfer risk or sovereign risk and the remaining risks derived from the international financial activity.
All outstandings must be assigned to the country of residence of the client except in the following cases:
•
Outstandings guaranteed by residents in other countries in a better category should be classified in the category of the guarantor.
•
Fully secured loans, when the security covers sufficiently the outstanding risk and can be enforced in Spain or in any other “category 1” country, should be classified as category 1.
•
Outstanding risks with foreign branches of a bank should be classified according to the residence of the headquarters of those branches.
The Bank of Spain has established six categories to classify such countries, as shown in the following table:
Country-Risk Categories Description
1
European Union, Norway, Switzerland, Iceland, USA, Canada, Japan, Australia and New Zealand
2
Low risk countries not included in 1
3
Countries with transitory difficulties
4
Countries with serious difficulties
5
Doubtful countries
6
Bankrupt countries

56

Table of Contents

The Bank of Spain allows each bank to decide how to classify the listed countries within this classification scheme, subject to the Bank of Spain’s oversight. The classification is made based on criteria such as the payment record (in particular, compliance with renegotiation agreements), the level of the outstanding debt and of the charges for debt services, the debt quotations in the international secondary markets and other indicators and factors of each country as well as all the criteria indicated by the Bank of Spain. All credit extensions and off-balance sheet risks included in country-risk categories 3 to 6, except the excluded cases described below, will be classified as follows:
•
Sub-standard assets: All outstandings in categories 3 and 4 except when they should be classified as non-performing or charged-off assets due to credit risk attributable to the client.
•
Non-performing assets: All outstandings in category 5 and off-balance sheet risks classified in category 6, except when they should be classified as non-performing or charged-off assets due to credit risk attributable to the client.
•
Charged-off assets: All other outstandings in category 6 except when they should be classified as charged-off assets due to credit risk attributable to the client.
Among others, the Bank of Spain excludes from country-risk outstandings:
• regardless of the currency of denomination of the asset, risks with residents in a country registered in subsidiary companies or multigroup companies in the country of residence of the holder;
• any trade credits established by letter of credit or documentary credit with a due date of one year or less after the drawdown date;
• any interbank obligations of branches of foreign banks in the European Union and of the Spanish branches of foreign banks;
• private sector risks in countries included in the monetary zone of a currency issued by a country classified in category 1; and
• any negotiable financial assets purchased at market prices for placement with third parties within the framework of a portfolio separately managed for that purpose, held for less than six months by the company.
Non-Accrual of Interest Requirements
The Group stops accruing interest on the principal amount of any asset that is classified as an impaired asset and on category 5 (doubtful) and category 6 (bankrupt) country-risk outstandings. The bank accounts for such collected interest on a cash basis, recording interest payments as interest income when collected.
The following table shows the amount of interest owed on non-accruing assets and the amount of such interest that was received:
IFRS-IASB
At December 31,
2009 2008 2007
(in thousands of euros)
Interest owed on non-accruing assets
Domestic
765,101 231,486 80,133
International
1,829,676 489,241 291,987
Total
2,594,777 720,727 372,120
Interest received on non-accruing assets
Domestic
151,459 95,428 81,233
International
157,724 125,386 103,031
Total
309,183 220,814 184,264
The balances of the recorded investment in impaired loans as of December 31, 2009, 2008 and 2007 are as follows:
Thousands of Euros
2009 2008 2007
Other impaired loans (*)
3,283,860 2,417,529 1,260,497
Impaired loans more than ninety days past due
21,269,764 11,773,284 4,918,158
Total impaired loans
24,553,624 14,190,813 6,178,655
(*)
See above “Bank of Spain Classification Requirements- d) Other Non-Performing Assets” for a detailed explanation of assets included under this category.
The roll-forward of allowances (under IFRS-IASB) is shown in Note 10 to our consolidated financial statements.

57

Table of Contents

Guarantees
The Bank of Spain requires some guarantees to be classified as non-performing in the following amounts:
• in cases involving past-due guaranteed debt: (i) for non-financial guarantees, the amount demanded by the beneficiary and outstanding under the guarantee; and (ii) for financial guarantees, at least the amount classified as non-performing of the guaranteed risk; and
• in all other cases, the entire amount of the guaranteed debt when the debtor has declared bankruptcy or has demonstrated serious solvency problems, even if the guaranteed beneficiary has not reclaimed payment.
Allowances for Credit Losses and Country-Risk Requirements
We calculate simultaneously the allowances required due to credit risk attributable to the client and to country-risk and apply the ones that are more demanding.
The Bank of Spain requires that we develop internal models to calculate the allowances for both credit risk and country-risk based on historical experience. As of July 2008, the Bank of Spain had approved for regulatory capital calculation purposes the Group’s internal models affecting the vast majority of the Group’s credit risk net exposure. Bank of Spain will continue to review the models for the purpose of calculating allowances for loan losses. The calculation obtained based on the output parameters of internal models is consistent with the best estimate of the Group as to the probable losses using possible scenarios which rely on the approved internally developed models, and which constitute an appropriate basis for determining loan loss allowances. While these models are not yet approved by the Bank of Spain for loan loss allowance calculation, we are required to calculate the allowances according to the instructions described below. The difference between loan loss provisions calculated using internal models and those calculated under Bank of Spain Guidance, was not material for any of the three years ending December 31, 2009.
The global allowances will be the sum of those corresponding to losses in specific transactions ( Specific Allowances ) and those not specifically assigned ( General Allowance ) due to credit risk, plus the Allowances for Country-Risk .
Specific and General Allowances for Credit Losses
The Group methodology for calculation of loan loss allowances is summarized as follows:
•
Assets classified as doubtful due to counterparty arrears: debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually, taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors. The allowance percentages applied, based on the age of the past-due amounts, are described in Note 2.g) to our consolidated financial statements.
•
Assets classified as doubtful for reasons other than counterparty arrears: Debt instruments which are not classifiable as doubtful due to arrears but for which there are reasonable doubts as to their repayment under the contractual terms are assessed individually, and their allowance is the difference between the amount recognized in assets and the present value of the cash flows expected to be received.
•
General allowance for inherent losses: The Group covers its losses inherent in debt instruments not measured at fair value through profit or loss and in contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, inherent losses are losses incurred at the reporting date, calculated using statistical methods that have not yet been allocated to specific transactions.
•
Our methodology for determining the loans general allowance for incurred loan losses, intends to identify the amount of incurred losses as of the balance sheet date of loans that have not yet been identified as impaired, but that we estimate based on our past history and specific facts that will manifest within a one year lead time period from the balance sheet date. The above demonstrates those loans were having problems as of the balance sheet date. That is what we call inherent losses in the context of our internal models in which loan loss allowances are calculated.

58

Table of Contents

The Group has been using since 1993 its internal models for assigning solvency and internal ratings, which measure the degree of risk of a client or transaction. Each rating corresponds to a certain probability of default or non-payment, the result of the Group’s past experience, except for some designated low default portfolios. The Group has approximately 200 internal rating models for risk admission and monitoring (models for corporate, sovereign, financial institutions; medium and small companies, retail, etc).
The ratings accorded to customers are regularly reviewed, incorporating new financial information and the experience in the development of the banking relationship with the customer. The regularity of the reviews increases in the case of clients who reach certain levels in the automatic warning systems and for those classified as special watch. The rating tools are also reviewed so that Group’s accuracy can be fine-tuned.
In order to make the internal ratings of the various models comparable and to be able to make comparisons with the ratings of external rating agencies, the Group has a master ratings scale. The comparisons are established via the probability of default associated with each rating.
The process: credit rating and parameter estimation
The credit risk associated to each transaction is quantified by means of its incurred loss. Risk measurement quantification requires following two steps; the first one is the estimation, and the second one is the assignment of the parameters that define the credit risk: Probability of Default, Loss Given Default and Exposure at Default.
The Group covers its losses inherent in debt instruments not measured at fair value through profit or loss and in contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, inherent losses are losses incurred at the reporting date, calculated using statistical methods, that have not yet been allocated to specific transactions.
The Group uses the concept of incurred loss to quantify the cost of the credit risk and include it in the calculation of the risk-adjusted return of its transactions. The parameters necessary for its calculation are also used to calculate economic capital and to calculate BIS II regulatory capital under internal models.
Incurred loss is the cost of the credit risk of a transaction that will manifest within a one year lead time from the balance sheet date considering the characteristics of the counterparty and the guarantees and collateral associated with the transaction.
The loss is calculated using statistical models that consider the following three factors: “exposure at default”, “probability of default” and “loss given default”.
•
Exposure at default (EaD) is the amount of risk exposure at the date of default by the counterparty.
•
Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The probability of default is associated with the rating/scoring of each counterparty/transaction.
•
PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year. The definition of default used includes past-dues by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective doubtful assets).
•
Loss given default (LGD) is the loss arising in the event of default. It depends mainly on the guarantees associated with the transaction.
Estimation is based on the Group’s own internal experience, i.e. the historical records of default for each rating as well as the recoveries experience regarding non performing loans:
•
In portfolios where the internal experience of defaults is scant, such as banks, sovereigns or global wholesale banking, estimates of the parameters come from alternative sources: market prices or studies of outside agencies which draw on the shared experience of a sufficient number of institutions. These portfolios are called low default portfolios.
•
For the rest of portfolios, estimates are based on the institution’s internal experience.

59

Table of Contents

The LGD calculation is based on the analysis of recoveries of past due transactions, considering not only revenues and costs associated with the collection process, but also the moment when these revenues and costs take place and all indirect costs linked to the collecting activity.
The estimation of the EaD comes from comparing the use of the lines committed at the moment of default and a normal situation, in order to identify the real consumption of the lines at the time of default.
Once estimated, the credit risk parameters are assigned to assets that are not past due and play an essential role in the risk management and decision taking processes. These parameters are used by several management tools such as (1) pre-classifications, (2) economic capital, (3) return on risk adjusted capital (RORAC) or (4) stress scenarios.
Control of the process
Internal validation is a prerequisite for supervisory validation and consists of a specialized and sufficiently independent unit obtaining a technical opinion on whether the internal model is appropriate for the purposes used (internal and regulatory) and concluding on its usefulness and effectiveness. Moreover, it must evaluate whether the risk management and control procedures are appropriate for the entity’s strategy and risk profile.
Grupo Santander’s corporate framework of internal validation is fully aligned with the criteria for internal validation of advanced models issued by the Bank of Spain. The criterion of separation of functions is maintained between Internal Validation and Internal Auditing which, as the last element of control in the Group, is responsible for reviewing the methodology, tools and work done by Internal Validation and to give its opinion on its degree of effective independence.
Other Non-Performing Assets . If a non-performing asset is an “other non-performing asset”, see “—Bank of Spain Classification Requirements—Other Non-Performing Assets”, the amount of the required allowance will be the difference between the amount outstanding and the current value of the expected collectable cash flows. The minimum allowance will be 25% and up to 100% of the amounts treated as non-performing, depending on management’s opinion of the loan recovery expectations. When the treatment of such asset as a non-performing asset is due to, in management’s opinion, an inadequate financial or economical condition of the borrower, and the amount estimated as non-collectible is less than 25% of the outstanding debt, the amount of the required allowance will be at least 10% of the outstanding debt.
Sub-standard Assets . The necessary allowance for assets classified in this category is determined as the difference between its outstanding balance and the current value of the expected collectable cash flows. In every case, the amount of the required allowance must be higher than the general allowance that would correspond in case of being classified as standard asset and lower than would correspond if classified as non-performing asset. When assets are classified as sub-standard due to insufficient documentation and have an outstanding balance higher than € 25,000, the applicable allowance is 10%.
Allowances for Country-Risk
Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, the Group classifies all the transactions performed with third parties into six different groups assigning to each group the credit loss allowance percentages.

60

Table of Contents

Guarantees
Allowances for non-performing guarantees will be equal to the amount that, using prudent criteria, is considered irrecoverable.
Bank of Spain Foreclosed Assets Requirements
If a Spanish bank eventually acquires the properties (residential or not) which secure loans or credits, the Bank of Spain requires that the credit risk allowances previously established be reversed, provided that the acquisition cost less the estimated selling costs (which shall be at least 30% of such value) exceeds the amount of the debt, disregarding allowances, unless the acquisition cost is greater than the mortgage value, in which case the latter shall be taken as the reference value.
Bank of Spain Charge-off Requirements
The Bank of Spain does not permit non-performing assets to be partially charged-off.
The Bank of Spain requires Spanish banks to charge-off immediately those non-performing assets that management believes will never be repaid or that were made to category 6 (“bankrupt”) countries or residents of such category 6 countries. See the above sub-section entitled “—Bank of Spain Classification Requirements—Country-Risk Outstandings”. Otherwise, the Bank of Spain requires Spanish banks to charge-off non-performing assets four years after they were classified as non-performing. Spanish banks may carry fully secured past-due mortgage loans beyond this four-year deadline for up to six years if there are objective factors that indicate an improved likelihood of recovery. Accordingly, even if allowances have been established equal to 100% of a non-performing asset (in accordance with the Bank of Spain criteria discussed above), the Spanish bank may maintain that non-performing asset, fully provisioned, on its balance sheet for the full four or six-year period if management believes based on objective factors that there is some possibility of recoverability of that asset.

61

Table of Contents

Movements in Allowances for Credit Losses
The following table analyzes movements in our allowances for credit losses and movements, by domicile of customer, for the years indicated. See “Presentation of Financial and Other Information”. For further discussion of movements in the allowances for credit losses, see “Item 5. Operating and Financial Review and Prospects—A. Operating results—Results of Operations for Santander—Impairment Losses (net)”.
IFRS-IASB
Year Ended December 31,
2009 2008 2007 2006 2005
(in thousands of euros)
Allowance for credit losses at beginning of year
Borrowers in Spain
5,948,950 4,512,000 4,318,320 2,809,599 1,679,781
Borrowers outside Spain
6,770,673 4,284,371 3,969,808 4,092,326 4,160,864
Total
12,719,623 8,796,371 8,288,128 6,901,925 5,840,645
Inclusion of acquired companies’ credit loss allowances
Borrowers in Spain
— — — — —
Borrowers outside Spain
1,426,104 2,310,095 7,356 164,530 4,006
Total
1,426,104 2,310,095 7,356 164,530 4,006
Recoveries of loans previously charged off (1)
Borrowers in Spain
115,069 129,660 148,849 123,566 105,800
Borrowers outside Spain
799,652 570,087 463,602 418,402 373,934
Total
914,721 699,747 612,451 541,968 479,734
Net provisions for credit losses (1)
Borrowers in Spain
2,499,843 928,236 658,990 793,898 1,048,552
Borrowers outside Spain
8,588,153 4,968,652 2,761,606 1,669,466 976,315
Total
11,087,996 5,896,888 3,420,596 2,463,364 2,024,867
Charge offs against credit loss allowance
Borrowers in Spain
(1,236,859 ) (731,588 ) (573,787 ) (269,559 ) (226,036 )
Borrowers outside Spain
(8,557,769 ) (3,820,805 ) (2,746,375 ) (2,100,306 ) (1,293,458 )
Total
(9,794,628 ) (4,552,393 ) (3,320,162 ) (2,369,865 ) (1,519,494 )
Other movements (2)
1,544,817 (431,084 ) (211,998 ) 586,206 72,167
Allowance for credit losses at end of year (*)
Borrowers in Spain
6,992,818 5,948,950 4,512,000 4,318,320 2,809,599
Borrowers outside Spain
10,905,814 6,770,673 4,284,371 3,969,808 4,092,326
Total
17,898,632 12,719,623 8,796,371 8,288,128 6,901,925
(*)
Allowances for the impairment losses on the assets making up the balances of “Loans and receivables — Loans and advances to customers” and “Loans and receivables — Loans and advances to credit institutions”. See “Item 3. Key information — A. Selected Financial Data”.
(1)
We have not included separate line items for charge-offs of loans not previously provided for (loans charged-off against income) and recoveries of loans previously charged-off as these are not permitted under Spanish regulation.
(2)
The changes in “Other Movements” from 2005, to 2006, to 2007, to 2008 and to 2009 principally reflects foreign exchange differences.

62

Table of Contents

The table below shows a breakdown of recoveries, net provisions and charge-offs against credit loss allowance by type and domicile of borrower for the years indicated.
Year Ended December 31,
2009 2008 2007 2006 2005
(in thousands of euros)
Recoveries of loans previously charged off-
Domestic:
Commercial, financial, agricultural, industrial
31,969 30,136 32,045 37,879 51,649
Real estate and construction
15,162 4,860 10,718 5,646 140
Other mortgages
24,340 11,480 17,644 11,249 5,226
Installment loans to individuals
42,946 74,974 70,082 59,726 32,303
Lease finance
621 6,198 4,517 5,023 2,903
Other
31 2,012 13,843 4,043 13,579
Total Borrowers in Spain
115,069 129,660 148,849 123,566 105,800
Borrowers outside Spain
Government and official institutions
34 — 8 1,126 1
Commercial and industrial
731,641 483,589 397,126 299,302 292,279
Mortgage loans
35,047 28,494 30,360 7,751 3,468
Other
32,930 58,004 36,108 110,223 78,186
Borrowers outside Spain
799,652 570,087 463,602 418,402 373,934
Total
914,721 699,747 612,451 541,968 479,734
Net provisions for credit losses-
Domestic:
Commercial, financial, agricultural, industrial
752,961 265,121 (278,355 ) 405,914 416,993
Real estate and construction
528,124 (76,668 ) 240,462 20,430 70,124
Other mortgages
263,700 276,578 298,645 96,209 87,823
Installment loans to individuals
848,450 399,651 383,582 278,223 226,177
Lease finance
73,055 26,619 16,038 55,894 27,864
Other
33,553 36,935 (1,382 ) (62,772 ) 219,571
Total Borrowers in Spain
2,499,843 928,236 658,990 793,898 1,048,552
Borrowers outside Spain
Government and official institutions
14,218 (8,344 ) (1,797 ) 2,035 16,836
Commercial and industrial
7,667,916 2,709,732 2,016,115 1,128,005 820,912
Mortgage loans
532,539 242,965 237,553 11,612 88,812
Other
373,480 2,024,299 509,735 527,814 49,755
Borrowers outside Spain
8,588,153 4,968,652 2,761,606 1,669,466 976,315
Total
11,087,996 5,896,888 3,420,596 2,463,364 2,024,867
Charge offs against credit loss allowance
Domestic:
Commercial, financial, agricultural, industrial
(355,554 ) (121,751 ) (140,715 ) (55,982 ) (113,357 )
Real estate and construction
(137,183 ) (34,429 ) (29,466 ) (18,911 ) (8 )
Other mortgages
(235,659 ) (61,618 ) (11,807 ) (7,284 ) (14,674 )
Installment loans to individuals
(481,164 ) (503,166 ) (356,532 ) (184,218 ) (67,554 )
Lease finance
(25,681 ) (2,693 ) (1,344 ) (1,775 ) (8,007 )
Other
(1,618 ) (7,931 ) (33,923 ) (1,389 ) (22,436 )
Total Borrowers in Spain
(1,236,859 ) (731,588 ) (573,787 ) (269,559 ) (226,036 )
Borrowers outside Spain
Government and official institutions
(213 ) — — (174 ) —
Commercial and industrial
(7,826,967 ) (2,807,232 ) (1,969,576 ) (1,333,617 ) (1,120,180 )
Mortgage loans
(393,104 ) (1,736 ) (6,693 ) (46,603 ) (30,562 )
Other
(337,485 ) (1,011,837 ) (770,106 ) (719,912 ) (142,716 )
Borrowers outside Spain
(8,557,769 ) (3,820,805 ) (2,746,375 ) (2,100,306 ) (1,293,458 )
Total
(9,794,628 ) (4,552,393 ) (3,320,162 ) (2,369,865 ) (1,519,494 )

63

Table of Contents

Allowances for Credit Losses
IFRS-IASB
Year Ended December 31,
2009 % 2008 % 2007 % 2006 % 2005 %
(in thousands of euros, except percentages)
Borrowers in Spain:
Commercial, financial, agricultural, industrial
1,742,508 9.74 1,690,171 13.29 1,121,382 12.75 2,054,720 24.79 1,419,729 20.57
Real estate and construction
1,896,177 10.59 1,490,138 11.72 1,412,652 16.06 515,597 6.22 363,991 5.27
Other mortgages
1,375,447 7.68 1,271,684 10.00 805,437 9.16 457,132 5.52 186,574 2.70
Installment loans to individuals
1,673,557 9.35 1,182,274 9.29 926,917 10.53 889,283 10.73 469,677 6.81
Lease finance
215,785 1.21 112,874 0.89 162,405 1.85 166,542 2.01 75,777 1.10
Other
89,344 0.50 201,809 1.59 83,207 0.95 235,046 2.84 293,851 4.26
Total Borrowers in Spain
6,992,818 39.07 5,948,950 46.77 4,512,000 51.30 4,318,320 52.10 2,809,599 40.71
Borrowers outside Spain:
Government and official institutions
19,149 0.11 13,653 0.11 25,650 0.29 30,054 0.36 41,302 0.60
Commercial and industrial
8,529,010 47.65 4,517,625 35.52 2,762,325 31.40 2,670,075 32.22 3,413,736 49.46
Mortgage loans
1,555,212 8.69 1,615,112 12.70 1,354,866 15.40 831,972 10.04 363,980 5.27
Other
802,443 4.48 624,283 4.91 141,530 1.61 437,707 5.28 273,308 3.96
Total Borrowers outside Spain
10,905,814 60.93 6,770,673 53.23 4,284,371 48.70 3,969,808 47.90 4,092,326 59.29
Total
17,898,632 100.00 12,719,623 100.00 8,796,371 100.00 8,288,128 100.00 6,901,925 100.00
Impaired Balances
The following tables show our impaired assets (loans, securities and other assets to collect) and contingent liabilities, excluding country-risk. We do not keep records classifying balances as non-accrual, past due, restructured or potential problem loans, as those terms are defined by the SEC. However, we have estimated the amount of our balances that would have been so classified, to the extent possible, below.
IFRS
At December 31,
Non-performing balances 2009 2008 2007 2006 2005
(in thousands of euros, except percentages)
Past-due and other non-performing balances (1) (2) (3):
Domestic
10,405,450 6,405,803 1,887,167 1,288,857 1,110,784
International
14,148,174 7,785,010 4,291,488 3,318,690 3,230,716
Total
24,553,624 14,190,813 6,178,655 4,607,547 4,341,500
(1)
We estimate that the total amount of our non-performing balances fully provisioned under IFRS and which under U.S. GAAP would have been charged-off from the balance sheet was € 1,302.6 million, € 1,206.5 million, € 1,582.0 million, € 2,877.6 million and € 2,996,6 million at December 31, 2005, 2006, 2007, 2008 and 2009, respectively.
(2)
Non-performing balances due to country risk were € 121.1 million, € 83.0 million, € 6.7 million, € 2.6 million and € 7.8 million at December 31, 2005, 2006, 2007, 2008 and 2009, respectively.
(3)
We estimate that at December 31, 2005, 2006, 2007, 2008 and 2009 (i) the total amount of our non-performing past-due balances was € 3,367.1 million, € 3,841.2 million, 4,918.2 million, € 11,773.3 million and € 21,269.8 million respectively, and (ii) the total amount of our other non-performing balances was € 974.4 million, € 766.3 million, € 1,260.5 million, € 2,417.5 million and € 3,283,9 million, respectively.

64

Table of Contents

We do not believe that there is a material amount of assets not included in the foregoing table where known information about credit risk at December 31, 2009 (not related to transfer risk inherent in cross-border lending activities) gave rise to serious doubts as to the ability of the borrowers to comply with the loan repayment terms at such date.
Evolution of Impaired Balances
The following tables show the movement in our impaired assets and contingent liabilities (excluding country-risk, see “—Country-Risk Outstandings”).
IFRS
Quarter ended Year ended Year ended Year ended Year ended Year ended
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
(in thousands of euros) 2009 2009 2009 2009 2009 2008 2007 2006 2005
Opening balance
14,190,813 18,967,529 21,751,606 22,666,379 14,190,813 6,178,655 4,607,547 4,341,500 4,114,691
Net additions
5,290,126 4,877,401 4,169,928 3,896,875 18,234,330 11,346,183 5,014,270 2,567,912 1,473,809
Increase in scope of consolidation
1,033,001 — — — 1,033,001 2,088,943 1,000 164,000 (33,000 )
Exchange differences
211,246 369,976 (301,581 ) 610,468 890,109 (870,575 ) (124,000 ) (96,000 ) 300,000
Writeoffs
(1,757,657 ) (2,463,300 ) (2,953,574 ) (2,620,098 ) (9,794,629 ) (4,552,393 ) (3,320,162 ) (2,369,865 ) (1,514,000 )
Closing balance
18,967,529 21,751,606 22,666,379 24,553,624 24,553,624 14,190,813 6,178,655 4,607,547 4,341,500
The Group’s non-performing balances have increased during 2008 and 2009, mainly due to (1) the rapid deterioration of the global macroeconomic environment and (2) the increase in the Bank’s scope of consolidation (due to the acquisitions of Alliance & Leicester, Sovereign, Banco Real, GE Money and RBS Europe). As shown in the table above, in 2008 and the first quarter of 2009, the Group’s non-performing balances increased by € 2.09 billion and € 1.03 billion, respectively, due to acquisitions. Other factors leading to the increase in the Group’s non-performing balances were the higher volumes of lending in recent years and the change of mix (principally in Latin America) toward more profitable but higher risk products. The principal geographic drivers of the increase in non-performing balances, other than through acquisitions, were Spain, the United Kingdom and Brazil.
The increase in non-performing balances is also aggravated through the classification as non-performing of the entire outstanding principal amount and accrued interest on any loan on which any payment of principal, interest or agreed cost is 90 days or more past due. We refer to this effect as the “individual loan drag effect”. An additional impact occurs by the so-called “client drag effect”, through which Spanish banking groups classify as non-performing the aggregate risk exposure (including off-balance sheet risks) to a single obligor, whenever the amount of non-performing balances of such obligor exceeds 25% of its total outstanding risks (excluding non-accrued interest on loans to such borrower). Both drag effects have a larger impact in the case of mortgages and corporate loans due to the greater average amount of these loans.
Notwithstanding the above, during the course of 2009, the previously increasing rate of growth of net additions to non-performing balances has reversed such that the rate of growth has decreased, consistent with what appears to be the start of the recovery from the current economic downturn.

65

Table of Contents

Impaired Balances Ratios
The following table shows the total amount of our computable credit risk, the amount of our non-performing assets and contingent liabilities by category, our allowances for credit losses, the ratio of our impaired balances to total computable credit risk and our coverage ratio at the dates indicated.
IFRS
At December 31,
2009 2008 2007 2006 2005
(in thousands of euros, except percentages)
Computable credit risk (1)
758,346,873 697,199,713 649,342,484 588,372,837 489,662,040
Non-performing balances by segments:
Individuals
14,589,806 10,113,539 4,774,589 3,707,554 3,109,299
Mortgages
6,110,013 3,238,670 1,584,517 1,230,406 1,031,866
Consumer loans
6,164,477 5,711,326 2,695,997 2,093,490 1,755,682
Credit cards and others
2,315,316 1,163,543 494,075 383,658 321,751
Enterprises
7,811,870 2,860,333 1,309,738 843,807 1,165,851
Corporate Banking
2,127,493 1,130,459 62,224 38,300 63,758
Public sector
24,455 86,481 32,105 17,886 2,592
Total non performing balances
24,553,624 14,190,812 6,178,656 4,607,547 4,341,500
Allowances for non-performing balances
18,497,070 12,862,981 9,302,230 8,626,937 7,047,475
Ratios
Non-performing balances to computable credit risk
3.24 % 2.04 % 0.95 % 0.78 % 0.89 %
Coverage ratio (2)
75.33 % 90.64 % 150.55 % 187.23 % 162.33 %
Balances charged-off to total loans and contingent liabilities
1.17 % 0.55 % 0.41 % 0.31 % 0.21 %
(1)
Computable credit risk is the sum of the face amounts of loans and leases (including non-performing assets but excluding country risk loans), guarantees and documentary credits.
(2)
Allowances for non-performing balances as a percentage of non-performing balances.
The ratio of non-performing balances to computable credit risk was 0.89%, 0.78%, 0.95%, 2.04% and 3.24% for the Group as a whole as of December 31, 2005, 2006, 2007, 2008 and 2009, respectively. In the current economic downturn, the effect of which is exacerbated by the drag effects described above, our non-performing balances ratio increased, and we expect it will continue to do so although at a slower pace as highlighted by the recent quarterly trend of diminishing net additions to non-performing balances discussed above.
The coverage ratio fell to 91% in December 2008, and further to 75% in December 2009. This ratio is calculated as allowances for non-performing balances as a percentage of non-performing balances.
The main reasons for the increases in the non-performing balances ratio and the decreases in the coverage ratio are the following:
We establish our expectations of credit loss (and our corresponding allowances) for our entire loan portfolio, not just for our non-performing balances. Our expectations of credit loss for our entire portfolio typically increase at a slower rate than the rate at which our non-performing balances increase, particularly during an economic downturn, when non-performing loans grow quickly but the performing loan portfolio grows at a slower pace and with lower-risk loans, reflecting caution due to macroeconomic conditions. As a result, the ratio of our non-performing balances to computable credit risk typically increases since the numerator (non-performing balances) increases faster than the denominator (computable credit risk). Similarly, our coverage ratio typically decreases since, for the reasons discussed above, the numerator (allowances for credit losses) does not increase as fast as the denominator (non-performing balances).
To a lesser extent, the consolidation of Sovereign in the first quarter of 2009, with a coverage ratio of 62%, has also slightly decreased the Group’s average coverage ratio.

66

Table of Contents

We are currently highly exposed to real estate markets, especially in Spain and the United Kingdom. Mortgage loans are one of our principal assets, comprising 53% of our loan portfolio as of December 31, 2009, and we are focused on first home mortgages. 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, and historically low interest rates in the Eurozone. The United Kingdom experienced a similar 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. In this favorable environment, the Group has maintained prudent risk management with a mortgage portfolio focused on first homes with average loan to values in Spain and the United Kingdom of 52% and 56%, respectively, as of December 31, 2009. As a result of the general macroeconomic deterioration in the second half of 2008, a percentage of these assets have become non-performing and, as a result of the quality of the collateral, the inexistence of both option adjustable rate mortgage (ARM) loans and of monthly payments below accrued interest, the requirements of allowances for these non-performing assets have remained low.
As a result of the factors described above (the increase in the scope of consolidation, the economic downturn, our higher lending volumes and the change of mix (principally in Latin America)), our net impairment for credit losses was € 11,088.0 million for 2009, an 88.0% or € 5,191.1 million increase from € 5,896.9 million for 2008. This increase did not have a significant impact on the attributable profit for the period due to the positive evolution of income and the appropriate management of spreads.
Other Non-Accruing Balances
As described above under “—Bank of Spain Classification Requirements”, we do not classify our loans and contingent liabilities to borrowers in countries with transitory difficulties (category 3) and countries in serious difficulties (category 4) as impaired balances. Loans and contingent liabilities in these categories do not stop accruing interests. However, we treat category 5 (doubtful countries) country-risk outstandings as both a non-accruing and impaired balance.
IFRS-IASB
Year Ended December 31,
Summary of non-accrual balances 2009 2008 2007 2006 2005
(in millions of euros)
Balances classified as Non-Performing Balances
24,553.6 14,190.8 6,178.7 4,607.5 4,341.5
Non-Performing Balances due to country risk
7.8 2.6 6.7 83.0 121.1
Total non-accruing balances
24,561.4 14,193.4 6,185.4 4,690.5 4,462.6
As of December 31, 2007, 2008 and 2009, the amounts of “restructured loans” were € 465.2 million, € 648.7 million and € 3,829 million, respectively. Restructured loans are those which have been reclassified from non-performing loans to normal investment under certain conditions of payment and increase in guarantees. The strong increase in 2009 is directly related to the increase in non-performing loans explained above.

67

Table of Contents

Foreclosed Assets
The tables below set forth the movements in our foreclosed assets for the periods shown.
IFRS-IASB
Year Ended
Quarterly movements December 31,
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2009 2009 2009 2009 2009 2008 2007
(in thousands of euros, except percentages)
Opening balance
1,309,989 1,800,682 2,211,633 2,472,401 1,309,989 494,567 408,450
Foreclosures
859,462 933,761 764,437 826,232 3,383,892 1,712,821 851,152
Sales
(368,769 ) (522,810 ) (503,669 ) (582,759 ) (1,978,007 ) (897,399 ) (765,035 )
Gross foreclosed assets
1,800,682 2,211,633 2,472,401 2,715,874 2,715,874 1,309,989 494,567
Allowances established
(185,163 ) (239,684 ) (276,178 ) (713,373 ) (713,373 ) (169,030 ) (111,026 )
Allowance as a percentage of foreclosed assets
10.28 % 10.84 % 11.17 % 26.27 % 26.27 % 12.90 % 22.45 %
Closing balance (net)
1,615,519 1,971,949 2,196,223 2,002,501 2,002,501 1,140,959 383,541
Liabilities
Deposits
The principal components of our deposits are customer demand, time and notice deposits, and international and domestic interbank deposits. Our retail customers are the principal source of our demand, time and notice deposits. For an analysis, by domicile of customer, of average domestic and international deposits by type for 2006, 2007, 2008 and 2009, see “—Average Balance Sheets and Interest Rates—Liabilities and Interest Expense”.
We compete actively with other commercial banks and with savings banks for domestic deposits. Our share of customer deposits in the Spanish banking system (including Cajas de Ahorros ) was 16.2% at December 31, 2009, according to figures published by the Spanish Banking Association (AEB) and the Confederación Española de Cajas de Ahorros (“CECA”) . See “—Competition”.

68

Table of Contents

The following tables analyze our year-end deposits.
Deposits (from central banks and credit institutions and customers) by type of deposit
IFRS-IASB
At December 31,
Deposits from central banks and credit institutions- 2009 2008 2007
(in thousands of euros)
Reciprocal accounts
948,049 509,282 562,619
Time deposits
78,325,126 82,559,946 71,227,723
Other demand accounts
3,340,932 2,527,834 2,466,369
Repurchase agreements
56,818,092 41,651,446 36,615,910
Central bank credit account drawdowns
2,658,925 2,626,262 2,008,927
Other financial liabilities associated with transferred financial assets
— — —
Hybrid financial liabilities
463 2,600 15,760
Total
142,091,587 129,877,370 112,897,308
Customer deposits-
Demand deposits-
Current accounts
135,895,002 94,773,159 87,136,743
Savings accounts
127,940,647 115,673,794 90,727,525
Other demand deposits
3,570,326 3,035,757 3,593,720
Time deposits-
Fixed-term deposits
192,244,789 143,130,514 92,375,364
Home-purchase savings accounts
315,867 295,458 296,768
Discount deposits
448,432 11,625,840 9,933,139
Funds received under financial asset transfers
2 2 0
Hybrid financial liabilities
5,447,496 8,159,893 8,494,773
Other financial liabilities associated with transferred financial assets
— — —
Other time deposits
212,111 290,053 113,562
Notice deposits
2,208,116 1,764,954 283,301
Repurchase agreements
38,693,449 41,480,026 62,451,624
Total
506,976,237 420,229,450 355,406,519
Total deposits
649,067,824 550,106,820 468,303,827

69

Table of Contents

Deposits (from central banks and credit institutions and customers) by location of office
IFRS-IASB
At December 31,
Deposits from central banks and credit institutions- 2009 2008 2007
(in thousands of euros)
Due to credit institutions
Offices in Spain
68,500,717 61,175,697 66,139,163
Offices outside Spain:
Other EU countries
56,157,152 55,594,532 31,782,431
United States
1,002,056 722,833 421,513
Other OECD countries (1)
38,669 38,067 44,136
Central and South America (1)
16,371,115 12,291,897 14,502,083
Other
21,878 54,344 7,982
Total offices outside Spain
73,590,870 68,701,673 46,758,145
Total
142,091,587 129,877,370 112,897,308
Customer deposits
Offices in Spain
170,760,231 142,376,596 131,833,844
Offices outside Spain:
Other EU countries
199,169,106 170,778,310 134,505,644
United States
37,851,345 8,440,893 17,881,211
Other OECD countries (1)
1,101,108 470,721 189,548
Central and South America (1)
96,804,592 96,103,045 69,360,898
Other
1,289,855 2,059,885 1,635,374
Total offices outside Spain
336,216,006 277,852,854 223,572,675
Total
506,976,237 420,229,450 355,406,519
Total deposits
649,067,824 550,106,820 468,303,827
(1)
In this schedule Mexico is classified under “Central and South America”
The following table shows the maturity of time deposits (excluding inter-bank deposits) in denominations of $100,000 or more for the year ended December 31, 2009. Large denomination customer deposits may be a less stable source of funds than demand and savings deposits.
December 31, 2009
Domestic International Total
(in thousands of euros)
Under 3 months
14,481,824 27,067,550 41,549,374
3 to 6 months
3,604,073 10,665,456 14,269,529
6 to 12 months
4,347,421 17,860,482 22,207,903
Over 12 months
4,081,087 26,264,353 30,345,440
Total
26,514,405 81,857,841 108,372,246

70

Table of Contents

The aggregate amount of deposits held by non-resident depositors (banks and customers) in our domestic branch network was € 48.7 million, € 52.8 million and € 87.1 million, at December 31, 2007, 2008 and 2009, respectively.
Short-Term Borrowings
IFRS-IASB
At December 31,
2009 2008 2007
Average Average Average
Short-Term Borrowings Amount Rate Amount Rate Amount Rate
(in thousands of euros, except percentages)
Securities sold under agreements to repurchase (principally Spanish Treasury notes and bills):
At December 31
95,511,541 1.85 % 83,531,515 4.12 % 99,067,534 3.66 %
Average during year
90,542,348 2.24 % 84,194,507 3.78 % 90,977,794 3.86 %
Maximum month-end balance
101,311,947 99,067,534 99,067,534
Other short-term borrowings:
At December 31
28,678,183 3.75 % 41,759,661 4.89 % 32,706,892 7.29 %
Average during year
34,032,816 2.65 % 45,106,644 5.13 % 27,071,238 5.42 %
Maximum month-end balance
41,759,661 49,522,970 44,052,354
Total short-term borrowings at year-end
124,189,724 2.29 % 125,291,176 4.37 % 131,774,426 4.56 %
Competition
We face strong competition in all of our principal areas of operation from other banks, savings banks, credit co-operatives, brokerage services, on-line banks, insurance companies and other financial services firms.
Banks
Two Spanish banking groups dominate the retail banking sector in Spain. These two groups are headed by Banco Bilbao Vizcaya Argentaria, S.A. and Santander.
At the end of December 2009, these two Spanish banking groups accounted for approximately 60.1% of loans and 63.9% of deposits of all Spanish banks, which in turn represented 28.8% of loans and 28.7% of deposits of the financial system, according to figures published by the Spanish Banking Association (AEB) and the Confederación Española de Cajas de Ahorro (“CECA”). These banking groups also hold significant investments in Spanish industry.
Foreign banks also have a presence in the Spanish banking system as a result of liberalization measures adopted by the Bank of Spain in 1978. At December 31, 2009, there were 88 foreign banks (of which 80 were from European Union countries) with branches in Spain. In addition, there were 18 Spanish subsidiary banks of foreign banks (of which 15 were from European Union countries).
Spanish law provides that any financial institution organized and licensed in another Member State of the European Union may conduct business in Spain from an office outside Spain. They do not need prior authorization from the Spanish authorities to do so. Once the Bank of Spain receives notice from the institution’s home country supervisory authority about the institution’s proposed activities in Spain, the institution is automatically registered and the proposed activities are automatically authorized.

71

Table of Contents

The opening of a branch of any financial institution authorized in another Member State of the European Union does not need prior authorization or specific allocation of resources. The opening is subject to the reception by the Bank of Spain of a notice from the institution’s home country supervisory authority containing, at least, the following information:
•
Program of activities detailing the transactions to be made and the corporate structure of the branch;
•
Address in Spain of the branch;
•
Name and curriculum vitae of the branch’s managers;
•
Stockholders’ equity and solvency ratio of the financial institution and its consolidated group; and
•
Detailed information about any deposit guarantee scheme that assures the protection of the branch’s depositors.
Once the Bank of Spain receives the notice, it notifies the financial institution, thereby permitting the branch to be registered in the Mercantile Register and, then, in the Special Register of the Bank of Spain.
Spanish law requires prior approval by the Bank of Spain for a Spanish bank to acquire a significant interest in a bank organized outside the European Union, create a new bank outside the European Union or open a branch outside the European Union. Spanish banks must provide prior notice to the Bank of Spain to conduct any other business outside of Spain.
When a new bank is created by a Spanish bank outside of Spain, the following information has to be provided to the Bank of Spain:
•
amount of the investment;
•
percentage of the share capital and of the total voting rights;
•
name of the companies through which the investment will be made;
•
draft of the By-laws;
•
program of activities, setting out the types of business envisaged, the administrative and accounting organization and the internal control procedures, including those established to prevent money laundering transactions;
•
list of the persons who will be members of the first board of directors and of the senior management;
•
list of partners with significant holdings, and
•
detailed description of the banking, tax and anti-money laundering regulations of the country where it will be located.
The opening of branches outside Spain requires prior application to the Bank of Spain, including information about the country where the branch will be located, the address, program of activities and names and resumes of the branch’s managers. The opening of representative offices requires prior notice to the Bank of Spain detailing the activities to be performed.
In addition, we face strong competition outside Spain, particularly in Argentina, Brazil, Chile, Mexico, Portugal, the United Kingdom, Germany and the United States. In these corporate and institutional banking markets, we compete with the large domestic banks active in these markets and with the major international banks.

72

Table of Contents

The global banking crisis has reduced the capacity of many institutions to lend and has resulted in the withdrawal or disappearance of a number of market participants and significant consolidation of competitors, particularly in the US and UK. Competition for retail deposits has intensified significantly reflecting the difficulties in the wholesale money markets.
In a number of these markets there are regulatory barriers to entry or expansion, and the state ownership of banks. Competition is generally intensifying as more players enter markets that are perceived to be de-regulating and offer significant growth potential.
Competition for corporate and institutional customers in the UK is from UK banks and from large foreign financial institutions who are also active and offer combined investment and commercial banking capabilities. Santander UK’s main competitors are established UK banks, building societies and insurance companies and other financial services providers (such as supermarket chains and large retailers).
In the UK credit card market large retailers and specialist card issuers, including major US operators, are active in addition to the UK banks. In addition to physical distribution channels, providers compete through direct marketing activity and the internet.
In the United States, Sovereign competes in the Northeastern, New England and New York retail and mid-corporate banking markets with local and regional banks and other financial institutions. Sovereign also competes in the US in large corporate lending and specialized finance markets, and in fixed-income trading and sales. Competition is principally with the large US commercial and investment banks and international banks active in the US.
Savings Banks
Spanish savings banks (“ Cajas de Ahorros ”) are mutual organizations which engage in the same activities as banks, but primarily take deposits and make loans, principally to individual customers and small to medium-sized companies. The Spanish savings banks provide strong competition for the demand and savings deposits which form an important part of our deposit base. Spanish savings banks, which traditionally were regional institutions, are permitted to open branches and offices throughout Spain. In the last few years, mergers among savings banks increased. The Spanish savings banks’ share of domestic deposits and loans were 60.8% and 53.0%, at December 31, 2009.
Credit Co-operatives
Credit co-operatives are active principally in rural areas. They provide savings and loan services including financing of agricultural machinery and supplies. They are also a source of competition.
Brokerage Services
We face competition in our brokerage activities in Spain from brokerage houses of other financial institutions.
Spanish law provides that any investment services company authorized to operate in another Member State of the European Union may conduct business in Spain from an office outside Spain, once the National Securities Market Commission (Comisión Nacional del Mercado de Valores—“CNMV”) receives notice from the institution’s home country supervisory authority about the institution’s proposed activities in Spain.
Spanish law provides that credit entities have access, as members, to the Spanish stock exchanges, in accordance with the provisions established by the Investment Services Directive.
We also face strong competition in our mutual funds, pension funds and insurance activities from other banks, savings banks, insurance companies and other financial services firms.
On-line Banks and Insurance Companies
The entry of on-line banks into the Spanish banking system has increased competition, mainly in customer funds businesses such as deposits. Insurance companies and other financial service firms also compete for customer funds.

73

Table of Contents

SUPERVISION AND REGULATION
Bank of Spain and the European Central Bank
The Bank of Spain, which operates as Spain’s autonomous central bank, supervises all Spanish financial institutions, including us. Until January 1, 1999, the Bank of Spain was also the entity responsible for implementing Spanish monetary policy. As of that date, the start of Stage III of the European Monetary Union, the European System of Central Banks and the European Central Bank became jointly responsible for Spain’s monetary policy. The European System of Central Banks consists of the national central banks of the twenty seven Member States belonging to the European Union, whether they have adopted the euro or not, and the European Central Bank. The “Eurosystem” is the term used to refer to the European Central Bank and the national central banks of the Member States which have adopted the euro. The European Central Bank is responsible for the monetary policy of the European Union. The Bank of Spain, as a member of the European System of Central Banks, takes part in the development of the European System of Central Banks’ powers including the design of the European Union’s monetary policy.
The European System of Central Banks is made up of three decision-making bodies:
• the Governing Council, comprised of the members of the Executive Board of the European Central Bank and the governors of the national central banks of the 16 Member States which have adopted the euro;
• the Executive Board, comprised of the president, vice-president and four other members; and
• the General Council of the European Central Bank, comprised of the president and vice-president of the European Central Bank and the governors of the national central banks of the 27 European Union Member States.
The Governing Council is the body in charge of formulating monetary policy for the euro area and adopting the guidelines and decisions necessary to perform the Euro system’s tasks. The Executive Board is the body in charge of implementing the monetary policy for the euro area laid out by the Governing Council and providing the instructions necessary to carry out monetary policy to the euro area’s national central banks.
The European Central Bank has delegated the authority to issue the euro to the central banks of each country participating in Stage III. These central banks are also in charge of executing the European Union’s monetary policy in their respective countries. The countries that have not adopted the euro will have a seat in the European System of Central Banks, but will not have a say in the monetary policy or instructions laid out by the governing council to the national central banks.
Since January 1, 1999, the Bank of Spain has performed the following basic functions attributed to the European System of Central Banks:
• executing the European Union monetary policy;
• conducting currency exchange operations consistent with the provisions of Article 109 of the Treaty on European Union, and holding and managing the States’ official currency reserves;
• promoting the sound working of payment systems in the euro area; and
• issuing legal tender bank notes.
Notwithstanding the European Monetary Union, the Bank of Spain continues to be responsible for:
• maintaining, administering and managing the foreign exchange and precious metal reserves;
• promoting the sound working and stability of the financial system and, without prejudice to the functions of the European System of Central Banks, of national payment systems;

74

Table of Contents

• placing coins in circulation and the performance, on behalf of the State, of all such other functions entrusted to it in this connection;
• preparing and publishing statistics relating to its functions, and assisting the European Central Bank in the compilation of the necessary statistical information;
• rendering treasury services to the Spanish Treasury and to the regional governments, although the granting of loans or overdrafts in favor of the State, the regional governments or other bodies referred to in Article 104 of the European Union Treaty, is generally prohibited;
• rendering services related to public debt to the State and regional governments; and
• advising the Spanish Government and preparing the appropriate reports and studies.
The Bank of Spain has the following supervisory powers over Spanish banks, subject to applicable laws, rules and regulations issued by the Spanish Government and its Ministry of Economy and Finance:
• to conduct periodic inspections of Spanish banks to test compliance with current regulations concerning, among other matters, preparation of financial statements, account structure, credit policies and provisions and capital adequacy;
• to advise a bank’s board of directors and management when its dividend policy is deemed inconsistent with the bank’s financial results;
• to undertake extraordinary inspections of banks concerning any matters relating to their banking activities;
• to participate with, as the case may be, other authorities in appropriate cases in the imposition of penalties to banks for infringement or violation of applicable regulations; and
• to take control of credit entities and to replace directors of credit entities when a Spanish credit entity faces an exceptional situation that poses a risk to the financial status of the relevant entity.
Liquidity Ratio
European Central Bank regulations require credit institutions in each Member State that participates in the European Monetary Union, including us, to place a specific percentage of their “Qualifying Liabilities” with their respective central banks in the form of interest bearing deposits as specified below (the “Liquidity Ratio”).
The European Central Bank requires the maintenance of a minimum liquidity ratio by all credit institutions established in the Member States of the European Monetary Union. Branches located in the Eurozone of institutions not registered in this area are also subject to this ratio, while the branches located outside the Eurozone of institutions registered in the Eurozone are not subject to this ratio.
“Qualifying Liabilities” are broadly defined as deposits and debt securities issued. The Liquidity Ratio is 2% over Qualifying Liabilities except in relation to deposits with stated maturity greater than two years, deposits redeemable at notice after two years, repos and debt securities with a stated maturity greater than two years, for which the ratio is 0%.
Liabilities of institutions subject to the Liquidity Ratio and liabilities of the European Central Bank and national central banks of a participating Member State of the European Monetary Union are not included in the base of “Qualifying Liabilities”.
Investment Ratio
The Spanish Government has the power to require credit institutions to invest a portion of certain “Qualifying Liabilities” in certain kinds of public sector debt or public-interest financing (the “investment ratio”), and has exercised this power in the past. Although the investment ratio has been 0% since December 31, 1992, the law which authorizes it has not been abolished, and the Spanish Government could reimpose the ratio, subject to EU requirements.

75

Table of Contents

Capital Adequacy Requirements
During 2007, the Bank and its Spanish bank subsidiaries were subject to Bank of Spain Circular 5/1993 on capital adequacy requirements. Additionally, Spain forms part of the Basel Committee on Banking Regulations and Supervisory Practices since February 2001 and we calculate our capital requirements under this committee’s criteria (the Basel I Accord). In June 2006 the European Union adopted a new regulatory framework (recast of Directives 2006/48/EC and 2006/49/EC) that promotes more risk sensitive approaches to the determination of minimum regulatory capital requirements in accordance with the New Basel Accord (“Basel II” or “BIS II”). Finally, the Royal Decree 216/2008 published on February 16, 2008, the Law 36/2007 amending Law 13/1985, and Bank of Spain Circular 3/2008 published on June 10, 2008, introduced these European Directives into the Spanish regulatory framework, and BIS II was incorporated into the Spanish regulations, following its adoption by the European Union.
The Spanish capital adequacy requirements applicable until June 30, 2008 distinguished between “basic” and “complementary” capital and require certain ratios of basic and total capital to risk-weighted assets. Basic capital generally includes ordinary shares, non-cumulative preferred securities and most reserves, less interim dividends, goodwill and intangible assets, treasury stock and financing for the acquisition (by persons other than the issuer’s employees) of the issuer’s shares. Complementary capital generally includes cumulative preferred securities, revaluation and similar reserves, dated and perpetual subordinated debt, general credit allowances and capital gains. The Bank’s total capital was reduced by certain deductions that need to be made with respect to its investments in other financial institutions.
The computation of both basic and complementary capital was subject to provisions limiting the type of stockholding and the level of control which these stockholdings grant to a banking group. The level of dated subordinated debt taken into account for the calculation of complementary capital may not exceed 50% of basic capital, the level of non-cumulative preferred securities may not exceed 30% of basic capital, the level of step-up preferred securities may not exceed 15% of basic capital and the total amount of complementary capital admissible for computing total capital may not exceed the total amount of basic capital.
The consolidated total capital of a banking group calculated in the manner described above may not be less than 8% of the group’s risk-weighted assets net of specified provisions and amortizations. The calculation of total risk-weighted assets applies minimum multipliers of 0%, 10%, 20%, 50% and 100% to the group’s assets.
Spanish regulations provided that, if certain requirements are met, Spanish banks may include the net credit exposure arising from certain interest rate and foreign exchange related derivative contracts (rather than the entire notional amount of such contracts) in their total risk-adjusted assets for purposes of calculating their capital adequacy ratios.
Spanish banks were permitted to include the net credit exposure arising from interest rate and foreign exchange transactions related to derivative products provided that (i) all derivative related transactions between the parties form a single agreement; (ii) the incumbent bank has submitted to the Bank of Spain legal opinions with regard to the validity of the netting provisions; and (iii) the incumbent bank has implemented the appropriate procedures to revise the treatment of netting if there is an amendment of the regulations in force.
As a result of the new Basel capital accord issued by the Basel Committee (Basel II), a new regulatory framework (Directives 2006/48/EC and 2006/49/EC) was adopted in June 2006 by the European Union. Since then, each country has been going through the process of implementing the directives, firstly in national laws and secondly in the specific regulations of each national supervisor. This new framework is applicable to all Spanish banks. Law 36/2007 (November 17), which amends Law 13/1985 on investment ratios, capital and reporting requirements of financial intermediaries and Royal Decree 216/2008 (February 15), transposes Directive 2006/48/EC and Directive 2006/49/EC into the Spanish Law.
Bank of Spain Circular 3/2008 published on June 10, 2008 mandated Spanish entities to report capital ratios using the Basel II framework from June 30, 2008.

76

Table of Contents

Basel II introduces more emphasis on risk sensitivity, supervisory review and market discipline (through more extensive disclosures). Banks have minimum capital requirements in order to support credit, market and operational risk.
The capital requirements can be calculated through standard or advanced internal models. The standardized model uses an approach to risk weighted assets calculation based on the quality of the assets and the available external agency ratings. Depending on the ratings, different risk weights are applied (20%, 35%, 50%, 75%, 100% and 150%).
The Group has been using, from the outset, advanced internal models to calculate the capital requirements for credit risk of the units with the largest credit risk exposure (the Parent Bank and Banesto in Spain, Santander UK and Alliance & Leicester in the United Kingdom), and plans to extend these models to its other main units in the next few years (Santander Totta in Portugal already implemented these models in 2009). The use of advanced internal models is subject to stringent internal validation and supervisory approval requirements. Internal validation and supervisory review and approval of the models are not confined to the quantitative model, but also encompass qualitative requirements relating to the technological environment and the integration of the models into management. In the case of the Group, this has entailed review and approval by the Bank of Spain, the FSA and the Bank of Portugal of several credit risk models applicable to the various business segments. In June 2008, Bank of Spain authorized the use of internal models to determine the regulatory capital requirements of the above mentioned Group’s main units beginning as of June 30, 2008, except for Santander Totta which was authorized in June 2009.
The new regulatory standards positively affect the Group’s capital ratios, as the use of internal models reduces the risk weighted exposure and, consequently, the Group’s capital needs are lower. This improvement is partly offset by the higher penalization from including operational risk and, second, by the limitation of the inclusion of general provisions among second tier funds to 60%.
At December 31, 2009, our eligible capital exceeded the minimum required by the Bank of Spain by over € 25 billion. Our Spanish subsidiary banks were, at December 31, 2009, each in compliance with these capital adequacy requirements, and all our foreign subsidiary banks were in compliance with their local regulations.
The calculation of the minimum capital requirements under the new regulations, referred to as Pillar I, is supplemented by an internal capital adequacy assessment process (“ICAAP”) and supervisory review, referred to as Pillar II. In the case of the Group, the ICAAP is based on an internal model which is used to quantify the economic capital required, given the Group’s global risk profile, to maintain a target AA rating. Lastly, Basel II regulations establish, through Pillar III, strict standards of transparency in the disclosure of risk information to the market.
Concentration of Risk
Spanish banks may not have exposure to a single person or group in excess of 25% (20% in the case of an affiliate) of the bank’s equity. Any exposure to a person or group exceeding 10% of a bank’s capital is deemed a concentration and the total amount of exposure represented by all of such concentrations must not exceed 800% of such capital (excluding exposures to the Spanish government, the Bank of Spain, the European Union and certain other exceptions).
Legal Reserve and Other Reserves
Spanish banks are subject to legal and other restricted reserves requirements. In addition, we must allocate profits to certain other reserves as described in Note 33 to our consolidated financial statements.
Allowances for Credit Losses and Country-Risk
For a discussion relating to allowances for credit losses and country-risk, see “—Classified Assets—Bank of Spain Classification Requirements”.
Employee Pension Plans
At December 31, 2009, our pension plans were all funded according to the criteria disclosed in Note 25 to our consolidated financial statements.

77

Table of Contents

Restrictions on Dividends
We may only pay dividends (including interim dividends) if such payment is in compliance with the Bank of Spain’s minimum capital requirement (described under “—Capital Adequacy Requirements”) and other requirements or, as described below, under certain circumstances when we have capital that is 20% or less below the Bank of Spain’s minimum capital requirements.
If a banking group meets this capital requirement, it may dedicate all of its net profits to the payment of dividends, although in practice Spanish banks normally consult with the Bank of Spain before declaring a dividend. Even if a banking group meets the capital requirement as a group, any consolidated Spanish credit entity that is a subsidiary that does not meet the capital requirement on its own will be subject to the limitations on dividends described below. If a banking group or any Spanish credit entity subsidiary of the group has capital that is 20% or less below the Bank of Spain’s minimum capital requirement, it must devote an amount of net profits determined by the Bank of Spain to reserves, and dividends may be paid out of the remainder only with the prior approval of the Bank of Spain. If the capital is 20% or more, or its basic capital is 50% or more, below the minimum requirement, it may not pay any dividends and must allocate all profits to reserves unless otherwise authorized by the Bank of Spain. In the case of a banking group failing to meet the capital requirement, however, the Bank of Spain can authorize that the consolidated subsidiaries in the group pay dividends without restriction, so long as they are at least 50% owned by group companies and, if they are credit entities, independently comply with the capital requirement.
If a bank has no net profits, its board of directors may propose at the general meeting of shareholders that a dividend be declared out of retained earnings. However, once the board of directors has proposed the dividend to be paid, it must submit the proposal to the Minister of Economy and Finance who, in consultation with the Bank of Spain, may in his discretion authorize or reject the proposal of the board.
Compliance with such requirements notwithstanding, the Bank of Spain is empowered to advise a bank against the payment of dividends on solvency and soundness grounds. If such advice is not followed, the Bank of Spain may require that notice of such advice be included in the bank’s annual report registered before the Mercantile Register. In no event may dividends be paid from certain legal reserves.
Interim dividends of any given year may not exceed the net profits for the period from the closing of the previous fiscal year to the date on which interim dividends are declared. In addition, the Bank of Spain recommends that interim dividends not exceed an amount equal to one-half of all net income from the beginning of the corresponding fiscal year. Although banks are not legally required to seek prior approval from the Bank of Spain before declaring interim dividends, the Bank of Spain has asked that banks consult with it on a voluntary basis before declaring interim dividends.
Limitations On Types Of Business
Spanish banks generally are not subject to any prohibitions on the types of businesses that they may conduct, although they are subject to certain limitations on the types of businesses they may conduct directly.
The activities that credit institutions authorized in another Member State of the European Union may conduct and which benefit from the mutual recognition within the European Union are detailed in article 52 of Law 26/1988 (July 29, 1988).
Deposit Guarantee Fund
The Deposit Guarantee Fund on Credit Institutions (“Fondo de Garantía de Depósitos”, or the “FGD”), which operates under the guidance of the Bank of Spain, guarantees in the case of the Bank and our Spanish banking subsidiaries: (i) bank deposits up to € 100,000 per depositor; and (ii) securities and financial instruments which have been assigned to a credit institution for its deposit, register or for other such services, up to € 100,000 per investor. Pursuant to regulations affecting the FGD, the FGD may purchase non-performing loans or may acquire, recapitalize and sell banks which experience difficulties.

78

Table of Contents

The FGD is funded by annual contributions from member banks. The amount of such bank’s contributions is currently 0.6 per thousand (0.4 per thousand for savings banks and 0.8 per thousand for credit cooperatives) of the year-end amount of deposits to which the guarantee extends. For that purpose, the calculation basis will take into consideration the bank deposits, plus 5% of the market quotation (or nominal value or redemption value in case the securities are not traded in any secondary market) of the guaranteed securities at the end of the financial year. Nevertheless, the Minister of Economy and Finance may reduce the member bank contributions once the capital of the FGD resources exceeds its requirements, and suspend further contributions when the FGD’s funds exceed the requirement by 1% or more of the calculation basis.
As of December 31, 2009, the Bank and its domestic bank subsidiaries were members of the FGD and thus were obligated to make annual contributions to it.
Data Protection
Law 15/1999, dated December 13, 1999, establishes the requirements relating to the treatment of customers’ personal data by credit entities. This law requires credit entities to notify the Spanish Data Protection Agency prior to creating files with a customer’s personal information. Furthermore, this law requires the credit entity to identify the persons who will be responsible for the files and the measures that will be taken to preserve the security of those files. The files must then be recorded in the Data Protection General Registry, once compliance with the relevant requirements has been confirmed. Credit entities that breach this law may be subject to claims by the interested parties before the Data Protection Agency. The Data Protection Agency, which has investigatory and sanctioning capabilities, is the Spanish Authority responsible for the control and supervision of the enforcement of this law.
Recent Legislation
Law 6/2007 (April 12) amending the Securities Market Law, in order to modify the rules for takeover bids and for issuers transparency. This law has been further developed by Royal Decree 1066/2007 (July 27) on rules applicable to takeover bids for securities and by Royal Decree 1362/2007 (October 19), on transparency requirements for issuers of listed securities (see Item 9 of Part I, “The Offer and Listing—C. Markets—Spanish Securities Market—Securities Market Legislation” and Item 10 of Part I, “Additional Information—B. Memorandum and Articles of Association—Tender Offers”).
Law 16/2007 (July 4) introduces a series of amendments to the Spanish mercantile legislation, Commercial Code and Companies Law, in order to adapt it to certain international accounting standards introduced by Regulation 1606/2002/EC of the European Union and of the Council with regard to international financial reporting standards.
Law 22/2007 (July 11) completes the incorporation into the Spanish legal system of Directive 2002/65/EC concerning the distance marketing of consumer financial services.
Law 36/2007 (November 17) introduces a series of amendments to Law 13/1985 (May 25), on investment ratios, capital and reporting requirements of financial intermediaries, in order to adapt it to Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions. The provisions of this Directive and the provisions in Directive 2006/49/EC on the minimum capital adequacy of investment firms and credit institutions, implements in the European Union the provisions of the 2004 New Basel Capital Accord (Basel II) which focuses on capital allocation as a primary means of controlling risk. Further implementation in Spain of the above mentioned Directives has been made by Royal Decree 216/2008 (February 15), on capital of financial institutions and by Bank of Spain Circular 3/2008, published on June 10, 2008 (see “Capital Adequacy Requirements” above).
Law 41/2007 (December 7) amends Law 2/1981 (March 25) on the mortgage market and regulations related to the mortgage and financial systems, by regulating reverse mortgages and long term care insurance and by setting out a specific tax rule. The purpose of this law is to provide the Spanish mortgage market with greater flexibility. A number of reforms have been introduced relating to (i) asset or financing transactions carried out by credit institutions; and (ii) liability transactions, i.e., those of moving mortgage loans and credits that credit institutions carried out as refinancing mechanisms (mortgage participations, mortgage bonds and covered bonds). A new Royal Decree 716/2009 of April 24, 2009 has been enacted implementing some of the reforms introduced by Law 41/2007 on the mortgage market.

79

Table of Contents

Law 47/2007 (December 19) amends the Securities Market Law in order to adapt it to (i) Directive 2004/39/EC on markets in financial instruments (MiFID), (ii) Directive 2006/73/EC implementing Directive 2004/39/EC with respect to the organizational requirements and operating conditions for investment firms and defined terms for the purpose of that Directive; and (iii) Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions. Further Directive 2006/49/EC and MiFID implementation have been introduced by Royal Decrees 216/2008 and 217/2008 (both of February 15), respectively (see Item 9 of Part I, “The Offer and Listing—C. Markets. —Spanish Securities Market—Securities Market Legislation”).
Law 4/2008 (December 23, 2008) abolishes wealth tax, brings into general use the monthly refund system for value added tax, and introduces other amendments to tax legislation.
Law 3/2009, of April 3, on structural modifications of commercial companies ( Ley sobre modificaciones estructurales de las sociedades mercantiles ), entails a profound reform of our legal system in various areas of corporate Law:
(i) cross-border mergers and international transfers of a corporation’s registered office are regulated;
(ii) rules applicable to corporate restructuring transactions of the different types of commercial companies are unified;
(iii) the quantitative limitations for the acquisition of treasury stock by public limited companies are extended (10% for listed companies and 20% for unlisted companies).
(iv) preemptive rights are abolished in the case of non-monetary contributions, preemptive rights of the holders of convertible debentures are eliminated, and the ability to exclude preemptive rights of the shareholders for the issuance of convertible debentures is expressly provided.
This law will enter into force within three months of the publication thereof in the Spanish Official Gazette, except for the provisions relating to intra-European Union cross-border mergers, which entered into force on the day following publication thereof.
Law 5/2009, of June 29, amending Securities Market Law 24/1988, of July 28, Law 26/1988 of July 26 on Discipline and Control of the Credit Institutions, and the Revised Private Insurance Regulation and Supervision Law, approved by Legislative Royal Decree 6/2004, of October 29, for the reform of the Regime on Significant Holdings in Investment Firms, Credit Institutions and Insurance Companies, which implements Directive 2007/44/EC of the European Parliament and of the Council, sets up the criteria and procedures used to assess the suitability of potential acquirers of qualifying holdings of credit institutions, investment firms and insurance companies.
Final provisions of the Law 5/2009 amend a wide and important range of Spanish laws which includes among others Law 35/2003 of November 4, on Collective Investment Schemes, Law 19/1992, of July 7, on the regime governing real estate investment companies and funds, mortgage securitization funds and the Spanish Corporations Law granting shareholders of listed companies, through a vote at the Annual Shareholder’s Meeting, the option of delegating to the Board of Directors the power of excluding the right of preemptive subscription in relation to convertible debenture issuances.
Law 11/2009 of October 26, regulating listed corporations investing in real estate (the so-called SOCIMIs), encourages investment in Spanish real estate during the economic recession by providing for specific tax advantages to companies meeting specific corporate, regulatory and tax requisites. Law 11/2009 also regulates income deriving from loans between related parties and clarifies the regime applicable for the offsetting of losses generated by companies within the same group at the level of the tax group when there are more than two levels of subsidiaries.

80

Table of Contents

Law 16/2009, of November 13, on Payment Services, which transposes into Spanish law Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007, regulates the manner in which payment services are rendered in Spain, entities authorized to provide the aforementioned services, and the duties of users and providers of these services, focusing on the following areas:
(i) Definition of the payment services, within a both positive and negative scope, and the restricted entities authorized to render such services;
(ii) Regulation of Payment Institutions, which shall be subject to the supervision of the Bank of Spain;
(iii) Transparency and information requirements of the payment services providers; and
(iv) Rights and obligations in relation to the provision and use of the payment services of both the payments services providers and the payment services users.
Law 16/2009 also regulates the penalties to which the Payment Institutions shall be subject, which also can be extended to those legal or individuals who have a significant holding in these entities, as well as transitional provisions regarding certain contracts entered into by credit institutions and their customers and those contracts entered into by currency exchange institutions and their clients, both for the rendering of payment services.
Law 26/2009 of December 23 on the 2010 General State Budgets, which was published in the State’s Official Newsletter on December 24, 2009, introduces in a series of measures dealing with main aspects of the tax systems. The most significant of these are:
a) Individual Income Tax rates applicable to “savings income” (dividends, interest, net worth gains) are increased to 19% or 21%;
b) Corporate Income Tax rates of withholding and on account payment of Corporate Tax is increased to 19%, and for small- and medium-sized businesses that create or maintain employment, two levels of reduced rates (20% or25%) have been established;
c) starting on July 1, 2010, general and reduced rates of Value Added Tax (VAT) are respectively increased from 16% and 7% to 18% and 8%; and
d) with respect to the Non-Resident Income Tax, the rate applicable to savings income is currently 19%.
* * * * * *
In an attempt to deal with the international financial crisis, due to the exceptional circumstances notably beginning in the second half of 2008, the following laws were approved in Spain:
• Royal Decree 1642/2008, of December 10, increased consumer deposit and investment guarantees up to € 100,000 for each depositor or investor and Spanish entity.
• Royal Decree-Law 6/2008, of October 10, creates the Spanish Financial Asset Acquisition Fund, and Order EHA/3118/2008, dated October 31, enacts this Royal Decree. The purpose of the fund, which is managed by Spain’s Ministry of Economy and Finance and has an initial endowment of € 30 billion that can be increased to € 50 billion, is to acquire, with public financing and based on market criteria via auctions, financial instruments issued by credit institutions and securitization funds (which are backed by loans granted to individuals, companies and non-financial entities) as a measure to increase liquidity.

81

Table of Contents

• Royal Decree-Law 7/2008, of October 13, on Emergency Economic Measures in connection with the Concerted Euro Area Action Plan (“RD 7/2008”), and Order EHA/3364/2008, dated November 21, as amended by Order EHA/3748/2008 of December 23, enacting article 1 of the aforementioned Royal Decree, include the following measures:
• Article 1 of RD 7/2008, authorizes the granting of state guarantees for certain new financing transactions carried out by credit entities resident in Spain up to a maximum amount of € 100 billion. The purpose of Order EHA/3364/2008, as amended by Order EHA/3748/2008 is to implement the provisions of RD 7/2008 and to specify certain essential aspects of the system for granting guarantees to credit entities, such as: (i) the characteristics of the guarantees to be granted; (ii) the requirements that the beneficiary entities and the transactions must fulfill; and (iii) the process to be followed in order to grant the guarantees. Debt issued under this state guarantee must form part of individual operations or issuance programs; not be subordinated or secured by any other class of guarantee; be traded on official Spanish secondary markets; mature within three months and three years (although this maturity can be extended to five years subject to prior notification to the Bank of Spain); be fixed or floating rate (subject to special conditions for floating-rate debt); be repaid in a single installment at maturity; not have any options or other derivatives attached to it; and, not be less than € 10 million per issue. The deadline for issuing debt eligible for state guarantees is December 31, 2009 and the total amount of guarantees is € 100 billion.
• Authorization, on an exceptional basis, until December 31, 2009, for the Spanish Ministry of Economy and Finance to acquire regulatory capital (including preferred securities and quotas) issued by credit entities resident in Spain that need to reinforce their capital and request such action. These acquisitions will require a report from the Bank of Spain.
• Royal Decree-law 3/2009, of March 27, on urgent measures for tax, financial and insolvency matters, amends the Spanish Insolvency Law (in force since 2004), and aims: (i) to facilitate restructuring outside insolvency proceedings for companies undergoing financial difficulties; (ii) to expedite insolvency proceedings for companies which either decide or are bound to restructure in an insolvency situation; and (iii) to settle certain discrepancies concerning credit subordinations. Additionally, it authorizes the Consorcio de Compensación de Seguros to participate in the reassurance of credit insurance transactions.
• Royal Decree-Law 9/2009, of June 26, on bank restructuring and credit institutions equity reinforcement, which also aims at maintaining confidence in the financial system and enhancing its strength and solvency so that the surviving institutions are sound and able to provide credit normally, proposes a bank restructuring model based on the three Credit Institution Deposit Guarantee Funds and the use of the “Fund for the Orderly Bank Restructuring”, which has three different stages: (i) the search of a private solution by the credit institution itself; (ii) the adoption of measures aimed at dealing with any weakness that affect the viability of credit institutions, with the participation of the Credit Institution Deposit Guarantee Funds and (iii) restructuring processes with the intervention of the Fund for Orderly Bank Restructuring.
This recapitalization scheme for credit institutions has been approved by the European Commission until 30 June 2010, concluding the scheme is compatible with article 107.3.b of the Treaty on the Functioning of the European Union (TFEU). A possible prolongation of the model beyond 30 June 2010 must be notified to the Commission together with a report on the functioning of the scheme.
United Kingdom Regulation
FSA
Both Santander UK and our London branch are regulated by the Financial Services Authority (“FSA”). The FSA is the single statutory regulator responsible for regulating deposit taking, mortgages, insurance and investment business pursuant to the Financial Services and Markets Act 2000 (“FSMA”). It is a criminal offense for any person to carry on any of the activities regulated under this Act in the United Kingdom by way of business unless that person is authorized by the FSA or falls under an exemption.
The FSA has authorized Santander UK, as well as some of its subsidiaries, to carry on certain regulated activities. The regulated activities they are authorized to engage in depend upon permissions granted by the FSA. The main permitted activities of Santander UK and its authorized subsidiaries are described below.
Mortgages
Lending secured on land, at least 40% of which is used as a dwelling by an individual borrower or relative, has been regulated by the FSA since October 31, 2004. Santander UK is authorized to enter into, advise and arrange regulated mortgage contracts.

82

Table of Contents

Banking
Deposit taking is a regulated activity that requires a firm to be authorized and supervised by the FSA. Santander UK has permission to carry on deposit taking as do several of its subsidiaries, including Alliance & Leicester plc, Abbey National Treasury Services plc and Cater Allen Limited.
Insurance
United Kingdom banking groups may provide insurance services through other group companies. Insurance business in the United Kingdom is divided between two main categories: Long-term Assurance (such as whole of life, endowments, life insurance investment bonds) and General Insurance (such as buildings and contents coverage, annually renewable life, health and travel protection coverage and motor insurance).
Under the FSMA, effecting or carrying out any contract of insurance, whether general or long-term, is a regulated activity requiring authorization. Life insurance mediation has been subject to regulation for many years. General insurance mediation has been subject to regulation by the FSA since January 14, 2005.
Santander UK is authorized by the FSA to sell both Long-term Assurance and General Insurance, and receives commissions for the policies arranged.
Investment business
Investment business such as dealing in, arranging deals in, managing and giving investment advice in respect of most types of securities and other investments, including options, futures and contracts for differences (which would include interest rate and currency swaps) and long-term assurance contracts are all regulated activities under the FSMA and require authorization by the FSA.
Santander UK and a number of its subsidiaries have permission to engage in a wide range of wholesale and retail investment businesses including selling investment-backed life assurance and pension products, unit trust products and individual savings accounts (tax exempt saving products) and providing certain retail equity products and services.
United States Supervision and Regulation
Our operations are subject to extensive federal and state banking and securities regulation and supervision in the United States. We engage in U.S. banking activities directly through our New York branch and indirectly through Banesto’s branch in New York, Santander UK’s branch in Connecticut, our subsidiary Edge Act corporation, Banco Santander International, in Miami, Banco Santander Puerto Rico (“Santander Puerto Rico”) in Puerto Rico and Sovereign Bank, a federally-chartered savings bank that is headquartered in Pennsylvania and has branches in various states.
Regulatory Authorities
We are a bank holding company under the U.S. Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), by virtue of our ownership of Santander Puerto Rico. As a result, we and our U.S. operations are subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).
Santander Puerto Rico is a Puerto Rico-chartered bank, and its deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”). As such, Santander Puerto Rico is subject to regulation, supervision and examination by the Puerto Rico Bureau of Financial Institutions and the FDIC. Sovereign Bank is a federally-chartered savings bank, the deposits of which are also insured by the FDIC. Sovereign Bank is subject to regulation, supervision and examination by the Office of Thrift Supervision and the FDIC. Our New York branch is supervised by the Federal Reserve Board and the New York State Banking Department, but its deposits are not insured (or eligible to be insured) by the FDIC. Banesto’s branch in New York is supervised by the Federal Reserve Board and the New York State Banking Department. Santander UK’s branch in Connecticut is supervised by the Federal Reserve Board and the Connecticut Department of Banking. Banco Santander International is supervised by the Federal Reserve Board.

83

Table of Contents

Restrictions on Activities
As described below, federal and state banking laws and regulations restrict our ability to engage, directly or indirectly through subsidiaries, in activities in the United States.
We are required to obtain the prior approval of the Federal Reserve Board before directly or indirectly acquiring the ownership or control of more than 5% of any class of voting shares of U.S. banks, certain other depository institutions, and bank or depository institution holding companies. Under the Bank Holding Company Act Federal Reserve Board regulations and the Home Owner’s Loan Act, our U.S. banking operations (including our New York branch and Santander Puerto Rico) are also restricted from engaging in certain “tying” arrangements involving products and services.
Santander Puerto Rico and Sovereign Bank are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be made and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of these subsidiaries.
The Gramm-Leach Bliley Act of 1999 (the “GLB Act”) and Federal Reserve Board regulations contain provisions that could affect our operations and the operations of all financial institutions. One of these provisions requires our depository institution subsidiaries to disclose our privacy policy to consumers and to offer them the ability to opt out of having their non-public information disclosed to third parties. In addition, individual states are permitted to adopt more extensive privacy protections through legislation or regulation. In addition, the so-called “push-out” provisions of the GLB Act narrow the exclusion of banks (including U.S. branches of foreign banks, such as our New York branch) from the definitions of “broker” and “dealer” under the Securities Exchange Act of 1934.
In addition, under U.S. federal banking laws, state-chartered banks (such as Santander Puerto Rico) and state-licensed branches and agencies of foreign banks (such as our New York branch) may not, as a general matter, engage as a principal in any type of activity not permissible for their federally chartered or licensed counterparts, unless (i) in the case of state-chartered banks (such as Santander Puerto Rico), the FDIC determines that the additional activity would pose no significant risk to the FDIC’s Deposit Insurance Fund and is consistent with sound banking practices, and (ii) in the case of state licensed branches and agencies (such as our New York branch), the Federal Reserve Board determines that the additional activity is consistent with sound banking practices. United States federal banking laws also subject state branches and agencies to the same single-borrower lending limits that apply to federal branches or agencies, which are substantially similar to the lending limits applicable to national banks. These single-borrower lending limits are based on the worldwide capital of the entire foreign bank ( i.e. , Banco Santander, S.A. in the case of our New York branch).
Under the International Banking Act of 1978, as amended, the Federal Reserve Board may terminate the activities of any U.S. office of a foreign bank if it determines that the foreign bank is not subject to comprehensive supervision on a consolidated basis in its home country (unless the home country is making demonstrable progress toward establishing such supervision), or that there is reasonable cause to believe that such foreign bank or its affiliate has violated the law or engaged in an unsafe or unsound banking practice in the United States and, as a result of such violation or practice, the continued operation of the U.S. office would be inconsistent with the public interest or with the purposes of federal banking laws.
There are various legal restrictions on the extent to which we and our nonbank subsidiaries can borrow or otherwise obtain credit from our U.S. banking subsidiaries or engage in certain other transactions involving those subsidiaries. In general, these transactions must be on terms that would ordinarily be offered to unaffiliated entities and must be secured by designated amounts of specified collateral. In addition, certain transactions, such as certain extensions of credit by a U.S. bank subsidiary to, or purchases of assets by such a subsidiary from, us or our nonbank subsidiaries are subject to volume limitations. These restrictions also apply to certain transactions of our New York Branch with certain of our U.S. affiliates.

84

Table of Contents

Our New York Branch
Our New York branch is licensed by the New York Superintendent of Banks to conduct a commercial banking business. Under the New York State Banking Law and regulations, our New York branch is required to maintain eligible high-quality assets with banks in the State of New York, as security for the protection of depositors and certain other creditors.
The New York State Banking Law also empowers the Superintendent of Banks to establish asset maintenance requirements for branches of foreign banks, expressed as a percentage of each branch’s liabilities. The presently designated percentage is 0%, although the Superintendent may impose additional asset maintenance requirements upon individual branches on a case-by-case basis. No such requirement has been imposed upon our New York branch.
The New York State Banking Law authorizes the Superintendent of Banks to take possession of the business and property of a New York branch of a foreign bank under circumstances involving violation of law, conduct of business in an unsafe manner, impairment of capital, suspension of payment of obligations, or initiation of liquidation proceedings against the foreign bank at its domicile or elsewhere. In liquidating or dealing with a branch’s business after taking possession of a branch, only the claims of creditors which arose out of transactions with a branch are to be accepted by the Superintendent of Banks for payment out of the business and property of the foreign bank in the State of New York, without prejudice to the rights of the holders of such claims to be satisfied out of other assets of the foreign bank. After such claims are paid, the Superintendent of Banks will turn over the remaining assets, if any, to the foreign bank or its duly appointed liquidator or receiver.
Under the New York State Banking Law, our New York branch is generally subject to the same limits on lending to a single borrower, expressed as a ratio of capital, that apply to a New York state-chartered bank, except that for our New York branch such limits are based on our worldwide capital.
Our U.S. Depository Institution Subsidiaries
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”) provides for extensive regulation of depository institutions (such as Santander Puerto Rico and Sovereign Bank), including requiring federal banking regulators to take “prompt corrective action” with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. For this purpose, FDICIA establishes five tiers of institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” As an insured depository institution’s capital level declines and the depository institution falls into lower categories (or if it is placed in a lower category by the discretionary action of its supervisor), greater limits are placed on its activities and federal banking regulators are authorized (and, in many cases, required) to take increasingly more stringent supervisory actions, which could ultimately include the appointment of a conservator or receiver for the depository institution (even if it is solvent). In addition, FDICIA generally prohibits an FDIC-insured bank from making any capital distribution (including payment of a dividend) or payment of a management fee to its holding company if the bank would thereafter be undercapitalized. If an insured depository institution becomes “undercapitalized,” it is required to submit to federal regulators a capital restoration plan guaranteed by the depository institution’s holding company. The guarantee is limited to 5% of the depository institution’s assets at the time it becomes undercapitalized or, should the undercapitalized depository institution fail to comply with the plan, the amount of the capital deficiency at the time of failure, whichever is less. If an undercapitalized depository institution fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.” Significantly undercapitalized depository institutions may be subject to a number of restrictions, including requirements to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and restrictions on accepting deposits from correspondent banks. “Critically undercapitalized” depository institutions are subject to appointment of a receiver or conservator.

85

Table of Contents

Monetary Policy and Exchange Controls
The decisions of the European System of Central Banks influence conditions in the money and credit markets, thereby affecting interest rates, the growth in lending, the distribution of lending among various industry sectors and the growth of deposits. Monetary policy has had a significant effect on the operations and profitability of Spanish banks in the past and this effect is expected to continue in the future. Similarly, the monetary policies of governments in other countries in which we have operations, particularly in Latin America, the United States and the United Kingdom, affect our operations and profitability in those countries. We cannot predict the effect which any changes in such policies may have upon our operations in the future, but we do not expect it to be material.
The European Monetary Union has had a significant effect upon foreign exchange and bond markets and has involved modification of the internal operations and systems of banks and of inter-bank payments systems. Since January 1, 1999, the start of Stage III, see “—Supervision and Regulation—Bank of Spain and the European Central Bank,” Spanish monetary policy has been affected in several ways. The euro has become the national currency of the fifteen participating countries and the exchange rates between the currencies of these countries were fixed to the euro. Additionally, the European System of Central Banks became the entity in charge of the European Union’s monetary policy.
C. Organizational structure
Banco Santander, S.A. is the parent company of the Group which was comprised at December 31, 2009 of 848 companies that consolidate by the global integration method. In addition, there are 142 companies that are accounted for by the equity method.
See Exhibits I, II and III to our consolidated financial statements included in this Form 20-F for details of our consolidated and non-consolidated companies.
D. Property, plant and equipment
During 2009, the Bank and its banking subsidiaries either leased or owned premises in Spain and abroad, which at December 31, 2009 included 4,865 branch offices in Spain and 8,795 abroad. These figures include traditional branches and banking services points but do not include electronic service points. See Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations and Recent events” and Note 16 to our consolidated financial statements.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
Critical Accounting Policies
The preparation of the Group’s consolidated financial statements requires a significant amount of judgment involving estimates and assumptions which can be inherently uncertain at the time they are made (see Note 1-c to our consolidated financial statements). Changes in assumptions may have a significant impact on the financial statements in the periods in which they are changed. Judgments or changes in assumptions are submitted to the audit and compliance committee of the board of directors and/or to our regulatory authorities and are disclosed in the notes to our consolidated financial statements.
Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates if assumptions and conditions change.

86

Table of Contents

We believe that of our significant accounting policies, the following may involve a high degree of judgment:
Fair value of financial instruments
Trading assets or liabilities, financial instruments that are classified at fair value through profit or loss, available for sale securities, and all derivatives are recorded at fair value on the balance sheet. The fair value of a financial instrument is the value at which it could be bought or sold in a current transaction between willing parties. If a quoted price in an active market is available for an instrument, the fair value is calculated based on that price.
If there is no market price available for a financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving the same or similar instruments and, in the absence thereof, on the basis of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.
We use derivative financial instruments for both trading and non-trading activities. The principal types of derivatives used are interest rate swaps, future rate agreements, interest rate options and futures, foreign exchange forwards, foreign exchange futures, foreign exchange options, foreign exchange swaps, cross currency swaps, equity index futures and equity options. The fair value of standard derivatives is calculated based on published price quotations. The fair value of over-the-counter (“OTC”) derivatives is taken to be the sum of the expected future cash flows arising from the instrument, discounted to present value at the date of measurement (“present value” or “theoretical close”) using valuation techniques commonly used by the financial markets as follows:
•
In the valuation of financial instruments permitting static hedging (principally, forwards and swaps), and in the valuation of loans and advances, the “present value” method is used. Expected future cash flows are discounted using the interest rate curves of the applicable currencies. The interest rate curves are generally observable market data.
•
In the valuation of financial instruments requiring dynamic hedging (principally structured options and other structured instruments), the Black-Scholes model is generally used. Certain observable market inputs are used in the Black-Scholes model to generate variables such as the bid-offer spread, exchange rates, volatility, correlation between indexes and market liquidity, as appropriate.
•
In the valuation of financial instruments exposed to interest rate risk (such as interest rate futures, caps and floors), the present value method (futures) and Black-Scholes model (plain vanilla options) are used. For more structured instruments that require dynamic hedging, the Heath-Jarrow-Morton model is used. The main inputs used in these models are principally observable market data, including appropriate interest rate curves, volatilities, correlations and exchange rates.
•
In the case of linear instruments (such as bonds and fixed-income derivatives), credit risk is measured using dynamic models similar to those used in the measurement of interest rate risk. In the case of non-linear instruments, if they are exposed to portfolio credit risk (such as credit derivatives), the joint probability of default is determined using the Standard Gaussian Copula model. The main inputs used in the Standard Gaussian Copula model are generally data relating to individual issuers in the portfolio and correlations thereto. The main inputs used in determining the underlying cost of credit for credit risk derivatives are quoted credit spreads, and the correlation between individual issuers’ quoted credit derivatives.
The determination of fair value requires the use of estimates and certain assumptions. If quoted market prices are not available, fair value is calculated using widely accepted pricing models that consider contractual prices of the underlying financial instruments, yield curves, contract terms, observable market data, and other relevant factors. The use of different estimates or assumptions in these pricing models could lead to a different valuation being recorded in our consolidated financial statements.
In Note 2. d) iii. to our consolidated financial statements additional information can be found regarding valuation techniques used by the Group, along with details of the principal assumptions and estimates used in these models and the sensitivity of the valuation of financial instruments to changes in the principal assumptions used.

87

Table of Contents

Allowance for credit losses
Financial assets accounted for at amortized cost and contingent liabilities are assessed for objective evidence of impairment and any resulting allowances for credit losses are recognized and measured in accordance with IAS 39. Credit losses exist if the carrying amount of an asset or claim or a portfolio of assets or claims exceeds the present value of the estimated future cash flows.
Credit losses on these impaired assets and contingent liabilities are assessed as follows:
•
Individually, for all significant debt instruments and for instruments which, although not material, are not susceptible to being classified in homogeneous groups of instruments with similar risk characteristics: instrument type, debtor’s industry and geographical location, type of guarantee or collateral, and age of past-due amounts, taking into account: (i) the present value of future cash flows, discounted at an appropriate discount rate; (ii) the debtor’s financial situation; and (iii) any guarantees in place.
•
Collectively, in all other cases, we group transactions on the basis of the nature of the obligors, the conditions of the countries in which they reside, transaction status, type of collateral or guarantee, and age of past-due amounts. For each group, we establish the appropriate impairment losses (“identified losses”) that must be recognized.
Additionally, we recognize an impairment allowance for credit losses when it is probable that a loss has been incurred, taking into account the historical loss experience and other circumstances known at the time of assessment. For this type of allowance, credit losses are losses incurred at the reporting date, calculated using statistical methods, that have not yet been allocated to specific transactions.
We have implemented a methodology which complies with IFRS-IASB and is consistent with the Bank of Spain requirements for the determination of the level of provisions required to cover inherent losses. This methodology initially classifies portfolios considered normal risk (debt instruments not classified at fair value through profit or loss, contingent risks and contingent commitments) into the following groups, according to the associated level of risk:
(i) No appreciable risk.
(ii) Low risk.
(iii) Medium-low risk.
(iv) Medium risk.
(v) Medium-high risk.
(vi) High risk.
Once these portfolios have been classified, the Bank of Spain, based on experience and information available to it with respect to the Spanish banking sector, has determined the methodology and parameters that entities should apply in the calculation of the provisions for inherent losses in debt instruments and contingent risks and commitments classified as normal risk.
The calculation establishes that the charge for inherent losses to be made in each period will be equal to: (i) the sum of multiplying the value, positive or negative, of the variation in the period of the balance of each class of risk by the constant α corresponding to that class, plus (ii) the sum of multiplying the total amount of the operations included in each class at the end of the period by the relevant β, minus (iii) the amount of the net charge for the specific allowance made in the period.
The parameters α and β as determined by the Bank of Spain’s guidance take into account historic inherent losses and adjustments to reflect the current economic circumstances.

88

Table of Contents

The allowances for impaired balances recorded by Grupo Santander as at December 31, 2009, using the methodology outlined above, was € 18,497 million.
Additionally, with the objective of ensuring that the provisions resulting from the application of the criteria required by the Bank of Spain are reasonable, the Group estimates the allowances for credit losses using models based on its own credit loss experience and management’s estimate of future credit losses. The Group has developed internal risk models, based on historical information available for each country and type of risk (homogenous portfolios); a full description of our credit risk management system is included in Item 11. Quantitative and Qualitative Disclosures about Market Risk Part 4. Credit Risk. These models produce a result that substantially the same as the level of provisions at which we arrive using the model established by the Bank of Spain, as explained below. These internal models may be applied in future periods, and although approved for regulatory capital calculations, they are currently subject to local regulatory approval by the Bank of Spain for purposes of loan loss provisions. In order for each internal model to be considered valid by the local regulator for use, the calculation should be methodologically correct, and be supported by historical information which covers at least one complete economic cycle and is stored in databases which are consistent with information that has been audited by both the group internal auditing function and external auditors.
Since 1993, the Group has employed its own models for assigning solvency and internal ratings, which aim to measure the degree of risk associated with a client or transaction. Each rating corresponds to a certain probability of default or non-payment, based on the Group’s past experience. The development of the internal models has led to the introduction of databases that can be used to estimate the risk parameters required in the calculation of capital and expected loss, following market best practices and the guidelines of the New Capital Accord (Basel II).
There is no substantial difference in the calculation of loan allowances between the EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and IFRS-IASB.
The estimates of a portfolio’s inherent risks and overall recovery vary with changes in the economy, individual industries, countries and individual borrowers’ or counterparties’ ability and willingness to repay their obligations. The degree to which any particular assumption affects the allowance for credit losses depends on the severity of the change and its relationship to the other assumptions.
Key judgments used in determining the allowance for loan losses include: (i) risk ratings for pools of commercial loans and leases, (ii) market and collateral values and discount rates for individually evaluated loans, (iii) product type classifications for consumer and commercial loans and leases, (iv) loss rates used for consumer and commercial loans and leases, (v) adjustments made for current events and conditions, (vi) domestic, global and individual countries economic uncertainty, and (vii) overall credit conditions.
Credit losses are generally recognized through allowances for credit losses. As a result of certain unusual circumstances (for example, bankruptcy or insolvency), the loss can be directly recognized through write-offs.
Specific allowances for credit losses come from the impairment process. Loans are identified as impaired and income no longer accrued when it is determined that collection of interest or principal is doubtful or when the interest or principal has been past due for 90 days or more, unless the loan is well secured and in the process of collection.
Globally managed clients, corporate, sovereign and other loans with significant balances are individually assessed based on the borrower’s overall financial condition, resources, guarantees and payment record. An impairment loss is recognized when there are doubts about collection, or when interest or principal is past due for 90 days or more.
Consumer mortgage, installment, revolving credit and other consumer loans are evaluated collectively, and an impairment loss is recognized when interest or principal is past due for 90 days or more.
According to Bank of Spain’s requirements, non-performing loans must be wholly provisioned (hence all the credit loss recognized) when they are more than 24 months overdue, or after more than 6 years for secured mortgage loans.

89

Table of Contents

When a loan is deemed partially uncollectible, the credit loss is charged against earnings through allowances for credit losses instead of through a partial write-off of the loan, as this is not permitted by the Bank of Spain. If a loan becomes entirely uncollectible, its allowance is increased until it reaches 100% of the loan balance.
The credit loss recognition process is independent of the process for the removal of impaired loans from the balance sheet. The entire loan balance is kept on the balance sheet until any portion of it has been classified as non-performing for 4 years, or up to 6 years for some secured mortgage loans (the maximum period established in the Bank of Spain regulations), depending on management’s view as to the recoverability of the loan. After that period the loan balance and its specific allowance are removed from the balance sheet and recorded in off-balance sheet accounts, with no resulting impact on net income attributable to the Group.
An additional allowance for credit losses attributed to the remaining portfolio is established via a process that considers the potential loss inherent in the portfolio. Also, an allowance is recorded for those exposures where the sovereign risk, transfer risk and risks arising from international financial activity add some doubts as to the collection of debts (the Country-risk Allowance).
Impairment
Certain assets, including goodwill, other intangible assets, equity method investments, financial assets not carried at fair value through profit or loss and other assets are subject to impairment review. We record impairment charges when we believe there is objective evidence of impairment, or that the cost of the assets may not be recoverable. Assessment of what constitutes impairment is a matter of significant judgment.
Goodwill and other intangible assets are tested for impairment on an annual basis, or more frequently if events or changes in circumstances, such as an adverse change in business climate or observable market data, indicate that these assets may be impaired. An impairment loss recognized for goodwill may not be reversed in a subsequent period. The fair value determination used in the impairment assessment requires estimates based on quoted market prices, prices of comparable businesses, present value or other valuation techniques, or a combination thereof, requiring management to make subjective judgments and assumptions. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions.
In relation to goodwill, the first step of the impairment review process requires the identification of cash-generating units (“CGU”). These are the smallest identifiable group of assets that, as a result of continuing operations, generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill is then allocated to these CGUs; this allocation is reviewed following a business reorganization. The carrying value of the CGU, including the allocated goodwill, is compared to its fair value to determine whether an impairment exists. To calculate these fair values, management may use quoted prices, if available, appraisals made by independent external experts or internal estimations. Assumptions about expected future cash flows require management to make estimations and judgments. For this purpose, management analyzes the following: (i) certain macroeconomic variables that might affect its investments (including population data, the political and economic environment, as well as the banking system’s penetration level); (ii) various microeconomic variables comparing our investments with the financial industry of the country in which we carry on most of our business activities (breakdown of the balance sheet, total funds under management, results, efficiency ratio, capital ratio and return on equity, among others); and (iii) the price earnings (“P/E”) ratio of the investments as compared with the P/E ratio of the stock market in the country in which the investments are located and those of comparable local financial institutions.
Equity method investments are evaluated for impairment on an annually basis, or more frequently if events or changes in circumstances indicate that these assets are impaired. An equity method investment is impaired if its fair value is deemed to be less than its cost. Accordingly, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment.
All debt and equity securities (other than those carried at fair value through profit or loss) are subject to impairment testing every reporting period. The carrying value is reviewed in order to determine whether an impairment loss has been incurred. Evaluation for impairment includes both quantitative and qualitative considerations. For debt securities, such considerations include actual and estimated incurred credit losses indicated by payment default, market data on (estimated) incurred losses and other current evidence that the issuer may not pay amounts when due. Equity securities are impaired when management believes that, based on (the combination of) a significant or prolonged decline of fair value below the acquisition price, there is sufficient reason to believe that the acquisition cost may not be recovered. ‘Significant’ and ‘prolonged’ are interpreted on a case-by-case basis for specific equity securities; generally 40% and 18 months are used as triggers.

90

Table of Contents

Upon impairment, the full difference between amortized cost and fair value is removed from equity and recognized in net profit or loss. Impairments on debt securities may be reversed if there is a decrease in the amount of the impairment which can be objectively related to an observable event. Impairments on equity securities may not be reversed.
In 2009, the recovery in the securities markets and the positive effect that decreases in interest rates had on debt securities, resulted in a positive valuation adjustment in “Available-for-sale financial assets”. Additionally, impairment of goodwill and other intangible assets was € 32 million.
As of December 31, 2009, none of our cash-generating units with significant goodwill is at risk of impairment.
In 2008, our impairment reviews resulted in impairment charges of € 2,042 million related to the write-down of the ownership interests in Fortis and The Royal Bank of Scotland and € 984 million related to goodwill and other intangible assets, mainly, due to the write-down of the intangible assets arising from the acquisition of Abbey in 2004.
Our impairment reviews in 2007 resulted in impairment charges of € 1,053 million related principally to our equity method investment in Sovereign. Other than the impairment recognized by Sovereign itself, € 586 million of the total impairment charges related to goodwill held by the Group and € 104 million to exchange differences. Additionally, we recorded goodwill impairment of € 15 million and other intangible asset impairments of € 563 million.
Retirement Benefit Obligations
The Group provides pension plans in most parts of the world. For defined contribution plans, the pension cost recognized in the consolidated income statement represents the contribution payable to the scheme. For defined benefit plans, the pension cost is assessed in accordance with the advice of a qualified external actuary using the projected unit credit method. This cost is annually charged to the consolidated income statement.
The actuarial valuation is dependent upon a series of assumptions; the principal ones are set forth below:
•
assumed interest rates;
•
mortality tables;
•
annual social security pension revision rate;
•
price inflation;
•
annual salary growth rate, and
•
the method used to calculate vested commitments to current employees.
The difference between the fair value of the plan assets and the present value of the defined benefit obligation at the balance sheet date, adjusted for any historic unrecognized actuarial gains or losses and past service cost, is recognized as a liability in the balance sheet.
Further information on retirement benefit obligations is set out in Notes 2 and 25 to our consolidated financial statements.
Business combinations and goodwill
Goodwill and intangible assets include the cost of acquired subsidiaries in excess of the fair value of the tangible net assets recorded in connection with acquisitions as well as acquired intangible assets which include core deposits, customer lists, brands and assets under management. Accounting for goodwill and acquired intangible assets requires management’s estimates regarding: (1) the fair value of the acquired intangible assets and the initial amount of goodwill to be recorded, (2) the amortization period (for identified intangible assets other than goodwill) and (3) the recoverability of the carrying value of acquired intangible assets.

91

Table of Contents

To determine the initial amount of goodwill to be recognized on an acquisition, we have to determine the fair value of the consideration and the fair value of the net assets acquired. We use independent appraisers and our internal analysis, generally based on discounted cash flow techniques, to determine the fair value of the net assets acquired and non-cash components of the consideration paid. The actual fair value of net assets acquired could differ from the fair value determined, resulting in an under- or over-statement of goodwill.
We test goodwill for impairment at the reporting unit level. We identify our reporting units as one level below our business segments, based on our management structure. We keep those reporting units unchanged unless business segment reorganization occurs.
The useful lives of acquired intangible assets are estimated based on the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the acquired entity.
For acquired intangible assets, the amortization period is reviewed annually. In making these assumptions, we consider historical results, adjusted to reflect current and anticipated operating conditions. Because a change in these assumptions can result in a significant change in the recorded amount of acquired intangible assets, we believe the accounting for business combinations is one of our critical accounting estimates.
As a result of the first consolidation of the acquired subsidiaries Santander UK (2004), Santander Consumer USA (2006), Banco Real (2008), Sovereign (2009) and Santander Cards UK (2009), a significant amount of goodwill was recorded (see Note 17 to our consolidated financial statements). Management made this determination, based in part upon independent appraisals of intangible assets, which is initially estimated and subsequently revised within the one year time period allowed by IFRS-IASB.
Investment Securities
Under IFRS-IASB when there is evidence that a reduction in the fair value of a debt security classified as available for sale or loans and receivables is due to impairment, the unrealized loss is charged to net income but, if it subsequently recovers its value, the impairment losses are reversed. The process is similar in the case of equity securities except that any recovery in the value of the equity security is registered as a positive valuation adjustment in equity.
We conduct reviews to assess whether an other-than-temporary impairment exists. These reviews consist of: (i) the identification of securities that have been impaired during the last six months, and (ii) the calculation of the value of the impairment that is not expected to be recovered. Changing global and regional conditions and conditions related to specific issuers or industries could adversely affect these values. Changes in the fair values of trading securities are recognized in earnings.
A. Operating results
We have based the following discussion on our consolidated financial statements. You should read it along with these financial statements, and it is qualified in its entirety by reference to them.
In a number of places in this report, in order to analyze changes in our business from period to period, we have isolated the effects of foreign exchange rates on our results of operations and financial position. In particular, we have isolated the effects of depreciation of local currencies against the euro because we believe that doing so is useful in understanding the development of our business. For these purposes, we calculate the effect of movements in the exchange rates by multiplying the previous period balances in local currencies by the difference between the exchange rate to the euro of the current and the previous period.

92

Table of Contents

General
We are a financial group whose main business focus is retail banking, complemented by global wholesale banking, asset management and insurance businesses.
Our main source of income is the interest that we earn from our lending activities, by borrowing funds from customers and money markets at certain rates and lending them to other customers at different rates. We also derive income from the interest and dividends that we receive from our investments in fixed/variable income and equity securities and from our trading activities in such securities and derivatives, by buying and selling them to take advantage of current and/or expected differences between purchase and sale prices.
Another source of income are the commissions that we earn from the different banking and other financial services that we provide (credit and debit cards, insurance, account management, bill discounting, guarantees and other contingent liabilities, advisory and custody services, etc.) and from our mutual and pension funds management services.
In addition, from time to time, we derive income from the capital gains we make from the sale of our holdings in Group companies.
2009 Overview
We believe that the following factors had a significant impact on our results of operations and financial condition as of and for the year ended December 31, 2009.
The global economy suffered its worst recession in recent history in 2009. Global GDP shrank 2.4% compared to growth of 2.2% in 2008. The recession, which hit developed economies particularly hard, was especially intense during the first months of the year. The various monetary, fiscal and financial recovery measures began to take effect in the second half of the year, and most countries registered positive growth in the fourth quarter. Of note was the strong recovery of emerging economies, most notably China, which was reflected in the recovery in trade and higher prices of commodities. The global economy ended 2009 in an upturn, although it is still fragile and of moderate intensity.
The US economy declined 2.4% in 2009, but ended the year with positive growth, thanks to firm fiscal, monetary and financial measures and the easing of the real estate slump. Negative inflation for most of the year enabled the Federal Reserve to hold its key rate at 0-0.25%, while the budget deficit was more than 10% largely because of the fiscal stimulus.
Latin America withstood the international economic and financial crisis well. Unlike previous recessions, the region’s greater strength enabled anti-cyclical policies to be applied, banking crises to be avoided and maintained relatively stable interest rates. The economic downturn was not as intense as in developed countries and growth was positive at the end of the year.
Brazil was the best example. The reforms undertaken in the last few years made the economy more resilient, thereby increasing its international credibility and providing leeway to apply expansive policies (for example, increasing lending via state banks and setting interest rates at historic lows of 8.75%). GDP growth for the whole year was flat, following a fourth quarter with growth of around 5% year-on-year, and inflation was 4.5%, within the central bank’s target range. The real remained strong and ended the year at $1=BRL 1.74, in line with the periods of greatest strength in 2007 and 2008.
The Chilean economy shrank 1.5%, a moderate decline given its high degree of openness to the international economy, thanks to large cuts in official interest rates to 0.5%. Negative inflation enabled the central bank to maintain its very expansive monetary policy. The Chilean peso, after several months of instability, recovered to $1=CLP 507, stronger even than in 2007.
Mexico was the hardest hit (GDP: -6.5%), largely because of its strong links with the neighboring US economy and with the most affected sectors. At the end of the year, the improvement in the US economy and the decline in official Mexican interest rates to 4.5% (inflation above 5% for several quarters prevented deeper cuts) laid the foundations for a moderate recovery. The Mexican peso depreciated against the dollar to approximately $1=MXN 13.1.

93

Table of Contents

The euro zone’s GDP declined 4.0%, with a profile similar to that of the US but more adverse: a larger reduction in the first quarter and less intense recovery. The measures implemented by governments and the European Central Bank, including lowering the repo rate to 1% in the second quarter, helped the economy grow in the third and fourth quarters. Contained inflation (negative rates after the summer) facilitated the expansive monetary policy, while the euro remained strong throughout the year ( € 1=$1.44).
Germany, the strongest economy of the euro zone, shrank 5% as a result of the worsening of the global economy and its impact on exports and investment. The progressive recovery combined with fiscal stimulus programs and the relative stability of the labor market, which underpinned consumption, pushed the German economy out of recession in the last quarter of 2009.
The Spanish economy declined 3.6%, slightly less than the euro zone due to a less intense recession at the onset. The recovery underway in the rest of the world also began to be felt in Spain. The pace of decline in the economy slowed in the second half and quarter-on-quarter growth moved close to positive rates. However, the slump in the property sector continued to damage the recovery, which will be slower than in the euro zone as a whole.
The UK economy, with a growth profile similar to that of the euro zone, contracted 4.7%, due to the weakness of its financial system and the high level of household indebtedness. Unlike the rest of Europe, inflation remained at more than 2% for most of the year, mainly due to the weakness of sterling ( € 1=£0.90 compared to € 1=£0.65 at the start of the crisis). The fall in the UK base rate to 0.5% at the beginning of 2009 and the fiscal and financial recovery measures enabled quarter-on-quarter growth to be positive in the fourth quarter.
Results of Operations for Santander
Summary
Profit attributable to the Parent as reported in our consolidated financial statements for the year ended December 31, 2009 was € 8,942.5 million, a 0.7% or € 66.1 million increase from € 8,876.4 million in 2008, which was a 2.0% or € 183.8 million decrease from € 9,060.3 million in 2007. The 2009 growth was mainly due to an increase in interest income/ (charges) partially offset by increases in administrative expenses and impairment losses. Additionally, there is a positive effect in most line items of the income statement from the increased scope of consolidation as a result of the businesses acquired in the UK (Alliance & Leicester and Bradford & Bingley), Santander Consumer Finance, the consolidation of Sovereign by global integration (as of February 2009) and the consolidation of Banco Real by global integration for the whole of 2009 (as compared to 3 months in 2008). These effects were partially offset by the impact of exchange rate fluctuations.
Interest Income / (Charges)
Interest income was € 26,298.5 million in 2009, a 49.9% or € 8,760.1 million increase from € 17,538.5 million in 2008, which was a 21.4% or € 3,095.7 million increase from € 14,442.8 million in 2007.
2009 compared to 2008
The € 8,760.1 million increase in interest income in 2009 was due to an improvement of customer spreads (which rose by € 2,724.4 million) together with a increase of € 6,035.6 million in business volumes. International net interest income grew by € 6,853.6 million while domestic net interest income grew by € 1,906.5 million. Spreads on loans were notably better (for the whole Group they increased from 265 basis points to 329 basis points), although they began to ease in the second quarter, while spreads on deposits were negatively affected by lower interest rates. Volumes benefited from the acquisitions, basically Sovereign, Alliance & Leicester and specialized consumer credit companies. On the other hand, exchange rate movements reduced growth by 4 percentage points.
Average total earning assets were € 1,003,956.4 million for the year ended December 31, 2009, a 17.1% or € 146,849.9 million increase from € 857,106.5 million for the same period in 2008. This was due to an increase of € 20,589.0 million in the average balances of our domestic total earning assets (mainly due to an increase of € 15,198.2 million in the average balances of debt securities and an increase of € 6,075.9 million in the average balances due from credit entities partially offset by a decrease of € 4,360.4 million in the average balances of our domestic loan and credit portfolio) and an increase of € 126,260.9 million in the average balance of our international total earning assets (mainly due to an increase of € 95,918.6 million in the average balances of our international loan and credit portfolio, an increase of € 18,722.2 million in the average balances of other interest earning assets (mainly derivatives) and an increase of € 19,130.4 million in the average balances of our debt securities portfolio).

94

Table of Contents

The Group’s net lending amounted to € 682,551 million, 9% higher than in 2008. Excluding the perimeter effects and in local currencies, there was a decrease in net lending of 2%. Lending to the public sector increased 28% and loans to other resident sectors dropped 4%, in line with the deceleration in the market. Secured loans, the main component, increased by 1%, while the commercial portfolio dropped 25%, as a result of shorter maturities and more direct impact from reduced business activity. Other loans declined 7%. Loans to the non-resident sector rose 17%, affected by perimeter changes and exchange rates.
Continental Europe’s balance of total lending decreased 1%. In Spain, the combined lending of the Santander Branch Network and Banesto dropped 4%, following the pattern in the resident sector.
Santander Consumer Finance increased its lending 6%, because of the integration of the assets acquired from Royal Bank of Scotland and GE, while lending in Portugal was 1% lower due to the 8% decrease in loans to companies as credit to individuals and SMEs grew 2% and 9%, respectively.
In the United Kingdom, lending grew 5% on a local currency basis. Mortgage loans rose 5%, lifting their share of new gross lending to 19% (+5 percentage points in 2009), credit to companies increased 3% and personal loans, with a small relative share in total lending, dropped 24%, in line with the Group’s strategy.
Lending in Latin America declined 8%, excluding the impact of exchange rates and the sale of Banco de Venezuela. Of note was the decline of 5% in Brazil (driven primarily by corporate lending), while lending in Chile and Mexico decreased 6% and 11%, respectively, the latter negatively affected by the reduction in the credit card business.
Sovereign recorded total loans of € 34,605 million, with a downward trend in the balances of non-strategic segments and already showing in the fourth quarter the first increases in attractive segments (multifamily and residential mortgages).
At the end of 2009, Continental Europe accounted for 47% of total lending (35% Spain), the UK 33%, Latin America 15% (8% Brazil) and Sovereign 5%. The respective figures a year earlier were 52% for Continental Europe, 33% for the UK and 15% for Latin America.
Our overall net yield spread increased from 1.91% in 2008 to 2.54% in 2009. Domestic net yield spread increased from 1.29% in 2008 to 1.45% in 2009. International net yield spreads increased from 2.23% in 2008 to 3.05% in 2009. In general, spreads improved during the period in most areas due to the focus on profitability rather than volume.
2008 compared to 2007
The € 3,095.7 million increase in interest income in 2008 was due to an improvement of customer spreads (which rose by € 3,697.4 million) partially offset by a reduction of € 601.7 million in business volumes, mainly in Spain. International net interest income grew more significantly than domestic net interest income. Of note was the growth of the Santander Branch Network, Santander Consumer Finance, United Kingdom and the businesses in Brazil and Chile. This was due to moderate growth in business volumes in most units (except Spain), which was higher in Latin America, as well as better customer spreads in the main units. Net interest income benefited from the consolidation of Banco Real in the fourth quarter.
Average total earning assets were € 857,106.5 million for the year ended December 31, 2008, a 6.8% or € 54,887.8 million increase from € 802,218.7 million for the same period in 2007. This was due to an increase of € 27,027.6 million in the average balances of our domestic total earning assets (mainly due to an increase of € 19,480.8 million in the average balances of our domestic loans and credits portfolio partially offset by a decrease of € 6,152.6 million in the average balances of other interest earning assets (mainly derivatives)) and an increase of € 27,860.2 million in the average balance of our international total earning assets (mainly due to an increase of € 10,685.4 million in the average balances of our international loan and credit portfolio and an increase of € 23,032.1 million in the average balances of other interest earning assets (mainly derivatives), partially offset by a decrease of € 18,234.3 million in the average balances of our debt securities portfolio).

95

Table of Contents

The Group’s gross lending amounted to € 639,354 million, 10.3% higher than in 2007. Lending to resident sectors increased by € 5,306 million (reflecting an increase of 2.3%), with that to the public sector up 36.1%, secured loans 0.2% and other credits 7.5% (reflecting the better performance of balances with SMEs). Credit to the nonresident sector rose 15.9%, affected by perimeter changes and exchange rates.
Continental Europe’s total lending increased 4%. In Spain, the Santander Branch Network’s and Banesto’s lending increased 4%, with lower growth in mortgages and a better performance in SMEs.
Santander Consumer Finance increased its lending 18%, partly because of the integration of the assets acquired from Royal Bank of Scotland, while Portugal’s was 8% higher, with lending to individuals up 4% and those to SMEs 16%.
Santander UK’s balances, excluding repos, were 13% lower in euros, hit by sterling’s slide of 23%. In sterling, mortgages rose 10% and personal loans, with a small relative share in total lending in line with the Group’s strategy, dropped 17%. Including Alliance & Leicester, lending in the UK in sterling at the end of 2008 was 43% higher than a year earlier.
Lastly, excluding Banco Real, Latin America’s lending was flat in euros, also hit by the depreciation of currencies. Growth in local currency was 15% on average (as Brazil’s growth in reais was 19%, Mexico’s growth in Mexican pesos was 8% and Chile’s growth in Chilean pesos was 20%). Including Banco Real and in local currency, total lending increased 51% (in Brazil it was 2.4 times higher than at the end of 2007).
Our overall net yield spread increased from 1.70% in 2007 to 1.91% in 2008. Domestic net yield spread increased from 1.18% in 2007 to 1.29% in 2008. International net yield spreads increased from 1.98% in 2007 to 2.23% in 2008. In general, spreads improved during the period in most areas due to the focus on profitability rather than volume.
Income from Equity Instruments
Income from equity instruments was € 436.5 million in 2009, a 21.0% or € 116.3 million decrease from € 552.8 million in 2008, which was a 31.6% or € 132.8 million increase from € 420.0 million in 2007.
While in 2008 income from equity instruments increased as compared to 2007 due to an increase of dividends from available for sale financial assets, in particular from RBS and Fortis, in 2009 we did not obtain dividends from these companies.
Income from Companies Accounted for by the Equity Method
Income from companies accounted for by the equity method decreased € 792.3 million during 2009, to € -0.5 million as a result of the full consolidation or disposition of its primary contributors. During 2008 these entities contributed € 791.8 million to our net income, which was an increase of 80.7% or € 353.7 million from the € 438.0 million earned in 2007.

96

Table of Contents

The entities providing the largest portions of the contributions in 2009 and 2008 include the following:
Contributions to Net Income (1)
Investment December 31, 2009 December 31, 2008
(in thousands of euros)
Grupo Real (2)
15,341 711,146
CEPSA (3)
— 130,932
Sovereign (4)
(15,691 ) (110,251 )
Attijariwafa Bank Société Anonyme (5)
— 27,560
(1)
Contributions to income from companies accounted for by the equity method include dividends.
(2)
Banco Real was fully consolidated in the Group’s consolidated financial statements in the fourth quarter of 2008. Until then, Banco Real had been accounted for using the equity method through ownership interest. The amount of € 15,341 thousand corresponds to 3 companies that were still accounted for by the equity method during 2009.
(3)
CEPSA was classified on December 31, 2008 as a “non-current asset held for sale” and was finally sold during 2009.
(4)
Sovereign’s contribution to net income was accounted for by the equity method until February 2009 when it was fully consolidated. The losses disclosed above for 2009 correspond only to January (prior to our full consolidation of Sovereign).
(5)
Reclassified to available-for-sale in the second half of 2008.
Fee and Commission Income
Fee and commission income was € 9,080.1 million in 2009, representing 9.8% growth compared to € 8,266.3 million in 2008. During 2008, fee and commission income increased by 5.1% over the € 7,868.5 million obtained in 2007.
2009 compared to 2008
Fee and commission income for 2009 and 2008 was as follows:
Amount %
2009 2008 Change Change
(in thousands of euros, except percentages)
Mutual and pension funds
1,177,934 1,542,470 (364,536 ) (23.63 )
Insurance
1,861,169 1,755,336 105,833 6.03
Securities services
774,296 704,525 69,771 9.90
Commissions for services
5,266,735 4,263,964 1,002,771 23.52
Credit and debit cards
1,033,383 856,642 176,741 20.63
Account management
858,696 570,446 288,250 50.53
Bill discounting
318,750 300,042 18,708 6.24
Contingent liabilities
422,065 384,254 37,811 9.84
Other operations
2,633,841 2,152,580 481,261 22.36
Total fee and commission income
9,080,134 8,266,295 813,839 9.85
Fee and commission income rose 9.8% to € 9,080.1 million in 2009 compared to 2008. The increase is explained by the full consolidation of Banco Real in 2009 while in 2008 this entity was accounted for by the equity method for all but three months. Eliminating this effect, fee income was flat mainly due to higher revenues from fee income from services, which were partially offset by lower revenues from mutual and pension funds.
Average balances of mutual funds under management in Spain decreased 26.3% from € 49.5 billion in 2008 to € 36.5 billion in 2009. This decrease was due to customer preference for time deposits and the deterioration in market conditions during 2009. Average balances of mutual funds abroad increased by 5.0% from € 57.1 billion in 2008 to € 60.0 billion in 2009, mainly due to increased activity in Brazil, Chile and the United Kingdom, partially offset by a decrease in Mexico, Switzerland and Portugal.

97

Table of Contents

Average balances of pension funds in Spain decreased by 4.2% from € 10.0 billion in 2008 to € 9.6 billion in 2009. Since we sold our pension funds businesses in Latin America, our remaining business abroad is in Portugal. Average balances of pension funds in Portugal decreased 5.1% from € 1.4 billion in 2008 to € 1.3 billion in 2009.
2008 compared to 2007
Fee and commission income for 2008 and 2007 was as follows:
Amount %
2008 2007 Change Change
(in thousands of euros, except percentages)
Mutual and pension funds
1,542,470 1,891,417 (348,947 ) (18.45 )
Insurance
1,755,336 1,414,796 340,540 24.07
Securities services
704,525 970,639 (266,114 ) (27.42 )
Commissions for services
4,263,964 3,591,653 672,311 18.72
Credit and debit cards
856,642 775,134 81,508 10.52
Account management
570,446 555,902 14,544 2.62
Bill discounting
300,042 222,835 77,207 34.65
Contingent liabilities
384,254 341,956 42,298 12.37
Other operations
2,152,580 1,695,826 456,754 26.93
Total fee and commission income
8,266,295 7,868,505 397,790 5.06
Fee and commission income rose 5.1% to € 8,266.3 million in 2008 compared to 2007 due to the net difference between higher revenues from fee income from services and lower revenues from mutual and pension funds and from securities.
Fee and commission income in Latin America grew significantly while Continental Europe was in line with 2007 as it was more affected by the decrease in fee income from managed funds, the lower revenues in some wholesale banking businesses and the impact of regulatory changes in Portugal.
Average balances of mutual funds under management in Spain decreased 28.4% from € 69.2 billion in 2007 to € 49.5 billion in 2008. This decrease was due to customer preference for time deposits and the deterioration in market conditions during 2008. Average balances of mutual funds abroad decreased by 2.4% from € 58.5 billion in 2007 to € 57.1 billion in 2008, mainly due to decreased activity in Portugal, the United Kingdom and Switzerland, partially offset by the increase in Brazil due to the consolidation of Banco Real.
Average balances of pension funds in Spain decreased by 1.0% from € 10.1 billion in 2007 to € 10.0 billion in 2008. Since we sold our pension funds businesses in Latin America, our remaining business abroad is in Portugal. Average balances of pension funds in Portugal decreased 4.4% from € 1.5 billion in 2007 to € 1.4 billion in 2008.
Gains (Losses) on Financial Assets and Liabilities (net)
Net gains on financial assets and liabilities in 2009 were € 3,801.6 million, a 31.4% growth from € 2,892.2 million in 2008. During 2008, net gains on financial assets and liabilities increased by 25.4% over the € 2,306.4 million earned in 2007. Gains (losses) on financial assets and liabilities include gains and losses arising from the following: marking to market our trading portfolio and derivative instruments, including spot market foreign exchange transactions, sales of investment securities and liquidation of our corresponding hedge or other derivative positions. For further details, see Note 44 to our consolidated financial statements.
2009 compared to 2008
Net gains on financial assets and liabilities rose 31.4% to € 3,801.6 million largely due to the improved performance of revenues from wholesale businesses, mostly originating in customer operations.

98

Table of Contents

2008 compared to 2007
Net gains on financial assets and liabilities rose 25.4% to € 2,892.2 million principally due to the gains of € 741 million obtained from the sale of subordinated liabilities from ABN AMRO, which were partially offset by the € 643 million losses from the fund created for Grupo Santander customers, who suffered losses due to the collapse of Lehman and the Bernard L. Madoff fraud.
Other operating income / expenses
Net other operating income in 2009 was € 143.9 million with a 47.1% decrease from € 271.8 million in 2008. During 2008, net other operating income decreased by 6.4% from the € 290.6 million earned in 2007. Under this line item we include income and expenses from insurance activity, from non-financial services, other commissions and charges to the Fondo de Garantía de Depósitos.
In 2009, the increase in insurance activity and in income from non-financial services was offset by higher charges to the Fondo de Garantía de Depósitos that increased to € 317.7 million from € 179.0 million a year earlier.
In 2008, the 9.4% increase in insurance activity was offset by lower income from non-financial services and higher charges to the Fondo de Garantía de Depósitos.
Administrative Expenses
Administrative expenses were € 14,824.6 million in 2009, a 27.1% or € 3,158.7 million increase from € 11,665.9 million in 2008, which was a 8.3% or € 889.2 million increase from € 10,776.7 million in 2007.
2009 compared to 2008
Administrative expenses for 2009 and 2008 were as follows:
Amount %
2009 2008 Change Change
(in thousands of euros, except percentages)
Personnel expenses
8,450,283 6,813,351 1,636,932 24.03
Other general expenses
6,374,322 4,852,506 1,521,816 31.36
Building and premises
1,613,675 1,206,895 406,780 33.70
Other expenses
1,435,743 1,048,392 387,351 36.95
Information technology
785,504 504,196 281,308 55.79
Advertising
594,432 534,876 59,556 11.13
Communications
631,806 452,900 178,906 39.50
Technical reports
359,753 298,037 61,716 20.71
Per diems and travel expenses
262,097 257,079 5,018 1.95
Taxes (other than income tax)
312,994 279,250 33,744 12.08
Guard and cash courier services
331,220 235,207 96,013 40.82
Insurance premiums
47,098 35,674 11,424 32.02
Total administrative expenses
14,824,605 11,665,857 3,158,748 27.08
The 27.1% increase in administrative expenses in 2009 reflected a 24.0% increase in personnel expenses and a 31.4% increase in other general expenses.

99

Table of Contents

The full consolidation of Banco Real for the whole of 2009 as compared to only three months in 2008 together with the consolidation of Sovereign and the acquisitions of Alliance & Leicester and Bradford & Bingley in UK and General Electric Money in Continental Europe, account for the vast majority of the increase. Excluding these acquisitions and the effects of exchange rate fluctuations, administrative expenses were flat or reflect very moderate changes consistent with the objective of expense control. Of note were Brazil and Mexico with reductions of 3.7% and 3.4%, respectively.
2008 compared to 2007
Administrative expenses for 2008 and 2007 were as follows:
Amount %
2008 2007 Change Change
(in thousands of euros, except percentages)
Personnel expenses
6,813,351 6,434,343 379,008 5.89
Other general expenses
4,852,506 4,342,327 510,179 11.75
Building and premises
1,206,895 965,937 240,958 24.95
Other expenses
1,048,392 897,877 150,515 16.76
Information technology
504,196 468,273 35,923 7.67
Advertising
534,876 553,967 (19,091 ) (3.45 )
Communications
452,900 401,057 51,843 12.93
Technical reports
298,037 294,058 3,979 1.35
Per diems and travel expenses
257,079 271,842 (14,763 ) (5.43 )
Taxes (other than income tax)
279,250 265,542 13,708 5.16
Guard and cash courier services
235,207 188,717 46,490 24.63
Insurance premiums
35,674 35,057 617 1.76
Total administrative expenses
11,665,857 10,776,670 889,187 8.25
The 8.3% increase in administrative expenses in 2008 reflected a 5.9% increase in personnel expenses and a 11.7% increase in other general expenses.
If Banco Real had been accounted for by the equity method in the fourth quarter of 2008, expenses would have increased at a notably slower pace than the equivalent rates in previous quarters. The current environment of lower revenue growth requires even stricter management of costs. All geographic as well as global units registered growth in administrative expenses that was in accord with the Group’s cost control and with ongoing business development plans. The Group’s targets of efficiency were met in 2008.
Depreciation and Amortization
Depreciation and amortization was € 1,596.4 million in 2009, a 28.8% or € 356.9 million increase from € 1,239.6 million in 2008, which was a 0.6% or € 7.6 million decrease from € 1,247.2 million in 2007. The full consolidation of Banco Real and Sovereign and the acquisitions of Alliance & Leicester and Bradford & Bingley account for the majority of this increase.
Provisions (net)
Net provisions were € 1,792.1 million in 2009, a 9.2% or € 151.6 million increase from € 1,640.6 million in 2008, which was an 83.2% or € 745.0 million increase from € 895.6 million in 2007. This item includes additions charged to the income statement in relation to provisions for pensions and similar obligations, provisions for contingent liabilities and commitments and other provisions (mainly provisions for restructuring costs and tax and legal litigation). The 9.2% increase in 2009 is mainly due to an increase in tax and legal litigation provisions partially offset by a decrease in provisions for pensions. See Note 25 to our consolidated financial statements.

100

Table of Contents

Impairment Losses (net)
Impairment losses (net) were € 11,743.0 million in 2009, a 60.2% or € 4,410.7 million increase from € 7,332.3 million in 2008, which was a 47.3% or € 2,353.9 million increase from € 4,978.3 million in 2007.
Impairment losses are divided in the income statement as follows:
2009 2008 2007
(in thousands of euros)
Impairment losses on financial assets:
11,578,322 6,283,053 3,430,122
Loans and receivables
11,087,996 5,896,888 3,420,596
Other financial assets not measured at fair value through profit and loss
490,326 386,165 9,526
Impairment losses on other assets:
164,630 1,049,226 1,548,218
Goodwill and other intangible assets
31,249 983,929 1,162,872
Other assets
133,381 65,297 385,346
Total impairment losses (net)
11,742,952 7,332,279 4,978,340
2009 compared to 2008
The € 5,191.1 million increase in net impairment losses for loans and receivables in 2009 compared to 2008 (which amounted to an increase of 88.0%) reflected a € 5,341.5 million net increase in allowances ( € 11,928.6 million in 2009 compared to € 6,587.1 million in 2008), a € 215.9 million increase in recoveries of loans previously charged-off ( € 914.7 million in 2009 compared to € 698.8 million in 2008) and a € 65.5 million increase in impairment losses of other assets.
These sharp year-on-year increases reflect the impact of the consolidation of new units and the organic increase in most of the business units. The primary cause of the increase was the macroeconomic environment that deteriorated significantly. A secondary cause was the change of mix of the portfolio in previous years toward more profitable products but with a higher risk premium.
Our total allowances for credit losses (excluding country-risk) increased by € 5,634.1 million to € 18,497.1 million at December 31, 2009, from € 12,863.0 million at December 31, 2008.
Non-performing balances (excluding country-risk) increased by € 10,362.8 million to € 24,553.6 million at December 31, 2009, compared to € 14,190.8 million at December 31, 2008. Our coverage ratio was 75.3% at December 31, 2009, and 90.6% at December 31, 2008. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Impaired Balances Ratios”.
The € 952.7 million decrease in impairment losses on other assets, goodwill and other intangible assets was due to the impairment of the brand and other intangible assets of Santander UK in 2008 that did not recur in 2009.
2008 compared to 2007
The € 2,476.3 million increase in net impairment losses for loans and receivables in 2008 compared to 2007 (which amounted to an increase of 72.4%) reflected a € 2,557.5 million net increase in allowances ( € 6,587.1 million in 2008 compared to € 4,029.6 million in 2007), a € 86.4 million increase in recoveries of loans previously charged-off ( € 698.8 million in 2008 compared to € 612.4 million in 2007) and a € 5.2 million increase in impairment losses of other assets.
Impairment losses increased in 2008 compared to 2007 in most business units for various reasons: firstly, and most importantly, the faster than expected deterioration in the macroeconomic environment; secondly, the growth in lending, which in some units was still 20%; thirdly, the change in the portfolio mix in previous years and lastly the integration in the fourth quarter of Banco Real.

101

Table of Contents

Our total allowances for credit losses (excluding country-risk) increased by € 3,560.8 million to € 12,863.0 million at December 31, 2008, from € 9,302.2 million at December 31, 2007.
Non-performing balances (excluding country-risk) increased by € 8,012.2 million to € 14,190.8 million at December 31, 2008, compared to € 6,178.7 million at December 31, 2007. Our coverage ratio was 90.6% at December 31, 2008, and 150.5% at December 31, 2007. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Impaired Balances Ratios”.
Net gains / (losses) on other assets
Net gains on other assets were € 339.6 million in 2009, a 81.5% or € 1,492.5 million decrease from € 1,832.1 million in 2008, which was a 25.3% or € 621.4 million decrease from € 2,453.5 million in 2007.
2009 compared to 2008
Amount %
2009 2008 Change Change
(in thousands of euros, except percentages)
Gains / (losses) on disposal of assets not classified as non-current assets held for sale
1,565,013 101,156 1,463,857 1,447.1
Of which:
Disposal of investments (1)
1,527,734 49,967 1,477,767 2,957.5
Gains / (losses) on disposal of non-current assets held for sale not classified as discontinued operations
(1,225,407 ) 1,730,902 (2,956,309 ) (170.8 )
Of which:
Sale of Grupo Santander City
— 836,742 (836,742 ) —
Antonveneta
— 3,045,647 (3,045,647 ) —
Impairment and sale of RBS and Fortis
— (2,042,695 ) 2,042,695 —
Sale of Attijariwafa Bank
218,223 — 218,223 —
Losses on impairment of tangible assets (2)
(1,350,592 ) (70,027 ) (1,280,565 ) 1,828.7
(1)
€ 1,498.9 million refer to the sale of shares in Santander Brasil as part of the initial public offering (see Item 4 “Information on the Company—A. History and Development of the Company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—Initial Public Offering of Banco Santander (Brasil), S.A.”).
(2)
In 2009 includes impairment due to assets acquired for a gross amount of € 814 million ( € 554 million net of taxes). For additional information, see note 50 to our consolidated financial statements.

102

Table of Contents

2008 compared to 2007
Amount %
2008 2007 Change Change
(in thousands of euros, except percentages)
Gains / (losses) on disposal of assets not classified as non-current assets held for sale
101,156 1,810,428 (1,709,272 ) (94.4 )
Of which:
Disposal of investments
49,967 16,388 33,579 204.9
Sale of real state assets
51,189 1,794,040 (1,742,851 ) (97.1 )
Gains / (losses) on disposal of non-current assets held for sale not classified as discontinued operations
1,730,902 643,050 1,087,852 169.2
Of which:
Sale of Grupo Santander City
836,742 — 836,742 —
Antonveneta
3,045,647 — 3,045,647 —
Intesa San Paolo
— 566,090 (566,090 ) —
Impairment and sale of RBS and Fortis (*)
(2,042,695 ) — (2,042,695 ) —
(*)
Write-down recognized in the income statement of ownership interests in RBS and Fortis. See note 50 to our consolidated financial statements.
Income Tax
The provision for corporate income tax was € 1,206.6 million in 2009, a 34.3% or € 629.4 million decrease from € 1,836.1 million in 2008, which was a 20.9% or € 486.1 million decrease from € 2,322.1 million in 2007. The effective tax rate was 11.5% in 2009, 16.8% in 2008 and 20.7% in 2007. For information about factors affecting effective tax rates, see Note 27 to our consolidated financial statements.
Profit / (losses) from discontinued operations
Profit from discontinued operations were € 30.9 million in 2009, a 90.3% or € 288.3 million decrease from profits of € 319.1 million in 2008. In 2008, profits from discontinued operations decreased 67.7% or € 668.6 million from the € 987.8 million earned in 2007.
The 2009 divestment relates to the sale of our subsidiary in Venezuela to the Bank of Economic and Social Development of Venezuela (see Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—Banco de Venezuela”).
During 2008, the Group did not discontinue any significant operation.
Profit attributable to minority interests
Profit attributable to minority interests was € 469.5 million, a 3.0% or € 13.5 million increase from € 456.0 million in 2008, which was a 20.8% or € 119.9 million decrease from € 575.9 million in 2007. For further details, see Note 28 to our consolidated financial statements.
2009 compared to 2008
The € 13.5 million increase in profit attributable to minority shareholders in 2009 was principally due to the increase in net income of Grupo Santander Brazil partially offset by a decrease of Grupo Financiero Santander, S.A. de C.V. and Banesto.

103

Table of Contents

2008 compared to 2007
The € 119.9 million decrease in profit attributable to minority shareholders in 2008 is principally due to the reduced net income of the consolidated company Grupo Financiero Santander, S.A. de C.V.
Results of Operations by Business Areas
IFRS 8, Operating Segments, came into force in 2009, replacing IAS 14, and implemented a new approach to business segments financial reporting. Pursuant to IFRS 8, the segment information must be presented in the same format as that information is used internally by management to assess the performance of such segments and to allocate resources among them. Pursuant to IFRS 8, segment information for prior years that is reported as comparative information, must be restated in the initial year of application. Segment income statements for the years 2008 and 2007 contained herein differ from those presented in our previous annual reports on Form 20-F.
Our results of operations by business areas can be summarized as follows (see Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”):
First level (geographic) :
Continental Europe
Variations
2009 2008 2007 2009/2008 2008/2007
(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)
11,456 9,259 7,742 23.7 % 19.6 %
Income from equity instruments
218 266 202 (18.0 %) 31.7 %
Income from companies accounted for by the equity method
7 15 9 (53.3 %) 66.7 %
Net fees and commissions
3,787 4,074 4,137 (7.0 %) (1.5 %)
Gains/losses on financial assets and liabilities (net)
687 764 732 (10.1 %) 4.4 %
Other operating income/(expenses) (net)
139 181 133 (23.2 %) 36.1 %
TOTAL INCOME
16,294 14,559 12,955 11.9 % 12.4 %
Administrative expenses
(5,334 ) (4,956 ) (4,564 ) 7.6 % 8.6 %
Personnel expenses
(3,306 ) (3,123 ) (3,037 ) 5.9 % 2.8 %
Other general expenses
(2,028 ) (1,833 ) (1,527 ) 10.6 % 20.0 %
Depreciation and amortization
(570 ) (500 ) (559 ) 14.0 % (10.6 %)
Impairment losses on financial assets (net)
(3,286 ) (2,476 ) (1,557 ) 32.7 % 59.0 %
Provisions (net)
(311 ) (89 ) 45 249.4 % (297.8 %)
Impairment losses on other assets (net)
(41 ) (16 ) (8 ) 156.3 % 100.0 %
Gains/(losses) on other assets (net)
(81 ) (38 ) 11 113.2 % (445.5 %)
OPERATING PROFIT/(LOSS) BEFORE TAX
6,671 6,484 6,323 2.9 % 2.5 %
Income tax
(1,768 ) (1,686 ) (1,777 ) 4.9 % (5.1 %)
PROFIT FROM CONTINUING OPERATIONS
4,903 4,798 4,546 2.2 % 5.5 %
Profit/(loss) from discontinued operations (net)
(45 ) (21 ) — 114.3 % n/a
CONSOLIDATED PROFIT FOR THE YEAR
4,858 4,777 4,546 1.7 % 5.1 %
Profit attributable to minority interests
65 109 107 (40.4 %) 1.9 %
Profit attributable to the Parent
4,793 4,668 4,439 2.7 % 5.2 %

104

Table of Contents

2009 compared to 2008
In 2009, Continental Europe contributed 46.4% of the profit attributable to the Group’s operating areas. The main driver of growth in Continental Europe was the rise in interest income.
Growth reflected some perimeter effect, mainly in total income from the consolidation of the acquired consumer businesses (primarily, GE Money in the first quarter of 2009).
Interest income was € 11,456 million in 2009, which is a 23.7% or € 2,197 million increase from the € 9,259 million obtained in 2008. The increase was largely driven by active management of spreads that offset the slowdown in volumes, in line with the market trend. Interest income from the Santander Branch Network rose 16.0%, Santander Consumer Finance, aided by the latest acquisitions increased 31.8%and Global Wholesale Banking increased due to a sharp rise in spreads. Revenues from insurance increased 15.3% to € 122 million.
Net fees and commissions were € 3,787 million in 2009, a 7.0% decrease from € 4,074 million in 2008 because of lower activity and lower demand for some products, especially mutual funds. Fees also decreased because of the Bank’s commitment of Zero services fees from the Queremos ser tu Banco ( We want to be your Bank ) policy.
Gains/(losses) on financial assets and liabilities were € 687 million in 2009, a 10.1% decrease from € 764 million in 2008 due to hedging of interest rates and exchange rates.
Total income grew 11.9%, a strong pace in the current environment, in line with growth from 2007 to 2008.
Administrative expenses were € 5,334 million in 2009, a 7.6% increase from € 4,956 million in 2008. This growth was mainly due to the consolidation of the units acquired from GE Money. Excluding these acquisitions, costs were almost flat, in line with the cost to income target ratio.
Impairment losses on financial assets were € 3,286 million in 2009, a 32.7% increase from € 2,476 million in 2008. Impairment losses grew due to new acquisitions, economic deterioration and the mix of the portfolio (more profitable but higher risk). NPL ratio increased from 2.3% in 2008 to 3.6% in 2009, while NPL coverage decreased from 90% in 2008 to 77% in 2009.
Profit attributable to the Parent was € 4,793 million in 2009, a 2.7% increase from € 4,668 million in 2008. Income growth absorbed the increase in loan-loss provisions due to increased profits of the Santander Branch Network, Portugal and Global Wholesale Banking. Profits for Banesto decreased 28.0% (mainly due to higher impairment losses) and for Santander Consumer Finance declined 9.2% (mainly because of Spain and discontinued operations, although its evolution gradually improved during the second half of the year).
2008 compared to 2007
In 2008, Continental Europe contributed 49.0% of the profit attributable to the Group’s operating areas. The main drivers of growth in Continental Europe were the rise in interest income together with the selective control of costs.
Interest income was € 9,259 million in 2008, which is a 19.6% or € 1,517 million increase from the € 7,742 million obtained in 2007 due in part, to the active management of spreads which partly offset the slowdown in volumes.
Net fees and commissions were € 4,074 million in 2008, a 1.5% decrease from € 4,137 million in 2007 because of the decrease in such income from Global Wholesale Banking while the retail units increased. Among the retail units there was a significant increase in Santander Consumer Finance due to the improved conditions in the marketing of products while the other main units decreased slightly.
Gains/(losses) on financial assets and liabilities were € 764 million in 2008, a 4.4% increase from € 732 million in 2007 reflecting a higher growth from Global Wholesale Banking with a moderate or negative performance by the retail units reflecting the volatility of the markets on the selling of customer products.

105

Table of Contents

Administrative expenses were € 4,956 million in 2008, an 8.6% increase from € 4,564 million in 2007. Santander Branch Network increased 16.6% and Portugal and Banesto remained flat reflecting the strict control on expenses. Administrative expenses for Santander Consumer Finance increased by 12.1% after consolidating the new units of Netherlands and Germany.
Impairment losses on financial assets were € 2,476 million in 2008, a 59% increase from € 1,557 million in 2007. Impairment losses grew significantly in all units due to the increase in non-performing loans as a result of the intensified economic downturn. NPL ratio increased from 0.9% in 2007 to 2.3% in 2008 while NPL coverage decreased from 188% in 2007 to 90% a year later.
Profit attributable to the Parent was € 4,668 million in 2008, a 5.2% increase from € 4,439 million in 2007. This increase was largely due to the units in Spain while Portugal’s and Santander Consumer Finance’s profits were nearly flat.
United Kingdom
Variations
2009 2008 2007 2009/2008 2008/2007
(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)
3,934 2,411 2,334 63.2 % 3.3 %
Income from equity instruments
— — 1 n/a n/a
Income from companies accounted for by the equity method
— 1 2 n/a (50.0 %)
Net fees and commissions
993 926 1,007 7.2 % (8.0 %)
Gains/losses on financial assets and liabilities (net)
506 500 436 1.2 % 14.7 %
Other operating income/(expenses) (net)
27 49 65 (44.9 %) (24.6 %)
TOTAL INCOME
5,460 3,887 3,845 40.5 % 1.1 %
Administrative expenses
(1,997 ) (1,603 ) (1,829 ) 24.6 % (12.4 %)
Personnel expenses
(1,170 ) (986 ) (1,045 ) 18.7 % (5.6 %)
Other general expenses
(827 ) (617 ) (784 ) 34.0 % (21.3 %)
Depreciation and amortization
(231 ) (158 ) (101 ) 46.2 % 56.4 %
Impairment losses on financial assets (net)
(881 ) (457 ) (312 ) 92.8 % 46.5 %
Provisions (net)
16 (29 ) 5 (155.2 %) (680.0 %)
Impairment losses on other assets (net)
— — (1 ) n/a n/a
Gains/(losses) on other assets (net)
— 32 15 n/a 113.3 %
OPERATING PROFIT/(LOSS) BEFORE TAX
2,367 1,672 1,622 41.6 % 3.1 %
Income tax
(641 ) (425 ) (421 ) 50.8 % 1.0 %
PROFIT FROM CONTINUING OPERATIONS
1,726 1,247 1,201 38.4 % 3.8 %
Profit/(loss) from discontinued operations (net)
— — — n/a n/a
CONSOLIDATED PROFIT FOR THE YEAR
1,726 1,247 1,201 38.4 % 3.8 %
Profit attributable to minority interests
— — — n/a n/a
Profit attributable to the Parent
1,726 1,247 1,201 38.4 % 3.8 %
2009 compared to 2008
In 2009, United Kingdom contributed 16.7% of the profit attributable to the Parent’s total operating areas. The 2009 results were driven by strong income growth across all businesses, which exceeded the increase in impairment losses, as well as continued cost control.

106

Table of Contents

Interest income was € 3,934 million in 2009, a 63.2% or € 1,523 million increase from € 2,411 million in 2008. Of the total increase, € 930 million represented the inclusion of the net interest income in 2009 of Alliance & Leicester. The remaining increase of € 593 million was driven by strong income growth across all businesses. Net interest income grew because of active management of spreads, mortgage spreads were higher in new loans and, the impact of the reduction of spreads in deposits was offset by a balanced mix of products and proactive hedging strategies.
Net fees and commissions were € 993 million in 2009, a 7.2% or € 67 million increase from € 926 million in 2008. Of the total increase, € 302 million represented the inclusion of the fee income in 2009 of Alliance & Leicester. The remaining decrease of € 234 million was largely due to lower fees on unsecured lending products, as part of our strategy to reduce unsecured lending exposures, and lower fees from current accounts due to repricing. In addition, mortgage fees were adversely impacted by a reduction in the volume of mortgage redemptions given decreased activity in the market as a result of declining house prices and lower levels of supply.
Gains / losses on financial assets and liabilities were € 506 million in 2009, a 1.2% or € 6 million increase from € 500 million in 2008. Alliance & Leicester contributed a loss of € 33 million, however, this was more than offset by an increase of € 39 million in the rest of Santander UK, reflecting strong performances in the equity business of Santander Global Banking & Markets (due to sales of retail products through the branch network) and the short term markets business, which benefited from a favorable trading environment caused by wider spreads in an illiquid market.
Administrative expenses were € 1,997 million in 2009, a 24.6% or € 394 million increase from € 1,603 million in 2008. Of the total increase, € 564 million represented the inclusion of the administrative expenses in 2009 of Alliance & Leicester. An additional € 67 million was due to costs related to Bradford & Bingley’s savings business for which only four months were included in 2008. The remaining administrative expenses decrease was largely due to the removal of duplications across back office and support functions due to the integration of Alliance & Leicester and Bradford & Bingley. Synergies of some £100 million were obtained, higher than the forecast for the year, and work continues in order to eliminate overlapping in back office and support functions in all businesses and achieve the additional savings envisaged for 2011.
Impairment losses on financial assets were € 881 million in 2009, a 92.8% or € 424 million increase from € 457 million in 2008. Of the total increase, € 237 million represented the inclusion of Alliance & Leicester’s impairment losses in 2009. The remaining increase of € 187 million was distributed across all products with the largest increase relating to mortgages, as the impact of falling house prices and the lagged effect of unemployment, as anticipated, started to emerge. Most of the impact losses occurred in the first half of the year, with second half performance stabilizing and in some areas improving. With respect to mortgages, the second half of the year saw a slower rate of growth in arrearages, with fewer losses than observed earlier in the year, in part as a result of collection activities and mitigating actions, but also due to the low interest rate environment and the slight upturn in housing prices. The improvement in performance across all portfolios in the second half of the year exceeded set expectations. A strong mortgage coverage ratio of close to 21% has been preserved.
The NPL ratio was 1.7% at the end of 2009 (compared to 1.6% at September 2009 and 1.0% at December 2008). The NPL ratio in mortgages rose by a smaller extent, ending the year at 1.4% (compared to 1.3% at September 2009 and 0.9% at December 2008). This ratio compares favorably with the rest of the sector, which, according to the Council of Mortgage Lenders (the “CML”), was 2.4% at the end of 2009. The stock of properties in possession dropped to only 0.05% of the total portfolio compared to 0.14% to the CML.
NPL coverage was 44% (compared to 48% at September 2009 and 69% at December 2008). This decline was due to a significant extent to the lower share in total unsecured loans, whose coverage is much higher, as secured loans’ coverage only declined three percentage points (December 2009: 21%; December 2008: 24%). Moreover, this coverage continues to be higher than the average of our competitors in the UK. Coverage of unsecured loans remained at more than 100%.
Profit attributable to the Parent was € 1,726 million in 2009, a 38.4% or € 479 million increase from € 1,247 million in 2008. The comparison with 2008 reflects the inclusion of the results in 2009 of Alliance & Leicester ( € 308 million).

107

Table of Contents

2008 compared to 2007
In 2008, United Kingdom contributed 13.1% of the profit attributable to the Parent’s total operating areas. The 2008 results were affected by the challenging financial environment and by the sterling’s depreciation in the fourth quarter.
Interest income was € 2,411 million in 2008, a 3.3% or € 77 million increase from € 2,334 million in 2007. In local currency, the increase was 20% reflecting the solid increase in assets and liabilities, as well as active management of spreads on capturing and retaining funds.
Net fees and commissions were € 926 million in 2008, a 8.0% or € 81 million decrease from € 1,007 million in 2007. In local currency, net fees and commissions increased 6.7% due to greater activity. Despite difficult market conditions, Retail Banking continued in the UK to broaden its cross-selling activity, with increased commission from credit cards and investments. Growth in these areas was offset by lower mortgage redemption volumes, lower unsecured lending and continued pressure on current account charges.
Gains / losses on financial assets and liabilities were € 500 million in 2008, a 14.7% or € 64 million increase from € 436 million in 2007. In local currency, gains on financial transactions rose 33.2% backed by the good developments in markets’ business in the second half of the year.
Administrative expenses were € 1,603 million in 2008, a 12.4% or € 226 million decrease from € 1,829 million in 2007. In local currency, administrative expenses increased by 1.9% due to continuing cost reduction activity partially offset by costs relating to the Bradford & Bingley savings business and branch network.
Impairment losses on financial assets were € 457 million in 2008, a 46.5% or € 145 million increase from € 312 million in 2007. In local currency, the increase was 69.5%, largely because of the release of general provisions in 2007 as specific provisions only increased by 8.5%. The increase in specific provisions was low as compared with other units because, despite the deterioration in economic conditions, credit quality remained strong due to a continued reduction in the size of the unsecured personal lending book. The NPL ratio for the UK segment rose from 0.60% to 1.04% at the end of 2008, while coverage increased from 66% to 69%.
Profit attributable to the Parent was € 1,247 million in 2008, a 3.8% or € 46 million increase from € 1,201 million in 2007. The comparison with 2007 is affected by the sterling’s depreciation; in local currency profit attributable to the Parent increased by 20.5%.

108

Table of Contents

Latin America
Variations
2009 2008 2007 2009/2008 2008/2007
(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)
11,959 8,025 6,144 49.0 % 30.6 %
Income from equity instruments
96 58 34 65.5 % 70.6 %
Income from companies accounted for by the equity method
10 680 — (98.5 %) n/a
Net fees and commissions
3,925 3,208 2,694 22.4 % 19.1 %
Gains/losses on financial assets and liabilities (net)
1,663 857 674 94.0 % 27.2 %
Other operating income/(expenses) (net)
15 10 49 50.0 % (79.6 %)
TOTAL INCOME
17,668 12,838 9,595 37.6 % 33.8 %
Administrative expenses
(6,032 ) (4,651 ) (3,847 ) 29.7 % 20.9 %
Personnel expenses
(3,210 ) (2,504 ) (2,105 ) 28.2 % 19.0 %
Other general expenses
(2,822 ) (2,147 ) (1,742 ) 31.4 % 23.2 %
Depreciation and amortization
(566 ) (404 ) (328 ) 40.1 % 23.2 %
Impairment losses on financial assets (net)
(4,979 ) (3,020 ) (1,546 ) 64.9 % 95.3 %
Provisions (net)
(681 ) (533 ) (437 ) 27.8 % 22.0 %
Impairment losses on other assets (net)
(22 ) (6 ) (30 ) 266.7 % (80.0 %)
Gains/(losses) on other assets (net)
40 54 169 (25.9 %) (68.0 %)
OPERATING PROFIT/(LOSS) BEFORE TAX
5,428 4,278 3,576 26.9 % 19.6 %
Income tax
(1,257 ) (663 ) (809 ) 89.6 % (18.0 %)
PROFIT FROM CONTINUING OPERATIONS
4,171 3,615 2,767 15.4 % 30.6 %
Profit/(loss) from discontinued operations (net)
91 340 303 (73.2 %) 12.2 %
CONSOLIDATED PROFIT FOR THE YEAR
4,262 3,955 3,070 7.8 % 28.8 %
Profit attributable to minority interests
428 346 404 23.7 % (14.4 %)
Profit attributable to the Parent
3,834 3,609 2,666 6.2 % 35.4 %
2009 compared to 2008
In 2009, Latin America contributed 37.1% of the profit attributable to the Parent’s total operating areas. This was due to a growth in all the countries in the region, with the exception of Mexico.
Interest income was € 11,959 million in 2009, a 49% or € 3,934 million increase from € 8,025 million in 2008. Most of the increase represented the inclusion of Banco Real for all of 2009. Interest income also increased due to effective spread management and volumes. The rise in spreads on loans was due to the measures taken to increase entry prices and try to offset the higher cost of financing in the markets and the higher risk premium. Spreads on loans (with differences between countries) were higher than in 2008. After falling, spreads on deposits stabilized to some extent (decreases in year-end spreads compared to 2008 were 375 basis points in Mexico, 500 basis points in Brazil, 600 basis points in Colombia and 775 basis points in Chile).
Income from companies accounted for by the equity method was € 10 million in 2009 compared to € 680 million in 2008. This difference was due to the contribution from RFS Holdings, B.V. (essentially, Banco Real) which in 2008 consolidated nine months of profit after tax in this line, while in 2009 Banco Real results were consolidated in the appropriate income statement line items.

109

Table of Contents

Net fees and commissions were € 3,925 million in 2009, 22.4% or € 717 million increase from € 3,208 million in 2008, mostly due to the inclusion of Banco Real for the entire year. Of note was fee income growth in Chile (4% in local currency) as a result of increases in international trade (+50.0%), insurance (+20.5%) and credit cards (+19.4%). In other areas, fees decreased slightly due to regulatory pressures.
Gains / losses on financial assets and liabilities were € 1,663 million in 2009, a 94% or € 806 million increase from € 857 million in 2008, due to inclusion of Banco Real together with higher customer activity and benefits from lower interest rates.
Administrative expenses were € 6,032 million in 2009, a 29.7% or € 1,381 million increase from € 4,651 million in 2008, affected by the consolidation of Banco Real for all of 2009.
Impairment losses on financial assets were € 4,979 million in 2009, a 64.9% or € 1,959 million increase from € 3,020 million in 2008. This increase was due both to the consolidation of Banco Real for the whole year and, equally, to increased provisions across the region. The economic downturn generally eroded credit quality. Most of the impact was felt in the first half of the year, second half performance stabilized in some countries and improved in others as a result of risk management activities. The NPL ratio was 4.2% at the end of 2009 (2.9% in December 2008), while coverage was 105% (108% in December 2008).
Profit attributable to the Parent was € 3,834 million in 2009, a 6.2% or € 225 million increase from € 3,609 million in 2008. Retail Banking’s attributable profit declined 9.3%, impacted by the sale of Banco de Venezuela and higher minority interests in Brazil. Global Wholesale Banking’s attributable profit increased 77.9%, due to 31.2% growth in total income, lower costs and reduced provisions for loan losses, and the attributable profit of Asset Management and Insurance rose 17.4%.
2008 compared to 2007
In 2008, Latin America contributed 37.9% of the profit attributable to the Parent’s total operating areas after consolidating the fourth quarter results of Banco Real in Brazil (previously, Banco Real was accounted for by the equity method). Economic growth in the main countries slowed down significantly in the second half of 2008, especially in the fourth quarter, reflecting the adverse impact of the global financial crisis and the downturn or recession in developed economies, particularly the US. The most visible and immediate impact of the financial crisis on Latin America is the sharp depreciation of currencies against the dollar (around 20% for some) as of the middle of September in 2008. Particularly, the Brazilian real and the Chilean peso appreciated against the dollar until the third quarter of 2008 and then slid sharply in the fourth quarter. The dollar, the currency used to manage business in Latin America, depreciated 7% against the euro in 2008 (annual average). The Chilean peso depreciated against the euro from 715 to 757, the Mexican peso from 15.0 to 16.3 and the Brazilian real remained virtually unchanged.
Interest income was € 8,025 million in 2008, a 30.6% or € 1,881 million increase from € 6,144 million in 2007. Spreads on loans (varying from country to country) dropped 22 basis points in the fourth quarter (due to lower growth in consumer credit and cards). Spreads on deposits raised 30 basis points between the third and fourth quarters.
Income from companies accounted for by the equity method was € 680 million in 2008, due to the contribution from RFS Holdings, B.V. (essentially, Banco Real) which in 2008 consolidated nine months in this line.
Net fees and commissions were € 3,208 million in 2008, a 19.1% or € 514 million increase from € 2,694 million in 2007 due to the focus on recurring revenues and, specifically, on developing fee-generating products and services. Of note was the strong increase of fees from insurance and credit cards. In light of the global economic downturn, the Group is placing less emphasis on market share in retail lending and, in wholesale businesses, focusing on the provision of services and the generation of fee income.
Gains / losses on financial assets and liabilities were € 857 million in 2008, a 27.2% or € 183 million increase from € 674 million in 2007 due to customer activity and capital gains in portfolios.

110

Table of Contents

Administrative expenses were € 4,651 million in 2008, a 20.9% or € 804 million increase from € 3,847 million in 2007, affected by the consolidation of Banco Real in the fourth quarter.
Impairment losses on financial assets were € 3,020 million in 2008, a 95.3% or € 1,474 million increase from € 1,546 million in 2007 because of the growth in lending and the greater focus, until recently, on the more profitable segments, but also with a higher risk premium, and the consolidation of Banco Real. The NPL ratio for Latin America was 2.9% at the end of 2008 (1.9% in 2007), while coverage was 108% (134% in 2007).
Profit attributable to the Parent was € 3,609 million in 2008, a 35.4% or € 943 million increase from € 2,666 million in 2007.
Sovereign
(in millions of euros) 2009 (1)
INTEREST INCOME / (CHARGES)
1,160
Income from equity instruments
1
Income from companies accounted for by the equity method
(3 )
Net fees and commissions
380
Gains/losses on financial assets and liabilities (net)
14
Other operating income/(expenses) (net)
(89 )
TOTAL INCOME
1,463
Administrative expenses
(766 )
Personnel expenses
(457 )
Other general expenses
(309 )
Depreciation and amortization
(115 )
Impairment losses on financial assets (net)
(571 )
Provisions (net)
(55 )
Impairment losses on other assets (net)
(1 )
Gains/(losses) on other assets (net)
(2 )
OPERATING PROFIT/(LOSS) BEFORE TAX
(47 )
Income tax
22
PROFIT FROM CONTINUING OPERATIONS
(25 )
Profit/(loss) from discontinued operations (net)
—
CONSOLIDATED PROFIT FOR THE YEAR
(25 )
Profit attributable to minority interests
—
Profit attributable to the Parent
(25 )
(1)
As Sovereign was fully acquired on January 30, 2009, only 11 months for 2009 are presented here.

111

Table of Contents

2009
In 2009, Sovereign pursued the integration and alignment with the business model of Grupo Santander and a series of steps were taken to inject stability into corporate governance and solidify the balance sheet and income statement: (1) creation of a solid corporate governance structure under the direct supervision of the highest executive bodies (management committee and the Board, supported by the audit committee) and committees to oversee the bank’s main functions (risks, ALCO, marketing, etc); (2) adapting the bank’s management to the Group’s standards, with the appointment of a new team and centralization of key areas (management control, human resources, risks, etc); (3) the Group’s risk model was put into effect, with weekly reviews by a risk committee whose members include independent directors and technological and human resources were boosted, with a special focus on loan recoveries; (4) optimization of the management structure and strengthening of the balance sheet by updating the policies regarding control of interest rate risk, levels of capitalization, liquidity management and contingency plans; (5) a cost-cutting plan was implemented which streamlined headcount and reduced general, technological and operating expenses. The elimination of redundant functions, business reorganization and leverage in the global scope of Santander’s operations, IT model and cost structure enabled Sovereign to end 2009 with monthly expenses 20% lower than that in the fourth quarter of 2008 and close to the medium-term target; and (6) review and reorganization of the business lines under a customer banking focus. Sovereign’s products have been segmented and cataloged into four large areas: Retail Banking, SMEs, Large Companies and Specialized Businesses. The structure of wholesale banking also began to be defined.
Sovereign’s performance since becoming part of the Group has been impacted by its integration activities and, above all, by the economic recession. Its performance improved in the third and fourth quarters when growth was positive.
Net interest income for 2009 was € 1,160 million, representing 79% of the total income, with a good growth quarter on quarter. This was due to repricing of loans, the lower cost of customer deposits (which cost decreased 91 basis points between the first and fourth quarters) and ALCO management that offset the lower volume of lending.
In an environment of low short-term interest rates, management focused on improving spreads on new loans and renewal of credits in order to incorporate the higher cost of liquidity and the greater risk. This limited the impact of the decrease in interest rates on the return on basic loans, while continuing to reduce lending in non-core segments and businesses. In deposits, there was a sharp drop in prices, particularly in higher cost products. This occurred with only a 8% loss of volume as the 35% reduction on the balances of high cost products, such as retail time deposits and wholesale deposits was partly offset by the 15% increase in retail demand deposits.
Administrative expenses were € 766 million in 2009 and recent months saw a cost reduction trend largely due to the removal of duplications and higher synergies. This, together with a higher income growth, positively impacted the efficiency ratio, which decreased from 74.5% in the first quarter to 53.9% in the fourth quarter.
Impairment losses on financial assets were € 571 million in 2009. Performance has stabilized in recent months, once the target level of provisions as a percentage of loans stated in the acquisition was surpassed (3.6% of gross lending at the end of 2009). As of December 2009, the NPL ratio was 5.3% and coverage ratio was 62%, with 74% of loans covered by collateral or guarantees.
Positive developments during 2009, with gradual increases in revenues, cost reductions and control of loan-loss provisions, made operating profit positive in the third and fourth quarters.

112

Table of Contents

Corporate Activities
Variations
2009 2008 2007 2009/2008 2008/2007
(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)
(2,210 ) (2,157 ) (1,777 ) 2.5 % 21.4 %
Income from equity instruments
121 229 183 (47.2 %) 25.1 %
Income from companies accounted for by the equity method
(15 ) 96 427 (115.6 %) (77.5 %)
Net fees and commissions
(5 ) 59 30 (108.5 %) 96.7 %
Gains/losses on financial assets and liabilities (net)
1,376 1,353 1,113 1.7 % 21.6 %
Other operating income/(expenses) (net)
52 32 43 62.5 % (25.6 %)
TOTAL INCOME
(681 ) (388 ) 19 75.5 % n/a
Administrative expenses
(695 ) (455 ) (536 ) 52.7 % (15.1 %)
Personnel expenses
(307 ) (200 ) (247 ) 53.5 % (19.0 %)
Other general expenses
(388 ) (255 ) (289 ) 52.2 % (11.8 %)
Depreciation and amortization
(114 ) (177 ) (259 ) (35.6 %) (31.7 %)
Impairment losses on financial assets (net)
(1,861 ) (331 ) (14 ) 462.2 % 2,264.3 %
Provisions (net)
(762 ) (989 ) (509 ) (23.0 %) 94.3 %
Impairment losses on other assets (net)
(100 ) (1,027 ) (1,510 ) (90.3 %) (32.0 %)
Gains/(losses) on other assets (net)
382 1,783 2,259 (78.6 %) (21.1 %)
OPERATING PROFIT/(LOSS) BEFORE TAX
(3,831 ) (1,584 ) (550 ) 141.9 % 188.0 %
Income tax
2,437 938 684 159.8 % 37.1 %
PROFIT FROM CONTINUING OPERATIONS
(1,394 ) (646 ) 134 115.8 % (582.1 %)
Profit/(loss) from discontinued operations (net)
(15 ) — 685 n/a n/a
CONSOLIDATED PROFIT FOR THE YEAR
(1,409 ) (646 ) 819 118.1 % (178.9 %)
Profit attributable to minority interests
(24 ) 1 65 n/a (98.5 %)
Profit attributable to the Parent
(1,385 ) (647 ) 754 114.1 % (185.8 %)
2009 compared to 2008
Net interest income for Corporate Activities was a loss of € 2,210 million in 2009 in line with 2008.
Income from equity instruments was € 121 million in 2009, a 47.2% decrease from 2008 due to lower dividends from Royal Bank of Scotland and Fortis ( € 436 million in 2009 versus € 553 million in 2008).
Income from companies accounted for by the equity method was a loss of € 15 million in 2009 compared to a gain of € 96 million in 2008 due to the sale of the stake in CEPSA.
Gains / losses on financial assets and liabilities were € 1,376 million in 2009, in line with € 1,353 million in 2008. This includes results from centralized management of interest rate and currency risk of the Parent as well as from equities.
Administrative expenses were € 695 million in 2009, a 52.7% increase as compared to 2008, partly offset by lower depreciation charges. The sale of Santander Financial City in Spain, together with the disposal of other buildings, generated higher administrative costs (higher rent) and lower amortizations.
In 2009, net provisions were € 762 million, impairment losses were € 1,861 million and gains on other assets were € 382 million. These line items include the following: gains of € 1,499 million from the initial public offering of Santander Brasil and gains of € 218 million from the sale of Attijariwafa Bank. This was offset by loan loss provisions of € 1,500 million ( € 1,041 million net of taxes), provisions for real estate acquired of € 814 million ( € 554 million net of taxes), an additional provision for Metrovacesa for € 269 million, a restructuring fund for GE and Sovereign for € 260 million and other funds for € 463 million, including early retirements.

113

Table of Contents

Loss attributable to the Parent amounted to € 1,385 million in 2009 because of lower income (due to the sale of the stake in CEPSA and lower dividends from RBS and Fortis), higher costs (the sale of Santander Financial City in Spain which generated higher administrative costs) and higher provisions (mainly related to Metrovacesa).
2008 compared to 2007
Interest income decreased by € 380 million in 2008, a 21.4% decrease as compared to 2007, due to the higher cost of financing the assets of ABN AMRO.
Income from equity instruments was € 229 million in 2008, a 25.1% increase from 2007. This figure is the net result of the increase in the dividends from Royal Bank of Scotland and Fortis and the lower dividends from Intesa Sanpaolo (sold in 2007).
Income from companies accounted for by the equity method was € 96 million in 2008 compared to € 427 million in 2007. CEPSA’s contribution was lower because as of October 1, 2008 its profits ceased to be recorded by the equity method as the stake was transferred to non-current assets held for sale.
Gains / losses on financial assets and liabilities were € 1,353 million in 2008, a 21.6% increase from € 1,113 million in 2007. A major factor here was the creation of a € 643 million fund ( € 450 million net of tax) for Grupo Santander customers who suffered losses due to the collapse of Lehman Brothers and to the Bernard L. Madoff fraud which was offset by the € 741 million capital gains from the sale of ABN’s liabilities.
Administrative expenses were € 455 million in 2008, a 15.1% decrease as compared to 2007.
In 2008, net provisions were € 989 million, impairment losses on other assets were € 1,027 million and gains / losses on other assets were € 1,783 million. These line items include the capital gains generated from the sale of Grupo Santander City € 586 million) and from the sale of the businesses in Italy acquired from ABN ( € 2,245 million) partially offset by € 386 million from a fund for restructuring costs, € 382 million from an early retirement fund, and € 175 million from other funds. Additionally, € 1,430 million to write down the stakes in Fortis and Royal Bank of Scotland, € 904 million to amortize the intangibles of Santander UK and € 295 million to amortize the goodwill of Santander Consumer Finance and writedowns in other portfolios (all figures net of taxes).
Loss attributable to the Parent was € 647 million in 2008 as a result of the increase in impairments and provisions registered during the period.

114

Table of Contents

Second level (business):
Retail Banking
Variations
2009 2008 2007 2009/2008 2008/2007
(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)
25,942 17,613 14,771 47.3 % 19.2 %
Income from equity instruments
127 154 77 (17.5 %) 100.0 %
Income from companies accounted for by the equity method
12 556 9 (97.8 %) 6,077.8 %
Net fees and commissions
7,523 6,861 6,432 9.6 % 6.7 %
Gains/losses on financial assets and liabilities (net)
1,454 1,100 957 32.2 % 14.9 %
Other operating income/(expenses) (net)
(230 ) 31 47 (841.9 %) (34.0 %)
TOTAL INCOME
34,828 26,315 22,293 32.4 % 18.0 %
Administrative expenses
(12,734 ) (9,857 ) (8,942 ) 29.2 % 10.2 %
Personnel expenses
(7,280 ) (5,806 ) (5,430 ) 25.4 % 6.9 %
Other general expenses
(5,454 ) (4,051 ) (3,512 ) 34.6 % 15.3 %
Depreciation and amortization
(1,367 ) (946 ) (878 ) 44.5 % 7.7 %
Impairment losses on financial assets (net)
(9,744 ) (5,672 ) (3,357 ) 71.8 % 69.0 %
Provisions (net)
(1,001 ) (607 ) (423 ) 64.9 % 43.5 %
Impairment losses on other assets (net)
(61 ) (24 ) (38 ) 154.2 % (36.8 %)
Gains/(losses) on other assets (net)
(43 ) 43 289 (200.0 %) (85.1 %)
OPERATING PROFIT/(LOSS) BEFORE TAX
9,878 9,252 8,944 6.8 % 3.4 %
Income tax
(2,300 ) (1,825 ) (2,347 ) 26.0 % (22.2 %)
PROFIT FROM CONTINUING OPERATIONS
7,578 7,427 6,597 2.0 % 12.6 %
Profit/(loss) from discontinued operations (net)
46 319 151 (85.6 %) 111.3 %
CONSOLIDATED PROFIT FOR THE YEAR
7,624 7,746 6,748 (1.6 %) 14.8 %
Profit attributable to minority interests
465 434 457 7.1 % (5.0 %)
Profit attributable to the Parent
7,159 7,312 6,291 (2.1 %) 16.2 %
2009 compared to 2008
The Group’s Retail Banking segment generated 69.3% of the operating areas’ total profit attributable to the Parent.
Interest income increased 47.3 % to € 25,942 million, due to the impact of new acquisitions (including Banco Real, Alliance & Leicester, Bradford & Bingley and GE Money) and effective margin management in all the regions. Loans grew 11% in 2009, while deposits experienced a growth of 23%, more positively impacted by the new acquisitions.
Net fees and commissions were € 7,523 million in 2009, a 9.6% increase from € 6,861 million in 2008, favorably influenced by the new acquisitions.
Gains / losses on financial assets and liabilities were € 1,454 million in 2009, a 32.2% increase from € 1,100 million in 2008.
Administrative expenses were € 12,734 million in 2009, a 29.2% increase from € 9,857 million in 2008. This increase was due to the inclusion of the administrative expenses of the new acquisitions. The underlying administrative expenses (excluding exchange rate effects and acquisitions) remained flat, largely due to the streamlining of back-office operations and support functions due to the integration synergies. This had a positive effect on our cost income ratio.

115

Table of Contents

Impairment losses on financial assets were € 9,744 million in 2009, a 71.8% or € 4,072 million increase from € 5,672 million in 2008. This increase was due to the new acquisitions and a higher charge distributed across all products with the largest increase relating to mortgages, as the impact of falling housing prices and the lagging effect of unemployment, as anticipated, started to emerge in some countries. Most of the impact came through in the first half of the year, with second half performance stabilizing and in some areas improving.
Profit attributable to the Parent was € 7,159 million in 2009, a 2.1% decrease from € 7,312 million in 2008.
Retail Banking in Continental Europe increased its net interest income by 23.3% while attributable profit decreased by 3.7%. The main drivers were moderate business volumes, good management of spreads in an environment of lower interest rates, control of costs (flat on a like-for-like basis) and increase of impairment losses.
The profit of Retail Banking in the United Kingdom was 34.0% higher (+50.1% in sterling), due to the good performance of Santander UK and the consolidation of Alliance & Leicester and Bradford & Bingley. The drivers were the same as for other units: higher revenues spurred by net interest income and lower growth in costs offset by higher loan-loss provisions.
The results of Retail Banking in Latin America are explained by the full consolidation of Banco Real for the all of 2009 together with growth in customer business, good net interest income performance within the region’s environment of lower economic growth, effective control of expenses compatible with business development and savings from synergies in Brazil. Net interest income rose 54.3%, compared to 2008 and total income was 37.8% higher compared to 2008 while operating expenses grew at a slightly slower pace (+32.9%) improving the efficiency ratio. However, as a result of the big increase loss provisions, attributable profit was 12.8% lower, although on an improving trend.
Private banking activity was lower in the first half of 2009 because of the economic developments in the second half of 2008. Total income declined 6.9%, due to the reduction in average volumes managed and the shift in customer preferences towards a more conservative mix of products. This was mitigated to some extent by the 9.9% decline in personnel and general costs. Attributable profit was 1.6% higher at € 330 million.
2008 compared to 2007
The Group’s Retail Banking segment generated 76.8% of the operating areas’ total profit attributable to the Parent. This result was conditioned by two factors: on the one hand, the performance in euro terms in the UK and Latin America reflects the negative impact of exchange rates, which absorbed the growth in local currencies. On the other, the full consolidation of one quarter of Banco Real has a positive impact of 3 percentage points on profits.
Interest income increased 19.2 % to € 17,613 million, due to the impact of increased business (including the entry of Banco Real) and better customer spreads.
Net fees and commissions were € 6,861 million in 2008, a 6.7% increase from € 6,432 million in 2007.
Gains / losses on financial assets and liabilities were € 1,100 million in 2008, a 14.9% increase from € 957 million in 2007.
Administrative expenses were € 9,857 million in 2008, a 10.2% increase from € 8,942 million in 2007. This increase is well below growth of total income and it is affected by the consolidation of Banco Real in the fourth quarter.
Impairment losses on financial assets were € 5,672 million in 2008, a 69% or € 2,315 million increase from € 3,357 million in 2007. This increase was due to the deterioration of the market together with the greater volume of lending and the greater risk premium caused by the entry into more profitable segments and products, as well as the consolidation of Banco Real.

116

Table of Contents

Profit attributable to the Parent was € 7,312 million in 2008, a 16.2% increase from € 6,291 million in 2007.
Retail Banking in Continental Europe continued the growth trends in volumes and earnings of the last two years. The main units of growth were the Santander Branch Network and Banesto Retail and the main drivers were: (1) the good evolution of business, that performed better than the market, although quarter-on-quarter growth eased; (2) the careful management of prices in a changing environment of interest rates; and (3) selective control of expenses.
Retail Banking in the UK in euro terms was strongly affected by the negative impact of exchange rates. Operating profit before tax in 2008 in sterling was 12.1% higher than in 2007 but it was 3.5% lower in 2007 in euros.
The results of Retail Banking in Latin America came from growth in customer business, the good performance of interest income and net fees, and control of costs compatible with ongoing business development. The factors behind this growth were the rise in the number of individual customers and SMEs, and development of loyalty products. Growth was partly offset by a large rise in net loan-loss provisions (partly due to the deterioration of the economic environment and partly due to regulatory changes in Mexico and the unification of criteria in Brazil after the integration of Banco Real), together with a decrease of gains/losses on other assets .
Global Wholesale Banking
Variations
2009 2008 2007 2009/2008 2008/2007
(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)
2,366 1,892 1,303 25.1 % 45.2 %
Income from equity instruments
188 164 148 14.6 % 10.8 %
Income from companies accounted for by the equity method
2 87 2 (97.7 %) 4,250.0 %
Net fees and commissions
1,131 883 911 28.1 % (3.1 %)
Gains/losses on financial assets and liabilities (net)
1,382 995 855 38.9 % 16.4 %
Other operating income/(expenses) (net)
(16 ) (45 ) (29 ) (64.4 %) 55.2 %
TOTAL INCOME
5,053 3,976 3,190 27.1 % 24.6 %
Administrative expenses
(1,117 ) (1,060 ) (1,012 ) 5.4 % 4.7 %
Personnel expenses
(725 ) (672 ) (625 ) 7.9 % 7.5 %
Other general expenses
(392 ) (388 ) (387 ) 1.0 % 0.3 %
Depreciation and amortization
(86 ) (98 ) (90 ) (12.2 %) 8.9 %
Impairment losses on financial assets (net)
37 (281 ) (58 ) (113.2 %) 384.5 %
Provisions (net)
6 (26 ) 58 (123.1 %) (144.8 %)
Impairment losses on other assets (net)
(3 ) — — n/a n/a
Gains/(losses) on other assets (net)
— 4 (94 ) n/a (104.3 %)
OPERATING PROFIT/(LOSS) BEFORE TAX
3,890 2,515 1,994 54.7 % 26.1 %
Income tax
(1,125 ) (775 ) (486 ) 45.2 % 59.5 %
PROFIT FROM CONTINUING OPERATIONS
2,765 1,740 1,508 58.9 % 15.4 %
Profit/(loss) from discontinued operations (net)
— — 40 n/a n/a
CONSOLIDATED PROFIT FOR THE YEAR
2,765 1,740 1,548 58.9 % 12.4 %
Profit attributable to minority interests
— (1 ) 9 n/a n/a
Profit attributable to the Parent
2,765 1,741 1,539 58.8 % 13.1 %
2009 compared to 2008
Global Wholesale Banking generated 26.8% of the operating areas’ profit attributable to the Parent in 2009. Growth was generated by clients in our core markets and was positively influenced by our diversified portfolio.

117

Table of Contents

This performance was backed by a customer-focused business model, the area’s global reach and its connection with local units, and strict control of expenses and risks. Another decisive factor is the strength of the Group’s capital and liquidity which, within rigorous control of both variables, enabled us to maintain a high level of unrestricted activity and take on new operations.
The business model and the strong balance sheet were combined with a more favorable environment, higher spreads and volatilities than in 2008 and many competitors focused on aspects other than pure business. All of this enabled Santander to penetrate attractive business segments profitably and occupy spaces left by others without increasing risk levels.
Interest income was € 2,366 million in 2009, a 25.1% or € 474 million increase from € 1,892 million in 2008. Net fees and gains on financial assets and liabilities increased 28.1% and 39%, respectively, due to increased transaction volumes and margin improvements.
Administrative expenses were € 1,117 million in 2009, a 5.4% increase from € 1,060 million in 2008. This increase, much lower than that of total income (+27.1%), was due to strict control of expenses and allowed for improvement in the efficiency ratio.
Impairment losses on financial assets were a gain of € 37 million in 2009 versus a loss of € 281 million in 2008. The main reason is a decrease in provisions, which had increased in 2008 due to certain large operations that took place in the second half of 2008.
Profit attributable to the Parent was € 2,765 million in 2009, a 58.8% increase from € 1,741 million in 2008. All geographic areas increased their revenues: Continental Europe (+27%), United Kingdom (+7%) and Latin America (+26%). These growth rates were achieved with strict management of volumes and risks. The area’s risk weighted asset levels at the end of 2009 were lower than in 2008.
The product areas also made progress in their increasingly global business vision, which is adapted to the changing needs of markets and customers. Their performance was as follows:
Global Transaction Banking: increased its customer revenues 34%, backed by solid market position, where it provides local and regional solutions for corporate and institutional customers.
Corporate Finance: reduced its customer revenues by 41%, due to the decline in the number and size of corporate operations and the impact on year-on-year comparisons of the high revenues from a particular operation in 2008. Excluding this operation, and backed by the strong performance of the asset & capital structuring business, revenues were almost in line with those in 2008.
Credit Markets: increased their customer revenues by 76%, backed by all products and countries, particularly Spain and Latin America. In loans, Santander enjoyed a good year and participated in several large operations that contributed to the total with more than € 25 billion.
Rates: increased their customer revenues by 14%, backed by all countries and business lines, although with slowing growth (+64% in the first half and +41% in the first nine months). The strong growth at the start of the year, based on higher spreads because of the lack of depth of the market, greater penetration and good credit management, was reduced in the last part of 2009 following a trend toward normalization of market conditions.
2008 compared to 2007
Global Wholesale Banking generated 18.3% of the operating areas’ profit attributable to the Parent in 2008. The area’s growth was due to a customer-focused business model, the area’s global capacities and connection with local units, and the strength of the Group’s capital and liquidity which made it possible to increase profit.
Interest income was € 1,892 million in 2008, a 45.2% or € 589 million increase from € 1,303 million in 2007. The strong growth in customer revenues accounted for more than 85% of the area’s total revenues. Almost all segments of business and countries grew throughout the year especially in the fourth quarter, partly due to the improved spreads and the acceleration of revenues in hedging the positions of our clients.

118

Table of Contents

Net fees and commissions were € 883 million in 2008, a 3.1% decrease from € 911 million in 2007, affected by the strong decrease in the results of trading activity due to the instability of the markets.
Total income was € 3,976 million in 2008, a 24.6% increase from € 3,190 million in 2007.
Administrative expenses were € 1,060 million in 2008, a 4.7% increase from € 1,012 million in 2007 due to a strict adjustment of expenses and structures to the new environment.
Impairment losses on financial assets were € 281 million in 2008, a € 223 million increase from € 58 million in 2007. The main reason is the increase in general provisions because of large operations in the second half of the year, particularly in the fourth quarter.
Asset Management and Insurance
Variations
2009 2008 2007 2009/2008 2008/2007
(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)
201 190 146 5.8 % 30.1 %
Income from equity instruments
— 6 12 n/a (50.0 %)
Income from companies accounted for by the equity method
— 53 — n/a n/a
Net fees and commissions
431 464 495 (7.1 %) (6.3 %)
Gains/losses on financial assets and liabilities (net)
34 26 30 30.8 % (13.3 %)
Other operating income/(expenses) (net)
338 254 229 33.1 % 10.9 %
TOTAL INCOME
1,004 993 912 1.1 % 8.9 %
Administrative expenses
(278 ) (293 ) (286 ) (5.1 %) 2.4 %
Personnel expenses
(138 ) (135 ) (132 ) 2.2 % 2.3 %
Other general expenses
(140 ) (158 ) (154 ) (11.4 %) 2.6 %
Depreciation and amortization
(29 ) (18 ) (20 ) 61.1 % (10.0 %)
Impairment losses on financial assets (net)
(10 ) — — n/a n/a
Provisions (net)
(36 ) (18 ) (22 ) 100.0 % (18.2 %)
Impairment losses on other assets (net)
— 2 (1 ) n/a n/a
Gains/(losses) on other assets (net)
— 1 — n/a n/a
OPERATING PROFIT/(LOSS) BEFORE TAX
651 667 583 (2.4 %) 14.4 %
Income tax
(219 ) (174 ) (174 ) 25.9 % 0.0 %
PROFIT FROM CONTINUING OPERATIONS
432 493 409 (12.4 %) 20.5 %
Profit/(loss) from discontinued operations (net)
— — 112 n/a n/a
CONSOLIDATED PROFIT FOR THE YEAR
432 493 521 (12.4 %) (5.4 %)
Profit attributable to minority interests
28 22 45 27.3 % (51.1 %)
Profit attributable to the Parent
404 471 476 (14.2 %) (1.1 %)
2009 compared to 2008
This segment accounted for 3.9% of profit attributable to the Parent in 2009.
Total income increased slightly in 2009 (+1.1%) as a result of higher revenues from insurance partly offset by a decrease in asset management, particularly fee income. A key factor was the sharp decline in the managed volumes of mutual funds, mainly in Spain.

119

Table of Contents

Administrative expenses were € 278 million in 2009, a 5.1% decrease from € 293 million in 2008 reflecting continuous efforts to adapt the structures to the new revenue environment.
Profit attributable to the Parent was € 404 million, a 14.2% decrease due to higher impairment losses on assets, provisions and tax rate.
Santander Asset Management generated fee and commission income in 2009 of € 1,178 million, 23.6% lower than in 2008 because of the preference for liquidity and deposits by financial agents and the impact of the markets on portfolios, both in lower average volumes under management as well as their composition (more conservative and lower return).
Of note, however, was the trend towards stabilization of revenues as of the second quarter, in contrast to the double digit falls at the end of 2008 and the start of 2009. This was due to the gradual recovery of mutual fund markets, begun in Latin America and now spreading to Europe, which improved volumes.
Total managed assets stood at € 116,500 million at the end of 2009, 15% more than a year earlier but still 6% below the average volume of 2008.
Attributable profit was € 54 million (-65.9%), after deducting operating expenses and fees paid to the commercial networks.
Santander Insurance generated fee and commission income in 2009 of € 1,861 million, a 6.0% increase as compared to 2008.
Total income in this area amounted to € 728.7 million, a 21.5% increase as compared to the previous year. This increase together with moderate growth of general administrative expenses (+3.8) lead to attributable profit of € 350 million, 12.2% more than in 2008.
Santander Insurance continued to progress in its global business model and foster the development of new products via its distribution channels. It also consolidated its position with the acquisition of the 50% of the insurer Real Tokio Marine Vida e Previdencia in Brazil that the Group did not own and the integration of the businesses of Alliance & Leicester, GE Money and Sovereign.
Premium income was 14% lower, eroded by the Group’s reduced lending (which affected insurance products related to credits) and customers’ greater preference for liquidity, which reduced the demand for savings insurance.
2008 compared to 2007
This segment accounted for 4.9% of profit attributable to the Parent in 2008.
Total income was € 993 million in 2008, an 8.9% or € 81 million from € 912 million in 2007 as the higher revenues from insurance did not offset the fall in fee income. The latter was hit by the decline in the volume of mutual funds in the main countries where the Group operates, particularly Spain. In this market, customer demand and the focus of retail networks shifted to traditional and/or structured deposits.
Administrative expenses were € 293 million in 2008, a 2.4% or € 7 million increase from € 286 million in 2007 reflecting the area’s efforts to adapt its structures to the new environment of revenues, while absorbing the investments made to generate global businesses.
Asset Management. Santander Asset Management’s global business generated € 1,542.5 million of fees in 2008 reflecting a drop of 18.4% as compared to 2007. General administrative expenses were € 157.4 million (-1.1%) and profit attributable to the Parent was € 159.3 million. Total managed pension and mutual funds amounted to € 100 billion.

120

Table of Contents

Insurance. The global business of Santander Insurance generated fee income of € 1,755 million (reflecting an increase of 24.0%). Total income in this area was € 599.9 million (+20.6%), general administrative expenses were € 136.1 million (+6.9%) and profit attributable to the Parent was € 311.8 million (+35.6%).
Financial Condition
Assets and Liabilities
Our total assets were € 1,110,529.5 million at December 31, 2009, a 5.8% or € 60,897.9 million increase from total assets of € 1,049,631.5 million at December 31, 2008. Our gross loans and advances to corporate clients, individual clients and government and public entities, including the trading portfolio, other financial assets at fair value and loans, increased by 9.6% to € 700,424.0 million at December 31, 2009 from € 639,354.5 million at December 31, 2008. The increase in our total assets was due, to a net perimeter rise from the consolidation of Sovereign and the consumer business units acquired, which more than offset the reduction in balances from the sale of our bank in Venezuela. In addition, the appreciation against the euro on the basis of period-end exchange rates of 29% for the Brazilian real, 7% for sterling, 2% for the Mexican peso and 21% for the Chilean peso also contributed to the increase. The dollar, however, depreciated 3%.
Customer deposits, which comprise deposits from clients and securities sold to clients under agreements to repurchase, increased by 20.6% from € 420,229.4 million at December 31, 2008, to € 506,976.2 million at December 31, 2009. This increase was also affected by both the exchange-rate impact and the consolidation effect described above. Other managed funds, including mutual funds, pension funds, managed portfolios and savings-insurance policies, decreased by 10.1% from € 131,061.5 million at December 31, 2008, to € 144,312.7 million at December 31, 2009.
In addition, and as part of the global financing strategy, during 2009 the Group issued € 60,999 million of senior debt (including Santander UK’s medium term program), of which € 7,077 million was mortgage bonds ( cédulas hipotecarias ) and € 6,874 million was subordinated debt.
During 2009, € 75,614 million of senior debt (including Santander UK’s medium term program), of which € 727 million was mortgage bonds ( cédulas hipotecarias ) and € 9,316 million was subordinated debt matured.
In order to improve its capital structure and strengthen the balance sheet, Grupo Santander made a series of exchange offers for securities of a nominal amount of approximately € 9,100 million. The exchange offers were made with new securities that met current standards and regulatory requirements for their calculation as equity at the consolidated level. As a result of these exchange offers, subordinated debt with a value of € 1,617 million was issued and preferred shares with a value of € 1,593 million were issued.
Goodwill was € 22,865 million at the end of 2009, a € 4,029 million increase from € 18,836 million at the end of 2008. This increase is the net difference between the entry into consolidation of the businesses acquired (Sovereign and GE Money) and the impact of exchange rates, mainly the appreciation of sterling and the Brazilian currency against the euro.
Capital
Stockholders’ equity, net of treasury stock, at December 31, 2009, was € 68,666.6 million, an increase of € 11,079.7 million or 19.2% from € 57,586.9 million at December 31, 2008, mainly due to the decrease of negative valuation adjustments and the increase of capital and reserves.
Our eligible stockholders’ equity was € 69,731 million at December 31, 2009. The surplus over the minimum required by the Bank of Spain was € 25,026 million. In accordance with the Basel II Accord criteria (which provide the framework under which Spanish entities must report capital ratios as of June 30, 2008), at December 31, 2009 the BIS II ratio was 14.2% (as compared to 13.3% at December 31, 2008), Tier I Capital was 10.1% (9.1% a year earlier) and core capital was 8.6% (7.5% in December 2008). See Item 4 of Part I, “Information on the Company—B. Business Overview—Supervision and Regulation—Capital Adequacy Requirements”.

121

Table of Contents

B. Liquidity and capital resources
Management of liquidity
For information about our liquidity risk management process, see Item 11 of Part I, “Quantitative and Qualitative Disclosures About Market Risk—Part. 10 Market Risk—Statistical Tools for Measuring and Managing Market Risk—Non Trading activity—Liquidity Risk” and “—Quantitative analysis—B. Non Trading Activity—Asset and liability management— Management of structural liquidity”.
Sources of funding
As a financial group, a principal source of our liquidity is our customer deposits which consist primarily of demand, time and notice deposits. In addition, we complement the liquidity generated by our customer deposits through access to the domestic and international capital markets and to the interbank market (overnight and time deposits). For this purpose, we have in place a series of domestic and international programs for the issuance of commercial paper and medium and long- term debt. We also maintain a diversified portfolio of liquid and securitized assets throughout the year. In addition, another source of liquidity is the generation of cash flow.
At December 31, 2009, we had outstanding € 212.0 billion of senior debt, of which € 81.5 billion were mortgage bonds and € 28.7 billion were promissory notes. Additionally, we had € 36.8 billion in outstanding subordinated debt (which includes € 7.3 billion preferred securities and € 0.4 billion in preferred shares).
The following table shows the average balances during the years 2009, 2008 and 2007 of our principal sources of funds:
2009 2008 2007
(in thousands of euros)
Due to credit entities
141,930,426 114,360,961 111,969,806
Customer deposits
463,602,299 354,193,915 332,678,212
Marketable debt securities
221,230,091 237,824,647 227,447,091
Subordinated debt
39,008,547 36,257,108 33,512,279
Total
865,771,363 742,636,631 705,607,388
The average maturity of our outstanding debt as of December 31, 2009 is as follows:
(1) Senior debt
3.0 years
(2) Mortgage debt
11.8 years
(3) Dated subordinated debt
7.5 years
For more information see Notes 22.b, 23.a and 51.a to our consolidated financial statements.
The cost and availability of debt financing are influenced by our credit ratings. A reduction in these ratings could increase the cost of, and reduce our market access to debt financing. Our credit ratings are as follows:
Long-Term Short-Term Financial Strength
Standard & Poor’s
AA A1+
Fitch
AA F1+ A/B
Moody’s
Aa2 P1 B-
DBRS
AA R1 (high)
Our total customer deposits, excluding assets sold under repurchase agreements, totaled € 468.3 billion at December 31, 2009. Loans and advances to customers (gross) totaled € 700.4 billion at the same date.

122

Table of Contents

We remain well placed to access various wholesale funding sources from a wide range of counterparties and markets, and the changing mix between customer deposits and repos, deposits by banks and debt securities in issue primarily reflects comparative pricing, maturity considerations and investor counterparty demand rather than any material perceived trend.
We use our liquidity to fund our lending and investment securities activities, for the payment of interest expense, for dividends paid to shareholders and the repayment of debt.
We, Grupo Santander, are a European, Latin American and North American financial group. Although, at this moment we are not aware of any legal or economic restrictions on the ability of our subsidiaries to transfer funds to the Bank (the Parent company) in the form of cash dividends, loans or advances, capital repatriation and other forms, or to have access to foreign currency at the official exchange rate, there is no assurance that in the future such restrictions will not be adopted or how they would affect our business. Nevertheless, the geographic diversification of our businesses limits the effect of any restrictions that could be adopted in any given country.
We believe that our working capital is sufficient for our present requirements and to pursue our planned business strategies.
As of December 31, 2009, and to the present date, we did not, and presently do not, have any material commitments for capital expenditures.
C. Research and development, patents and licenses, etc.
We do not currently conduct any significant research and development activities.
D. Trend information
The global financial services sector is likely to remain competitive with a large number of financial service providers and alternative distribution channels. Additionally, consolidation in the sector (through mergers, acquisitions or alliances) is likely to occur as the other major banks look to increase their market share, combine with complementary businesses or strengthen their balance sheets. In addition, regulatory changes will take place in the future that we expect will increase the overall level of regulation in the markets.
The following are the most important trends, uncertainties and events that are reasonably likely to have a material adverse effect on the Bank or that would cause the disclosed financial information not to be indicative of our future operating results or our financial condition:
•
a continued downturn in the Spanish and the United Kingdom real estate markets, and a corresponding increase in mortgage defaults, which could impact our NPL and decrease consumer confidence and disposable income;
•
uncertainty regarding interest rates in the United States and other countries;
•
uncertainties relating to economic growth expectations and interest rates cycles, especially in the United States, Spain, the United Kingdom, other European countries and Latin America, and the impact they may have over the yield curve and exchange rates;
•
the resulting effect of the global economic slowdown on Europe, the US and Latin America and fluctuations in local interest and exchange rates;
•
continued changes in the macroeconomic environment, such as sustained unemployment above historical levels, could further deteriorate the quality of our customers’ credit;
•
increases in our cost of funding, partially as a result of the fragility of the Greek economy, could adversely affect our net interest margin as a consequence of timing differences in the repricing of our assets and liabilities;
•
the effects of withdrawal of significant monetary and fiscal stimulus programs and uncertainty over government responses to growing public deficits;
•
continued instability and volatility in the financial markets;

123

Table of Contents

•
a drop in the value of the euro relative to the US dollar, the Sterling pound or Latin American currencies;
•
inflationary pressures, because of the effect they may have in relation to increases of interest rates and decreases of growth;
•
increased consolidation of the global financial services sector, which could further reduce our spreads;
•
although it is foreseeable that entry barriers to domestic markets in Europe will eventually be lowered, our possible plans of expansion into other markets could be affected by regulatory requirements of the national authorities of these countries;
•
acquisitions or restructurings of businesses that do not perform in accordance with our expectations or that subject us to previously unknown risks;
•
increased regulation, government intervention and new laws prompted by the recent turmoil in global financial markets which could change our industry and require us to modify our businesses or operations;
•
the risk of further reductions in liquidity and increases of credit spreads as a consequence of the crisis in the financial markets, which could affect not only our cost of funding but also the value of our proprietary portfolios and our assets under management; and
•
future regulatory changes that may increase the overall level of regulation in the markets.
E. Off-balance sheet arrangements
As of December 31, 2009, 2008 and 2007, we had outstanding the following contingent liabilities and commitments:
2009 2008 2007
(in thousands of euros)
Contingent liabilities:
Financial guarantees and other sureties
20,974,258 15,614,342 17,172,878
Irrevocable documentary credits
2,636,618 3,590,454 5,803,088
Other guarantees
35,192,187 45,613,498 52,632,118
Other contingent liabilities
453,013 504,900 608,501
59,256,076 65,323,194 76,216,585
Commitments:
Balances drawable by third parties
150,562,786 123,329,168 102,215,927
Other commitments
12,967,970 8,395,838 12,460,636
163,530,756 131,725,006 114,676,563
222,786,832 197,048,200 190,893,148
For more information see Note 35 to our consolidated financial statements.
In addition to the contingent liabilities and commitments described above, the following table provides information regarding off-balance sheet funds managed by us as of December 31, 2009, 2008 and 2007:
2009 2008 2007
(in thousands of euros)
Off-balance sheet funds:
Mutual funds
105,216,486 90,305,714 119,210,503
Pension funds
11,309,649 11,127,918 11,952,437
Other managed funds
18,364,168 17,289,448 19,814,340
134,890,303 118,723,080 150,977,280

124

Table of Contents

Relationship with unconsolidated companies
We have holdings in companies over which we are in a position to exercise significant influence, but that we do not control or jointly control. According to IFRS-IASB, these investments in associated companies are accounted for using the equity method (see further details of these companies in Exhibit II to our consolidated financial statements).
Transactions with these companies are made under market conditions and are closely monitored by our regulatory authorities. See Note 53 to our consolidated financial statements for further information.
Also, we use special purpose vehicles ( fondos de titulización ) in our securitization activity. According to the IFRS, only those vehicles that meet certain requirements are consolidated in the Group’s financial statements. We are not required to repurchase assets from or contribute additional assets to any of these special purpose vehicles. We do, however, provide in the ordinary course of business certain loans (amounting to € 251.6 million to fondos de titulización in Spain as of December 31, 2009) to some of these special purpose vehicles, which are provided for in accordance with the risks involved. In 2009, the Group securitized € 16 billion of medium and long-term assets. Given the difficulties in the securitization market since August 2007, all the issues were retained by the Group’s various units.
In addition, € 2 billion AAA securitization bonds were repurchased in the secondary market by Group issuers.
In the ordinary course of business, Santander UK enters into securitization transactions using special purpose securitization companies which are consolidated and included in Santander UK’s financial statements. Santander UK is under no obligation to support any losses that may be incurred by the securitization companies or the holders of the securities, and has no right or obligation to repurchase any securitized loan. Santander UK has made some interest-bearing subordinated loans to these securitization companies.
We do not have any further transactions with unconsolidated entities other than those mentioned above.
We have no other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
F. Tabular disclosure of contractual obligations
The following table summarizes our contractual obligations by remaining maturity at December 31, 2009:
More than More than
Contractual obligations Less than 1 year but 3 years but More than
(in millions of euros) 1 year less than 3 years less than 5 years 5 years Total
Deposits from credit institutions
39,003 5,238 4,962 1,578 50,781
Customer deposits
418,115 34,147 30,571 4,848 487,681
Marketable debt securities
67,366 50,302 31,498 57,324 206,490
Subordinated debt
6,039 1,714 3,097 25,955 36,805
Operating lease obligations
318 701 428 2,293 3,740
Purchase obligations
2 2 1 — 5
Other long-term liabilities (1)
— — — 10,629 10,629
Total
530,843 92,104 70,557 102,627 796,131
(1)
Other long-term liabilities relate to pensions and similar obligations
For a description of our trading and hedging derivatives, which are not reflected in the above table, see Note 36 to our consolidated financial statements.

125

Table of Contents

For more information on our marketable debt securities and subordinated debt, see Notes 22 and 23 to our consolidated financial statements.
G. Other disclosures
Higher-Risk Loans
Grupo Santander does not have any significant exposure to higher-risk loans. Our credit profile is focused on retail banking with a medium-low risk profile and with broad diversification both by geography and segment and nearly 59% of the Group’s total loan portfolio is secured and, in most cases, by real estate.
Mortgages to individuals represent approximately 42% of the Group’s total lending. These mortgages are focused on our core markets, Spain and the UK, and are principal residence mortgages with a low risk profile, low non-performing ratios (below the ratios of our peers) and an acceptable coverage ratio. This low risk profile allows us to envisage a relatively minor impact at Group level and a low final estimated loss.
In Spain, at December 31, 2009, the loan portfolio and thus its risk profile mainly comprises primary residence loans, with an average loan to value ratio (LTV) of 52.4% and an affordability rate of 30.8%. Residential mortgages account for 25.8% of the total portfolio in Spain, of which 85% has a LTV under 80%.
The UK’s mortgage portfolio is focused on primary residence mortgages, with high quality risk in terms of LTV (56.2% as of December, 31, 2009). The mortgages with the highest risk profile (buy-to-let) account for a small percentage of the total (slightly more than 1%).
Due to the economic downturn, the portfolio of loans to real estate developers has been significantly reduced, especially in Spain. At December 31, 2009, it accounted for 1.6% of the Group’s total portfolio. The Group’s risk policies stipulate that these loans should be granted not just based on the quality of the projects but also on the credit quality of the clients.
Changes in Practices
There have not been any significant changes in policies and practices in response to the effects of the current economic environment that might affect the quality of the credit information presented. This is due to the fact that the following policies and practices already formed part of our normal course of business:
a) Medium-low risk profile of the portfolio
Our risk profile is characterized by the prevalence of primary residence loans and a low effort rate of loan approval, which leads to a medium-low risk profile for the mortgage portfolio. This is due to the establishment of risk management frameworks and policies that reflect our risk management principles.
In addition to the tasks performed by the internal audit division, the risk unit has a specific risk monitoring function for adequate credit quality control with local and global teams.
b) Suspended accrual interest of non-performing past-due assets
Balances are deemed to be impaired, and the interest accrual suspended, when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts and on the dates initially agreed upon, after taking into account the guarantees received to secure (fully or partially) collection of the related balances. For all non-performing past-due assets, any collections relating to impaired loans and advances are used to recognize the accrued interest and the remainder, if any, is applied to reduce the principal amount outstanding. The amount of the financial assets that would be deemed to be impaired had the conditions thereof not been renegotiated, is not material with respect to the Group’s financial statements taken as a whole.
When the recovery of any recognized amount is considered unlikely, the amount is written off, without prejudice to any actions that we may initiate to seek collection.

126

Table of Contents

c) Allowances for credit losses and internal model
As of July 2008, the Bank of Spain had approved for regulatory capital calculation purposes the Group’s internal models affecting the vast majority of the Group’s credit risk net exposure. The Bank of Spain will continue to review the models for the purpose of calculating allowances for loan losses. The calculation obtained based on the output parameters of internal models is consistent with the best estimate of the Group as to the probable losses using possible scenarios which rely on the approved internally developed models, and which constitute an appropriate basis for determining loan loss allowances. While these models are not yet approved by the Bank of Spain for loan loss allowance calculation, we are required to calculate the allowances according to the instructions described in Item 4 in our annual report on Form 20-F for the year ended December 31, 2009, and are subject to continuing review by Bank of Spain, and subsequent continuous improvement of the processes within our internal model. The difference between loan loss provisions calculated using internal models and those calculated under Bank of Spain guidance, was not material for each one of the three years ending December 31, 2009.
Declines in Collateral Value
Declines in collateral value are not relevant in our portfolio given that residential mortgages with LTV up to 90% amount to only 6% of the total Group’s lending as of December 31, 2009. When a mortgage with these characteristics is authorized, the Group’s polices establish that the client must provide additional guarantees such as more properties, insurance coverage or others.
Other
During 2009, the general deterioration of the economic environment had a negative effect on the evolution of non-performing loans and the cost of credit. This effect was softened by prudent risk management which kept non-performing loan and coverage ratios at reasonable levels. Both ratios compare well with those of our competitors.
The Group uses credit derivatives to cover loans and trading transactions. The volume of this activity is small compared to that of our peers and is subject to strict internal controls that minimize operational risk. Risk in these activities is controlled via a series of limits such as VaR, nominal by rating, sensitivity to the spread by rating and name, and sensitivity to the rate of recovery and to correlation. Jump-to-default limits are also set by geographic area, sector and liquidity.
Exposures related to complex structured assets
The Group has a very limited exposure to complex structured assets. See “Item 11. Quantitative and Qualitative Analysis About Market Risk—Part 10. Market Risk—Quantitative analysis—C.Exposures related to complex structured assets”.

127

Table of Contents

Item 6. Directors, senior management and employees
A. Directors and senior management
We are managed by our board of directors, which currently consists of 19 members. In accordance with our By-laws ( Estatutos ), the board shall consist of at least 14 and not more than 22 members. Each member of the board is elected to a five-year term by our shareholders at a general meeting. Approximately one-fifth of the members are elected each year and members may be re-elected.
The 2010 annual general meeting will be held on June 11, 2010. At that meeting, Ángel Jado will be nominated for appointment as a new director. If he is approved, the board will increase to 20 members.
Our board of directors meets approximately nine times per year; however, in 2009 it met 11 times. Our board of directors elects our chairman, vice chairmen and chief executive officer from among its members. Between board meetings, lending and other board powers reside with the executive committee (comisión ejecutiva) and with the risk committee (comisión delegada de riesgos) . The chairman is the Bank’s most senior officer and, as a result, all powers as may be delegated under Spanish law, our By-laws and the Rules and Regulations of the Board of Directors have been delegated to him 1 . The chairman leads the Bank’s management team, in accordance with the decisions made and the criteria set by our shareholders at the general shareholders’ meeting and by the board.
By delegation and under the direction of the board and of the chairman, the chief executive officer leads the business and assumes the Bank’s highest executive functions.
Our board has ultimate lending authority and it delegates such authority to the risk committee, which generally meets twice a week.
Members of our senior management are appointed and removed by the board.
1
The Rules and Regulations of the Board are available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Board of directors—Rules and Regulations of the Board of Directors”.

128

Table of Contents

The current members of our board of directors are:
Name Position with Santander Director
Since
Emilio Botín (1)
Chairman 1960
Fernando de Asúa
First vice chairman 1999
Alfredo Sáenz
Second vice chairman and chief executive officer 1994
Matías R. Inciarte (2)
Third vice chairman 1988
Manuel Soto
Fourth vice chairman 1999
Assicurazioni Generali, S.p.A.
Director 1999
Antonio Basagoiti
Director 1999
Ana P. Botín (1)
Director 1989
Javier Botín (1)
Director 2004
Lord Burns
Director 2004
Guillermo de la Dehesa
Director 2002
Rodrigo Echenique
Director 1988
Antonio Escámez
Director 1999
Francisco Luzón
Director 1997
Abel Matutes
Director 2002
Juan R. Inciarte (2)
Director 2008
Luis Ángel Rojo
Director 2005
Luis Alberto Salazar-Simpson
Director 1999
Isabel Tocino
Director 2007
(1)
Ana P. Botín and Javier Botín are daughter and son, respectively, of Emilio Botín.
(2)
Matías R. Inciarte and Juan R. Inciarte are brothers.

129

Table of Contents

Our current executive officers are:
Name Position with Banco Santander
Emilio Botín
Chairman of the board of directors and of the executive committee
Alfredo Sáenz
Second vice chairman of the board of directors and chief executive officer
Matías R. Inciarte
Third vice chairman of the board of directors and chairman of the risk committee
Ana P. Botín
Chairwoman, Banesto
Francisco Luzón
Director, executive vice president, America
Juan R. Inciarte
Director, executive vice president, strategy
José A. Alvarez
Executive vice president, financial management and investor relations
Nuno Amado
Executive vice president, Santander Totta
Ignacio Benjumea
Executive vice president, general secretariat
Juan Manuel Cendoya
Executive vice president, communications, corporate marketing and research
José María Espí
Executive vice president, risk
José María Fuster
Executive vice president, technology and operations
José Luis G. Alciturri
Executive vice president, human resources
Enrique G. Candelas
Executive vice president, Santander branch network — Spain
Juan Guitard
Executive vice president, internal auditing
Antonio H. Osorio
Chief executive officer, Santander UK
Adolfo Lagos
Executive vice president, global wholesale banking
Jorge Maortua
Executive vice president, global wholesale banking
Javier Marín
Executive vice president, global private banking and asset management
Jorge Morán
Executive vice president, insurance and global direct banking
César Ortega
Executive vice president, general secretariat
Javier Peralta
Executive vice president, risk
Jaime P. Renovales
Executive vice president, general secretariat
Marcial Portela
Executive vice president, America
Magda Salarich
Executive vice president, Santander Consumer Finance
José Tejón
Executive vice president, financial accounting and control
Jesús M a Zabalza
Executive vice president, America
The following is a summary of the relevant business experience and principal business activities of our current directors and executive officers:
Emilio Botín (chairman of the board of directors and of the executive committee)
Born in 1934. He joined the board of directors of Banco Santander in 1960 and was appointed chairman of the board in 1986.

130

Table of Contents

Fernando de Asúa (first vice chairman of the board of directors and chairman of the appointments and remuneration committee)
Born in 1932. Former vice chairman of Banco Central Hispanoamericano from 1991 to 1999. He was appointed director in April 1999 and first vice chairman in July 2004. He is a former chairman of IBM España, S.A. and he is currently the honorary chairman. In addition, he is a non-executive vice chairman of Técnicas Reunidas, S.A. and non-executive vice chairman of Constuctora Inmobiliaria Vasco-Atagonesa, S.A.
Alfredo Sáenz (second vice chairman of the board of directors and chief executive officer)
Born in 1942. Former chief executive officer and vice chairman of Banco Bilbao Vizcaya and chairman of Banca Catalana until 1993. In 1994, he was appointed chairman of Banesto and in February 2002, second vice chairman and chief executive officer of Santander.
Matías R. Inciarte (third vice chairman of the board of directors and chairman of the risk committee)
Born in 1948. He joined Banco Santander in 1984 and was appointed executive vice president and chief financial officer in 1986. He was appointed director in 1988 and second vice chairman in 1994. He is a non-executive director of Banesto, Sanitas, S.A. de Seguros and Financiera Ponferrada, S.A., SICAV and since 2008, president of the Fundación Príncipe de Asturias. Prior to joining Banco Santander, he was minister of the presidency of the Spanish Government from 1981 to 1982.
Manuel Soto (fourth vice chairman of the board of directors)
Born in 1940. He was appointed director in April 1999. He is a non-executive vice chairman of Indra Sistemas, S.A. and a non-executive director of Corporación Financiera Alba, S.A and Cartera Industrial REA, S.A. In addition, he was formerly chairman of Arthur Andersen’s Global Board and manager for EMEA (Europe Middle East and Africa) and India.
Assicurazioni Generali, S.p.A. (“Assicurazioni”)
An Italian insurance company represented on our board by its chairman, Antoine Bernheim. Assicurazioni is a former director of Banco Central Hispanoamericano from 1994 to 1999. Assicurazioni was appointed director in April 1999.
Antoine Bernheim (Representative of the company director Assicurazioni)
Born in 1924. He joined the board of directors of Assicurazioni Generali in 1973, becoming the company’s vice chairman in 1990 and chairman from 1995 to 1999. He was re-elected chairman in 2002. He is vice chairman of the supervisory board of Intesa Sanpaolo S.p.A., vice chairman of the Assicurazioni group’s subsidiary Alleanza Toro S.p.A., member of the board of Mediobanca, vice chairman of LVMH and of Bolloré Investissement. Antoine Bernheim is also a director of Generali France, Generali Deutchland AG, Generali España Holding Entidades de Seguros S.A., BSI, Generali Holding Vienna and Christian Dior S.A. Finally, he is a member of the supervisory board of Eurazeo.
Antonio Basagoiti
Born in 1942. Former executive vice president of Banco Central Hispanoamericano. He was appointed director in July 1999. He is a non-executive proprietary vice chairman of Faes Farma, S.A., a non-executive director of Pescanova, S.A. and member of the external advisory committee of A.T. Kearney. He is a former chairman of Unión Fenosa, S.A.
Ana P. Botín
Born in 1960. Former executive vice president of Banco Santander, S.A. and former chief executive officer of Banco Santander de Negocios from 1994 to 1999. In February 2002, she was appointed executive chairwoman of Banesto. She is also a non-executive director of Assicurazioni Generali, S.p.A. She is also a member of the International Advisory Board of the New York Stock Exchange, INSEAD, and Georgetown University.

131

Table of Contents

Javier Botín
Born in 1973. He was appointed director in July 2004. He is chairman and chief executive officer of JB Capital Markets, Sociedad de Valores, S.A.
Lord Burns
Born in 1944. He was appointed director in December 2004. He is also a non-executive chairman of Santander UK plc and Alliance & Leicester plc. In addition, he is chairman of Channel Four Television Corporation, a non-executive chairman of Glas Cymru (Welsh Water) and a non-executive director of Pearson Group plc. He was Permanent Secretary to the UK Treasury and chaired the UK Parliamentary Financial Services and Markets Bill Joint Committee and was a non-executive chairman of Marks & Spencer Group plc and a non-executive director of British Land plc and Legal & General Group plc.
Guillermo de la Dehesa
Born in 1941. Former secretary of state of economy and secretary general of commerce of the Spanish Government and chief executive officer of Banco Pastor. He is a state economist and Bank of Spain’s office manager (on leave). He was appointed director in June 2002. He is an international advisor of Goldman Sachs International, and a non-executive director of Campofrío Food Group, S.A. and Amadeus IT Holding, S.A. He is also chairman of the Centre for Economic Policy Research (CEPR) in London, member of the Group of Thirty of Washington, chairman of the board of trustees of the IE Business School and non-executive chairman of Aviva Grupo Corporativo, S.L. and Aviva Vida y Pensiones, S.A. de Seguros y Reaseguros.
Rodrigo Echenique
Born in 1946. Former director and chief executive officer of Banco Santander, S.A. from 1988 to 1994.
Antonio Escámez
Born in 1951. Former director and executive vice president of Banco Central Hispanoamericano from 1988 to 1999. He was appointed director in April 1999. He is also a non-executive chairman of Santander Consumer Finance, S.A., Open Bank, S.A. and Arena Communications Network, S.L., and a non-executive vice chairman of Attijariwafa Bank.
Francisco Luzón
Born in 1948. He joined Banco Santander in 1996 as executive vice president, adjunct to the chairman. Former chairman of Banco Exterior de España (from 1988 to 1996), Caja Postal (from 1991 to 1996), Corporación Bancaria de España (from 1991 to 1996) and of Argentaria (1996). He is also a non-executive director of Industria de Diseño Textil, S.A., world vice chairman of Universia and vice-chairman of the Spanish National Library.
Abel Matutes
Born in 1941. He joined Banco Santander in 2002 as member of the board. Former foreign minister of the Spanish Government and EU commissioner for the portfolios of Loans and Investment, Financial Engineering and Policy for Small and Medium-sized Companies (1989); North-South Relations, Mediterranean Policy and Relations with Latin America and Asia (1989) and of the Transport and Energy and Supply Agency of Euroatom (1993). He is also a chairman of Grupo de Empresas Matutes, and director of FCC Construcción, S.A. and TUI AG.
Juan R. Inciarte
Born in 1952. He joined Banco Santander in 1985 as director and executive vice president of Banco Santander de Negocios. He was appointed executive vice president in 1989 and was a director of Banco Santander from 1991 to 1999. He was appointed director in January 2008. He is also a non-executive vice chairman of Santander UK plc and a director of Santander Consumer Finance, S.A., Alliance & Leicester plc and RFS Holdings.

132

Table of Contents

Luis Ángel Rojo (chairman of the audit and compliance committee)
Born in 1934. He joined Banco Santander in 2005 as a member of the board. Former head of economics, Statistics and Research Department, deputy governor and governor of the Bank of Spain. He has been a member of the Governing Council of the European Central Bank, vice chairman of the European Monetary Institute, member of United Nations’ Development Planning Committee and treasurer of the International Association of Economy. He is a member of the Royal Academy of Moral and Political Sciences and of the Royal Academy of the Spanish Language.
Luis Alberto Salazar-Simpson
Born in 1940. He joined Banco Santander in 1999 as a member of the board. He is chairman of France Telecom España, S.A.
Isabel Tocino
Born in 1949. She joined Banco Santander in 2007 as a member of the board. Former minister for environment of the Spanish Government, former chairwoman of the European Affairs and of the Foreign Affairs Committees of Spanish Congress. She is currently an elected member of the Spanish State Council, a professor of the Complutense University of Madrid, a non-executive director of Televisión Autonómica de Madrid, S.A. (Telemadrid), Diagonal Gest and Climate Change Capital and a member of the Royal Academy of Doctors.
José A. Alvarez
Born in 1960. He joined the Bank in 2002. In 2004, he was appointed executive vice president, Financial Management and Investor Relations.
Nuno Amado
Born in 1959. He joined the Bank in 1997 as a member of the executive committee of BCI/Banco Santander Portugal. In December 2004, he was appointed director and vice chairman of Santander Totta’s executive committee. In July 2006, he was appointed executive vice president. Also in 2006, he was appointed Santander Totta’s chief executive officer.
Ignacio Benjumea
Born in 1952. He joined Banco Santander in 1987 as general secretary of Banco Santander de Negocios. In 1994 he was appointed executive vice president and general secretary and secretary of the board of Banco Santander. He is also a director of Bolsas y Mercados Españoles, Sociedad Holding de Mercados y Sistemas Financieros, S.A., Sociedad Rectora de la Bolsa de Madrid, S.A. and La Unión Resinera Española, S.A.
Juan Manuel Cendoya
Born in 1967. Former manager of the Legal and Tax Department of Bankinter, S.A. from 1999 to 2001. He joined the Bank in July 2001 as executive vice president, communications, corporate marketing and research.
José María Espí
Born in 1944. He joined the Bank in 1985 and, in 1988, was appointed executive vice president, human resources. In 1999 he was appointed executive vice president, risk. He is also chairman of Unión de Crédito Inmobiliario, S.A., E.F.C. and director of UCI, S.A.
José María Fuster
Born in 1958. He joined the Group in 1988. In 2004, he was appointed chief information officer of Grupo Santander. In the same year, he was also named member of the board of Abbey National plc and the board of Advisors of IBM Corporation. In 2006, he was appointed executive director of Banesto and, in 2007, executive vice president of technology and operations at Banco Santander. Presently, José María Fuster is also a director of Ingeniería de Software Bancario, S.A. (ISBAN).

133

Table of Contents

José Luis G. Alciturri
Born in 1949. He joined the Bank in 1996. Since November 2003, he has been responsible for the Group’s human resources. In 2007, he was appointed executive vice president.
Enrique G. Candelas
Born in 1953. He joined Banco Santander in 1975 and was appointed senior vice president in 1993. He was appointed executive vice president, Santander Branch Network Spain in January 1999.
Juan Guitard
Born in 1960. Former general secretary of the board of Banco Santander de Negocios (from 1994 to 1999) and manager of the investment banking department of the Bank (from 1999 to 2000). He rejoined the Bank in 2002, being appointed executive vice president, vice-secretary general of the board. On March 15, 2009, he was appointed head of internal auditing.
Antonio H. Osorio
Born in 1964. He joined Banco Santander in 1993 and was appointed executive vice president, Portugal, in January 2000 having previously been CEO of Banco Santander in Brazil. He was chairman of the executive committee of Banco Santander Totta, S.A., chairman of the executive committee of Banco Santander de Negocios Portugal, S.A. and non-executive director of Santander UK. In 2006, he was appointed chief executive officer of Santander UK and in 2008 he was appointed chief executive officer of Alliance & Leicester. In 2009, he was appointed non-executive director to the Court of the Bank of England.
Adolfo Lagos
Born in 1948. Former chief executive officer of Grupo Financiero Serfin since 1996. He was appointed executive vice president, America, in October 2002 and executive vice president, global wholesale banking, in April 2003.
Jorge Maortua
Born in 1961. Former executive vice president of Banesto since 2001. He joined the Bank in 2003 as head of global treasury and was appointed executive vice president, global wholesale banking, in 2004.
Javier Marín
Born in 1966. He joined the Bank in 1991. After serving in various positions within the Group, he was appointed executive vice president of the global private banking division in 2007. In November 2009, he was appointed head of the asset management and global private banking division.
Jorge Morán
Born in 1964. He joined the Bank in 2002. He was appointed executive vice president, asset management and insurance, in 2004. In December 2005, he was appointed executive vice president and chief operating officer of Santander UK and, in 2006, executive vice president in charge of insurance and global direct banking.
César Ortega
Born in 1954. He joined the Bank in 2000 and was appointed executive vice president, general secretariat, in 2006. He is also a non-executive director of Fomento de Construcciones y Contratas, S.A.

134

Table of Contents

Javier Peralta
Born in 1950. He joined the Bank in 1989 and was appointed executive vice president in 1993. In 2002, he was appointed executive vice president, risk.
Jaime P. Renovales
Born in 1968. He joined the Group in 2003 as secretary of the board of Banco Español de Crédito (Banesto). In March 2009, he was appointed executive vice president of Banco Santander, vice-secretary general and vice-secretary of the board.
Marcial Portela
Born in 1945. He joined the Bank in 1998 as executive vice president. In 1999, he was appointed executive vice president, America. He is also a director of Best Global, S.A.
Magda Salarich
Born in 1956. She joined the Bank in 2008 as executive vice president responsible for Santander’s Consumer Finance Division. Previously, she has held several positions in the automobile industry, including the position of director and executive vice president of Citroën España and head of commerce and marketing for Europe of Citroën Automobiles.
José Tejón
Born in 1951. He joined the Bank in 1989. In 2002, he was appointed executive vice president, financial accounting and control.
Jesús M a Zabalza
Born in 1958. Former executive vice president of La Caixa (from 1996 to 2002). He joined the Bank in 2002, being appointed executive vice president, America.
* * * * * *
In addition, Ramón Tellaeche, an adjunct to executive vice president of the Bank, is the head of the payment means division, and José A. Villasante, an adjunct to executive vice president of the Bank, is the head of the Santander Universidades division.
The following is a description of arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any person referred to above was appointed.
There is one director that is an international financial institution that holds shares in the Bank: Assicurazioni Generali S.p.A. (represented by Antoine Bernheim).
See also Item 7 of Part I, “Major Shareholders and Related Party Transactions — A. Major Shareholders– Shareholders’ agreements”.

135

Table of Contents

B. Compensation
Directors’ compensation
By-law stipulated fees
Article 58 of the Bank’s current Bylaws was approved at the annual shareholders’ meeting held on June 21, 2008 and provides that the directors will be entitled to receive 1% of the Bank’s net profit for such year for discharging their duties as members of the board of directors, including annual retainer and attendance fees. However, the board of directors may resolve to reduce this percentage. Previously, the 1% limit applied only with respect to the annual retainer and did not include attendance fees.
The amount set by the board of directors for 2009, calculated pursuant to the aforementioned Article 58 of the Bylaws, was 0.144% of the Bank’s profit for 2009, compared to 0.124% and 0.157% in 2008 and 2007, respectively, in like-for-like terms. At the proposal of the appointments and remuneration committee, on December 21, 2009 the board resolved to leave the annual retainer for 2009 unchanged from 2008.
Previously, at the board meeting held on December 22, 2008, the directors resolved to reduce the annual retainer corresponding to the directors for 2008 by 10% compared to 2007, and established the following retainer amounts (the respective proportional amounts were allocated to any directors who did not sit on the board for the whole year): € 106,300 gross retainer per director in 2009 and 2008 (2007: € 118,100) and each member of the following board committees received the following gross retainers in 2009 and 2008: executive committee, € 213,200 (2007: € 236,900); audit and compliance committee, € 50,000 (2007: € 55,000); appointments and remuneration committee, € 30,000 (2007: € 33,000). Also, the first vice chairman and the fourth vice chairman received a gross amount of € 36,000 each in 2009 and 2008 (2007: € 40,000).
Furthermore, the directors receive fees for attending board and committee meetings, excluding executive committee meetings.
The amounts of the fees for attending the meetings of the board of directors and of the board committees (excluding the executive committee) were the same in 2009 and 2008 and will remain unchanged for 2010, as resolved by the board on December 21, 2009. These attendance fees were approved by the directors at the board meeting held on December 17, 2009 in the following amounts:
• Board of directors: € 2,540 for resident directors and € 2,057 for non-resident directors.
• Risk committee and audit and compliance committee: € 1,650 for resident directors and € 1,335 for non-resident directors.
• Other committees: € 1,270 for resident directors and € 1,028 for non-resident directors.

136

Table of Contents

Salary compensation
Following is the detail of the salaries received by the Bank’s executive directors: Emilio Botín, Alfredo Sáenz, Matías R. Inciarte, Ana P. Botín, Francisco Luzón and Juan R. Inciarte, who took office as member of the board of directors on March 24, 2008.
Thousands of Euros
2009 2008 2007 (*)
Total salaries
25,784 25,489 24,315
Of which: variable remuneration in cash (or bonus)
15,240 15,240 16,088
(*)
The balances for 2007 do not include the remuneration for Juan R. Inciarte and, therefore, are not comparable.
The amounts of fixed salary remuneration received by the executive directors in 2009 were approved at the board meeting held on December 22, 2008, at the proposal of the appointments and remuneration committee, with the exception of the fixed salary remuneration of Ana P. Botín, which was approved by the directors at the board meeting held on January 26, 2009, also at the proposal of the appointments and remuneration committee.
At the meeting held on December 17, 2009, the appointments and remuneration committee proposed to the board of directors that the variable salary remuneration to be received in cash (or bonus) by all the executive directors in 2009 be maintained at the same amounts as in 2008. This proposal was approved by the directors at the board meeting held on December 21, 2009. Previously, at the board meetings of December 22, 2008 and January 26, 2009, the directors resolved to reduce these amounts by 15% as compared to 2007 (10% in the case of Ana P. Botín).

137

Table of Contents

The detail, by director, of the remuneration earned by the Bank’s directors in 2009 is as follows:
Thousands of Euros
2009 2008 2007
Bylaw-Stipulated Retainers
Other
Annual Retainer Attendance Fees Salary of Executive Directors (1) Remuneration
Variable
Appointments Remuneration
Audit and and in Cash (or Share
Executive Compliance Remuneration Other Fixed Bonus) Plan
Directors Board Committee Committee Committee Board Fees Remuneration (a) Total (b) Other Total Total Total
Emilio Botín
106 213 — — 25 5 1,344 1,987 3,331 310 1 3,992 5,420 3,910
Fernando de Asúa
142 213 50 30 25 188 — — — — — 647 642 677
Alfredo Sáenz
106 213 — — 25 5 3,703 4,745 8,447 837 602 10,237 9,295 9,604
Matías R. Inciarte
106 213 — — 25 162 1,710 2,503 4,213 398 221 5,339 6,541 5,154
Manuel Soto
142 — 50 30 25 31 — — — — — 277 274 306
Assicurazioni Generali, SpA.
123 — — — 10 — — — — — — 134 140 143
Antonio Basagoiti
106 213 — — 25 158 — — — — 7 510 517 523
Ana P. Botín
106 213 — — 25 5 1,294 1,786 3,081 203 13 3,647 4,021 3,517
Javier Botín (2)
106 — — — 23 — — — — — — 129 129 143
Lord Terence Burns
106 — — — 19 — — — — — — 125 123 135
Guillermo de la Dehesa
106 213 — 30 25 11 — — — — — 386 384 427
Rodrigo Echenique (**)
106 213 — 30 25 10 — — — — 33 418 443 562
Antonio Escámez
106 213 — — 23 157 — — — — 38 537 535 550
Francisco Luzón
106 213 — — 25 3 1,505 2,753 4,258 333 872 5,811 6,851 5,620
Abel Matutes
106 — 50 — 20 16 — — — — — 192 194 213
Juan R. Inciarte (*)
106 — — — 25 106 987 1,466 2,453 322 108 3,121 3,830 —
Luis Ángel Rojo
106 — 50 30 15 24 — — — — — 225 229 249
Luis Alberto Salazar-Simpson
106 — 50 — 25 21 — — — — — 202 198 214
Isabel Tocino (***)
106 — — — 25 — — — — — — 132 129 103
Mutua Madrileña Automovilística (3)
— — — — — — — — — — — — — 153
Total 2009
2,108 2,132 248 149 440 900 10,544 15,240 25,784 2,403 1,897 36,061 — —
Total 2008
2,084 2,132 248 149 411 942 10,249 15,240 25,489 6,612 1,827 — 39,894 —
Total 2007
2,324 2,370 275 165 424 813 8,227 16,088 24,315 — 1,517 — — 32,203
(*)
Appointed as member of the Bank’s board of directors on January 28, 2008, Juan R. Inciarte took office and was appointed as a member of the risk committee on March 24, 2008.
(**)
Ceased to be a member of the risk committee on March 24, 2008.
(***)
Appointed by co-optation by the board of directors at its meeting on March 26, 2007, Isabel Tocino took office at the meeting held on April 23, 2007. Her appointment was ratified by the shareholders at the annual shareholders’ meeting held on June 23, 2007.
(a)
Relating to 2009.
(b)
Amounts received in 2009 in respect of the variable remuneration in shares granted through the I-09 plan approved by the shareholders at the general meeting held on June 23, 2007.
(1)
Recognized under personnel expenses in the income statement of the Bank, except for the salary of Ana P. Botín, which is recognized at Banco Español de Crédito, S.A.
(2)
Amounts contributed to Marcelino Botín foundation.
(3)
Ceased to be a director on December 19, 2007.

138

Table of Contents

Other remuneration
The total amount recorded under “Other remuneration — share plan” as of December 31, 2009 in the foregoing table of € 2.4 million relates to the variable remuneration received in the form of Banco Santander, S.A. shares in 2009 under the I-09 incentive plan (I-09 plan) for directors approved at the general shareholders’ meeting on June 23, 2007. The total amount of € 6.6 million as of December 31, 2008 relates to the variable share-based remuneration received in 2008 by the Bank’s directors through the exercise of Banco Santander, S.A. share options granted under the I-06 incentive plan (I-06 plan) approved at the annual shareholders’ meeting of Banco Santander, S.A. held on June 18, 2005 and, in the case of Ana P. Botín, through the delivery of shares of Banco Español de Crédito, S.A. under an incentive plan for executives of that entity approved at its annual shareholders’ meeting held on February 28, 2006.
The amounts recorded under “Other remuneration — Other” include, among others, the life and medical insurance costs borne by the Group relating to the Bank’s directors.
Compensation to the board members as representatives of the Bank and to senior management
Representation on other boards
By resolution of the executive committee, all the remuneration received by the Bank’s directors who represent the Bank on the boards of directors of listed companies in which the Bank has a stake (at the expense of those companies) and which relates to appointments made after March 18, 2002, will accrue to the Group. The remuneration received by such directors was as follows:
Thousands of Euros
Company 2009 2008 2007
Emilio Botín
Shinsei Bank, Ltd. 30.1 53.0 50.1
Fernando de Asúa
CEPSA 100.2 97.2 97.2
Antonio Escámez
Attijariwafa Bank Société Anonyme 5.0 14.8 9.9
135.3 165.0 157.2
Emilio Botín ceased to discharge his duties as director of Shinsei Bank, Ltd. on June 23, 2009 and received compensation of € 73,100.
Also, in each year from 2005 through 2008, Emilio Botín received options to acquire shares of Shinsei Bank, Ltd. (Shinsei) as follows: 10,000 shares at a price of JPY 416 per share in 2008; 10,000 shares at a price of JPY 555 per share in 2007; 25,000 shares at a price of JPY 825 per share in 2006; and 25,000 shares at a price of JPY 601 per share in 2005. At December 31, 2009, the market price of the Shinsei share was JPY 101 and, therefore, regardless of the stipulated exercise periods, the options granted in each of those years would not have given rise to any gains had they been exercised.
Fernando Asúa ceased to discharge his duties as director of CEPSA on October 1, 2009 after the Group sold its ownership interest in that company.
Furthermore, the other directors of the Bank earned a total of € 663,000 in 2009 as members of the boards of directors of Group companies (2008: € 729,000; 2007: € 750,000), the detail being as follows: Lord Burns (Santander UK Plc), € 585,000; Rodrigo Echenique (Banco Banif, S.A.), € 36,000; and Matías R. Inciarte (U.C.I., S.A.), € 42,000.
Senior management
The following table details the remuneration paid to the Bank’s executive vice presidents, excluding executive directors’ remuneration, in 2009, 2008 and 2007:
Thousands of Euros
Number of Salary Other
Year Managers (1) Fixed Variable Total Remuneration Total
2007
26 19,504 42,768 62,272 10,092 72,364
2008
24 21,219 34,674 55,893 27,598 83,491
2009
24 21,512 36,468 57,980 16,745 74,725
(1)
At some point in the year they occupied the position of executive vice president. The amounts reflect the annual remuneration regardless of the number of months in which the position of executive vice president was occupied.

139

Table of Contents

The foregoing table includes all the items of remuneration paid to the senior managers, including life insurance premiums ( € 1,148,000 in 2009 and € 1,029,000 in 2008), termination or retirement benefits, and share-based remuneration systems. The variable share-based remuneration, which totaled € 5,982,000 in 2009, related to the 746,756 Banco Santander, S.A. shares received by the executive vice presidents under the I-09 plan. Also in 2008, € 22,410,000 was allocated due to the exercise by the executive vice presidents of 5,317,978 Santander share options under the I-06 plan and the delivery of Banesto shares under the incentive plan for executives approved at Banesto’s general shareholders’ meeting held on February 28, 2006. No remuneration of this kind was paid in 2007.
Pension commitments, other insurance and other items
The total balance of supplementary pension obligations assumed by the Group over the years to its current and retired employees (covered mostly by in-house provisions which amounted to € 10,629 million at December 31, 2009), includes the obligations to those who have been directors of the Bank during the year and who discharge (or have discharged) executive functions. The total pension obligations to these directors, together with the total sum insured under life insurance policies and other items, amounted to € 292 million at December 31, 2009 (December 31, 2008: € 311 million; December 31, 2007: € 264 million).
The following table provides information on: (i) the pension obligations assumed and covered by the Group; and (ii) other insurance, which includes premiums that are paid by the Group and the related cost which is included in the Other remuneration column in the table of page 138 above, in both cases in respect of the Bank’s executive directors:
Thousands of Euros
2009 2008 2007
Accrued Accrued Accrued
Pension Other Pension Other Pension Other
Obligations Insurance Obligations Insurance Obligations Insurance
Emilio Botín
24,642 — 25,579 — 22,926 —
Alfredo Sáenz
85,740 11,108 80,049 10,785 68,070 9,378
Matías R. Inciarte
52,536 5,131 50,894 4,982 44,226 4,529
Ana P. Botín
23,775 1,403 21,737 1,403 17,975 1,403
Francisco Luzón
53,513 9,031 53,083 7,624 45,468 7,624
Juan R. Inciarte
10,969 2,961 9,918 2,875 — —
251,175 29,634 241,260 27,669 198,665 22,934
The amounts in the “Accrued Pension Obligations” column in the foregoing table relate to the accrued present value of the future annual payments to be made by the Group. These amounts were obtained using actuarial calculations and cover the obligations to pay the respective calculated pension supplements. In the case of Emilio Botín, Alfredo Sáenz, Matías R. Inciarte and Ana P. Botín, these supplements were calculated as 100% of the sum of the fixed annual salary received at the date of effective retirement plus 30% of the arithmetical mean of the last three variable salary payments received. In the case of Francisco Luzón, added to the amount calculated above are the amounts received by him in the year before retirement or early retirement in his capacity as a member of the board of directors or the committees of the Bank or of other Group companies and, in addition, in the case of Juan R. Inciarte, 100% of the gross fixed annual salary received at the date of effective retirement.
On December 17, 2007, March 24, 2008, July 21, 2008 and April 28, 2009, the board of directors of the Bank resolved to authorize a change in the contracts of the executive directors and the other members of the Bank’s senior management -the senior executives- granting them the right, on the date of retirement -or pre-retirement, as appropriate- to opt to receive their accrued pensions in full but not in part -or amounts similar thereto- in the form of an annuity or a lump sum. In order to be financially neutral for the Group, the amount to be received in the form of a lump sum by the beneficiary at the date of retirement must be the aliquot part of the market value of the assets assigned to cover the mathematical provisions of the policy instrumenting these commitments to senior executives. The senior executives who are still in service on reaching the age of retirement -or who at the date of the contract entered into have passed the age of retirement- must state whether they wish to opt for this form of benefit. Should the senior executive subsequently die while still in service and prior to retirement, the lump sum of the pension will be paid to his/her heirs. Also, by virtue of the aforementioned resolutions of the board of directors, these contracts were adapted to the current Bylaws (Articles 49.2 and 58.4) and to the new pensions regime.
In 2009, Emilio Botín and Alfredo Sáenz, who have passed the age of retirement, exercised the option to receive their respective accrued pensions as a lump sum on the date of their respective effective retirement. The amounts included in the foregoing table in respect of the pensions accruing to these directors are those relating to the aforementioned lump sums, and no further amounts will accrue in respect of pensions after the retirement dates. The lump sums will be increased at an agreed-upon interest rate.

140

Table of Contents

Furthermore, at the board meeting held on December 21, 2009, the Bank’s directors resolved that the executive directors -and other members of senior management who are beneficiaries or defined benefit plans and have not reached the age of retirement- may opt, upon reaching the age of 60 and on each of their following birthdays until they are 64 years of age, to receive their accrued pensions as a lump sum, which will be determined at the exercise date of this option and which they (or their heirs in the event of death) will be entitled to receive when they retire or are declared to be disabled. Upon exercise of this option, no further pension benefit will accrue and the lump sum to be received, which will be increased at an agreed-upon interest rate, will be fixed. Also, any person who exercises this option must undertake not to retire early or to retire, in both cases at his/her own request, within two years from the exercise date.
Lastly, the board of directors resolution referred to in the preceding paragraph also regulates the impact of the deferral of the computable variable remuneration on the determination of the pension obligations (or similar amounts), in the form of an annuity or a lump sum, for pre-retirement, early retirement or normal retirement.
Pension provisions recognized and reversed in 2009 amounted to € 5,703,000 and € 4,000, respectively (2008: € 26,974,000 and € 11,000, respectively; 2007: € 21,615,000 and € 580,000, respectively).
Additionally, other directors have life insurance policies whose cost is borne by the Group, the related insured sum being € 3 million at December 31, 2009 (2008 and 2007: € 3 million). Also, payments made in 2009 to board members entitled to post-employment benefits totaled € 2.6 million.
Share-based payments
Pursuant to Spanish law and our By-laws, the decision to grant compensation linked to the Bank’s common shares must be made by the shareholders acting at a general shareholders’ meeting, at the proposal of the board of directors, following receipt of a report from the appointments and remuneration committee. Our policy provides that only executive directors may be beneficiaries of compensation systems consisting of the delivery of shares or rights thereto.

141

Table of Contents

The details of these plans granted to directors (see Note 47 to our financial statements) are as follows:
i) I-06 plan
In 2004, a long-term incentive plan (I-06) was designed which, consists of options on shares of the Bank and is tied to the achievement of two targets which have been achieved. The exercise period was from January 15, 2008 to January 15, 2009. The executive directors are beneficiaries of this plan; the number of Bank share options held by them is indicated below:
Options Options Exercised
at Number Market Remuneration Options Options Date of Date of
December 31, Exercise Options Number of of Shares Exercise Price Allocated at Number of at Exercise Commencement Expiry of
2005, Price Granted Options Acquired Price Applied (Thousands December 31, Options December 31, Price of Exercise Exercise
2006 and 2007 (Euros) Number Exercised (***) (Euros) (Euros) of Euros) 2008 Cancelled 2009 (Euros) Period Period
I-06 plan
Emilio Botín
541,400 9.09 — (541,400 ) 541,400 9.09 12.40 1,780 — — — — — —
Alfredo Sáenz
1,209,100 9.09 — — — — — 1,209,100 (1,209,100 ) — 9.09 01/15/08 01/15/09
Matías R. Inciarte
665,200 9.09 — (332,600 ) 67,901 9.09 14.12 1,661 332,600 (332,600 ) — 9.09 01/15/08 01/15/09
Ana P. Botín (*)
293,692 9.09 — — — — — 293,692 (293,692 ) — 9.09 01/15/08 01/15/09
Francisco Luzón
639,400 9.09 — (300,000 ) 60,656 9.09 14.04 1,473 339,400 (339,400 ) — 9.09 01/15/08 01/15/09
Juan R. Inciarte (**)
419,000 9.09 — (419,000 ) 419,000 9.09 11.72 1,090 — — — — — —
3,767,792 9.09 (1,593,000 ) 6,004 2,174,792 (2,174,792 ) — 9.09
(*)
Approved by Banesto’s shareholders at its annual shareholders’ meeting on February 28, 2006.
(**)
Juan R. Inciarte was appointed as member of the board of directors in 2008. The data on his options for prior dates relate to the options granted to him as an executive prior to his appointment as director.
(***)
Under the three-year I-06 incentive plan (see Note 47 to our consolidated financial statements), each purchase option granted entitles the beneficiary to acquire one Bank share at a price of € 9.09, and the number of shares acquired on the exercise of the options is determined on the basis of the settlement method used, which can be cash for stock or cashless for cash. In the case of cash-for-stock settlements, the number of shares granted as consideration for the payment in cash of the exercise price is equal to the number of options exercised.
As detailed in the foregoing table, the remuneration allocated to executive directors due to the exercise of Banco Santander, S.A. share options under the I-06 incentive plan (see Note 47 to our consolidated financial statements) amounted to € 6,004,000 in 2008. Additionally, the remuneration allocated to Ana P. Botín due to the delivery of Banesto shares under the incentive plan for executives approved by the shareholders at the annual shareholders’ meeting of this entity on February 28, 2006 amounted to € 608,000. The share options under I-06 plan that had not been exercised at December 31, 2008 expired on January 15, 2009.

142

Table of Contents

ii) Performance share plan
This plan, which provides for deferred variable remuneration in shares of the Bank, will involve successive three-year cycles of share deliveries to the beneficiaries, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end.
The table below shows the maximum number of options granted to each executive director in each cycle and the number of shares received under the I-09 plan. As established under this plan, the number of shares received was determined by the degree of achievement of the targets to which the plan was tied, and fell short of the maximum number.
Rights Rights Shares Rights Rights Share
at December Granted Delivered Cancelled at December Grant Delivery
31, 2008 (Number) (Number) (Number) 31, 2009 Date Deadline
I-09 plan:
Emilio Botín
41,785 — (37,937 ) (3,848 ) — 06/23/07 07/31/09
Alfredo Sáenz
110,084 — (99,945 ) (10,139 ) — 06/23/07 07/31/09
Matías R. Inciarte
53,160 — (48,264 ) (4,896 ) — 06/23/07 07/31/09
Ana P. Botín (*)
27,929 — (25,357 ) (2,572 ) — 06/23/07 07/31/09
Francisco Luzón
44,749 — (40,628 ) (4,121 ) — 06/23/07 07/31/09
Juan R. Inciarte (**)
43,322 — (39,332 ) (3,990 ) — 06/23/07 07/31/09
321,029 — (291,463 ) (29,566 ) —
I-10 plan:
Emilio Botín
62,589 — — — 62,589 06/23/07 07/31/10
Alfredo Sáenz
164,894 — — — 164,894 06/23/07 07/31/10
Matías R. Inciarte
79,627 — — — 79,627 06/23/07 07/31/10
Ana P. Botín (*)
41,835 — — — 41,835 06/23/07 07/31/10
Francisco Luzón
67,029 — — — 67,029 06/23/07 07/31/10
Juan R. Inciarte (**)
64,983 — — — 64,983 06/23/07 07/31/10
480,957 — — — 480,957
I-11 plan:
Emilio Botín
68,848 — — — 68,848 06/21/08 07/31/11
Alfredo Sáenz
189,628 — — — 189,628 06/21/08 07/31/11
Matías R. Inciarte
87,590 — — — 87,590 06/21/08 07/31/11
Ana P. Botín (***)
46,855 — — — 46,855 06/21/08 07/31/11
Francisco Luzón
77,083 — — — 77,083 06/21/08 07/31/11
Juan R. Inciarte
50,555 — — — 50,555 06/21/08 07/31/11
520,559 — — — 520,559
I-12 plan:
Emilio Botín
— 82,941 — — 82,941 06/19/09 07/31/12
Alfredo Sáenz
— 228,445 — — 228,445 06/19/09 07/31/12
Matías R. Inciarte
— 105,520 — — 105,520 06/19/09 07/31/12
Ana P. Botín
— 56,447 — — 56,447 06/19/09 07/31/12
Francisco Luzón
— 92,862 — — 92,862 06/19/09 07/31/12
Juan R. Inciarte
— 60,904 — — 60,904 06/19/09 07/31/12
— 627,119 — — 627,119
(*)
Without prejudice to the Banesto shares relating to Ana P. Botín by virtue of the Banesto Share-Based Payment Incentive Plan approved by the shareholders at the annual shareholders’ meeting of Banesto held on June 27, 2007, the maximum number of shares shown in the foregoing table relates to the aforementioned executive director, based on the resolution adopted at the aforementioned annual shareholders’ meeting.

143

Table of Contents

(**)
Juan R. Inciarte was appointed as member of the board of directors in 2008. The data on his options include the options granted to him as an executive prior to his appointment as director.
(***)
Without prejudice to the Banesto shares that might correspond to Ana P. Botín by virtue of the Banesto Share-Based Incentive Plan approved by the shareholders at the annual shareholders’ meeting of Banesto held on February 24, 2010, the maximum number of shares shown in the foregoing table relates to the aforementioned executive director in accordance with the resolution adopted at Banesto’s general shareholders’meeting.
iii) Obligatory investment share plan
Pursuant to the Obligatory investment share plan (see Note 47 to our consolidated financial statements), prior to February 29, 2008, February 28, 2009 and February 28, 2010, the current executive directors acquired as deferred share-based variable remuneration the number of Bank shares shown in the table below, which represented a cost of € 1.5 million in 2008, € 0.8 million in 2009 and € 1.5 million in 2010. Executive directors who hold the shares acquired through the Obligatory investment and remain in the Group’s employ for three years from the date on which the Obligatory investment is made will be entitled to receive the same number of Bank shares as that composing their initial Obligatory investment.
The annual shareholders’ meeting of June 19, 2009 introduced, for the third cycle, an additional requirement to that of remaining in the Bank’s employ, namely, that in the three-year period from the investment in the shares none of the following circumstances may arise: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations (including, in particular, risk regulations) applicable to the executive in question; or (iii) a material restatement of the Bank’s financial statements, except if required pursuant to a change in accounting standards.
3rd Cycle 2nd Cycle 1st Cycle
Executive Directors 2010-2012 2009-2011 2008-2010
Emilio Botín
20,515 19,968 16,306
Alfredo Sáenz
49,000 47,692 37,324
Matías R. Inciarte
25,849 25,159 20,195
Ana P. Botín (*)
18,446 16,956 13,610
Francisco Luzón
28,434 27,675 22,214
Juan R. Inciarte
15,142 14,738 14,617
157,386 152,188 124,266
(*)
In accordance with the resolution adopted by the shareholders at the annual shareholders’ meeting of Banco Santander held on June 23, 2007, the maximum number of shares relating to Ana P. Botín for the 2008-2010 cycle is that shown in the foregoing table, as approved by the annual shareholders’ meeting of Banesto held on June 27, 2007. Also, the maximum number of shares relating to Ana P. Botín for the 2009-2011 and 2010-2012 cycles as beneficiary of this plan is in line with the resolution adopted at the annual shareholders’ meeting of Banco Santander held on June 21, 2008 and by the shareholders at the annual shareholders’ meeting of Banesto held on February 24, 2010.

144

Table of Contents

Description of long term incentive plan, restricted shares plan and share ownership guidelines
Executive directors and the other members of the Bank’s senior management may also participate in the following plans:
1.
Performance shares plan;
2.
Obligatory investment plan with matched deferred bonus in shares or matched deferred bonus plan;
3.
Restricted shares plan; and
4.
Share ownership guidelines.
In addition, the Bank had a long-term incentive plan (I-06 plan) which expired on January 15, 2009.
Under Spanish law and our By-laws, the implementation of the first three plans, as well as the I-06 share option plan, requires specific resolutions of shareholders adopted at general shareholders’ meetings, which, to date, have been the following:
The shareholders acting at the general shareholders meeting of June 18, 2005, authorized a share option plan of the Bank (I-06 plan) tied to certain targets.
At the general shareholders’ meeting of June 23, 2007, the shareholders authorized the first two cycles of the performance shares plan (the I-09 and I-10 plans), the first cycle of the matched deferred bonus plan and the restricted shares plan, in the case of the latter for a 12-month period and up to a maximum of 2,189,004 shares. The maximum amount of all shares to be delivered by application of these programs was fixed at 28,144,334 shares (the 2007 Total Limit).
At the general shareholders’ meeting of June 21, 2008, the shareholders authorized the third cycle of the performance shares plan (the I-11 plan), the second cycle of the matched deferred bonus plan and the restricted shares plan, in the case of the latter for a 12-month period and up to a maximum of 1,900,000 shares. The maximum amount of all shares to be delivered by application of these programs was fixed at 19,960,000 shares (the 2008 Total Limit).
At the general shareholders’ meeting held on June 19, 2009, the shareholders authorized the fourth cycle of the performance shares plan (the I-12 plan), the third cycle of the matched deferred bonus plan and the restricted shares plan, in the case of the latter for a 12-month period and up to a maximum of 2,478,000 shares. The aggregate maximum amount of shares to be delivered pursuant to these programs was fixed at 26,027,580 shares (the 2009 Total Limit).
I-06 Plan
During 2004, a long-term incentive plan (the I-06 plan) for, executive directors, which consisted of options on shares of the Bank and was tied to two targets (increase in the trading price of the Bank’s shares and growth in earnings per share — in both cases above a sampling of comparable banks), was approved at the general shareholders’ meeting of June 18, 2005. The appointments and remuneration committee and the board of directors, at their meetings on March 26, 2007, each took note of compliance with the conditions to which the plan was subject, which gave participants therein the right to exercise options to purchase shares of the Bank during the period between January 15, 2008 and January 15, 2009.
Options not exercised as of January 15, 2009 expired without value and this plan was cancelled at December 31, 2009.

145

Table of Contents

1. Performance shares plan
This is variable remuneration payable in shares and is deferred for three years.
Each year, shares are granted to each participant which vest on a contingent basis based on the achievement of specified targets and compliance within the conditions thereof.
The targets for the first three cycles of this plan (I-09, I-10 and I-11 plans) are tied to the Bank’s total shareholder return and increase in earnings per share as compared to a group of reference banks, although the second metric was eliminated in the fourth cycle (I-12 plan) and changes were subsequently made to the reference group during the successive cycles. Companies which were the target of corporate transactions and the most affected by recapitalization efforts, which distort the comparison, have been removed, and new ones have been included, with the objective of better reflecting the comparable peer group at the moment when the shareholders acting at the general meeting approved each cycle.
At December 31, 2009, there were three cycles in effect, called I-10, I-11 and I-12 plans. The I-09 plan was cancelled at December 31, 2009. The table below describes the changes therein as regards the number of participants and the maximum number of shares to be distributed.
Number of Year Number of Deadline for
shares granted persons Date granted delivery of shares
Plans in effect at December 31, 2009
51,726,420
Of which:
I-10 plan
15,736,843 2007 5,507 June 23, 2007 July 31, 2010
I-11 plan
17,122,650 2008 5,771 June 21, 2008 July 31, 2011
I-12 plan
18,866,927 2009 6,510 June 19, 2009 July 31, 2012
1.1. Second cycle (I-10 plan)
A detailed description of the terms of this cycle (I-10 plan) is contained in our 2008 annual report on Form 20-F.
As of the date of this report, the results of the I-10 plan are known, although the shares have not yet vested. The level of achievement of the set objectives was 90.79%.
The number of shares that each executive director will receive is as follows:
I-10 plan Earned Maximum
Emilio Botín
56,825 62,589
Alfredo Sáenz
149,707 164,894
Matías R. Inciarte
72,293 79,627
Ana P. Botín
37,982 41,835
Francisco Luzón
60,856 67,029
Juan R. Inciarte
58,998 64,983

146

Table of Contents

1.2. Third cycle (I-11 plan)
A detailed description of the terms of this cycle (I-11 plan) is contained our 2008 annual report on Form 20-F.
1.3. Fourth cycle (I-12 plan)
The fourth cycle (I-12 plan) was approved at the annual general meeting of June 19, 2009, upon a proposal made by the board at its meeting of April 28, 2009, after a report of the appointment and remuneration committee of April 27, 2009.
The fourth cycle (I-12 plan) is subject to the following rules:
(i) Beneficiaries: The beneficiaries are the executive directors, other members of senior management and such other managers of Grupo Santander (excluding Banesto) as determined by the board of directors or the executive committee by delegation therefrom. At December 31, 2009, there were a total of 6,510 participants.
(ii) Objectives: The objectives used to determine the number of shares to be distributed are tied to total shareholder return (TSR). TSR is deemed to be the difference (expressed as a percentage) between the final value of an investment in ordinary shares in each of the compared institutions and the initial value of that same investment, taking into account that dividends or other similar items received by the shareholder for such investment during the corresponding period of time will be considered for the calculation of such final value as if they had been invested in more shares of the same kind on the first date that the dividend was due to the shareholders and at the average weighted listing price on such date. The determination of such initial and final values will be calculated based on the listing prices indicated in paragraph (iii) below.
At the end of the cycle, the TSR for Santander and each of the institutions within the group identified below (the Reference Group) will be calculated and listed in decreasing order. The percentage of shares that will vest will be determined based on the following scale and on the relative position of Santander within the Reference Group:
Santander’s position in the Percentage shares earned of
TSR ranking the maximum
1 st to 5 th
100.0%
6 th 82.5%
7 th 65.0%
8 th 47.5%
9 th 30.0%
10 th or lower 0%

147

Table of Contents

The Reference Group comprises the following 16 institutions:
Bank Country
Itaú Unibanco Banco Múltiplo
Brazil
BBVA
Spain
BNP Paribas
France
Credit Suisse
Switzerland
HSBC Holdings
United Kingdom
ING Group
The Netherlands
Intesa Sanpaolo
Italy
JP Morgan Chase & Co.
United States
Mitsubishi UFJ Financial Group
Japan
Nordea Bank
Sweden
Royal Bank of Canada
Canada
Société Générale
France
Standard Chartered
United Kingdom
UBS
Switzerland
UniCredit
Italy
Wells Fargo & Co.
United States
After a report of the appointments and remuneration committee, the board, or the executive committee by delegation therefrom, may adjust the composition of the Reference Group as required in view of unforeseen circumstances affecting the entities initially comprised therein. In such cases of adjustment of the composition of the Reference Group, no shares will vest if Santander falls below the Reference Group median (50 th percentile); the maximum percentage of the shares will vest if Santander falls within the top quartile (including the 25 th percentile) of the Reference Group; a maximum of 30% of the shares will be earned at the median (50 th percentile); and at positions above the 50 th percentile but below the 25 th percentile, the shares earned will be calculated by linear interpolation.
(iii) Duration: The fourth cycle (I-12 plan) will cover the years 2009, 2010 and 2011. The calculation of TSR will be based on the daily average weighted volume of the average weighted listing prices for the fifteen trading sessions prior to April 1, 2009 (exclusive) to calculate the initial value, and the fifteen trading sessions prior to April 1, 2012 (exclusive) to calculate the final value. To receive shares, those qualified must continue to be actively employed by the Group, except in the event of death or disability, through June 30, 2012.
Any distribution of shares will be made on the date established by the board of directors or by the executive committee by delegation therefrom, but not later than July 31, 2012.

148

Table of Contents

The shares will be delivered by the Bank or another Group company, as applicable.
(iv) Maximum number of shares to be distributed to each executive director:
Maximum
Executive directors number of shares
Emilio Botín
82,941
Alfredo Sáenz
228,445
Matías R. Inciarte
105,520
Ana P. Botín
56,447
Francisco Luzón
92,862
Juan R. Inciarte
60,904
The number of shares to which the director Ana P. Botín is entitled as beneficiary under this plan is consistent with the number approved by the shareholders at the general shareholders’ meeting of Banco Santander held on June 19, 2009, and at that of Banesto, held on February 24, 2010.
At its meeting of December 17, 2009, the appointments and remuneration committee reported favorably on the regulations for the fourth cycle of the performance shares plan, which was approved by the executive committee of the Bank on December 21, 2009.
1.4. Fifth cycle (I-13 plan).
The board, pursuant to a proposal of the appointments and remuneration committee, has submitted for the approval of our shareholders at the 2010 annual general meeting a new cycle (I-13 plan), the features of which are similar to those of previous cycles and are summarized below:
(i) Beneficiaries: The beneficiaries are the executive directors, other members of senior management and such other managers of Grupo Santander (excluding Banesto) as determined by the board of directors, or the executive committee by delegation therefrom. The overall number of participants is expected to be approximately 6,500, although the board of directors, or the executive committee by delegation therefrom, may decide to include (by promotion or addition to the Group) or exclude other participants, without changing the maximum overall number of shares that is authorized to be delivered at any time.
(ii) Objectives: The objectives used to determine the number of shares for distribution are tied to Total Shareholder Return (TSR). The determination of such initial and final values will be calculated based on the listing prices indicated in sub-section (iii) below.

149

Table of Contents

At the end of the respective cycle, the TSR for Santander and each of the entities of the group identified below (the Reference Group) will be calculated and will be listed in descending order. The application of the TSR indicator will determine the percentage of shares to vest, based on the following scale and on the relative position of Santander within the Reference Group:
Santander’s position in the Percentage shares earned of
TSR ranking the maximum
1 st to 5 th
100.0%
6 th 82.5%
7 th 65.0%
8 th 47.5%
9 th 30.0%
10 th onwards 0%
The Reference Group will be made up of the following 16 entities:
Bank Country
Itaú Unibanco Banco Múltiplo
Brazil
BBVA
Spain
BNP Paribas
France
Credit Suisse
Switzerland
HSBC Holdings
United Kingdom
ING Group
The Netherlands
Intesa Sanpaolo
Italy
JP Morgan Chase & Co.
United States
Mitsubishi UFJ Financial Group
Japan
Nordea Bank
Sweden
Royal Bank of Canada
Canada
Société Générale
France
Standard Chartered
United Kingdom
UBS
Switzerland
UniCredit
Italy
Wells Fargo & Co.
United States
After a report from the appointments and remuneration committee, the board or the executive committee by delegation therefrom, will have the power to adapt, if appropriate, the composition of the Reference Group in the event of unforeseen circumstances that may affect the entities initially comprised in such Group. In such cases, no shares will be earned if Santander ranks below the mean (50 th percentile) of the Reference Group; the maximum percentage of shares will be earned if Santander is included in the first quartile (including the 25 th percentile) of the Reference Group; 30% of the maximum number of shares will be earned at the mean (50 th percentile); and, for intermediate positions below the 50 th percentile but above the 25 th percentile, it will be calculated by linear interpolation.

150

Table of Contents

(iii) Duration: This fifth cycle will cover 2010, 2011 and 2012. In order to calculate TSR, the average weighted by daily volume of the average weighted listing prices of the fifteen trading sessions immediately preceding (but not including) April 1, 2010 will be taken into account (to calculate the value at the beginning of the period) and that of the fifteen trading sessions immediately preceding (but not including) April 1, 2013 (to calculate the value at the end of the period). To receive shares, those qualified must continue to be actively employed by the Group, except in the event of death or disability, through June 30, 2012. Delivery of the shares, if appropriate, will be made on the date determined by the board of directors, or by the executive committee by delegation therefrom but not later than July 31, 2013.
The shares will be delivered by the Bank or by another company of the Group, as the case may be.
(iv) Maximum number of shares to be delivered to each executive director:
Executive directors Maximum no. of shares
Emilio Botín
82,941
Alfredo Sáenz
228,445
Matías R. Inciarte
105,520
Ana P. Botín
56,447
Francisco Luzón
92,862
Juan R. Inciarte
60,904
Without prejudice to the Banesto shares that might correspond to the director Ana P. Botín under the plans that might be approved at Banesto’s general shareholders’ meeting, the maximum number of shares referred to in the preceding table corresponding to such executive director must be submitted for approval at such meeting.
2. Obligatory investment plan with matched deferred bonus in shares or matched deferred bonus plan
This is variable deferred remuneration payable in shares, which is implemented by means of the mandatory investment by the executive director of 10% of gross variable remuneration in cash (or bonus) for financial years 2007, 2008 and 2009 in shares of the Bank, within the limits approved at the general shareholders’ meetings.
The holding of such shares and continuity of the participant with the Group for a period of three years entitles the participant to receive the same number of shares as that initially purchased on an obligatory basis (one share for each share purchased).
At the annual general meeting of June 19, 2009, an additional requirement to that of continuity was added for the third cycle, which consists of not being involved in any of the following circumstances for a period of three years from the date of investment: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal rules or regulations, particularly those relating to risks; or (iii) material re-statement of the financial statements of the Bank, except when pursuant to a change in accounting standards.
The board, after a report of the appointments and remuneration committee, shall determine: (i) whether the aforementioned circumstances have occurred and, if they have, (ii) their effect on the number of shares to which each beneficiary is entitled, with the power to adjust such number based on the prevailing circumstances.

151

Table of Contents

As of the date of this annual report on Form 20-F, the mandatory investment of each executive director, for each of the first three cycles of this plan, has been as follows:
2009 2008 2007
Executive directors Third Cycle Second Cycle First Cycle
(No. of shares)
Emilio Botín
20,515 19,968 16,306
Alfredo Sáenz
49,000 47,692 37,324
Matías R. Inciarte
25,849 25,159 20,195
Ana P. Botín
18,446 16,956 13,610
Francisco Luzón
28,434 27,675 22,214
Juan R. Inciarte
15,142 14,738 14,617
2.1. First Cycle (2008-2010) of the matched deferred bonus plan
A detailed description of the terms of the first cycle of this plan is contained in our 2008 annual report on Form 20-F.
2.2. Second Cycle (2009-2011) of the matched deferred bonus plan
A detailed description of the terms of the second cycle of this plan is contained in our 2008 annual report on Form 20-F.
2.3. Third cycle (2010-2012) of the matched deferred bonus plan
This cycle was approved at the annual general shareholders’ meeting of June 19, 2009, upon a proposal made by the board of directors at its meeting of April 28, 2009, after a report of the appointments and remuneration committee of April 27, 2009.
The third cycle of this plan is subject to the following rules:
(i) Beneficiaries: At its meeting of February 1, 2010, the executive committee determined, by delegation of the board of directors, the 32 beneficiaries of this plan, who are executive directors and other members of the Bank’s senior management, as well as other executives of Grupo Santander (excluding Banesto).
(ii) Operation: Beneficiaries must use 10% of their gross variable annual remuneration (or bonus) for 2009 to purchase shares of the Bank on the market (the Obligatory Investment). Pursuant to the resolution adopted at the annual general shareholders’ meeting, the Obligatory Investment was made prior to February 28, 2010.
The beneficiaries of the plan will be entitled to receive from the Bank, or from another company within the Group, as the case may be, the same number of Santander shares that they have acquired initially on an obligatory basis, i.e., one share for each share acquired in the Obligatory Investment, provided always that, during a period of three years after the Obligatory Investment is made, the following conditions are met:
a) the shares acquired in the Obligatory Investment continue to be held by the participant;
b) the participant continues with Grupo Santander; and
c) none of the following circumstances occur:
• poor financial performance of the Group;
• breach by the beneficiary of the codes of conduct and other internal regulations (including, specifically, regulations regarding risks) which apply to the manager; or
• material re-statement of the financial statements of the Bank, except where applicable pursuant to changes in accounting regulations.

152

Table of Contents

The board of directors, after a report of the appointments and remuneration committee, shall determine: (i) whether the aforementioned circumstances have occurred and, if they have, (ii) their effect on the number of shares to which each beneficiary is entitled, with the power to adjust such number based on the prevailing circumstances.
(iii) Duration: This third cycle covers the years 2010 through 2012. The Bank will deliver the shares, if applicable, between January 1 and April 1, 2013, on the specific date that is determined by the board, or by the executive committee by delegation therefrom, but in any event within one month of the third anniversary of the Obligatory Investment.
The Obligatory Investment of each executive director has been as follows:
Executive directors No. of shares
Emilio Botín
20,515
Alfredo Sáenz
49,000
Matías R. Inciarte
25,849
Ana P. Botín
18,446
Francisco Luzón
28,434
Juan R. Inciarte
15,142
The number of shares to which the director Ana P. Botín is entitled was approved by the shareholders at the general shareholders’ meeting of Banesto held on February 24, 2010.
Deferred and Conditional Share Plan
At the 2010 annual general shareholders’ meeting, a new cycle of the matched deferred bonus plan was not proposed to our shareholders for approval, although this fact does not affect those cycles already approved. Instead, following a proposal of the appointments and remuneration committee, and in order to maintain and strengthen the deferred variable remuneration mechanisms 2 , the board is seeking the approval of our shareholders at the 2010 annual general shareholders’ meeting for the first cycle of the deferred and conditional share plan ( Plan de acciones de entrega diferida y condicionada ).
This new plan’s purpose is to ensure that part of the variable remuneration or bonus (approved by the board or by the proper body) that, until now, was received entirely in cash by the executive directors, officers or employees of Grupo Santander is deferred for payment in Santander shares over a three-year period, with one-third vesting each year.
The proposed first cycle of the deferred and conditional share plan is subject to the following terms and conditions:
(i) Purpose and beneficiaries: The first cycle of the deferred and conditional share plan shall be applied in relation to the variable remuneration in cash or bonus for financial year 2010 of the executive directors of the Bank and those officers or employees of Grupo Santander whose variable remuneration or annual bonus for 2010 is generally above the gross amount of € 300,000, and consists in the deferral of a portion of said variable remuneration or bonus for a three-year period for its payment, where applicable, in Santander shares, in accordance with the rules set forth below.
2
The new model includes the value of the additional 10% bonus (in shares) to which the directors were entitled under the obligatory investment plan (matched deferred bonus), which disappears.

153

Table of Contents

(ii) Operation: In addition to the beneficiary remaining with Grupo Santander, the accrual of deferred remuneration in the form of shares is conditioned upon none of the following circumstances existing during the three-year period prior to each of the deliveries, in the opinion of the board of directors, and following a review by the appointments and remuneration committee:
a)
poor financial performance of the Group;
b)
breach by the beneficiary of the internal regulations, including in particular those related to risks;
c)
material re-statement of the Bank’s financial statements, except when pursuant to a change in the accounting standards; or
d)
significant changes in financial capital and the qualitative assessment of the risks.
The deferral of the bonus will last for a period of three years and will be paid, where applicable, in three equal parts from the first year on.
The amount to be deferred shall generally be calculated in accordance with the following scale established by the board, based on the gross amount of variable remuneration in cash or annual bonus corresponding to financial year 2010:
Reference bonus
(thousands of euros) % deferred
Less than or equal to 300
0%
More than 300 to 600 (inclusive) 20%
More than 600 to 1,200 (inclusive) 30%
More than 1,200 to 2,400 (inclusive) 40%
More than 2,400 50%
(iii) Maximum number of shares to be delivered: Taking into account that the estimate of the board by virtue of the previous scale of the overall maximum amount to be deferred in shares of the global bonus for executive directors, officers and employees covered by this plan for year 2010 totals € 100 million (the Maximum Amount Distributable in Shares), the maximum number of Santander shares that may be delivered under this cycle of the plan (the Deferred and Conditional Share Plan Limit) will be determined by applying the following formula:
Deferred and Conditional Share Plan Limit =
Maximum Amount Distributable in Shares
Santander Share Price
where Santander Share Price is the daily weighted average weighted volume of the average weighted listing prices for the 15 trading sessions prior to the date on which the board of directors approves the 2010 bonus for executive directors.
The estimate of the maximum amount deferrable in shares for all of the executive directors of the Bank, which amounts to a total of € 10 million (Maximum Amount Distributable in Shares for Executive Directors) is included within the Maximum Amount Distributable in Shares. The maximum number of Santander shares that may be delivered under this cycle of the plan to all of the executive directors (the Executive Directors Share Limit), which in turn comes within the Deferred and Conditional Share Plan Limit, will be determined by applying the following formula:
Executive Directors Share Limit =
Maximum Amount Distributable in Shares for Executive Directors
Santander Share Price
Without prejudice to the Banesto shares that the director Ana P. Botín may be entitled to by virtue of a similar resolution that may be approved at the general shareholders’ meeting of Banesto, the number of shares to which the aforementioned executive director is entitled must be approved by the shareholders at such general shareholders’ meeting.

154

Table of Contents

3. Restricted shares plan
This plan consists of the delivery of shares without charge subject to mandatory continuity with the Group for a period of three to four years. After completion of the required minimum period established in each case, the participant will have the right to receive the shares.
The Bank intends to use this plan selectively as an instrument to retain or hire managers or employees (with the exception of executive directors) of the Bank and other companies of the Group. The board of directors, or the executive committee by delegation therefrom, has the power to decide on the use of this instrument.
The limits authorized at the annual general shareholders’ meetings of June 23, 2007 and June 21, 2008 expired without any share delivery commitment having been assumed.
At December 31, 2009, the authorized limit was 2,478,000 shares as approved at the annual general shareholders’ meeting of June 19, 2009. As of the date of this report on Form 20-F, no delivery commitment has been assumed under such authorization.
The use of such limit must also take into account the 2009 Total Limit mentioned above in this section.
The board, at the proposal of the appointments and remuneration committee, has requested shareholders acting at the 2010 annual general meeting to authorize delivery of Bank shares up to a maximum of 2,500,247 shares to be used selectively as an instrument to retain or hire managers or employees (with the exception of executive directors) of the Bank or of other companies of the Group. A minimum continuity period will be required of each participant of three to four years with the Group. Once the participant completes the minimum period set for each participant, he or she will have the right to delivery of shares.
4. Share ownership guidelines
The Group’s principal executives, including executive directors, must own a specific number of Santander shares on a permanent basis while serving at the Bank.
This obligation currently affects the Group’s 32 highest-ranking executives, including the Bank’s executive directors, and requires that they have invested in a number of Santander shares equivalent to one year’s fixed remuneration, and that they comply with this obligation within a five-year period that began on March 26, 2007.
The table below shows the number of shares that the executive directors of the Bank owned at December 31, 2009, which significantly exceeds the minimum amounts required under the share ownership guidelines:
% of Bank’s
Executive directors Direct Indirect Total share capital
Emilio Botín
8,137,775 40,936,473 49,074,248 0.596 %
Alfredo Sáenz
805,747 1,243,532 2,049,279 0.025 %
Matías R. Inciarte
887,710 82,521 970,231 0.012 %
Ana P. Botín
5,036,774 4,024,136 9,060,910 0.110 %
Francisco Luzón
1,132,264 26,964 1,159,228 0.014 %
Juan R. Inciarte
1,318,267 — 1,318,267 0.016 %
Total
17,318,537 46,313,626 63,632,163 0.773 %
The market value of such shares on the Automated Quotation System (Electronic Market) of the Spanish Stock Exchanges was € 735 million at year-end 2009.

155

Table of Contents

In addition, the members of senior management who are not directors owned a total of 3.9 million shares of Santander stock at December 31, 2009 which was valued at € 45.5 million.
5. Santander UK
The long-term incentive plans on shares of the Bank originally granted by management of Santander UK to its employees (consisting of Santander UK shares) are as follows:
Pounds Date of Date of
sterling (*) commencement expiry
Number Exercise Employee Number of exercise of exercise
of shares price Year granted group of persons period period
Plans outstanding at 01/01/07
10,354,232 4.32
Options exercised
(1,535,325 ) 3.81
Of which:
Executive Options
(33,904 ) 3.96
Sharesave
(1,501,421 ) 3.81
Options cancelled (net) or not exercised
(770,595 ) —
Plans outstanding at 12/31/07
8,048,312 5.34
Options granted (Sharesave)
5,196,807 7.69 2008 Employees 6,556 (**) 01/11/08
01/11/08 		01/11/11
01/11/13
Options exercised
(6,829,255 ) 4.91
Of which:
Executive Options
(132,107 ) 4.11
Sharesave
(4,506,307 ) 3.07
MTIP
(2,190,841 ) 8.73
Options cancelled (net) or not exercised
(262,868 ) 4.87
Of which:
Sharesave
(233,859 ) 4.13
MTIP
(29,009 ) 10.88
Plans outstanding at 12/31/08
6,152,996 7.00
Options granted (Sharesave)
4,527,576 7.26 2009 Employees 7,066 (**) 01/11/09
01/11/09 		01/11/12
01/11/14
Options exercised
(678,453 )
Of which:
Sharesave
(678,453 ) 3.85
Options cancelled (net) or not exercised
(1,277,590 )
Of which:
Sharesave
(1,277,590 ) 7.48
Plans outstanding at 12/31/09
8,724,529
Of which:
Executive Options
12,015 4.54 2003-2004 Managers 2 26/03/06 24/03/13
Sharesave
8,712,514 7.24 2004-2008-2009 Employees 11,919 (**) 01/04/06 01/11/14
(*)
At December 31, 2009, 2008 and 2007 the euro/pound sterling exchange rate was € 1.12600/GBP 1, € 1.04987/GBP 1 and € 1.36360/GBP 1, respectively.
(**)
Number of accounts/contracts. A single employee may have more than one account/contract. On September 30, 2008, 4,493 contracts were delivered with an execution date three years thereafter and 2,063 contracts with an execution date five years thereafter. The date of commencement of all these contracts is November 1, 2008.

156

Table of Contents

In 2005, the Group designed a Medium-Term Incentive Plan (MTIP) involving the delivery of Bank shares to Santander UK executives. Under the plan, effective allocation of the shares in 2008 was tied to the achievement of business targets by Santander UK (in terms of net profit and income). This plan was approved by the shareholders at the general shareholders’ meeting on June 17, 2006. Subsequently, it was considered necessary to amend the conditions of the plan in order to reflect the impact of the sale of Santander UK’s life insurance business to Resolution on the income targets of Santander UK for 2007. The board of directors, after obtaining a favorable report from the appointments and remuneration committee, submitted this amendment for ratification by the shareholders at the general shareholders’ meeting held on June 23, 2007. The amendment was approved thereat. In the first half of 2008, all the shares under this plan were delivered, and the plan was cancelled on June 30, 2008.
In 2008, the Group launched a voluntary savings scheme for Santander UK employees (Sharesave Scheme) whereby employees who join the scheme will have between GBP 5 and GBP 250 deducted from their net monthly pay over a period of three or five years. When this period has ended, the employees may use the amount saved to exercise options on shares of the Bank at an exercise price calculated by reducing by up to 20% the average purchase and sale prices of the Bank shares in the first three trading days of September 2008. This scheme, which commenced in September 2009, was approved at the general shareholders’ meeting held on June 21, 2008 and is authorized by the UK tax authorities (HMRC). At the general shareholders’ meeting on June 19, 2009, the shareholders approved a new plan with similar features to the plan approved in 2008.
C. Board practices
Date of expiration of the current term of office of the directors and the period during which the directors have served in that office:
The period during which the directors have served in their office is shown in the table under Section A of this Item 6.
The date of expiration of the current term of office is shown in the table below:
Date of
Name expiration (1)
Emilio Botín
1 st half 2013
Fernando de Asúa
1 st half 2011
Alfredo Sáenz
1 st half 2011
Matías R. Inciarte
1 st half 2014
Manuel Soto
1 st half 2014
Assicurazioni Generali, S.p.A
1 st half 2012
Antonio Basagoiti
1 st half 2012
Ana P. Botín
1 st half 2011
Javier Botín
1 st half 2010
Lord Burns
1 st half 2011
Guillermo de la Dehesa
1 st half 2014
Rodrigo Echenique
1 st half 2011
Antonio Escámez
1 st half 2012
Francisco Luzón
1 st half 2012
Abel Matutes
1 st half 2014
Juan R. Inciarte
1 st half 2013
Luis Ángel Rojo
1 st half 2013
Luis Alberto Salazar-Simpson
1 st half 2013
Isabel Tocino
1 st half 2011
(1)
Pursuant to the provisions of our By-laws, one-fifth of the board will be renewed every year, based on length of service and according to the date and order of their respective appointments.

157

Table of Contents

The principal terms and conditions of the contracts entered into by the Bank with its executive directors are as follows:
(i) Exclusivity and non-competition
Executive directors may not enter into other service contracts with other companies or entities, unless express prior authorization is obtained from the board of directors. In addition, executive director’s contracts contain non-compete provisions, which prohibit executive directors from providing services to companies engaged in activities of a nature similar to that of the Bank or the consolidated Group.
(ii) Code of conduct
Executive directors are required to strictly observe the provisions contained in the Rules and Regulations of the Board. They also must observe the provisions of Grupo Santander’s General Code of Conduct and the Code of Conduct in the Securities Market, specifically with respect to rules of confidentiality, professional ethics and conflicts of interest.
(iii) Remuneration
The remuneration for undertaking their executive responsibilities is compatible with the joint participation in the year’s profits (annual retainer and attendance fees) to which directors are entitled, as it is expressly stated by the By-laws and the Rules and Regulations of the Board.
a. Fixed remuneration of executive directors
The Group’s remuneration policy has been characterized by the development of long-term professional careers, for which reason a conservative remunerative mix has been applied in which the fixed remuneration represents a significant proportion of total remuneration.
The fixed remuneration received by the executive directors during the last three fiscal years was as follows:
Change
Thousands of euros 2009 (%) 2008 2007
Emilio Botín
1,344 3.0 % 1,305 1,187
Alfredo Sáenz
3,703 3.0 % 3,595 3,126
Matías R. Inciarte
1,710 3.0 % 1,661 1,510
Ana P. Botín
1,294 2.0 % 1,269 1,133
Francisco Luzón
1,505 3.0 % 1,461 1,271
Juan R. Inciarte(*)
987 3.0 % 958 —
Total
10,543 2.9 % 10,249 8,227
(*)
Juan R. Inciarte was appointed as a director in 2008 and as such his 2007 information is not included.
b. Variable remuneration of executive directors
The variable remuneration for financial year 2009 had a cash component and another deferred component made up entirely of shares:
i) The variable remuneration in cash (or bonus) for executive directors was set taking into account compliance with the targets for operating profit before tax and the quality of the results obtained. The latter is assessed with respect to the recurrence thereof (eliminating special or extraordinary transactions), the appropriate management of risk, and the efficient consumption of capital.

158

Table of Contents

ii) Variable deferred remuneration in shares is implemented through a performance shares plan (plan de acciones vinculado a objetivos) and an obligatory investment plan with matched deferred bonus in shares (plan de acciones vinculado a inversión obligatoria) , both of which are described above. The deferral is for three years and is linked to the creation of value for the shareholders, as accrual thereof is subject to meeting measurable financial targets and to compliance with other conditions during the effective period of the plans.
Under the Spanish law and our By-laws, the decision to grant remuneration linked to the Bank’s shares must be made by the shareholders acting at a general shareholders’ meeting, at the proposal of the board of directors, following receipt of a report from the appointments and remuneration committee. The Group’s policy provides that only executive directors may be beneficiaries of remuneration systems consisting of the delivery of shares or rights thereto.
The board approved the proposal of the appointments and remuneration committee to maintain variable remuneration in cash (or bonus) in 2009 for all executive directors at the same amounts accrued thereby for the prior financial year.
Set forth below is an individual breakdown of the changes therein during the last three financial years.
Change
Thousands of euros 2009 (%) 2008 2007
Emilio Botín
1,987 0.0 % 1,987 2,337
Alfredo Sáenz
4,745 0.0 % 4,745 5,582
Matías R. Inciarte
2,503 0.0 % 2,503 2,945
Ana P. Botín
1,786 0.0 % 1,786 1,985
Francisco Luzón
2,753 0.0 % 2,753 3,239
Juan R. Inciarte (1)
1,466 0.0 % 1,466 —
Total
15,240 0.0 % 15,240 16,088
(1)
Juan R. Inciarte was appointed as a director in 2008 and as such his 2007 information is not included.
c. Pension rights
Executive directors are entitled to receive a pension supplement upon retirement or early retirement, which the Bank may cause to be externally funded.
The Bank may request the early retirement of executive directors, provided that they are over 50 years of age and have more than 10 years’ service with the Bank and/or other companies of the Group. Executive directors may also request early retirement themselves if they are over 55 years of age and have 10 years’ service with the Bank and/or other companies of the Group. Notice of the decision to retire or to take early retirement must in any event be given 60 days in advance.
Pension rights are also recognized in the event of incapacity, and in case of death of the executive director, in favor of the spouse (widow benefits) and children (orphan benefits).
Generally, the amount of the pension supplement consists of the amount necessary to reach an annual gross amount equal to 100% of the fixed salary received by the director at the time the director actually ceased working, plus 30% of the average of the last three variable remuneration amounts received. In certain cases, if early retirement occurs at the request of the director, the amount resulting from the application of the method described above would be reduced by percentages ranging from 20% to 4%, depending on the age of the director at the time of early retirement.
For further details, see “B. Compensation — Compensation to the board members as representatives of the Bank and to Senior Management — Pension commitments, other insurance and other items”.

159

Table of Contents

(iv) Termination
The Bank’s executive directors have indefinite-term employment contracts.
Executive directors whose contracts are terminated voluntarily or due to breach of duties are not entitled to receive any economic compensation. If the contracts are terminated for reasons attributable to the Bank or due to certain objective circumstances (such as those affecting the executive directors’ functional and organic statute), the directors will be entitled, at the date of termination of their employment relationships with the Bank, to the following:
•
In the cases of Emilio Botín and Alfredo Sáenz, on proceeding to retired status, to receive the amounts corresponding to accrued pension ( € 24.6 million and € 85.7 million, respectively), in the form of capital, with no additional amount accruing by way of pension in the future, after the exercising by each of the directors of the consolidation option referred to under “B. Compensation — Compensation to the board members as representatives of the Bank and to Senior Management — Pension commitments, other insurance and other items”.
If termination of the contract with Alfredo Sáenz had occurred in 2009, he could have chosen to proceed to retired status or to receive a severance compensation equivalent to 40% of his annual fixed salary, multiplied by the number of years of his service at the Bank, up to a maximum of 10 times his annual fixed salary. However, Alfredo Sáenz has waived his right to receive such severance compensation.
•
In the cases of Matías R. Inciarte and Francisco Luzón, to take early retirement and to accrue pension supplements which, as of December 31, 2009, would amount to € 2,507,000 for Matías R. Inciarte and € 2,701,000 for Francisco Luzón.
•
In the case of Ana P. Botín, to receive a termination benefit amounting to five years’ annual fixed salary at the date of termination, which, as of December 31, 2009, would amount to € 6,472,000. In the event of termination attributable to the Bank, Ana P. Botín may opt to take early retirement and accrue an annual retainer. At December 31, 2009, this retainer would amount to € 1,841,000 per year. The two alternatives are mutually exclusive and, therefore, if Ana P. Botín were to opt to receive the termination benefit she would not receive any retainer.
•
In the case of Juan R. Inciarte, to receive a termination benefit amounting to five years’ annual fixed salary at the date of termination, which, as of December 31, 2009, would amount to € 4,936,000. In the event of termination attributable to the Bank, Juan R. Inciarte may opt to take early retirement and accrue an annual retainer. At December 31, 2009, this retainer would amount to € 869,000 per year. The two alternatives are mutually exclusive and, therefore, if Juan R. Inciarte were to opt to receive the termination benefit he would not receive any retainer.
In the event of Matías R. Inciarte, Francisco Luzón, Ana P. Botín or Juan R. Inciarte proceeding to pre-retired or retired status, they would be entitled to choose between receiving their accrued pensions (or amounts equivalent thereto) in the form of income or capital (i.e. as a lump sum consideration) in whole but not in part. Such right is independent of the option to which they are entitled, beginning from the age of 60 years (see “B. Compensation — Compensation to the board members as representatives of the Bank and to Senior Management — Pension commitments, other insurance and other items”).
(v) Insurance
The Bank provides to its executive directors life insurance, the premium for which is included in the column Other remuneration in the table of page 138 above, accident insurance, whose coverage varies in each cases on the basis of the policy set by the Bank for its senior executives, and a reimbursement healthcare insurance.

160

Table of Contents

(vi) Confidentiality and return of documents
The contracts contain confidentiality agreements, which cover the periods during and after the termination of the employment relationship.
(vii) Other conditions
The contracts provide for the following advance notice periods for termination of the executive officers’ position by the Bank or resignation by the executive officer.
Date of current contract By decision of the By decision of the
Advance notice period (month/day/year)(*) Bank (months) director (months)
Emilio Botín
04/29/2009 (** ) (** )
Alfredo Sáenz
04/29/2009 4 4
Matías R. Inciarte
04/29/2009 4 4
Ana P. Botín
04/29/2009 4 4
Francisco Luzón
04/29/2009 6 4
Juan R. Inciarte
04/29/2009 4 4
(*)
The board at its December 21, 2009 meeting authorized an amendment to the contracts with the executive directors Matías R. Inciarte, Ana P. Botín, Francisco Luzón and Juan R. Inciarte.
(**)
It is not contractually established.
Audit and compliance committee and appointments and remuneration committee
An audit and compliance committee as well as an appointments and remuneration committee operate as part of the board of directors. The audit and compliance committee consists exclusively of 5 external directors (all of whom are independent in accordance with the principles set forth in Article 6.2(c) of the Rules and Regulations of the Board). The appointments and remuneration committee consists of 5 external directors (all of whom are independent in accordance with the principles set forth in Article 6.2(c) of the Rules and Regulations of the Board). These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE.
The audit and compliance committee
The audit and compliance committee was created to provide support and specialization for the tasks of controlling and reviewing the Bank’s accounts and compliance function. Its mission, which has been defined and approved by the board, is established in the By-laws and in the Rules and Regulations of the Board.
Only non-executive directors can be members of this committee with independent directors (as defined in the Rules and Regulations of the Board) having a majority representation. Its chairman must always be an independent director (as defined in the Rules and Regulations of the Board) and someone who has the necessary knowledge and experience in matters of accounting, auditing or risk management. Currently, the chairman of the audit and compliance committee is Luis Ángel Rojo.
The members of the audit and compliance committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitude and experience in the areas of accounting, auditing or risk management.
Functions of the audit and compliance committee :
a) Have its chairman and/or secretary report to the general shareholders’ meeting with respect to matters raised therein by shareholders regarding its powers.

161

Table of Contents

b) Propose the appointment of the auditor, as well as the conditions in which such auditor will be hired, the scope of its professional duties and, if applicable, the revocation or non-renewal of its appointment. The committee shall favor the Group’s auditor also assuming responsibility for auditing the companies which comprise the Group.
c) Review the accounts of the Company and the Group, monitor compliance with legal requirements and the proper application of generally accepted accounting principles, and report on the proposals for alterations to the accounting principles and standards suggested by management.
d) Supervise the Bank’s internal audit services, and particularly:
(i) Propose the selection, appointment and withdrawal of the party responsible for internal audit;
(ii) Review the annual working plan for internal audit and the annual activities report;
(iii) Ensure the independence and effectiveness of the internal audit function;
(iv) Propose the budget for this service;
(v) Receive periodic information regarding the activities thereof; and
(vi) Verify that senior management takes into account the conclusions and recommendations of its reports.
e) Know the process for gathering financial information and the internal control systems. In particular, the audit and compliance committee shall:
(i) Supervise the process of preparing, and the integrity of, the financial information relating to the Company and the Group, reviewing compliance with regulatory requirements, the proper demarcation of group consolidation and the correct application of accounting standards; and
(ii) Periodically review the systems for the internal monitoring and management of risks, so that the principal risks are identified, managed and properly disclosed.
f) Report on, review and supervise the risk control policy established in accordance with the provisions of the Rules and Regulations of the Board.
g) Serve as a channel of communication between the board and the auditor, assess the results of each audit and the response of the management team to its recommendations, and act as a mediator in the event of disagreement between the board and the auditor regarding the principles and standards to be applied in the preparation of the financial statements. Specifically, it shall endeavor to ensure that the statements ultimately drawn up by the board are submitted to the general shareholders’ meeting without any qualifications or reservations in the auditor’s report.
h) Supervise the fulfillment of the audit contract, endeavoring to ensure that the opinion on the annual financial statements and the main contents of the auditor’s report are set forth in a clear and accurate fashion.
i) Ensure the independence of the auditor, by taking notice of those circumstances or issues that might risk such independence and any others related to the development of the auditing procedure, as well as receive information and maintain such communication with the auditor as is provided for in legislation regarding the auditing of financial statements and in technical auditing regulations. And, specifically, verify the percentage represented by the fees paid for any and all reasons of the total income of the audit firm, and the length of service of the partner who leads the audit team in the provision of such services to the Company. The annual report shall set forth the fees paid to the audit firm, including information relating to fees paid for professional services other than audit work. Furthermore, the committee shall ensure that the Company publicly communicates a change of auditor and accompanies such communication with a declaration regarding the possible existence of disagreements with the outgoing auditor and, if any, regarding the content thereof and, in the event of the resignation of the auditor, the committee shall examine the circumstances leading to such resignation.

162

Table of Contents

j) Report to the board, in advance of its adoption of the corresponding decisions, regarding:
(i) The financial information that the Company must periodically make public, ensuring that such information is prepared in accordance with the same principles and practices applicable to the annual financial statements.
(ii) The creation or acquisition of equity interests in special purpose entities or entities domiciled in countries or territories that are considered to be tax havens.
k) Supervise the observance of the code of conduct of the Group in the securities markets, the manuals and procedures for the prevention of money laundering and, in general, the rules of governance and compliance in effect in the Company, and make such proposals as are deemed necessary for the improvement thereof. In particular, the committee shall have the duty to receive information and, if applicable, issue a report on disciplinary penalties to be imposed upon members of the senior management.
l) Review compliance with such courses of action and measures as result from reports issued or inspection proceedings carried out by administrative authorities having functions of supervision and control.
m) Know and, if applicable, respond to the initiatives, suggestions or complaints put forward or raised by the shareholders regarding the area of authority of this committee and which are submitted to it by the office of the general secretary of the Company. The committee shall also:
(i) Receive, deal with and keep a record of the complaints received by the Bank on matters related to the process of gathering financial information, auditing and internal controls.
(ii) Receive on a confidential and anonymous basis communications from Group employees who express their concern on possible questionable practices in the areas of accounting or auditing.
n) Report on any proposed amendments to the Rules and Regulations of the Board prior to the approval thereof by the board of directors.
o) Evaluate, at least once a year, the committee’s operation and the quality of its work.
p) And the others specifically provided for in the Rules and Regulations of the Board.
The Group’s 2009 audit and compliance committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Committees report”.
The following are the current members of the audit and compliance committee:
Name Position
Luis Ángel Rojo
Chairman
Fernando de Asúa
Member
Manuel Soto
Member
Abel Matutes
Member
Luis Alberto Salazar-Simpson
Member
Ignacio Benjumea also acts as secretary to the audit and compliance committee but is classified as a non-member.

163

Table of Contents

The appointments and remuneration committee:
The Rules and Regulations of the Board state that the members of this committee must all be non-executive directors with independent directors (as defined in the Rules and Regulations of the Board) having a majority representation including an independent director as chairman (as defined in the Rules and Regulations of the Board).
Currently, the chairman of the appointments and remuneration committee is Fernando de Asúa, the first vice chairman of the board of directors.
The members of the appointments and remuneration committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitudes and experience and the goals of the committee.
Functions of the appointments and remuneration committee:
a) Establish and review the standards to be followed in order to determine the composition of the board and select those persons who will be proposed for election to serve as directors. In particular, the appointments and remuneration committee:
(i) Shall evaluate the competencies, knowledge and experience required of the director;
(ii) Shall specify the duties and the aptitudes needed of the candidates to fill each vacancy, evaluating the time and dedication needed for them to properly carry out their commitments; and
(iii) Shall receive for consideration the proposals of potential candidates to fill vacancies that might be made by the directors.
b) Prepare the proposals for appointment, re-election and ratification of directors provided for the Rules and Regulations of the Board, as well as the proposals for appointment of the members of each of the committees of the board of directors. Likewise, it shall prepare, the proposals for the appointment of positions on the board of directors and its committees.
c) Annually verify the classification of each director (as executive, proprietary, independent or other) for the purpose of their confirmation or review at the ordinary general meeting and in the annual corporate governance report.
d) Report on proposals for appointment or withdrawal of the secretary of the board, prior to submission thereof to the board.
e) Report on appointments and withdrawals of the members of senior management.
f) Propose to the board:
(i) The policy for compensation of directors and the corresponding report.
(ii) The policy for compensation of the members of senior management.
(iii) The individual compensation of the directors.
(iv) The individual compensation of the executive directors and, if applicable, external directors, for the performance of duties other than those of a mere director, and other terms of their contracts.
(v) The basic terms of the contracts and compensation of the members of senior management.
(vi) The remuneration of those other officers who, though not members of senior management, receive significant compensation, particularly variable compensation and whose activities may have a significant impact on the assumption of risk by the Group.

164

Table of Contents

g) Ensure compliance with the policy established by the Company for compensation of the directors and the members of senior management.
h) Periodically review the compensation programs, assessing the appropriateness and yield thereof and endeavoring to ensure that the compensation of directors shall conform to standards of moderation and correspond to the earnings of the Company.
i) Ensure the transparency of such compensation and the inclusion in the annual report and in the annual corporate governance report of information regarding the compensation of directors and, for such purposes, submit to the board any and all information that may be appropriate.
j) Ensure compliance by the directors with the duties prescribed the Rules and Regulations of the Board, prepare the reports provided for therein and receive information, and, if applicable, prepare a report on the measures to be adopted with respect to the directors in the event of non-compliance with the above mentioned duties or with the Code of Conduct of the Group in the Securities Markets.
k) Examine the information sent by the directors regarding their other professional obligations and assess whether such obligations might interfere with the dedication required of directors for the effective performance of their work.
l) Evaluate, at least once a year, its operation and the quality of its work.
m) Report on the process of evaluation of the committee and of the members thereof.
n) And others specifically provided for in the Rules and Regulations of the Board.
The Group’s 2009 appointments and remuneration committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Committees report”.
The following are the members of the appointments and remuneration committee:
Name Position
Fernando de Asúa
Chairman
Manuel Soto
Member
Guillermo de la Dehesa
Member
Rodrigo Echenique
Member
Luis Ángel Rojo
Member
Ignacio Benjumea also acts as secretary to the appointments and remuneration committee but is classified as a non-member.
D. Employees
As of December 31, 2009, we had 169,460 employees (as compared to 170,961 in 2008 and 131,819 employees in 2007) of which 35,076 were employed in Spain (as compared to 36,376 in 2008 and 36,558 in 2007) and 134,384 were employed outside Spain (as compared to 134,585 in 2008 and 95,261 in 2007). The terms and conditions of employment in the non-government-owned banks in Spain are negotiated on an industry-wide basis with the trade unions. This process has historically produced collective agreements binding upon all the private banks and their employees. A new agreement was signed on June 21, 2007 which will expire on December 31, 2010. The terms and conditions of employment in many of our subsidiaries outside Spain (including in Argentina, Portugal, Italy, Uruguay, Puerto Rico, Colombia, Chile, Mexico, Germany, the UK, Brazil and Poland) are negotiated either directly or indirectly (on an industry-wide basis) with the trade unions.

165

Table of Contents

The table below shows our employees by geographic area:
Number of employees
2009 2008 2007
SPAIN
35,076 36,376 36,558
LATIN AMERICA
84,976 95,375 64,899
Argentina
5,753 6,313 6,621
Brazil
50,904 53,198 21,876
Chile
11,850 12,081 13,025
Colombia
1,304 1,415 1,312
Mexico
12,509 13,924 14,053
Peru
47 52 43
Puerto Rico
1,796 1,885 2,227
Uruguay
757 847 302
Venezuela
56 5,659 5,439
EUROPE
37,871 36,778 28,060
Austria
467 — —
Czech Republic
166 205 195
Germany
2,852 2,431 1,846
Belgium
13 12 12
Finland
89 28 29
France
32 51 32
Greece
19 21 20
Hungary
47 84 90
Ireland
7 7 4
Italy
931 879 798
Luxembourg
3 3 —
Norway
385 361 330
Poland
867 852 638
Portugal
6,522 6,839 6,759
Russia
85 — —
Slovakia
— — 10
Switzerland
178 198 203
The Netherlands
423 289 51
United Kingdom
24,785 24,518 17,043
USA
11,355 2,051 1,978
ASIA
103 82 17
Hong Kong
72 75 13
China
23 — —
Japan
5 5 4
Others
3 2 —
OTHERS
79 299 307
Bahamas
56 55 56
Others
23 244 251
Total
169,460 170,961 131,819
In those cases where an employee is working from one country but is technically employed by a Group company located in a different country, we designate that employee as working from his/her country of residence.

166

Table of Contents

The table below shows our employees by type of business:
Number of employees
2009 2008 2007
Retail Banking
163,184 165,244 126,119
Asset Management and Insurance
1,558 1,435 1,585
Global Wholesale Banking
2,898 2,572 2,589
Corporate Activities
1,820 1,710 1,526
Total
169,460 170,961 131,819
As of December 31, 2009, we had 1,577 temporary employees (as compared to 1,814 as of December 31, 2008 and 1,754 as of December 31, 2007). In 2009, the average number of temporary employees working for the Group was 1,694 employees.
E. Share ownership
As of May 28, 2010, the direct, indirect and represented holdings of our current directors were as follows:
Direct Indirect stake and % of
Directors Stake represented Total shares Capital stock
Emilio Botín (1)
8,158,290 149,942,027 158,100,317 2.146 %
Fernando de Asúa
59,604 50,000 109,604 0.001 %
Alfredo Sáenz
854,747 1,243,532 2,098,279 0.025 %
Matías R. Inciarte (3)
913,559 160,657 1,074,216 0.013 %
Manuel Soto
60,659 360,109 420,768 0.005 %
Assicurazioni Generali S.p.A
1,072,277 92,690,958 93,763,235 1.139 %
Antonio Basagoiti
704,400 — 704,400 0.009 %
Ana P. Botín (1)
5,055,220 4,024,136 9,079,356 0.000 %
Javier Botín (1)(2)
4,793,481 4,652,747 9,446,228 0.000 %
Lord Burns (Terence)
30,101 27,001 57,102 0.001 %
Guillermo de la Dehesa
101 — 101 0.000 %
Rodrigo Echenique
658,758 9,280 668,038 0.008 %
Antonio Escámez
757,593 — 757,593 0.009 %
Francisco Luzón
1,171,933 39,864 1,211,797 0.015 %
Abel Matutes
123,388 2,590,104 2,713,492 0.033 %
Juan R. Inciarte
1,333,409 — 1,333,409 0.016 %
Luis Ángel Rojo
1 — 1 0.000 %
Luis Alberto Salazar-Simpson
250,000 5,641 255,641 0.003 %
Isabel Tocino
36,394 — 36,394 0.000 %
26,033,915 255,796,056 281,829,971 3.516 %
(1)
Emilio Botín has attributed the right of vote in a general shareholders’ meeting of 91,866,035 shares (1.12% of the capital stock) held by the Marcelino Botín Foundation, of 8,096,742 shares held by Jaime Botín, of 9,042,777 shares held by Emilio Botín O., of 9,079,356 shares held by Ana P. Botín and of 9,446,228 shares held by Javier Botín. This table shows the direct and indirect shareholding of the two latter who are directors, but in the column showing the percentage of capital stock, these shareholdings are presented together with those that belong or are also represented by Emilio Botín.
(2)
Javier Botín is a proprietary non-executive director as he represents in the board of directors a 2.146% of the Bank’s capital stock which corresponds to the holdings of the Marcelino Botín Foundation, Emilio Botín, Ana P. Botín, Emilio Botín O., Jaime Botín, Paloma O’Shea and his own.
(3)
Matías R. Inciarte has the right to vote 78,136 shares owned by two of his children.

167

Table of Contents

Santander’s capital is comprised of only one class of shares, all of which are ordinary and have the same rights.
As of May 28, 2010 our current executive officers (not directors) referred to above under Section A of this Item 6 as a group beneficially owned, directly or indirectly, 4,286,803 ordinary shares, or 0.05% of our issued and outstanding share capital as of that date. Together with the options granted, no individual executive officer beneficially owns, directly or indirectly, one percent or more of the outstanding share capital as of that date.
Item 7. Major Shareholders and Related Party Transactions
A. Major shareholders
As of December 31, 2009, to our knowledge no person beneficially owned, directly or indirectly, 5% or more of our shares.
At December 31, 2009 a total of 1,214,210,311 shares, or 14.76% of our share capital, were held by 1,045 registered holders with registered addresses in the United States and Puerto Rico, including JPMorgan Chase, as depositary of our American Depositary Share Program. These ADS’s were held by 20,712 record holders. Since certain of such shares and ADSs are held by nominees, the foregoing figures are not representative of the number of beneficial holders. Our directors and executive officers did not own any ADSs as of December 31, 2009.
To our knowledge, we are not controlled directly or indirectly, by any other corporation, government or any other natural or legal person. We do not know of any arrangements which would result in a change in our control.
Shareholders’ agreements
The Bank was informed in February 2006 of an agreement among certain shareholders. The agreement was also communicated to the CNMV, following the filing of the agreement both with the CNMV and in the Mercantile Registry of Cantabria.
The agreement was entered into by Emilio Botín, Ana P. Botín, Emilio Botín O., Javier Botín, Simancas, S.A., Puente San Miguel, S.A., Puentepumar, S.L., Latimer Inversiones, S.L. and Cronje, S.L. Unipersonal and relates to the shares of the Bank held by them or those over which they have voting rights.
Under this agreement and through the establishment of restrictions on the free transferability of their shares and the regulation of the exercise of the voting rights inherent in them, these shareholders have agreed to act in a coordinated manner, in order to develop a common, lasting and stable policy and an effective and unified presence and representation in the Bank’s governing bodies.
The agreement comprises a total of 44,396,513 shares of the Bank (0.540% of its share capital at the end of the year 2009). In addition, and in accordance with the first clause of the shareholders’ agreement, the agreement will be extended only in terms of the exercising of voting rights to other shares of the Bank that are subsequently held, directly or indirectly, by the signatories or those over which they have voting rights. As a result, as of December 31, 2009, another 32,227,650 shares (0.392% of the Bank’s share capital at the end of the year 2009) are also included in the syndicate of shareholders.
The chairman of the syndicate of shareholders is the person who is at any time the chairman of the Marcelino Botín Foundation, which is currently Emilio Botín.
Members of the syndicate are obliged to group together the voting rights and other political rights inherent in the syndicated shares, so that the exercising of such rights and, in general, the conduct of the members of the syndicate before the Bank, is done in a coordinated and unified fashion. For such purpose, the representation of such shares is attributed to the chairman of the syndicate as the common representative of the members of the syndicate.
Except for the transfers made to other members of the syndicate or the Marcelino Botín Foundation, the prior authorization of the syndicate is required before any proposed transfer of shares and it can freely authorize or deny any such proposed transfer.

168

Table of Contents

B. Related party transactions
Loans made to members of our board of directors and to our executive officers
The Group’s direct risk exposure to the Bank’s directors and the guarantees provided for them are detailed below.
Thousands of Euros
2009 2008 2007
Loans Loans Loans
and and and
Credits Guarantees Total Credits Guarantees Total Credits Guarantees Total
Alfredo Sáenz
16 — 16 25 — 25 6 — 6
Matías R. Inciarte
7 10 17 20 10 30 18 10 28
Manuel Soto
— — — 5 — 5 4 — 4
Antonio Basagoiti
47 1 48 66 1 67 94 1 95
Ana P. Botín
3 — 3 5 — 5 — — —
Javier Botín
2 — 2 — — — — — —
Rodrigo Echenique
9 — 9 12 — 12 7 — 7
Antonio Escámez
1,488 — 1,488 1,474 — 1,474 309 — 309
Francisco Luzón
5,004 — 5,004 1,649 — 1,649 722 — 722
Juan R. Inciarte
421 — 421 465 — 465 — — —
Luis Alberto Salazar-Simpson
434 — 434 461 — 461 — — —
Isabel Tocino
40 — 40 49 — 49 — — —
7,471 11 7,482 4,231 11 4,242 1,160 11 1,171
Additionally, the total amount of loans and credits made by us to our executive officers who are not directors, as of December 31, 2009, amounted to € 24 million (see Note 53 to our consolidated financial statements).
Loans extended to related parties were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectibility or present other unfavorable features.
Loans made to other Related Parties
The companies of the Group engage, on a regular and routine basis, in a number of customary transactions among Group members, including:
•
overnight call deposits;
•
foreign exchange purchases and sales;
•
derivative transactions, such as forward purchases and sales;
•
money market fund transfers;
•
letters of credit for imports and exports;
and others within the scope of the ordinary course of the banking business, such as loans and other banking services to our shareholders, to employees of all levels, and the associates and the members of the families of all these persons, as well as those other businesses conducted by the companies of the Group. All these transactions are made:
•
in the ordinary course of business;
•
on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other persons; and
•
did not involve more than the normal risk of collectibility or other unfavorable features.

169

Table of Contents

As of December 31, 2009 our loans and credits to associated and jointly controlled entities, amounted to € 149 million. Those loans and credits represented 0.02% of our total net loans and credits and 0.2% of our total stockholders’ equity as of December 31, 2009.
For more information, see Notes 3 and 53 to our consolidated financial statements.
C. Interests of experts and counsel
Not Applicable.
Item 8. Financial Information
A. Consolidated statements and other financial information
Financial Statements
See Item 18 for our consolidated financial statements.
(a) Index to consolidated financial statements of Santander
Page
Report of Deloitte, S.L.
F-1
Consolidated Balance Sheets as of December 31, 2009, 2008 and 2007
F-2
Consolidated Income Statements for the Years Ended December 31, 2009, 2008 and 2007
F-3
Consolidated Statements of Recognized Income and Expense for the Years Ended December 31, 2009, 2008 and 2007
F-4
Consolidated Statements of Changes in Total Equity for the Years Ended December 31, 2009, 2008 and 2007
F-5
Consolidated Statement of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
F-8
Notes to the Consolidated Financial Statements
F-9
Legal Proceedings
i. Tax disputes
As of the date hereof, the main tax disputes concerning the Group are as follows:
•
The “Mandados de Segurança” filed by Banco Santander Brasil, S.A. and other Group companies in Brazil challenging the increase in the rate of Brazilian Social Contribution tax on net income from 9% to 15% stipulated by Interim Measure 413/2008, ratified by Law 11,727/2008.
•
The “Mandados de Segurança” filed by Group companies in Brazil claiming their right to pay the Brazilian Social Contribution tax on net income at a rate of 8%.
•
The “Mandados de Segurança” filed by Banco Santander, S.A. and other Group entities claiming their right to pay the Brazilian PIS and COFINS Social Contributions only on the income from the provision of services. In the case of Banco Santander, S.A., the “Mandado de Segurança” was declared unwarranted and an appeal was filed at the Federal Regional Court. On September 13, 2007, the Federal Regional Court found in favor of Banco Santander, S.A. The Brazilian authorities have filed an appeal against this judgment at a higher court. In the case of Banco ABN AMRO Real, S.A., on March 9, 2007 the court found in its favor although the Brazilian authorities have also filed an appeal against this judgment at a higher court. On September 29, 2009 a resolution was issued whereby it partially admitted the appeal.

170

Table of Contents

•
Real Leasing S.A. Arrendamiento Mercantil and Banco ABN AMRO Real S.A. have filed various administrative and legal claims in connection with the deductibility of the provision for doubtful debts for 1995.
•
Banco Santander Brasil, S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against various municipalities that demand payment of the Service Tax on certain items of income from transactions not classified as provisions of services.
•
In November 2009 Banco Santander Brasil, S.A. and certain of its subsidiaries availed themselves of the program for the deferral and payment in cash of tax and Social Security debts established in Law 11,941/2009. The main processes included in this program, which were reported in prior years, refer to litigation related to: (i) the right to consider the Social Contribution tax on net income as deductible in the calculation of Brazilian Legal Entities Income Tax, (ii) the right to pay the Brazilian Social Contribution tax on net income at a rate of 8%, and (iii) the deductibility for Income tax purposes of the depreciation and amortization expense in the same period as that in which lease Income is recognized in finance lease companies. The participation in this program entails payment of the disputed amounts and the discontinuance before the end of February 2010 of the related court proceedings.
•
A claim was filed against Abbey National Treasury Services plc by tax authorities abroad in relation to the refund of certain tax credits and other associated amounts. The legal advisers of Abbey National Treasury Services plc considered that the grounds to contest this claim were well-founded, proof of which is that a favorable judgment was handed down at first instance in September 2006, although the judgment was appealed against by the tax authorities in January 2007. However, in December 2006 an unfavorable judgment for another taxpayer was handed down on another proceeding which might affect this case.
•
Legal action filed by Sovereign Bancorp Inc. claiming entitlement to an international double taxation tax credit in connection with taxes paid outside of the United States in fiscal years 2003 to 2005 in relation to financial transactions carried out with an international bank.
ii. Legal litigation
As of the date hereof, the principal legal litigation proceeding concerning the Group is as follows:
•
Misselling: claims associated with the sale by Abbey of certain financial products to its customers.
The provisions recorded by Abbey in this respect were calculated on the basis of the best estimate of the number of claims that will be received, of the percentage of claims that will be upheld and of the related amounts.
•
LANETRO, S.A.: claim (Ordinary Lawsuit no. 558/2002) filed by LANETRO, S.A. against Banco Santander, S.A. at Madrid Court of First Instance no. 34, requesting that the Bank comply with the obligation to subscribe to € 30.05 million of a capital increase of the complainant.
On December 16, 2003, a judgment was handed down dismissing the plaintiff’s request. The subsequent appeal filed by LANETRO was upheld by a decision of the Madrid Provincial Appellate Court on October 27, 2006. On March 30, 2010, the Spanish Supreme Court dismissed the extraordinary appeal on the grounds of procedural infringements, and partially admitted the appeal in cassation, which were both filed by the Bank against the decision of the Madrid Provincial Appellate Court.
•
Ordinary proceedings filed by Galesa de Promociones, S.A., against the Bank, at Elche Court of First Instance no. 5, Alicante (Ordinary Lawsuit no. 1946/2008). The claim sought damages amounting to € 51,396,971.43 as a result of a judgment handed down by the Supreme Court on November 24, 2004 setting aside a summary mortgage proceeding filed by the Bank against the complainant company, which concluded in the foreclosure by the Bank of the mortgaged properties and their subsequent sale by the Bank to third-party buyers. The judgment of the Supreme Court ordered the reversal of the court foreclosure proceeding prior to the date on which the auctions were held, a circumstance impossible to comply with due to the sale by the Bank of the properties to the aforementioned third parties, which therefore prevented the reincorporation of the properties into the debtor company’s assets and their re-auction.

171

Table of Contents

The damages claimed are broken down as follows: (i) € 18,428,076.43 relating to the value of the property auctioned; (ii) € 32,608,895 relating to the loss of profit on the properties lost by the complainant, which was prevented from continuing its business activity as a property developer; and (iii) € 360,000 relating to the loss of rental income.
On October 31, 2008, a summons to respond to and oppose the claim was served on the Bank, which responded to the complainant’s requests on a timely basis and, at the same time, filed a counterclaim against Galesa de Promociones, S.A. for the amount owed to the Bank, basing its calculation on the difference between the value of the properties and the amount of the loan.
Galesa de Promociones, S.A. replied to the counterclaim on January 12, 2009 and the preliminary hearings took place on April 7, 2009 and September 30, 2009.
On March 2, 2010, the Court of First Instance handed down a judgment partially upholding both the claim and the counterclaim, ordering the Bank to pay the claimant an amount of € 4,458,960.61, and Galesa Promociones, S.A. to pay the Bank an amount of € 1,428,075.70, giving rise to a total loss of € 3,030,874.91 for the Bank. Appeals have been prepared by Galesa and the Bank. The Bank filed its appeal on May 31, 2010.
•
Declaratory large claims action brought at Madrid Court of First Instance no. 19 (Ordinary Lawsuit no. 87/2001) in connection with a claim filed by Inversión Hogar, S.A. against the Bank. This claim sought the termination of a settlement agreement entered into between the Bank and the complainant on December 11, 1992.
On May 19, 2006, a judgment was handed down at first instance, whereby the agreement was declared to be terminated and the Bank was ordered to pay € 1.8 million, plus the related legal interest since February 1997, to return a property that was given in payment under the aforementioned agreement, to pay an additional € 72.9 million relating to the replacement value of the assets foreclosed, and subsequently sold, by the Bank, and to pay all the related court costs. The Bank and Inversión Hogar, S.A. filed appeals against the judgment.
On July 30, 2007, the Madrid Provincial Appellate Court handed down a decision upholding in full the appeal filed by the Bank, reversing the judgment issued at first instance and dismissing the appeal filed by Inversión Hogar, S.A. On completion of the clarification procedure, as it had announced previously, Inversión Hogar, S.A. filed a cassation appeal against the aforementioned decision and an extraordinary appeal on the grounds of procedural infringements at the Civil Division of the Supreme Court, which issued an order on December 1, 2009 admitting for consideration the appeals filed by Inversión Hogar, S.A. and its subsidiaries, with a summons to the Bank to present the related notice of opposition to these appeals, which was carried out on January 21, 2010.
•
Claim in an ordinary proceeding filed by Inés Arias Domínguez and a further 17 persons against Santander Investment, S.A. at Madrid Court of First Instance no. 13 (Ordinary Lawsuit no. 928/2007), seeking damages of approximately € 43 million, plus interest and costs. The complainants, who are former shareholders of Yesocentro, S.A. (Yesos y Prefabricados del Centro, S.A.), allege that Santander Investment, S.A. breached the advisory services agreement entered into on October 19, 1989 between the former Banco Santander de Negocios, S.A. and the complainants, the purpose of which was the sale of shares owned by the complainants to another company called Invercámara, S.A.
This claim was duly contested by Santander Investment, S.A. on November 5, 2007. The preliminary hearing was set for April 28, 2008 although it was subsequently postponed until the application for a resolution on a preliminary civil issue filed by the Bank was resolved.

172

Table of Contents

In the order issued by Madrid Court of First Instance no. 13 on September 11, 2008, the proceedings were stayed due to a preliminary civil issue. The complainants appealed the decision and the Bank responded to and opposed the complainant’s appeal on December 16, 2008.
In a decision issued by the Madrid Provincial Appellate Court on March 24, 2010 the plaintiffs’ appeal was dismissed, maintaining the stay of proceedings on the basis of the civil preliminary ruling until a ruling is issued in the proceeding filed by other shareholders of Yesocentro (Mr. Siro Díaz Díaz and his wife), filed at the Madrid Court of First Instance nº 47 (Ordinary Lawsuit no. 1051/2004).
•
On February 6, 2008, Banco Santander, S.A. filed a request for arbitration with the Secretary of the Spanish Arbitration Court against Gaesco Bolsa, Sociedad de Valores, S.A., in respect of the claim for € 66,418,077.27 that the latter owes Banco Santander, S.A. as a result of the early termination of the financial transaction framework agreement entered into with Banco Santander, S.A. and of the financial transactions performed under the agreement. In the same proceedings Gaesco filed a counterclaim against the Bank. On May 12, 2009, an arbitral award was issued upholding all the claims of Banco Santander, S.A. and dismissing the counterclaim filed by Gaesco. Gaesco has filed for the annulment of the arbitral award at the Madrid Provincial Appellate Court.
Additionally, Mobilaria Monesa, S.L. (parent of the former Gaesco) has filed a claim against Banco Santander, S.A. at Santander Court of First Instance no. 5, on the same grounds as previously mentioned, and which were resolved in arbitration, a circumstance that has been brought to the Court’s attention in the notice of opposition thereto prepared by the Bank .
•
Former Banco do Estado de São Paulo S.A. — “Banespa” — employees: a claim was filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s bylaws in the event that the entity obtained a profit and that the distribution of this profit, in the form of bonus, were approved by the board of directors. The bonus was not paid in 1994 and 1995 since the bank did not make a profit and partial payments were made from 1996 to 2000 in variable percentages as agreed by the board of directors, and the aforementioned clause was eliminated from the bylaws in 2001. After the Regional Labor Court ordered Banco Santander Banespa, S.A. (currently Banco Santander (Brasil), S.A.) to pay the half-yearly bonus in September 2005, the Bank filed an appeal at the High Labor Court which handed down a decision on June 25, 2008, ordering the Bank to pay the half-yearly bonus from 1996 onwards for a maximum amount equivalent to the share in the profits. Appeals against this decision were filed at the High Labor Court and at the Federal Supreme Court, and are currently in process.
•
Padrão Comércio e Incorporacão de Imóveis Ltda: Claim for BRL 87 million against Banco Santander Brasil, S.A. for purported wrongful charges made by its predecessor, Banco do Estado de São Paulo, S.A. (Banespa), since the opening of a current account in the city of Recife in 1994 to 1996. In 2006, the Pernambuco Court of Justice handed down a decision at first instance against Banespa for not having submitted all the relevant documentation. Banespa then filed an appeal, dismissed in 2009, in which a new expert’s report was requested and additional documentation was provided which evidenced that at least a portion of the funds under dispute were used by the complainant. Banco Santander Brasil requested clarification of this decision and a decision has yet to be handed down. Subsequently, Banco Santander Brasil intends to appeal to the High Court.
•
The bankruptcy of various Lehman Group companies was made public on September 15, 2008. Various customers of Santander Group were affected by this situation since they had invested in securities issued by Lehman or in other products which had such assets as their underlying security.
On November 12, 2008, the Group announced the implementation of a solution (which was of a strictly commercial, exceptional nature and did not imply any admission of misselling) for holders of one of the products sold -Seguro Banif Estructurado- issued by the insurance company Axa Aurora Vida, which had as its underlying security a bond issued and guaranteed by Lehman. The solution involved replacing the Lehman issuer risk with the issuer risk of Grupo Santander subsidiaries. The exchange period ended on December 23, 2008. As a result of the exchange, at 2008 year-end a loss was recognized under “Gains/losses on financial assets and liabilities (net)” in the consolidated income statement for the difference of € 46 million ( € 33 million after tax) between the fair value of the bonds received and the bonds delivered in the exchange.

173

Table of Contents

In February 2009, the Group offered a similar solution to other customers affected by the Lehman bankruptcy. The cost of this transaction, before tax, was € 143 million ( € 100 million after tax), which were recognized under “Gains/losses on financial assets and liabilities (net)” in the consolidated income statement for 2008.
At the date of this report on Form 20-F, certain lawsuits against the Group have been filed in relation to this matter. The Bank’s directors and its legal advisers consider that the various Lehman products were sold in accordance with the applicable legal regulations in force at the time of each sale or subscription and that the fact that the Group acted as intermediary would not give rise to any liability in relation to the insolvency of Lehman. Accordingly, it has not been necessary to recognize any liability in this connection in the consolidated financial statements for 2009.
•
The investigation by the US Securities and Exchange Commission (“SEC”) into the alleged fraud of Bernard L. Madoff Investment Securities LLC (“Madoff Securities”) took place in December 2008. The exposure of customers of the Group through the subfund Optimal Strategic US Equity (Optimal Strategic) was € 2,330 million, of which € 2,010 million related to institutional investors and international private banking customers, and the remaining € 320 million were in the investment portfolios of the Group’s private banking customers in Spain.
On January 27, 2009, the Group announced its decision to offer a solution to those of its private banking customers who had invested in Optimal Strategic and had been affected by the alleged fraud. This solution, which was applied to the principal amount invested, net of redemptions, totaled € 1,380 million. It consisted of a replacement of assets whereby the private banking customers could exchange their investments in Optimal Strategic for preference shares ( participaciones preferentes ) to be issued by the Group for the aforementioned amount of € 1,380 million, with an annual coupon of 2% and a call option that can be exercised by the issuer in year ten. At December 31, 2008, the Group determined that these events should be classified as “adjusting events after the reporting period”, as defined in IAS 10.3, since they provided evidence of conditions that existed at the end of the reporting period and, accordingly, in accordance with IAS 37.14, it recognized the pre-tax cost of this transaction for the Group ( € 500 million or € 350 million after tax) under Gains/losses on financial assets and liabilities (net) in the consolidated income statement for 2008.
The Group believes it has at all times exercised due diligence in the management of its customers’ investments in the Optimal Strategic fund. These products have always been sold in a transparent way pursuant to applicable legislation and established Group procedures and, accordingly, the decision to offer a solution was taken in view of the exceptional circumstances attaching to this case and based on solely commercial reasons, due to the interest the Group has in maintaining its business relationship with these customers.
At the date of this report on Form 20-F, certain lawsuits have been filed against the Group in relation to this matter in various different jurisdictions, including a class action lawsuit in the United States. The claims have been initiated by investors with investments with exposure to Madoff Securities, including holders of shares in Optimal Strategic, holders of financial structured products whose value and profitability were linked to the evolution of some Optimal funds (among them, Optimal Strategic) and holders of life insurance products which had as its underlying security a bond whose value and profitability was linked to the evolution of Optimal funds (among them, Optimal Strategic). All these proceedings are ongoing.
On March 18, 2009, the Group issued the preference shares earmarked for the replacement of assets offered to the private banking customers affected by the fraud perpetrated by Madoff Securities and those affected by the Lehman bankruptcy who were not able to participate in the exchange made on December 23, 2008 (referred to above). The preference shares have been listed on the London Stock Exchange since March 23, 2009. The level of acceptance of the exchange proposal is close to 97%.

174

Table of Contents

On May 26, 2009, two funds managed by Optimal Investment Services, S.A. a subsidiary indirectly owned by Banco Santander, S.A., announced that they had entered into an agreement with Irving H. Picard, the court-appointed Trustee for the liquidation of Madoff Securities. Under the agreement, the Trustee will allow the funds’ claims in the liquidation proceeding and reduce his clawback demands on the funds by the amounts withdrawn by the latter from Madoff Securities, in the 90 days prior to bankruptcy, which American legislation allows him to claim, in exchange for the partial payment of those demands by the funds. The funds are Optimal Strategic U.S. Equity Limited and Optimal Arbitrage Limited. These are the only Optimal funds that had accounts at Madoff Securities.
Pursuant to the agreement, the funds’ claims against Madoff Securities were allowed in their full amounts, calculated on a cash-in, cash-out basis, of $ 1,540,141,277.60 and $ 9,807,768.40, respectively, and the funds were entitled to Securities Investor Protection Corporation advances of $ 500,000 each. The funds have paid 85% of the clawback claims asserted by the Trustee. The payments totaled $ 129,057,094.60 for Optimal Strategic and $ 106,323,953.40 for Arbitrage.
The funds agreed not to file any other claims against Madoff Securities’ estate. The agreement also contains an “equal treatment” provision, so that if the Trustee settled similar clawback claims for less than 85%, the funds would receive a rebate of a portion of their payments to equalize the percentages applied to the funds with respect to other comparable investors.
The agreement followed the Trustee’s investigation of Optimal and its affiliates’ conduct in dealing with Madoff Securities, including a review of Optimal and its affiliates’ documents relating to their due diligence, in which the Trustee concluded that their conduct does not provide grounds to assert any claim against the Optimal companies or any entity of Santander Group (other than the clawback claims described above, which did not arise from any inappropriate conduct by the funds).
The agreement contains releases of all clawback and other claims the Trustee may have against the funds for any matters arising out of the funds’ investments with Madoff Securities. The Trustee’s release applies to all potential claims against other Optimal companies, Santander Group companies and their investors, directors, officers and employees who agree to release the Trustee and the Madoff Securities estate, to the extent the claims arose out of the funds’ dealings with Madoff Securities. It also releases both funds from potential clawback liability for any other withdrawals made by them.
The agreement between the Trustee and the aforementioned Optimal funds was approved by the United States Bankruptcy Court of the Southern District of New York on June 16, 2009.
Madoff Securities is currently in liquidation in accordance with the Securities Investor Protection Act of 1970 in the United States Bankruptcy Court of the Southern District of New York. Bernard L. Madoff, the chief executive of Madoff Securities, has pleaded guilty to perpetrating what was probably the largest pyramid fraud in history and has been sentenced to 150 years imprisonment.
Disposition of previously reported litigation
Following is a description of the developments in 2009 in relation to three claims arising from the absorption of Banco Santander Noroeste S.A. — “Banco Noroeste” by Banco Santander Brasil, S.A.:
•
Three claims filed by minority shareholders of Banco Noroeste requesting, in addition to compensation for damage and losses, the annulment of the general shareholders’ meeting that approved the merger between Banco Noroeste and Banco Santander Brasil, S.A., arguing that when the merger took place Banco Noroeste shareholders should have been offered a market value that would have enabled them to decide whether or not to sell their shares at that value.

175

Table of Contents

In the three cases, judgments were handed down at first instance, one of which found in favor of Banco Santander Brasil, S.A. and the other two against it. In the latter two cases the general shareholders’ meeting was not declared null and void but rather Banco Santander Brasil, S.A. was ordered to pay compensation. Appeals were filed against these judgments by Banco Santander Brasil, S.A.
The São Paulo Court of Justice recently handed down a joint judgment on the three appeals at second instance, finding that Banco Santander Brasil, S.A. should have duly prepared a valuation report using the disposal value method, thereby concluding that the minority shareholders be indemnified.
In the case of the shareholders that sold their shares, the Court indicated that they should receive the difference between the value at which they sold their shares (equity value) and market value (calculated as the disposal value) at that time, plus interest. In the case of the shareholders that did not sell, the Court considered that they should receive the market value at that time plus interest, less the present value of their shares. Unlike the judgments handed down at first instance, lost profits and damages were excluded and the amount of lawyers’ fees was reduced. Banco Santander Brasil plans to file appeals against this judgment at higher courts.
In August 2009, an agreement was reached with the minority shareholders of the former Banco Noroeste by virtue of which Banco Santander (Brasil) S.A. made a payment of BRL 106 million as compensation for damages related to the absorption of Banco Noroeste by Banco Santander (Brasil) S.A. Such compensation included the repurchase from the shareholders of the shares of Banco Santander (Brasil) S.A. that they held and payment of all other expenses. Based on the agreement, the minority shareholders accepted the annulment of all actions against Banco Santander (Brasil) S.A. and agreed not to file any further claims for the same reasons.
Other Litigation
In addition to the matters described above, the Bank and its subsidiaries 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 the Group’s lending activities, relationships with the Group’s 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 early stages of discovery, the Bank cannot state with confidence what the eventual outcome of these pending matters will be, what the timing of the ultimate resolution of these matters will be or what the eventual loss, fines or penalties related to each pending matter may be. The Bank believes that it has made adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings and believes that liabilities related to such claims and proceedings should not have, in the aggregate, a material adverse effect on the Group’s business, financial condition, or results of operations. However, 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 the Bank; as a result, the outcome of a particular matter may be material to the Bank’s operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and the level of the Bank’s income for that period.

176

Table of Contents

Dividend Policy
We have normally paid an annual dividend in quarterly installments. The table below sets forth the historical per share and per ADS (each of which represents the right to receive one of our shares) amounts of interim and total dividends in respect of each fiscal year indicated.
Euro per Share Interim Dollars per ADS Interim
First Second Third Fourth Total First Second Third Fourth Total
2004
0.0830 0.0830 0.0830 0.0842 0.3332 0.08484 0.08971 0.09175 0.09191 0.35821
2005
0.09296 0.09296 0.09296 0.13762 0.4165 0.09591 0.09466 0.09523 0.147016 0.432816
2006
0.106904 0.106904 0.106904 0.199913 0.5206 0.11582 0.11593 0.11400 0.222418 0.568168
2007
0.122940 0.122940 0.122940 0.281961 0.650781 0.137526 0.145308 0.149199 0.355829 0.787862
2008
0.135234 0.135234 0.122940 0.257373 0.650781 0.172148 0.137700 0.126043 0.266604 0.702495
2009
0.135234 0.12 0.12294 0.221826 0.60 0.156275 0.142827 0.136266 0.239545 0.674913
The board of directors has submitted for approval of our shareholders acting at the 2010 annual general meeting the proposal of distribution of profits earned by the Bank during 2009, which amount up to € 4,151 million, as follows:
•
Distribution of dividends already paid prior to the general shareholders’ meeting ( € 3,939.9 million) and acquisition of free-of-charge allotment rights, with a waiver of the exercise, of those shareholders who chose to receive cash remuneration, equivalent to the second interim dividend ( € 182.0 million) under the Santander Scrip Dividend program.
•
€ 29 million to voluntary reserves.
In addition, a further € 797 million were allocated to the remuneration of shareholders under the Santander Scrip Dividend program approved by the shareholders at the annual general meeting held on June 19, 2009, whereby the Bank offered shareholders the possibility to opt to receive an amount equivalent to the second interim dividend out of 2009 profit in cash or new shares. The other three interim dividends were paid in cash. For these purposes, the executive committee of Banco Santander, at its meeting held on October 13, 2009, resolved to carry out a capital increase with a charge to voluntary reserves as approved by the shareholders at the annual general meeting of June 19, 2009.
For a discussion of regulatory and legal restrictions on our payments of dividends, see “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Restrictions on Dividends”.
For a discussion of Spanish taxation of dividends, see “Item 10. Additional Information—E. Taxation—Spanish tax considerations—Taxation of dividends”.

177

Table of Contents

The dividends paid on the guaranteed non-cumulative preference stock of certain of our subsidiaries are limited by our Distributable Profits in the fiscal year preceding a dividend payment. “Distributable Profits” with respect to any year means our reported net profits after tax and extraordinary items for such year as derived from the Parent Bank’s non-consolidated audited profit and loss account prepared in accordance with Bank of Spain requirements and guidelines in effect at the time of such preparation. Such requirements and guidelines may be expected to reflect the Bank of Spain regulatory policies applicable to us, including without limitation those relating to the maintenance of minimum levels of capital. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Capital Adequacy Requirements” and “—Restrictions on Dividends”. According to our interpretation of the relevant Bank of Spain requirements and guidelines, Distributable Profits during the preceding five years were:
Year Ended December 31,
IFRS-IASB
2005 2006 2007 2008 2009
(in thousands of euros)
2,605,009
3,256,190 4,070,247 4,826,218 4,150,813
The portion of our net income attributable to our subsidiaries has increased steadily in recent years as our subsidiaries have grown and we have acquired new subsidiaries. Such profits are available to us only in the form of dividends from our subsidiaries and we are dependent to a certain extent upon such dividends in order to have Distributable Profits sufficient to allow payment of dividends on our guaranteed preferred stock of our subsidiaries as well as dividends on our shares (although the payment of dividends on the shares is limited in the event of the non-payment of preference share dividends). We generally control a sufficient proportion of our consolidated subsidiaries’ voting capital to enable us to require such subsidiaries to pay dividends to the extent permitted under the applicable law. As a result of our growth, the Bank, as the holding entity of the shares of our various companies, has added investments in our subsidiaries, the financial costs of which are borne by us.
B. Significant Changes
For significant changes that have occurred since December 31, 2009, see our Form 6-K relating to our first quarter 2010 results filed with the Securities and Exchange Commission on May 3, 2010.

178

Table of Contents

Item 9. The Offer and Listing
A. Offer and listing details
Market Price and Volume Information
Santander’s Shares
During 2009, our shares were the shares with the highest trading volume on the Spanish stock exchanges. At December 31, 2009, our shares represented 22.30% of the IBEX 35 Stock Exchange Index, the highest percentage among all Spanish issuers represented in this index. Our market capitalization of € 95,043 million at 2009 year-end was the largest of any Spanish company, according to information published by the Sociedad de Bolsas, S.A. (“Sociedad de Bolsas”).
At December 31, 2009, we had 3,062,633 registered holders of our shares and, as of such date, a total of 1,214,210,311 of our shares or 14.76% were held by 1,045 registered holders with registered addresses in the United States and Puerto Rico, including JP Morgan Chase, as depositary of our American Depositary Share program.
Our shares are traded on Spain’s automated “continuous market”, the national, centralized market which integrates by computer quotations originating in the four Spanish stock exchanges (Madrid, Barcelona, Valencia and Bilbao) (the “Automated Quotation Systems”). Our shares are also listed on the New York (in the form of American Depositary Shares), London, Milan, Lisbon, Buenos Aires and Mexico Stock Exchanges. At December 31, 2009, 67.62% of our shares were held of record by non-residents of Spain.

179

Table of Contents

The table below sets forth the high, low and last daily sales prices in euros for our shares on the continuous market for the periods indicated.
Euros per Share
High Low Last
2005 Annual
11.18 8.92 11.15
2006 Annual
14.37 10.54 14.14
2007 Annual
15.00 12.56 14.79
2008 Annual
14.59 5.11 6.75
First Quarter
14.59 11.17 12.62
Second Quarter
14.22 11.67 11.67
Third Quarter
12.48 9.95 10.50
Fourth Quarter
11.69 5.11 6.75
2009 Annual
11.96 4.00 11.55
First Quarter
7.24 4.00 5.19
Second Quarter
8.60 5.39 8.56
Third Quarter
11.22 8.12 11.00
Fourth Quarter
11.96 10.42 11.55
Last six months
2009
December
11.96 11.17 11.55
2010
January
11.98 10.03 10.30
February
10.62 9.24 9.55
March
10.48 9.66 9.84
April
10.79 9.10 9.55
May
9.50 7.71 8.33
June (through June 4, 2010)
8.20 7.55 7.55
On June 4, 2010, the reported last sale price of our shares on the continuous market was € 7.55.
American Depositary Shares (ADSs)
Our ADSs have been listed and traded on the New York Stock Exchange since July 30, 1987. Each ADS represents one of our shares and is evidenced by an American Depositary Receipt, or ADR. The deposit agreement, pursuant to which ADRs have been issued, is among us, JP Morgan Chase, as depositary, and the holders from time to time of ADRs. At December 31, 2009, a total of 242,347,903 of our ADSs were held by 20,712 registered holders. Since certain of such of our shares and our ADSs are held by nominees, the number of record holders may not be representative of the number of beneficial owners.

180

Table of Contents

The table below sets forth the reported high, low and last sale prices for our ADSs on the New York Stock Exchange for the periods indicated.
Dollars Per ADS
High Low Last
2005 Annual
13.27 11.37 13.19
2006 Annual
18.73 13.16 18.66
2007 Annual
22.14 17.29 21.54
2008 Annual
22.24 6.06 9.49
First Quarter
21.35 16.52 19.94
Second Quarter
22.24 18.19 18.19
Third Quarter
19.25 13.91 15.02
Fourth Quarter
16.44 6.06 9.49
2009 Annual
17.83 4.90 16.44
First Quarter
9.86 4.90 6.90
Second Quarter
12.17 7.15 12.10
Third Quarter
16.50 11.34 16.15
Fourth Quarter
17.83 15.22 16.44
Last six months
2009
December
17.70 16.05 16.44
2010
January
17.50 14.02 14.08
February
14.96 12.65 13.04
March
14.30 12.99 13.27
April
14.77 11.99 12.34
May
12.22 9.83 10.15
June (through June 4, 2010)
10.03 8.92 8.92
On June 4, 2010, the reported last sale price of our ADSs on the New York Stock Exchange was $8.92.
B. Plan of distribution
Not Applicable.
C. Markets
General
Spanish Securities Market
The Spanish securities market for equity securities (the “Spanish Stock Exchanges”) consists of four stock exchanges located in Madrid, Barcelona, Bilbao and Valencia (the “local exchanges”). The majority of the transactions conducted on them are done through the Automated Quotation System ( Sistema Interbancario Bursátil Español or “ S.I.B.E. ”). During the year ended December 31, 2009, the Automated Quotation System accounted for the majority of the total trading volume of equity securities on the Spanish Stock Exchanges.

181

Table of Contents

Automated Quotation System
The Automated Quotation System was introduced in 1989 and links the four local exchanges, providing those securities listed on it with a uniform continuous market that eliminates most of the differences among the local exchanges. The principal feature of the system is the computerized matching of buy and sell orders at the time of entry of the order. Each order is executed as soon as a matching order is entered, but can be modified or canceled until executed. The activity of the market can be continuously monitored by investors and brokers. The Automated Quotation System is operated and regulated by the Sociedad de Bolsas, a corporation owned by the companies that manage the local exchanges. All trades on the Automated Quotation System must be placed through a bank, brokerage firm, an official stock broker or a dealer firm member of a Spanish stock exchange directly.
There is a pre-opening session held from 8:30 a.m. to 9:00 a.m. each trading day on which orders are placed at that time. The computerized trading hours are from 9:00 a.m. to 5:30 p.m. Each session will end with a 5 minute auction, between 5:30 and 5:35 p.m., with a random closedown of 30 seconds. The price resulting from each auction will be the closing price of the session.
From May 14, 2001, new rules came into effect regarding the maximum price fluctuations in the price of stocks. Under the new rules, each stock in the continuous market is assigned a static and a dynamic range within which the price of stocks can fluctuate. The price of a stock may rise or fall by its static range (which is published once a month and is calculated according to the stock’s average historic price volatility) above or below its opening price (which shall be the closing price of the previous session). When the stock trades outside of this range, the trading of the stock is suspended for 5 minutes, during which an auction takes place. After this auction, the price of the stock can once again rise or fall by its static range above or below its last auction price (which will be considered as the new static price before triggering another auction). Furthermore, the price of a stock cannot rise or fall by more than its dynamic price range (which is fixed and published once a month and is calculated according to the stock’s average intra-day volatility), from the last price at which it has traded. If the price variation exceeds the stock’s dynamic range a five minute auction is triggered.
Moreover, there is a block market ( el mercado de bloques ) allowing for block trades between buyers and sellers from 9:00 a.m. to 5:30 p.m. during the trading session. Under certain conditions, this market allows cross-transactions of trades at prices different from prevailing market prices. Trading in the block market is subject to certain limits with regard to price deviations and volumes.
Between 5:30 p.m. and 8:00 p.m., trades may occur outside the computerized matching system without prior authorization of the Sociedad de Bolsas, at a price within the range of 5% above the higher of the average price and closing price for the day and 5% below the lower of the average price and closing price for the day, if there are no outstanding bids or offers, as the case may be, on the system matching or bettering the terms of the proposed off-system transaction, and if the trade involves more than € 300,000 and more than 20% of the average daily trading volume of the stock during the preceding quarter. At any time before 8:00 p.m., trades may take place (with the prior authorization of the Sociedad de Bolsas) at any price if:
• the trade involves more than € 1.5 million and more than 40% of average daily trading volume of the stock during the preceding quarter;
• relates to a merger or spin-off of a listed company;
• relates to the reorganization of a business group;
• the transaction is executed for the purposes of settling litigation;
• involves certain types of contracts or complex transactions; or
• the Sociedad de Bolsas finds other justifiable cause.

182

Table of Contents

Information with respect to computerized trades between 9:00 a.m. and 5:30 p.m. is made public immediately, and information with respect to trades outside the computerized matching system is reported to the Sociedad de Bolsas and published in the Boletín de Cotización and in the computer system by the next trading day.
Clearance and Settlement System
Until April 1, 2003, transactions carried out on the regional Spanish stock exchanges and the continuous market were cleared and settled through the Servicio de Compensación y Liquidación de Valores, S.A. (the “SCL”). Since April 1, 2003, the settlement and clearance of all trades on the Spanish stock exchanges, the Public Debt Market (Mercado de Deuda Pública), the AIAF Fixed Income Market ( Mercado AIAF de Renta Fija ) and Latibex — the Latin American stock exchange denominated in euros, are made through the Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A. (“Iberclear”), which was formed as a result of a merger between SCL and Central de Anotaciones del Mercado de Deuda Pública (CADE), which was managed by the Bank of Spain.
Book-Entry System
Ownership of shares listed on any Spanish stock exchange is required to be represented by entries in a register maintained by Iberclear, and transfers or changes in ownership are effected by entries in such register. The securities register system is structured in two levels: the central registry managed by Iberclear which keeps the securities balances of the participants, and a detailed registry managed by the participants where securities are listed by holder’s name.
Securities Market Legislation
The Spanish Securities Markets Act, which came into effect in 1989, among other things:
•
established an independent regulatory authority, the CNMV, to supervise the securities markets;
•
established a framework for the regulation of trading practices, tender offers and insider trading;
•
required stock exchange members to be corporate entities;
•
required companies listed on a Spanish stock exchange to file annual audited financial statements and to make public quarterly financial information;
•
established a framework for integrating quotations on the four Spanish stock exchanges by computer;
•
exempted the sale of securities from transfer and value added taxes;
•
deregulated brokerage commissions as of 1992; and
•
provided for transfer of shares by book-entry or by delivery of evidence of title.
The Securities Markets Act was amended by Law 37/1998, which implemented two European Union directives into Spanish law. The first is Directive 93/22/CE, relating to investment services within securities, later amended by Directive 95/26/CE of the European Parliament and Council. The second is Directive 97/9/CE of the European Parliament and Council, relating to indemnity systems.
Law 37/1998 introduced some innovations to the Securities Markets Act. The first was the recognition that both Spanish and other European Union Member State companies authorized to provide investment services have full access to the official secondary markets, with full capacity to operate, thereby enabling the direct admission of banking entities into the stock exchange area. The second innovation was that the scope of the Securities Markets Act was enlarged to include a list of financial instruments, such as financial exchange contracts, or installment financial contracts, which expanded the categories of securities included.

183

Table of Contents

The Securities Markets Act has been further amended by Law 44/2002 (November 22, 2002) on reform measures of the financial system, which introduced certain modifications to the laws governing financial markets and corporations, generally, including:
•
provisions regarding market transparency such as: requiring listed companies to establish an audit committee, redefining the reporting requirements for relevant events, rules relating to the treatment of confidential and insider information and related party transactions, and prevention of manipulative and fraudulent practices with respect to market prices;
•
the establishment of Iberclear; and
•
the authorization of the Minister of Economy and Finance to regulate financial services electronic contracts.
On July 17, 2003, the Securities Market law was amended by Law 26/2003 in order to reinforce the transparency of listed companies. It introduced:
•
information and transparency obligations including detailed requirements of the contents of the corporate website of listed companies and the obligation to file with the CNMV an annual corporate governance report; and
•
the obligation to implement a series of corporate governance rules including, among others, regulations regarding the boards of directors and the general shareholders’ meeting.
On March 11, 2005, Royal Decree Law 5/2005 was approved, modifying the Securities Market Law in order to implement the Directive 2003/71/EC of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading. The Directive: (i) harmonizes the requirements for the process of approval of prospectuses, which enables a prospectus to be valid throughout the European Union; and (ii) incorporates the application of the country of origin principle.
On April 22, 2005, the Securities Market Law was amended by Law 5/2005 on supervision of financial conglomerates in order to make the sectoral rules applicable to investment firms more consistent with other sectoral rules applicable to other groups with similar financial activities, such as credit institutions and insurance undertakings.
On November 14, 2005, the Securities Market Law was further amended by Law 19/2005, which refers to the European public limited-liability companies with registered offices in Spain and, on November 24, 2005, by Law 25/2005, of November 24, 2005, which regulates the capital risk entities.
Royal Decree 1310/2005 (November 4) partially developed the Securities Market Law 24/1988, in relation to the admission to trading of securities in the official secondary markets, the sale or subscription public offers and the prospectus required to those effects.
Royal Decree 1333/2005 (November 11), which developed the Securities Market Law 24/1988, in relation to market abuse.
Law 12/2006 (May 16) amended the Securities Market Law by (i) introducing a new article relating to notifications to the CNMV of transactions that might constitute insider dealing or market manipulation, (ii) completing the regulation of Bolsas y Mercados Españoles, and (iii) clarifying the regulation of significant participations on the entities which manage the clearing and settlement of securities and the Spanish secondary markets.
Law 36/2006 (November 30), relating to measures to prevent the tax fraud, among others, amends article 108 of the Securities Market Law.

184

Table of Contents

Law 6/2007 (April 12) amends the Securities Market Law, in order to modify the rules for takeover bids and for issuers transparency. This Law came into effect on August 13, 2007, and partially integrates into the Spanish legal system Directive 2004/25/EC of the European Parliament and of the Council of April 21, 2004 on takeover bids and Directive 2004/109/EC of the European Parliament and of the Council of December 15, 2004 on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC. This Law has been further developed by Royal Decree 1066/2007 (July 27) on rules applicable to takeover bids for securities and by Royal Decree 1362/2007 (October 19) on transparency requirements for issuers of listed securities. For a brief description of the provisions of Law 6/2007 as regards the rules applicable to takeover bids see “Item 10. Additional Information—B. Memorandum and Articles of Association—Tender Offers”.
Law 6/2007 (i) introduces several changes to the periodical financial information, annual, biannual and quarterly, to be published by issuers of listed securities; and (ii) introduces new developments to the system which establishes the duty to notify significant stakes in an enterprise, such as:
•
Anyone with a right to acquire, transfer or exercise voting rights granted by the shares, regardless of the actual ownership of the shares; and anyone owing, acquiring or transferring other securities or financial instruments which grant a right to acquire shares with voting rights, will also have to notify the holding of a significant stake in accordance with the developing regulations;
•
Directors of listed companies, in addition to notifying any transaction concerning the shares or other securities or financial instruments of the issuer which are linked to these shares, will have to inform the CNMV of their stake upon appointment or resignation;
•
Listed companies will be required to notify transactions concerning their treasury shares in certain cases, which will be established in the developing regulations.
Law 47/2007 (December 19) amends the Securities Market Law in order to adapt it to Directive 2004/39/EC on markets in financial instruments (MiFID), Directive 2006/73/EC implementing Directive 2004/39/EC with respect to the organizational requirements and operating conditions for investment firms and defining terms for the purpose of that Directive, and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions. The amendments introduced by Law 47/2007 represent important reforms of the Securities Market Law and serve to (i) increase the number of investment services that can be performed by the entities; (ii) reinforce the measures for the protection of investors; (iii) establish new organizational procedures for investment firms; and (iv) reinforce the supervisory powers of the CNMV, establishing cooperation mechanisms among supervisory authorities. Directive 2006/49/EC and MiFID implementation have been introduced by Royal Decrees 216/2008 and 217/2008 (both of February 15), respectively.
Trading by Santander’s Subsidiaries in the Shares
Some of our subsidiaries, in accordance with customary practice in Spain, and as permitted under Spanish law, have regularly purchased and sold our shares both for their own account and for the accounts of customers. Our subsidiaries have intervened in the market for our shares primarily in connection with customer transactions and, occasionally, in connection with transactions by non-customers that are undertaken for commercial purposes or to supply liquidity to the market when it is reasonable to do so. Such trading activity also has provided a mechanism for accumulating shares that were used to meet conversions into our shares, of bonds issued by us and other affiliated companies and to make offerings of shares. We expect that our subsidiaries may continue to purchase and sell our shares from time to time.
Our trading activities in our shares are limited to those set forth above. No affiliated company acts as a “market maker” as that term is understood in the United States securities markets. The continuous market is driven by orders, which are matched by the market’s computer system according to price and time entered. Santander and Banesto’s broker subsidiaries, Santander Investment Bolsa, S.V., S.A., and Banesto Bolsa, S.A., S.V.B., and the other brokers authorized to trade on the continuous market (“Member Firms”) are not required to and do not serve as market makers maintaining independently established bid and ask prices. Rather, Member Firms place orders for their customers, or for their own account, into the market’s computer system. If an adequate counterparty order is not available on the continuous market at that time, the Member Firm may solicit counterparty orders from among its own clients and/or may accommodate the client by filling the client’s order as principal.

185

Table of Contents

Under the Companies Law of Spain, a company and its subsidiaries are prohibited from purchasing shares of the company in the primary market. However, purchase of the shares is permitted in the secondary market provided that: (1) the aggregate nominal value of such purchases (referred to as “treasury stock” or “ autocartera ”) and of the shares previously held by the company and its subsidiaries does not exceed 10% of the total outstanding capital stock of the company, (2) the purchases are authorized at a meeting of the shareholders of the acquiring company and, if the acquisition relates to shares in the parent company, the acquiring company’s parent, and (3) such purchases, together with the shares previously held by the company and its subsidiaries, do not result in a net equity less than the company’s stock and its legal or by-laws undisposable reserves.
The law requires that the CNMV be notified each time the acquisition of treasury stock made since the last notification reaches 1% of the voting rights of the company, regardless of any other preceding sales. The Companies Law establishes, in relation to the treasury stock shares (held by us and our affiliates), that the exercise of the right to vote and other non-financial rights attached to them shall be suspended. Financial rights arising from treasury stock held directly by us, with the exception of the right to allotment of new bonus shares, shall be attributed proportionately to the rest of the shares.
The portion of trading volume in the shares represented by purchases by our subsidiaries has varied widely from day to day and from month to month and may be expected to do so in the future. In 2009, 9.8% of the volume traded of the shares was effected not as principal by Santander Investment Bolsa, S.V., S.A. and 2.72% was effected not as principal by Banesto Bolsa, S.A., S.V.B. The portion of trading volume in shares allocable to purchases and sales as principal by our companies was approximately 9.2% in the same period. The monthly average percentage of outstanding shares held by our subsidiaries ranged from 0.413% to 2.820% in 2009. At December 31, 2009, the Parent Bank and our subsidiaries held 2,584,249 of our shares (0.031% of our total capital stock as of that date).
D. Selling shareholders
Not Applicable.
E. Dilution
Not Applicable.
F. Expense of the issue
Not Applicable.
Item 10. Additional Information
A. Share capital
Not Applicable.
B. Memorandum and articles of association
The following summary of the material terms of our By-laws is not meant to be complete and is qualified in its entirety by reference to our By-laws. Because this is a summary, it does not contain all the information that may be important to you. You should read our By-laws carefully before you decide to invest. Copies of our By-laws are incorporated by reference.
The current By-laws for Banco Santander, S.A., except for subsections 1 and 2 of Article 5 regarding the Bank’s share capital, were approved by our shareholders acting at the general shareholders’ meeting held on June 21, 2008.

186

Table of Contents

Subsections 1 and 2 of Article 5 of the By-Laws show the current figure of the Bank’s share capital and the number of shares which was most recently amended by the share capital increase carried out on November 2, 2009 and filed with the office of the Mercantile Registry on the same day.
The current By-laws are included in Exhibit 1.1. The By-laws are also available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors — General information — By-laws”.
In connection with the amendment of our By-laws, the board of directors, at its meeting held on March 23, 2009, resolved to approve new Rules and Regulations of the Board in order to bring some aspects of its internal regulations into line with the By-laws approved by the shareholders at the general shareholders’ meeting held on June 21, 2008.
At its meeting held on April 21, 2009, the audit and compliance committee and the appointments and remuneration committee reported favorably on a proposed amendment of the Rules and Regulations of the Board, which is intended to reserve within the scope of powers of the appointments and remuneration committee and of the board, the responsibility to propose and decide, respectively, upon the remuneration of those managers who not belonging to senior management receive significant remuneration, especially variable remuneration, and whose activities might have a significant impact on the assumption of risks by the Group, as well as to include among the items comprising the report on remuneration policy those relating to the weight of variable deferred remuneration compared to total variable remuneration for executive directors. This amendment was approved by the board at its meeting held on April 26, 2010.
All references to the Rules and Regulations of the Board in this annual report on Form 20-F are references to the new text.
The Rules and Regulations of the Board are available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Board of directors—Rules and Regulations of the Board of Directors”.
General
As of December 31, 2009, the Bank’s share capital was € 4,114,413,067.50, represented by a single class of 8,228,826,135 book-entry Santander shares with a nominal value of € 0.50 each.
All of our shares are fully paid and non-assessable. Spanish law requires that bank-listed equity securities be issued in book-entry form only.
Register
Santander is registered with the Commercial Registry of Santander (Finance Section). The Bank is also recorded in the Special Registry of Banks and Bankers with registration number 0049, and its fiscal identification number is A-39000013.
Corporate Object and Purpose
Article 2 of our By-laws states that the corporate objective and purpose of Santander consists of carrying-out all types of activities, operations and services specific to the banking business in general and which are permitted under current legislation and the acquisition, holding and disposal of all types of securities.
Certain Provisions Regarding Shareholder Rights
As of the date of the filing of this report, Santander’s capital is comprised of only one class of shares, all of which are ordinary shares and have the same rights. Santander may issue non-voting shares for a nominal amount of not more than one-half of the paid-up share capital, and redeemable shares for a nominal amount of not more than one-fourth of its share capital.

187

Table of Contents

Our By-laws do not contain any provisions relating to sinking funds.
Our By-laws do not specify what actions or quorums are required to change the rights of holders of our stock. Under Spanish law, the rights of holders of stock may only be changed by an amendment to the By-laws of the company that complies with the requirements explained below under “—Meetings and Voting Rights.”
Meetings and Voting Rights
We hold our annual general shareholders’ meeting during the first six months of each fiscal year on a date fixed by the board of directors. Extraordinary meetings may be called from time to time by the board of directors whenever the board considers it advisable for corporate interests, and whenever so requested by shareholders representing at least 5% of the outstanding share capital of Santander. Notices of all meetings are published, at least one month prior to the date set for the meeting, in the Official Gazette of the Mercantile Register and in one of the local newspapers having the largest circulation in the province where the registered office of Santander is located. In addition, under Spanish law, the agenda of the meeting must be sent to the CNMV and the Spanish Stock Exchanges and published on the company’s website. Our last ordinary general meeting of shareholders was held on June 19, 2009 and our last extraordinary general meeting of shareholders was held on January 26, 2009. The 2010 annual general meeting will be held on June 11, 2010.
Each Santander share entitles the holder to one vote. Registered holders of any number of shares who are current in the payment of capital calls will be entitled to attend shareholders’ meetings. Our By-laws do not contain provisions regarding cumulative voting.
Any Santander share may be voted by proxy. Subject to the limitations imposed by Spanish law, proxies may be given to any individual or legal person, must be in writing or by remote means of communication and are valid only for a single meeting except where the representative is the spouse or an ascendant or descendant of the shareholder giving the proxy, or where the proxy-holder holds a general power of attorney executed as a public instrument with powers to manage the assets of the represented party in the Spanish territory. According to Spanish law, if a director or another person solicits a proxy for a director thus obtaining more than three proxies and the director is subject to a conflict of interest, the director holding the proxies may not exercise the voting rights attaching to the represented shares in connection with decisions relating to:
•
his appointment or ratification, removal, dismissal or withdrawal as director;
•
the institution of a derivative action against him; or
•
the approval or ratification of transactions between Santander and the director in question, companies controlled or represented by him, or persons acting for his account.
In accordance with the Rules and Regulations for the General Shareholders’ Meeting and in the manner established by such Rules and Regulations, the Group’s website includes from the date when the call of the general shareholders’ meeting is published, the text of all resolutions proposed by the board of directors with respect to the agenda items and the details regarding the manner and procedures for shareholders to follow to confer representation on any individual or legal entity. The manner and procedures for electronic delegation and voting via the Internet are also indicated.
At both general shareholders’ meetings held in 2004 (the annual shareholders’ meeting of June 19, 2004 and the extraordinary general meeting of October 21, 2004) our shareholders could exercise their voting and representation rights prior to the meetings by electronic means (via the Internet). In addition, at the extraordinary general shareholders’ meeting of October 21, 2004, our shareholders could vote by mail and in the annual shareholders’ meetings held on June 18, 2005, June 17, 2006, June 23, 2007, June 21, 2008 and June 19, 2009, and in the extraordinary general shareholders’ meeting of October 23, 2006, July 27, 2007 and January 26, 2009 our shareholders, besides exercising their voting and representation rights prior to the meeting by mail or via the Internet, were able to attend (besides attending and voting in person) via the Internet and were also able to vote in real time on the Internet on the resolutions considered at the meeting.

188

Table of Contents

Only registered holders of Santander shares of record at least five days prior to the day on which a meeting is scheduled to be held may attend and vote at shareholders’ meetings. As a registered shareholder, the depositary will be entitled to vote the Santander shares underlying the Santander ADSs. The deposit agreement requires the depositary to accept voting instructions from holders of Santander ADSs and to execute such instructions to the extent permitted by law.
In general, resolutions passed by a general meeting are binding upon all shareholders. In certain circumstances, Spanish law gives dissenting or absent shareholders the right to have their Santander shares redeemed by us at prices determined in accordance with established formulae or criteria. Santander shares held by the Bank or its affiliates are counted for purposes of determining quorums but may not be voted by the Bank or by its affiliates.
Resolutions at general meetings are passed provided that, regarding the voting capital present or represented at the meeting, the number of votes in favor is higher than the number of votes against or blank and abstentions.
In accordance with Spanish law, a quorum on first call for a duly constituted ordinary or extraordinary general meeting of shareholders requires the presence in person or by proxy of shareholders representing 25% of our subscribed voting capital. On second call there is no quorum requirement. Notwithstanding the above, a quorum of 50% of our subscribed voting capital is required on the first call to approve any of the following actions:
•
issuance of bonds;
•
increase or reduction of share capital;
•
rescission or limitation of the preferential right to subscribe new issuance of shares;
•
change of the registered address of Santander to a foreign country;
•
transformation of Santander (change in corporate nature) or merger, novation, split or spin-off; and
•
any other amendment of our By-laws.
A quorum of 25% of the subscribed voting capital is required to vote on such actions on the second call. A two-third majority of the present or represented voting capital is required to approve all of the above listed actions when the shareholders’ meeting is held on second call and less than 50% of the subscribed voting capital is present.
For purposes of determining the quorum, those shareholders who vote by mail or through the Internet are counted as being present at the meeting, as provided by the Rules and Regulations of the Bank’s general shareholders’ meetings.
Changes in Capital
Any increase or reduction in share capital must be approved at the general meeting in accordance with the procedures explained above in the section entitled “Meetings and Voting Rights”. However, the shareholders acting at the general shareholders’ meeting may delegate to the board of directors the power to increase share capital.
The capital increase may be effected by issuing new shares or by increasing the par value of existing shares. Capital reduction may be effected by reducing the par value of existing shares, by repurchasing them, or dividing them into groups for exchange.
Unpaid subscription amounts on partially paid-up shares must be paid by the shareholders at the time determined by the board of directors, within five years of the date of the resolution providing for the capital increase.

189

Table of Contents

At the Bank’s annual meeting of shareholders held on June 19, 2009, the shareholders passed resolutions which, among other things, grant the Bank the authority to increase the Bank’s capital by up to € 2,038,901,430.5 and also permits the Bank to issue bonds convertible or exchangeable into the Bank’s common stock in an amount up to € 7 billion aggregate principal amount.
Dividends
We normally pay an annual dividend in advance in quarterly installments in August and November of the current year and February and generally in May, of the following year. We and our domestic banking subsidiaries are subject to certain restrictions on dividend payments, as prescribed by the Ministry of Economy and Finance and the Bank of Spain. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Restrictions on Dividends”.
Once the annual accounts have been approved, the shareholders at the general shareholders’ meeting will resolve on the allocation of the results for the fiscal year. Dividends may only be distributed out of the earnings for the fiscal year or with a charge to unappropriated reserves, after the payments required by the law and the By-laws have been made, provided that the stockholders’ equity disclosed in the accounts is not reduced, to less than the share capital as a result of the distribution. If there are any losses from prior fiscal years that reduce the Bank’s stockholders’ equity below the amount of the share capital, the earnings must be used to offset such losses.
The amount, time and form of payment of the dividends, to be distributed among the shareholders in proportion to their paid-in capital will be established by resolutions adopted at the general meeting. The shareholders at the general shareholders’ meeting and the board of directors may make resolutions as to the distribution of interim dividends, subject to limitations and in compliance with the requirements established by the law.
A shareholder’s dividend entitlement lapses five (5) years after the dividend payment date.
The shareholders at the general shareholders’ meeting may resolve that dividends in kind can be paid, provided that:
•
the property or securities to be distributed are of the same nature;
•
the property or securities have been admitted to listing on an official market as of the effective date of the resolution, or liquidity is guaranteed by Santander within a maximum period of one year; and
•
the property or securities are not distributed for a value that is lower than the value at which they are recorded on Santander’s balance sheet.
Preemptive Rights
In the event of a capital increase each shareholder has a preferential right by operation of law to subscribe for shares in proportion to its shareholding in each new issue of Santander shares. The same right is vested on shareholders upon the issuance of convertible debt. Holders of convertible debt also have preemptive rights. However, preemptive rights of shareholders and holders of convertible debt may be excluded under certain circumstances by specific approval at the shareholders’ meeting (or upon its delegation by the board of directors) and preemptive rights are deemed excluded by operation of law in the relevant capital increase when the shareholders approve:
•
capital increases following conversion of convertible bonds into Santander shares;
•
capital increases due to the absorption of another company or of part of the spun-off assets of another company, when the new shares are issued in exchange for the new assets received; or
•
capital increases due to Santander’s tender offer for securities using Santander’s shares as all or part of the consideration.

190

Table of Contents

If capital is increased by the issuance of new shares in return for capital from certain reserves, the resulting new Santander shares will be distributed pro rata to existing shareholders.
Redemption
Our By-laws do not contain any provisions relating to redemption of shares except as set forth in connection with capital reductions. Nevertheless, pursuant to Spanish law, redemption rights may be created at a duly held general shareholders’ meeting. Such meeting will establish the specific terms of any redemption rights created.
Registration and Transfers
The Santander shares are in book-entry form in the Iberclear system. We maintain a registry of shareholders. We do not recognize, at any given time, more than one person as the person entitled to vote each share in the shareholders meeting.
Under Spanish law and regulations, transfers of shares quoted on a stock exchange are normally made through a Sociedad o Agencia de Valores , credit entities and investment services companies, that are members of the Spanish stock exchange.
Transfers executed through stock exchange systems are implemented pursuant to the stock exchange clearing and settlement procedures of Iberclear. Transfers executed “over the counter” are implemented pursuant to the general legal regime for book entry transfer, including registration by Iberclear.
New shares may not be transferred until the capital increase is registered with the Commercial Registry.
Liquidation Rights
Upon a liquidation of Santander, our shareholders would be entitled to receive pro-rata any assets remaining after the payment of our debts, taxes and expenses of the liquidation. Holders of non-voting shares, if any, are entitled to receive reimbursement of the amount paid before any amount is distributed to the holders of voting shares.
Change of Control
Our By-laws do not contain any provisions that would have an effect of delaying, deferring or preventing a change in control of the company and that would operate only with respect to a merger, acquisition or corporate restructuring involving Santander or any of our subsidiaries. Nonetheless, certain aspects of Spanish law described in the following section may delay, defer or prevent a change of control of the Bank or any of our subsidiaries in the event of a merger, acquisition or corporate restructuring.
Legal Restrictions on Acquisitions of Shares in Spanish Banks
Certain provisions of Spanish law require notice to the Bank of Spain prior to the acquisition by any individual or corporation of a substantial number of shares of a Spanish bank.
Any individual or corporation that wishes to acquire, directly or indirectly, a significant holding ( participación significativa ) in a Spanish bank must give advance notice to the Bank of Spain describing the size of such participation, its terms and conditions, and the anticipated closing date of the acquisition. “Significant participation” is defined as 5% of the outstanding share capital or voting rights of the bank or any lesser participation that gives the acquirer effective influence or control over the target bank.
In addition, prior notice must be given to the Bank of Spain of any increase, direct or indirect, in any significant holding resulting in percentage equity interest or voting rights reaching or surpassing one of the following percentages: 20%, 30% or 50%. Notice to the Bank of Spain is also required from anyone who, as a result of the contemplated acquisition, may attain sufficient power to control the credit entity.

191

Table of Contents

Any acquisition mentioned in the preceding sentence to which the required notice was not given or even if given, a three month period after receipt of notice has not yet elapsed, or that is opposed by the Bank of Spain will have the following effects: (1) the acquired shares will have no voting rights, (2) the Bank of Spain may seize control of the bank or replace its board of directors, and (3) a fine may be levied on the acquirer.
The Bank of Spain has sixty business days after the receipt of notice to object to a proposed transaction. Such objection may be based on finding the acquirer unsuitable on the basis, inter alia, of its commercial or professional reputation, its solvency or the transparency of its corporate structure. If sixty business days elapse without any word from the Bank of Spain, its authorization is deemed granted. However, absent objection by the Bank of Spain, it may set forth a different maximum period for closing the proposed transaction.
Any individual or institution that plans to sell its significant holding, or reduce it to one of the above-mentioned levels of ownership, or because of any sale will lose control of the entity, must provide advance notice to the Bank of Spain indicating the amount of the transaction and its anticipated closing date. Failure to comply with these requirements may subject the offending party to penalties.
Credit entities must notify the Bank of Spain as soon as they become aware of any acquisition or transfer of significant shares of its capital stock that exceeds the above-mentioned percentages. Furthermore, banks are required to inform the Bank of Spain as soon as they become aware, and in any case not later than 15 days after, any acquisition by a person or a group of at least 1% of such a bank’s total equity. The Bank of Spain also requires each bank to notify the Bank of Spain of a list, dated on the last day of each quarter and during April, July, October and January of all its shareholders that are financial institutions and all other shareholders that own at least 0.25% of the bank’s total equity.
If the Bank of Spain determines at any time that the influence of a person who owns a significant participation of a bank may adversely affect that bank’s financial situation, it may request that the Ministry of Economy and Finance: (1) suspend the voting rights of such person’s shares for a period not exceeding 3 years; (2) seize control of the bank or replace its board of directors; or (3) revoke the bank’s license in exceptional circumstances. A fine may also be levied on the relevant person.
Tender Offers
Law 6/2007, of April 12, which amends the Securities Market Law, has modified the rules for takeover bids. This Law, which came into effect on August 13, 2007, partially transposes into the Spanish legal system Directive 2004/25/EC of the European Parliament and of the Council of April 21, 2004 on takeover bids.
The new rules replace the traditional system where launching a takeover bid was compulsory prior to acquiring a significant shareholding in the target company and partial bids were permitted for a regime where takeover bids must be made for all the share capital after obtaining the control of a listed company (i.e. 30% of the voting rights or appointment of more than one-half of the members of the company’s board of directors) whether such control is obtained by means of an acquisition of securities or an agreement with other holders of securities.
The above does not prevent parties from making voluntary bids for a number that is less than the totality of securities in a listed company.
Law 6/2007 also regulates, among other things, (i) new obligations for the board of directors of the offeree company in terms of preventing the takeover bid (passivity rule); and (ii) the squeeze-out and sell-out rights when the offeror is a holder of securities representing at least 90% of the voting capital of the offeree company and the prior takeover bid has been accepted by holders of securities representing at least 90% of the voting rights covered by the bid.

192

Table of Contents

Royal Decree 1066/2007 on rules applicable to takeover bids for securities further developed the regulations on takeover bids established by Law 6/2007, completing the amendments introduced by Law 6/2007, in order to ensure that takeover bids are carried out within a comprehensive legal framework and with absolute legal certainty. The Royal Decree contains provisions regarding: (i) the scope and application to all takeover bids, whether voluntary or mandatory, for a listed company; (ii) the rules applicable to mandatory takeover bids when control of a company is obtained; (iii) other cases of takeover bids, such as bids for de-listing of securities and bids that must be made when a company wishes to reduce capital through the acquisition of its own shares for subsequent redemption thereof; (iv) the consideration and guarantees offered in a bid; (v) stages of the procedure that must be followed in a takeover bid; (vi) the mandatory duty of passivity of the offeree company’s board of directors and the optional regime of neutralization of other preventive measures against bids; (vii) changes to, withdrawal of, and cessation of effects of the bid; (viii) the acceptance period, the calculation of the acceptances received and the settlement of the bid; (ix) the procedures applicable to competing offers; (x) the rules for squeeze-outs and sell-outs; and (xi) certain rules on supervision, inspection and sanctions applicable with respect to the regulations on takeover bids.
Reporting Requirements
Royal Decree 1362/2007 requires that any entity which acquires or transfers shares and as a consequence the number of voting rights held exceeds, reaches or is below the threshold of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%, of the voting rights of a company, for which Spain is the member state of origin, listed on a Spanish stock exchange or on any other regulated market in the European Union, must, within 4 days after that acquisition or transfer, report it to such company, and to the CNMV. This duty to report the holding of a significant stake is applicable not only to the acquisitions and transfers in the terms described above, but also to those cases in which in the absence of an acquisition or transfer of shares, the percentage of an individual’s voting rights exceeds, reaches or is below the thresholds that trigger the duty to report, as a consequence of an alteration in the total number of voting rights of an issuer. Similar disclosure obligations apply, among others, in the event of: (i) the acquisition or disposal of any financial instruments entitling the holder to acquire the company’s shares (such as options, futures, swaps, etc.); (ii) certain voting, deposit, temporary transfer or other agreements regarding the relevant shares; or (iii) custodians or proxy-holders who can exercise with discretion the voting rights attached to the relevant shares. The above mentioned threshold percentage will be 1% or any multiple of 1% whenever the person who has the duty to notify is a resident of a tax haven or of a country or territory where there is no taxation or where there is no obligation to exchange tax information (in accordance with Spanish law).
In addition, any Spanish company listed on the Spanish stock exchanges must report any acquisition by such company (or a subsidiary) of the company’s own shares if the acquisition, together with any acquisitions since the date of the last report and without deducting sales of its own shares by the company or by its subsidiaries, causes the company’s ownership of its own shares to exceed 1% of its voting rights. See “Item 9. The Offer and Listing—C. Markets—Trading by Santander’s Subsidiaries in the Shares.”
Members of the board of directors of listed companies, in addition to notifying the CNMV of any transaction concerning the shares or other securities or financial instruments of the issuer which are linked to these shares, are required to inform the CNMV of their ratio of voting rights upon appointment or resignation.
In addition, top managers of any listed company must report to the CNMV the acquisition or disposal of shares or other securities or financial instruments of the issuer which are linked to these shares.
Board of Directors
Our board of directors may be made up of a minimum of 14 and a maximum of 22 members, appointed by the shareholders acting at the general meeting of shareholders.
Members of the board of directors are elected for an initial term of five years but can be re-elected. One fifth of the members of the board are elected each year.
A director could serve for a term shorter than the one for which he or she has been initially elected if the shareholders acting at a duly called general meeting decide that that director be replaced before completing his or her term.

193

Table of Contents

Although there is no provision in Spanish law regarding the composition of a board of directors, the Rules and Regulations of the Board provide that in exercising its powers to make proposals at the general shareholders’ meeting and to designate directors by interim appointment to fill vacancies (co-option), the board shall endeavor to ensure that the external or non-executive directors represent a wide majority over the executive directors and that the former include a reasonable number of independent directors. In addition, in all events, the board of directors shall endeavor such that the number of independent directors represent at least one-third of all directors.
Article 42.1 of our By-laws also provides that the shareholders at the general shareholders’ meeting shall endeavor to ensure that external or non-executive directors represent a large majority of the board of directors, and that a reasonable number of the board of directors are independent directors. In addition, the shareholders at the general shareholders’ meeting shall likewise endeavor to ensure that independent directors represent at least one-third of the total number of directors.
These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. See Item 16G of Part II, “Corporate Governance—Independence of the directors on the board of directors”. The Bank currently complies with this requirement.
Certain Powers of the Board of Directors
The actions of the members of the board are limited by Spanish law and certain general provisions contained in our By-laws. For instance, Article 57 of our By-laws states that the directors will be liable to Santander, to our shareholders and to our corporate creditors for any damages that they may cause by acts or omissions which are contrary to law or to the By-laws or by acts or omissions contrary to the duties inherent in the exercise of their office.
A director’s power to vote on a proposal, arrangement or contract in which such director is materially interested is not regulated by our By-laws. Conflicts of interest are regulated by Article 30 of the Rules and Regulations of the Board. Under Article 30, a director is obliged to inform the board of any direct or indirect conflict of interest which may exist with the Bank. If such a conflict relates to a particular transaction, then the director (i) may not undertake the transaction without the board’s authorization (such authorization can only be granted following a report of the appointments and remuneration committee); and (ii) the director may not take part in the discussion or voting regarding the transaction to which the conflict relates.
According to our By-laws, unpaid subscription amounts on partially paid-up shares shall be paid up by the shareholders at the time determined by the board of directors, within five years of the date of the resolution providing for the capital increase. The manner and other details of such payment shall be determined by the resolution providing for the capital increase. Without prejudice to the effects of default as set forth by law, any late payment of unpaid subscription amounts shall bear, for the benefit of the Bank, such interest as is provided by law in respect of late payments, starting from the day when payment is due and without any judicial or extra-judicial demand being required. In addition, the Bank shall be entitled to bring such legal actions as may be permitted by law in these cases.
Our current By-laws provide that the members of the board of directors are entitled to receive compensation for performing the duties entrusted to them by reason of their appointment, to be paid as a share in profits and by-law mandated compensation. This compensation has two components: an annual retainer and attendance fees. Attendance fees must be paid in advance on account of the profits for the fiscal year. The specific amount payable to each of the directors will be determined by the board of directors, taking into consideration the positions held by each director on the board and their membership in and attendance at the meetings of the various committees. The aggregate amount of the compensation for performing the duties entrusted to the directors by reason of their appointment is equal to one percent of Santander’s profit for the fiscal year, provided, however, that the board may resolve that such percentage be reduced in those years in which the board deems it justified.
Directors may also receive compensation in the form of shares of the Bank or options over the shares, or other remuneration linked to share value following a resolution adopted by the shareholders at the general shareholders’ meeting (conducted in accordance with our By-laws and applicable Spanish legislation).

194

Table of Contents

Regardless of the limit set above, the directors are entitled to receive compensation (salaries, incentives, bonuses, pension, insurance and severance payments) that the board of directors consider appropriate, for the performance of duties in Santander other than the duties of supervision and collective decision-making that the directors perform as members of the board.
The board of directors must, on an annual basis, prepare a report, which sets forth the standards and basis used to determine the compensation of the directors and the compensation received by each director.
Board of Directors Qualification
There are no mandatory retirement provisions due to age for board members in our By-laws or in the regulations of our board of directors. These regulations contain provisions relating to the cessation of directorship for other reasons.
C. Material contracts
During the past two years, the Bank was not a party to any contract outside its ordinary course of business that was material to the Group as a whole, except as disclosed in “Item 4. Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations— Sovereign Bancorp, Inc. (“Sovereign”) ” and in “Item 4. Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations— ABN AMRO Holding N.V. (“ABN AMRO”) .”
D. Exchange controls
Restrictions on Foreign Investments
Under present regulations, foreign investors may transfer invested capital, capital gains and dividends out of Spain without limitation on the amount other than applicable taxes. See “—Taxation”. On July 4, 2003, Law 19/2003 was approved which updates Spanish exchange control and money laundering prevention provisions, by recognizing the principle of freedom of the movement of capital between Spanish residents and non residents. The law establishes procedures for the declaration of capital movements for purposes of administrative or statistical information and authorizes the Spanish Government to take measures which are justified on grounds of public policy or public security. It also provides the mechanism to take exceptional measures with regard to third countries if such measures have been approved by the European Union or by an international organization to which Spain is a party. The Spanish stock exchanges and securities markets are open to foreign investors. Royal Decree 664/1999, on Foreign Investments (April 23, 1999), established a new framework for the regulation of foreign investments in Spain which, on a general basis, will no longer require any prior consents or authorizations from authorities in Spain (without prejudice to specific regulations for several specific sectors, such as television, radio, mining, telecommunications, etc.). Royal Decree 664/1999 requires notification of all foreign investments in Spain and liquidations of such investments upon completion of such investments to the Investments Registry of the Ministry of Economy and Finance, strictly for administrative statistical and economical purposes. Only investments from “tax haven” countries (as they are defined in Royal Decree 1080/1991), shall require notice before and after performance of the investment, except that no prior notice shall be required for: (1) investments in securities or participations in collective investment schemes that are registered with the CNMV, and (2) investments that do not increase the foreign ownership of the capital stock of a Spanish company to over 50%. In specific instances, the Counsel of Ministers may agree to suspend, all or part of, Royal Decree 664/1999 following a proposal of the Minister of Economy and Finance, or, in some cases, a proposal by the head of the government department with authority for such matters and a report of the Foreign Investment Body. These specific instances include a determination that the investments, due to their nature, form or condition, affect activities, or may potentially affect activities relating to the exercise of public powers, national security or public health. Royal Decree 664/1999 is currently suspended for investments relating to national defense. Whenever Royal Decree 664/1999 is suspended, the affected investor must obtain prior administrative authorization in order to carry out the investment.

195

Table of Contents

E. Taxation
The following is a discussion of the material Spanish and US federal income tax consequences to you of the ownership and disposition of ADSs or shares.
The discussion of Spanish tax consequences below applies to you only if you are a non-resident of Spain and your ownership of ADSs or shares is not effectively connected with a permanent establishment or fiscal base in Spain and only if you are a US resident entitled to the benefits of the Convention Between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “Treaty”).
You should consult your own tax adviser as to the particular tax consequences to you of owning the shares or ADSs including your eligibility for the benefits of any treaty between Spain and the country of your residence for the avoidance of double taxation, the applicability or effect of any special rules to which you may be subject, and the applicability and effect of state, local, foreign and other tax laws and possible changes in tax law.
Spanish tax considerations
The following is a summary of material Spanish tax matters and is not exhaustive of all the possible tax consequences to you of the acquisition, ownership and disposition of ADSs or shares. This discussion is based upon the tax laws of Spain and regulations thereunder, which are subject to change, possibly with retroactive effect.
Taxation of dividends
Under Spanish law, dividends paid by a Spanish resident company to a holder of ordinary shares or ADSs not residing in Spain for tax purposes and not operating through a permanent establishment in Spain are subject to Spanish Non-Resident Income Tax at an 19% rate. Prior to January 1, 2010 the rate was 18%.
In addition, according to the Spanish Non Resident Income Tax Law, if you are resident in the European Union or in a country with which there is an effective exchange of information for tax purposes as defined in Spanish Law 36/2006 and you do not operate in Spain through a permanent establishment, dividends up to 1,500 euros, considering all Spanish-source dividends you may obtain in the calendar year, are exempt from Spanish taxation. However, Spanish withholding tax will nevertheless be required to be deducted from the gross amount of the dividends, and you will have to seek a refund of such withholding taxes from the Spanish tax authorities, following the standard refund procedure described below.
As of January 1, 2010, we levied an initial withholding tax on the gross amount of dividends at a 19% tax rate (prior to this date the rate was 18%), following the procedures set forth by the Order of April 13, 2000. However, under the Treaty and subject to the fulfillment of certain requirements, you may be entitled to a reduced rate of 15%.
To benefit from the Treaty’s reduced rate of 15%, you must provide our depositary, JPMorgan Chase, with a certificate from the United States Internal Revenue Service (the “IRS”) stating that to the knowledge of the IRS, you are a resident of the United States within the meaning of the Treaty. The IRS certificate is valid for a period of one year.
According to the Order of April 13, 2000, to get a direct application of the Treaty-reduced rate of 15%, the certificate referred to above must be provided to our depositary before the tenth day following the end of the month in which the dividends were distributable by us. If you fail to timely provide our depositary with the required documentation, you may obtain a refund of the 4% in excess withholding that would result from the Spanish tax authorities in accordance with the procedures below.
Spanish refund procedure
According to Spanish Regulations on Non-Resident Income Tax, approved by Royal Decree 1776/2004, dated July 30, 2004, as amended, a refund of the amount withheld in excess of the rate provided by the Treaty can be obtained from the relevant Spanish tax authorities. To pursue the refund claim, if you are a US resident entitled to the benefits of the Treaty, you are required to file all of the following:
•
a Spanish 210 Form,

196

Table of Contents

•
the certificate referred to in the preceding section, and
•
evidence that Spanish non-resident income tax was withheld with respect to you.
The refund claim must be filed within four years of the date on which the withheld tax was collected by the Spanish tax authorities. You are urged to consult your own tax adviser regarding refund procedures and any US tax implications of refund procedures.
Taxation of capital gains
Under Spanish law, any capital gains derived from securities issued by persons residing in Spain for tax purposes are considered to be Spanish source income and, therefore, are taxable in Spain. If you are a US resident, income from the sale of ADSs or shares will be treated as capital gains for Spanish tax purposes. As of January 1, 2010, Spanish non-resident income tax is levied at a 19% rate on capital gains realized by persons not residing in Spain for tax purposes who are not entitled to the benefit of any applicable treaty for the avoidance of double taxation. Prior to this date the rate was 18%.
Notwithstanding the above, capital gains derived from the transfer of shares on an official Spanish secondary stock market by any holder who is a resident of a country that has entered into a treaty for the avoidance of double taxation with Spain containing an “exchange of information” clause will be exempt from taxation in Spain. In addition, under the Treaty, capital gains realized by you upon the disposition of ADSs or shares will not be taxed in Spain provided you have not held, directly or indirectly, 25% or more of our stock during the twelve months preceding the disposition of the stock. You are required to establish that you are entitled to this exemption by providing to the relevant Spanish tax authorities an IRS certificate of residence in the United States, together with the appropriate Spanish tax form, not later than 30 days after the capital gain was realized.
Spanish wealth tax
Individuals not residing in Spain who hold shares or ADSs located in Spain are subject to the Spanish wealth tax (Spanish Law 19/1991), which imposes a tax on property located in Spain on the last day of any year. The Spanish tax authorities may take the view that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. However, Law 4/2008, dated December 23, 2008, has amended the Spanish wealth tax law, introducing a 100% tax rebate and eliminating the obligation to file any form for tax periods starting as of January 1, 2008. Consequently, no obligation for this tax arises for non resident individuals holding shares or ADSs on December 31, 2008 or after.
Spanish inheritance and gift taxes
Transfers of shares or ADSs upon death or by gift are subject to Spanish inheritance and gift taxes (Spanish Law 29/1987) if the transferee is a resident of Spain for tax purposes, or if the shares or ADSs are located in Spain at the time of gift or death, or the rights attached thereto could be exercised or have to be fulfilled in the Spanish territory, regardless of the residence of the beneficiary. In this regard, the Spanish tax authorities may determine that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. The applicable tax rate, after applying all relevant factors, ranges between 0% and 81.6% for individuals.
Gifts granted to corporations non-resident in Spain are subject to Spanish Non-Resident Income Tax at an 19% tax rate on the fair market value of the shares as a capital gain. Prior to January 1, 2010, the rate was 18%. If the donee is a United States corporation, the exclusions available under the Treaty described in the section “—Taxation of capital gains” above will be applicable.
Expenses of transfer
Transfers of ADSs or shares will be exempt from any Spanish transfer tax or value-added tax. Additionally, no Spanish stamp tax will be levied on such transfers.

197

Table of Contents

US Tax Considerations
The following summary describes the material US federal income tax consequences of the ownership and disposition of ADSs or shares, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to acquire such securities. The summary applies only to US Holders (as defined below) that hold ADSs or shares as capital assets for tax purposes and does not address special classes of holders, such as:
•
certain financial institutions;
•
insurance companies;
•
dealers and traders in securities that use a mark-to-market method of tax accounting;
•
holders holding ADSs or shares as part of a hedge, “straddle”, conversion transaction or integrated transaction;
•
holders whose “functional currency” is not the US dollar;
•
holders liable for the alternative minimum tax;
•
tax exempt entities, including “individual retirement accounts” and “Roth IRAs”;
•
partnerships or other entities classified as partnerships for US federal income tax purposes;
•
holders that own or are deemed to own 10% or more of our voting shares;
•
holders that acquired our ADSs or shares pursuant to the exercise of an employee stock option or otherwise as compensation;
•
holders holding ADSs or shares in connection with a trade or business outside the United States.
If an entity that is classified as a partnership for US federal income tax purposes holds shares or ADSs, the US federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular US federal income tax consequences of owning and disposing of the shares or ADSs.
The summary is based upon tax laws of the United States including the Internal Revenue Code of 1986, as amended to the date hereof (the “Code”), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, all as of the date hereof, changes to any of which may affect the tax consequences described herein, possibly with retroactive effect. In addition, the summary is based on the Treaty and is based in part on representations of the depositary and assumes that each obligation provided for in or otherwise contemplated by the deposit agreement or any other related document will be performed in accordance with its terms. US Holders are urged to consult their own tax advisers as to the US, Spanish or other tax consequences of the ownership and disposition of ADSs or shares in their particular circumstances.
As used herein, a “US Holder” is, for US federal income tax purposes, a beneficial owner of ADSs or shares that is:
(i)
a citizen or resident of the United States;
(ii)
a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or of any political subdivision thereof; or
(iii)
an estate or trust the income of which is subject to US federal income taxation regardless of its source.
In general, for US federal income tax purposes, US Holders of ADSs will be treated as the owners of the underlying shares represented by those ADSs. Accordingly, no gain or loss will be recognized if a US Holder exchanges ADSs for the underlying shares represented by those ADSs.

198

Table of Contents

The US Treasury has expressed concerns that parties to whom American depositary shares are released before delivery of shares to the depositary (“pre-release”), or intermediaries in the chain of ownership between US holders and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by US holders of American depositary shares. These actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of Spanish taxes and the availability of the reduced tax rate for dividends received by certain non-corporate holders, each described below, could be affected by actions taken by these parties or intermediaries.
Taxation of Distributions
Subject to the discussion of the passive foreign investment company rules below, to the extent paid out of our current or accumulated earnings and profits (as determined in accordance with US federal income tax principles), distributions, including the amount of any Spanish withholding tax, made with respect to ADSs or shares (other than certain pro rata distributions of our capital stock or rights to subscribe for shares of our capital stock) will be includible in the income of a US Holder as foreign-source ordinary dividend income. Because we do not maintain calculations of our earnings and profits under US federal income tax principles, it is expected that distributions generally will be reported to US Holders as dividends. These dividends will be included in a US Holder’s income on the date of the US Holder’s (or in the case of ADSs, the depositary’s) receipt of the dividend, and will not be eligible for the “dividends-received deduction” generally allowed to corporations receiving dividends from domestic corporations under the Code. The amount of the distribution will equal the US dollar value of the euros received, calculated by reference to the exchange rate in effect on the date that distribution is received (which, for US Holders of ADSs, will be the date that distribution is received by the depositary), whether or not the depositary or US Holder in fact converts any euros received into US dollars at that time. If the dividend is converted into US dollars on the date of receipt, a US Holder generally will not be required to recognize foreign currency gain or loss in respect thereof. A US Holder may have foreign currency gain or loss if the euros are converted into US dollars after the date of receipt. Any gains or losses resulting from the conversion of euros into US dollars will be treated as ordinary income or loss, as the case may be, of the US Holder and will be US-source.
Subject to applicable limitations and the discussion above regarding concerns expressed by the US Treasury, under current law, dividends paid to certain non-corporate US holders in taxable years beginning before January 1, 2011 will be taxed at favorable rates, up to a maximum rate of 15%. Non-corporate holders should consult their own tax advisers to determine the implications of the rules regarding this favorable rate in their particular circumstances.
Subject to certain generally applicable limitations that may vary depending upon your circumstances and subject to the discussion above regarding concerns expressed by the US Treasury, a US Holder will be entitled to a credit against its US federal income tax liability for Spanish income taxes withheld at the rate provided by the Treaty. Spanish income taxes withheld in excess of the rate applicable under the Treaty will not be eligible for credit against a U.S Holder’s federal income tax liability. See “Spanish tax considerations — Spanish refund procedure —” for a discussion of how to obtain amounts withheld in excess of the applicable Treaty rate. The limitation on foreign taxes eligible for credit is calculated separately with regard to specific classes of income. Instead of claiming a credit, a US Holder may, at its election, deduct such otherwise creditable Spanish taxes in computing taxable income, subject to generally applicable limitations under US law.
A US Holder must satisfy minimum holding period requirements in order to be eligible to claim a foreign tax credit for foreign taxes withheld on dividends. The rules governing foreign tax credits are complex and, therefore, US Holders are urged to consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to make effective use of foreign tax credits.

199

Table of Contents

Sale or Exchange of ADSs or Shares
Subject to the discussion of the passive foreign investment company rules below, gain or loss realized by a US Holder on the sale or exchange of ADSs or shares will be subject to US federal income tax as capital gain or loss (and will be long-term capital gain or loss if the US Holder held the ADSs or shares for more than one year) in an amount equal to the difference between the US Holder’s tax basis in the ADSs or shares and the amount realized on the disposition, in each case as determined in US dollars. Gain or loss, if any, will be US-source for foreign tax credit purposes. The deductibility of capital losses is subject to limitations. Long-term capital gain of a non-corporate US holder is generally taxed at a preferential rate.
Passive Foreign Investment Company Rules
We believe that we were not a “passive foreign investment company” (“PFIC”) for US federal income tax purposes for the 2009 taxable year. However, because our PFIC status depends upon the composition of our income and assets and the fair market value of our assets (including, among others, less than 25% owned equity investments) from time to time, and upon certain proposed Treasury Regulations that are not yet in effect but are proposed to become effective for taxable years after December 31, 1994, there can be no assurance that we will not be a PFIC for any taxable year.
If we are a PFIC for any taxable year, any gain recognized by a US Holder on a sale or other disposition of ADSs or shares would be allocated ratably over the US Holder’s holding period for the ADSs or shares. The amounts allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to all other taxable years would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the amount allocated to those taxable years. Further, any distribution in respect of ADSs or shares in excess of 125% of the average of the annual distributions on ADSs or shares received by the US Holder during the preceding three years or the US Holder’s holding period, whichever is shorter, would be subject to taxation as described above. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the ADSs or shares.
In addition, if we are a PFIC in a taxable year in which we pay a dividend or the prior taxable year, the 15% dividend rate discussed above with respect to dividends paid to non-corporate holders would not apply.
Information Reporting and Backup Withholding
Payment of dividends and sales proceeds that are made within the United States or through certain US-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (i) the US Holder is an exempt recipient or (ii) in the case of backup withholding, the US Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a US Holder will be allowed as a credit against the US Holder’s US federal income tax liability and may entitle the US Holder to a refund, provided that the required information is timely furnished to the IRS.
F. Dividends and paying agents
Not Applicable.
G. Statement by experts
Not Applicable.

200

Table of Contents

H. Documents on display
We are subject to the information requirements of the Exchange Act, except that as a foreign issuer, we are not subject to the proxy rules or the short-swing profit disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file or furnish reports and other information with the SEC. Reports and other information filed or furnished by us with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 100 F Street, N.E., Washington, D.C. 20549, and at the SEC’s regional offices at 233 Broadway, New York, New York 10279 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may also be inspected at the offices of the New York Stock Exchange, 11 Wall Street, New York, New York 10005, on which our ADSs are listed. In addition, the SEC maintains a website that contains information filed electronically with the SEC, which can be accessed over the internet at http://www.sec.gov . The information contained on this website does not form part of the present paper.
I. Subsidiary information
Not Applicable.

201

Table of Contents

Item 11. Quantitative and Qualitative Disclosures About Market Risk
Introduction
Our risk management activities involve the integrated qualification and quantification of the different types of risk (credit risk, operational risk, reputational risk and market risk) which are assumed by our business units in their activities.
We have divided this section into the following ten parts:
•
Corporate principles of risk management;
•
Corporate governance of the risk function;
•
Integral control of risk;
•
Credit risk;
•
Operational risk;
•
Reputational risk;
•
Adjustment to the new regulatory framework;
•
Economic capital;
•
Risk training activities; and
•
Market risk.
Part 1. Corporate principles of risk management
The vital importance for banks to have appropriate risk management was highlighted in 2009.
Our risk policy is focused on maintaining a low-medium and predictive risk profile.
Quality management of risk is one of our hallmarks and thus a priority in our business. For 150 years, we believe we have combined prudence in risk management with use of advanced risk management techniques, which have proven to be decisive in generating recurrent and balanced earnings and creating shareholder value.
The turmoil affecting financial markets since July 2007 has put the effectiveness of our risk management policies to the test.
Our risk management is based on the following principles:
• Involvement of senior management. The board’s risk committee, the senior management committees and the Group’s units are structured in such a way as to involve management in global supervision of risk taking.
• Independence from the business areas. Matías R. Inciarte, the Group’s third vice-chairman and chairman of the board’s risk committee, reports directly to the board of directors. The establishment of separate functions between the business areas (risk takers) and the areas responsible for risk measurement, analysis, control and information provides independence and autonomy to control risks.

202

Table of Contents

• Collective decision-making (including at the branch level) ensures a variety of opinions are heard and does not make results dependent on decisions solely taken by individuals.
• Joint responsibility for decisions on credit operations between risk and business areas.
• Defining functions. Each risk taker unit and, where appropriate, risk manager has clearly defined the types of activities, segments, risks they could incur and decisions they might make in the sphere of risks, in accordance with delegated powers. How risk is contracted, managed and where operations are recorded is also defined.
• Risk measurement. This considers all the risk positions taken throughout the business perimeter and uses the basic measures in the components and dimensions of risk, in the whole life cycle, for the management at each moment.
• This qualitative approach is based on the use of a series of integrating metrics, primarily consumption of risk capital and RORAC (risk adjusted return).
• Limiting risks. The aim is to limit, efficiently and comprehensively, the maximum risk levels for the various risk measures, so that the risks incurred are known and the necessary infrastructure exists for their management, control and information, so as to prevent undesired types or levels of risk from being incurred and exposures and the losses therefrom, exceeding the maximum levels approved.
• Setting policies and risk procedures. The policies and procedures constitute the basic regulatory framework, articulated through circulars and operating rules which regulate risk activities and processes.
• Defining and assessing risk methodologies. The methodologies provide the definitions of internal risk models, applied by the Group, and, so, require risk measures, methods for evaluating products, methods for constructing interest rate curves and market data series, calculations of capital consumption on the basis of risk and other risk analysis methods, as well as respective calibration and testing.
Management and control of risks at Santander is structured around the following phases:
• Establishment of risk management policies which reflect the principles and standards for the general functioning of risk activities in Grupo Santander, based on a corporate risk management framework which embraces the organizational model and the management model, as well as a series of more specific corporate frameworks for regulating the functions of the directorate general of risk. At the local level, the risk units incorporate the corporate rules to their internal policies and develop the corresponding procedures in order to:
• Identify risks by constantly reviewing and monitoring exposures, assessing new products and analyzing particular transactions.
• Measure risks using methodologies and models that have been put in use after a process of validation and approval.
• Formulate our appetite for risks by setting global and specific limits for the different types of risks, products, customers, groups, sectors and geographic areas.
• Prepare and distribute a complete series of reports, which are reviewed on a daily basis by those responsible for the management of Santander at all levels.
• Implement a system of risks control, which verifies every day the extent to which our risks profile is in line with the risk policies approved and the limits established.

203

Table of Contents

We have been using a series of techniques and tools for many years. They are mentioned in other parts of this report. Of note among them, given that we implemented them ahead of time and in line with the New Basel Capital Accord (BIS II), are:
• Internal rating and scoring models which, by assessing the various qualitative and quantitative components by client and operation, enable the probability of failure to be estimated first and then, on the basis of estimates of losses, the expected loss.
• Economic capital, as the homogeneous metric of the risk assumed and the basis for measuring management.
• Return on Risk Adjusted Capital (RORAC), for pricing operations (bottom up) and analysis of portfolios and units (top down).
• Value at Risk (VaR) as an element of control and for setting the market risk limits of the different trading portfolios.
• Analysis of scenarios and stress testing to complement the analysis of market and credit risk, in order to assess the impact of alternative scenarios, including on provisions and on capital.
For these reasons, we are in accord with BIS II, which recognizes and supports the banking industry’s most advanced practices which the Group has been anticipating.
We calculate the minimum regulatory capital in accordance with Bank of Spain circular 3/2008 on determining and controlling the minimum equity of credit institutions. This regulation completed the transfer to Spanish banking legislation of the Directives (2006/48EC and 2006/49/EC) which incorporate to EU regulations the new Basel Capital Accord (BIS II).
Part 2. Corporate governance of the risk function
The risk committee is responsible for proposing to the board the Group’s risk policy. The board is responsible for approving the policy under its powers of administration and supervision. The committee also ensures that the Group’s activities are consistent with its risk tolerance level and establishes the global limits for the main risk exposures, reviewing them systematically and resolving those transactions that exceed the powers delegated in bodies further down the hierarchy.
The committee is of an executive nature and takes decisions in the sphere of the powers delegated to it by the board. It is chaired by the third vice- chairman of Grupo Santander and contains four other board members.
The committee met 99 times during 2009, underscoring the importance that we give to risk management.
The main responsibilities of the board’s risk committee are to:
• Propose to the board the risk policy for the Group, which must, in particular, identify:
–
The different types of risk (financial, operational, technological, legal and reputational, among others) facing it;
–
The information and internal control systems used to control and manage these risks;
–
The level of risk considered acceptable; and
–
The measures envisaged to mitigate the impact of identified risks, in the event that they materialize;
• Systematically review exposures with the main customers, economic sectors, geographic areas and types of risk.
• Authorize the management tools and risk models, as well as be familiar with the results of the internal validation.
• Ensure that the Group’s actions are consistent with the previously decided risk tolerance level.

204

Table of Contents

• Know, assess and monitor the observations and recommendations periodically formulated by the supervisory authorities in the exercise of their function.
• Resolve transactions that are beyond the powers delegated to bodies further down the hierarchy, as well as the global limits of pre-classification of economic groups or in relation to exposures by classes of risk.
The board’s risk committee delegates some of its powers to other risk committees which are structured by geographic area, business and types of risk.
Our risks function is conducted via two supervising bodies for risks which are independent of the business areas, both from the hierarchical and functional standpoint. Both of them are directly linked to the board via the risk committee and the third vice-chairman (the most senior executive responsible for the Group’s risk management).
In order to meet the requirements of Basel II and reinforce the capacity to tend to the Group’s business growth, the organizational and functional framework of its two directorates-general is as follows:
• Directorate general of integral control and internal validation of risk, with responsibilities of global scope and corporate nature and support for the Group’s organs of governance, which are:
– To assess the suitability and appropriateness of the classification systems, internal processes and treatment of data, in accordance with Basel II.
– To ensure that the management and control systems of the various risks are in line with the Bank’s global risk profile.
• Directorate general of risk, with functions in the following blocks:
– A corporate structure, with global scope responsibilities (“all risks, all countries”), which establishes the policies, methodologies and control: solvency, market and methodology.
– A business structure, centered on the execution and integration in management of the risks function in the Group’s retail, global and local businesses. In this structure, the corporate area of Brazil’s risk was created in 2009, within the Group’s risk division. This area’s objectives include: improving the relation with and joint work between the global areas of risk and the local unit in Brazil, foster globalization of the risk models and obtain and systemize risk management information.
Part 3. Integral control of risks
In 2008 we created the function of integral control of risks, anticipating the new regulatory requirements, then being discussed in numerous organizations and forums, including the Basel Committee, CEBS and FSF, as well as the recommendations on best risk management practices formulated by various public and private bodies.
In July 2009, the Basel Committee required banks to put the integral control of risks function into effect immediately.
Organization, mission and features of internal control of risks
The organization of this function is part of the directorate general of integral control and internal validation of risk. This function supports the Group’s governance bodies in risk management and control.
Particular attention is paid to credit risk (including concentration and counterparty risks); market risk (including liquidity risk, interest rate and exchange rate risk); operational and technology risks; and compliance and reputational risk.

205

Table of Contents

Integral control of risks aims to:
• Module 1) Ensure that the management and control systems of the various risks inherent in Grupo Santander’s activity meet the most demanding criteria and the best practices observed in the industry and/or required by regulators.
• Module 2) Ensure that senior management has at its disposal an integral vision of the profile of the various risks assumed and that these risks are in line with the previously agreed appetite for risks.
• Module 3) Supervise compliance in time and form with the recommendations drawn up for risk management matters following inspections by internal auditing and by the supervisors to whom Santander is subject.
Internal control of risk supports the work of the risk committee, providing it with the best practices in risk management.
The main features of this function are:
• Global and corporate scope: all risks, all businesses, all countries;
• A third layer of control, following the one by the person responsible for managing and controlling each risk in the sphere of each business or functional unit (first layer of control) and the corporate control of each risk (second layer). This ensures the vision and thus integral control of all risks incurred during the year.
• Special attention is paid to the development of best practices in the sphere of the financial industry, in order to be able to incorporate quickly any advances deemed opportune.
• Optimizing the information available and the resources that Grupo Santander assigns to controlling the various risks.
Methodology and tools
In order to systemize the function and adjust it to Santander’s specific needs, the necessary methodology and tools to support it were developed. This makes application of the methodology traceable. The methodology and the tools are articulated through the three modules previously referred to for all risks treated:
• Module 1) A guide of tests or reviews exists for each risk. It consists of more than 650 tests (for all the risks), divided in spheres of control (for example, corporate governance, organizational structure, management systems, integration in management, technology environment, contingency plans and business continuity, etc).
Applying the tests and obtaining the relevant evidence which is assessed and enables the parameters of control of the various risks to be homogenized is done every six months. New tests are incorporated as needed. The support tool is the risk control monitor, which is a repository of the results of each test and of their work papers.
• Module 2) A synthetic control panel is being designed, along with the corresponding tool, to enable senior management to monitor the various risks assumed and their degree of adjustment to the previously formulated risk appetites.
• Module 3) The SEGRE tool is used to track the recommendations made by internal auditing and by the supervisors regarding risk control and management and it also includes the recommendations by integral control. Use of this tool is coordinated with the relevant risk control areas so that monitoring is optimized.
The Bank of Spain can access these tools if it so wishes.

206

Table of Contents

Main advances in 2009
In deploying the internal control of risks, the following stages were covered:
(a) The first cycle of reviewing the various risks was completed in close contact with the corporate areas of control, contrasting and assessing the control and management systems of these risks. Improvements were identified and turned into recommendations -with their corresponding schedule for implementation agreed with the areas- so that progress could be monitored.
(b) The corporate model of integral control of risks was presented, as well as the first diagnostic report on the auditing and compliance committee, the risk committee and the board which approved the model.
(c) The process of informing the board and giving them an integral vision of all risks was begun.
(d) The first steps were taken to extend the integral control of risks model to the Group’s main units.
Part 4. Credit risk
4.1 Introduction to the treatment of credit risk
Credit risk is the possibility of losses stemming from the failure of clients or counterparties to meet their financial obligations with the Group.
The Group’s risks function is organized on the basis of the type of customer in order to distinguish, for risk management purposes, between companies under individualized management and standardized customers:
• Those under individualized management are assigned, mainly because of the risk assumed, a risk analyst. This category includes the companies of wholesale banking, financial institutions and some of the companies of retail banking. Risk management is conducted through expert analysis backed up by tools to support decision making based on internal models of risk assessment.
• Standardized: customers refer to those who have not been specifically assigned a risk analyst. This category includes individuals, individual businessmen and retail banking companies that are not segmented. Management of these risks is based on internal models of assessment and automatic decisions, complemented -where the model does not go far enough or is not sufficiently precise- by teams of analysts specialized in this type of risk.
4.2 Main magnitudes and evolution
The Group’s credit risk profile is characterized by diversified geographic distribution and predominantly retail banking activity.
A. Global map of credit risk in 2009
The table below sets out the global credit risk exposure in nominal amounts (except for derivatives and repos exposure which is expressed in equivalent credit) at December 31, 2009.
Growth in lending was moderate, due to reduced demand (a very significant part of the growth was due to the change in perimeter with the incorporation of Sovereign). The nominal exposure to credit risk increased 8.8%, particularly due to customers and commitments to customers. Excluding Sovereign, growth was 3.3%.
Spain is the most relevant unit with respect to exposure to credit risk (7% lower in absolute terms). Of note in the rest of Europe, which accounts for more than one third of the credit exposure, is the presence in the UK. Overall, Europe accounts for 75% of the credit exposure.

207

Table of Contents

In Latin America investment grade countries accounted for 96% of the region’s exposure.
With the incorporation of Sovereign Bank, the US accounted for 6% of credit exposure at the end of 2009.
Grupo Santander Gross exposure to credit risk
Million euros
Sovereign fixed Private fixed Outstanding Drawable Commitments
Outstanding Commitments income income to credit credit to credit
to customers to customers (exc trading.) (exc trading.) entitles entities entities Total % %/dec. 08
Spain
281,621 57,179 29,602 11,835 28,440 1,113 27,911 437,700 39.6 % (7.1 %)
Parent bank
170,692 39,716 20,769 8,049 19,038 736 19,053 278,053 25.2 % (8.6 %)
Bonesto
80,109 11,167 6,204 2,003 6,696 225 8,701 115,104 10.4 % 3.2 %
Others
30,819 6,296 2,629 1,784 2,706 152 157 44,543 4.0 % (19.4 %)
Rest of Europe
305,831 36,827 3,844 16,025 9,025 155 18,877 390,583 35.3 % 10.8 %
Germany
22,256 9 — 159 432 — 5 22,861 2.1 % (5.0 %)
Portugal
22,143 8,276 2,734 1,410 2,425 — 1,519 38,507 3.5 % 6.9 %
United Kingdom
228,044 26,484 464 14,136 5,172 155 17,132 291,587 26.4 % 12.9 %
Others
33,387 2,058 646 320 996 — 220 37,627 3.4 % 10.6 %
Latin America
104,965 45,537 24,280 1,821 20,684 19 10,648 207,953 18.8 % 15.4 %
Brazil
62,952 30,996 16,719 1,212 14,535 — 5,564 131,978 11.9 % 38.3 %
Chile
20,200 6,300 2,220 502 1,812 19 3,209 34,261 3.1 % 22.0 %
Mexico
11,611 6,724 4,252 — 2,220 — 1,573 26,379 2.4 % (7.3 %)
Others
10,202 1,516 1,089 108 2,118 — 303 15,335 1.4 % (45.6 %)
United States
43,814 9,395 1,742 9,157 2,970 77 105 67,260 6.1 %
Rest of the world
1,017 262 80 1 167 — — 1,526 0.1 %
Total Group
737,246 149,200 59,547 38,839 61,287 1,363 57,540 1,105,022 100.00 % 8.8 %
% of total
66.7 % 13.5 % 5.4 % 3.5 % 5.5 % 0.1 % 5.2 % 100 %
% change/dec. 08
6.5 % 27.2 % 68.5 % 45.3 % (30.8 %) (77.3 %) 16.9 % 8.8 %
Data at December 31, 2009, drawn up on the basis of legal company criteria.
ECR (equivalent credit risk net value or replacement plus the maximum potential value, includes mitigants)
Derivatives and repos exclude Sovereign and Alliance & Leicester.
Balances with customers exclude repos (EUR 13,439 million) and other customer create assets (EUR 7,661 million)
Balances with credit entities (excluding repos and trading) include EUR 29,718 million of deposits in central banks.

208

Table of Contents

B. Evolution of the magnitudes in 2009
The evolution of non-performing loans and the cost of credit reflect the impact of the deterioration of the economic environment softened by prudent risk management which generally enabled these figures to remain lower than those of our competitors. As a result, we maintain a significant level of coverage and general provisions.
Our ratio of non-performing loans (NPLs) was 3.24% at the end of 2009, after an increase of 120 basis points during the year. NPL coverage was 75.3% compared to 90.6% at the end of 2008.
Specific provisions for loan losses, net of recoveries, amounted to € 11,760 million, 1.57% of the average credit exposure with customers (the year’s average lending plus financial guarantees), up from 1.16% in 2008.
Grupo Santander’s credit risk management
Credit risk Spec, prov net of
with customers* NPL ratio Coverage recovered write-offs** Credit cost
(million euros) % % (million euros) (% of risk)
2009 2008 2009 2008 2009 2008 2009 2008 2009 2008
Continental Europe
366,970 368,512 3.64 2.31 76.6 90.0 5,084 3,201 1.39 0.89
Santander Branch network
129,099 135,508 4.38 2.58 64.9 74.9 1,851 1,204 1.41 0.91
Banesto
86,681 87,925 2.97 1.64 64.1 106.5 737 450 0.89 0,53
Santander Consumer Finance
60,245 56,245 5.39 4.18 96.8 85.5 2,005 1,402 3.38 2.71
Portugal
34,501 34,760 2.27 1.72 64.6 77.2 95 6 0.27 0.02
United Kingdom
238,215 217,063 1.71 1.04 43.8 68.5 1,018 442 0.43 0.23
Latin America
117,146 112,040 4.25 2.95 105.2 108.3 5,053 3,965 4.44 3.44
Brazil
65,611 53,764 5.27 3.58 99.2 102.4 3,537 2,493 5.88 4.30
Mexico
12,676 13,482 1.84 2. 41 264.4 132.1 824 879 6.13 5.44
Chile
21,384 18,848 3.20 2.64 89.0 102.4 402 350 1.98 1.73
Puerto Rico
4,132 4,810 9.60 6.92 53,3 61.0 89 138 1.99 2.84
Colombia
1,719 1,464 1.83 1.79 187.5 204.1 31 44 1.94 2.83
Argentina
2,936 3,271 2.60 1.83 141.0 178.6 91 49 2.99 1.54
Sovereign
38,770 5.35 62.5 578
Total Group
758,347 697,200 3.24 2.04 75.3 90.6 11,760 7,659 1.57 1.16
Memo item:
Spain
284,307 300,524 3.41 1.95 73.4 98.5 3,497 2,150 1.20 0.71
Data drawn up on the basis of management criteria, Memo item, on the basis of accounting criterion — Financial Control
The figures for 2008 have been restated, consolidating Banco Real by global integration for the year
(*) Includes gross loans to customers, guarantees and documentary credits
(**) Bad debts recovered
C. Distribution of credit risk
The charts below show the diversification of our loans by countries and customer segments both for our total credit portfolio and for our massive or standardized portfolio. We are geographically diversified and focused on our core markets.
Our profile is essentially retail (86.3% retail banking), and most portfolios are products with a real guarantee (e.g. mortgages).

209

Table of Contents

(PIE CHART)
(PIE CHART)
4.3 Metrics and measurement tools
A. Rating tools
Since 1993, we have been using our own models for assigning solvency and internal ratings, which measure the degree of risk of a client or transaction. Each rating corresponds to a certain probability of default or non-payment, the result of past experience, except for some termed “low default portfolios”. We have around 200 internal rating models for risk admission and monitoring.
Global rating tools are used for the segments of sovereign risk, financial institutions and global wholesale banking. Their management is centralized in the Group, both for determining their rating as well as for monitoring the risk. These tools assign a rating for each customer, based on balance sheet ratios or macroeconomic variables, and supplemented by the expert view of an analyst.
In the case of companies and institutions under individualized management, the Parent company of our Group has defined a single methodology for formulating a rating in each country. The rating is determined by an automatic model which reflects a first intervention by the analyst and which may later be complemented. The automatic model determines the rating in two phases, one quantitative and the other qualitative based on a corrective questionnaire which enables the analyst to modify the automatic scoring by a maximum of ±2 points of rating. The quantitative rating is determined by analyzing the credit performance of a sample of customers and the correlation with their financial statements. The questionnaire has 24 questions divided into six areas of assessment. The automatic rating can be changed by an analyst by overriding it or by using a manual assessment model.

210

Table of Contents

The ratings accorded to customers are regularly reviewed, incorporating any new financial information available and the experience in the development of the banking relation. The regularity of the reviews increases in the case of clients who reach certain levels in the automatic warning systems and for those classified as “special watch”. The rating tools are also reviewed so that their accuracy can be fine-tuned.
In the case of standardized risks, both for transactions with companies as well as individuals, there are scoring tools which automatically assess the operations.
These admission systems are complemented by performance assessment models which enable the risk assumed to be better predicted. They are used for both preventative activities as well as sales.
B. Parameters of credit risk
The assessment of a customer or transaction, through ratings or scorings, constitutes a judgment of the credit quality, which is quantified via probability of default (PD).
As well as evaluating the customer, quantifying credit risk requires other parameters to be estimated such as exposure at default (EaD) and the percentage of EaD that might not be recovered (loss given default or LGD). Other aspects are also included such as quantifying off-balance sheet exposures, which depend on the type of product, or analysis of expected recoveries, related to the guarantees existing.
These factors comprise the main credit risk parameters. Their combination enables the probable or expected loss (EL) to be calculated. This loss is considered as one more cost of the activity as it reflects the risk premium and should be incorporated into the price of operations.
The following charts show the distribution of failed consumer loans and mortgages since 2001 on the basis of the percentage recovered after discounting all the costs –including the financial or opportunity– from the recovery process.
(PIE CHART)
The risk parameters also calculate the regulatory capital in accordance with the rules of the new Basel Capital Accord (BIS II). The regulatory capital is the difference between the unexpected and the expected loss.
The unexpected loss is the basis for calculating the capital and makes reference to a very high level of loss. But the loss is not very probable, not considered recurrent and must be tackled with equity.
Estimates of the risk parameters (PD, LGD and EaD) should be based on internal experience – i.e. on observations of defaults and experience in recovering these transactions.

211

Table of Contents

In portfolios where the internal experience of defaults is scant, such as banks, sovereigns or global wholesale banking, estimates of the parameters come from alternative sources: market prices or studies by external agencies which draw on the shared experience of a sufficient number of institutions. These portfolios are called low default portfolios.
For other portfolios, estimates are based on the institution’s internal experience. The PD is calculated by observing the NPL entries and putting them in relation to the final rating assigned to the customer or with the scoring assigned to the operations.
The LGD calculation is based on observing the recovery process of transactions not fulfilled, taking into account not only the revenues and costs associated with this process, but also the moment when they are produced and the indirect costs incurred in recovery activity.
The estimation of the EaD comes from comparing the use of the lines committed at the moment of default and a normal situation, in order to identify the real consumption of the lines at the time of default.
The parameters estimated for global portfolios are the same for all the Group’s units. A financial institution with a rating of 8.5 will have the same PD regardless of the unit in which its exposure is recorded. On the other hand, retail portfolios have specific scoring systems in each unit of the Group. This requires separate estimates and specific assignment in each case.
The parameters are then assigned to the transactions present in the balance sheet in order to calculate the expected losses and the capital requirements associated with such exposure.
C. Master scale of global ratings
The models committee approved the following relation between internal rating and probability of default (PD) for the global portfolios of banks and global wholesale banking.
Probability of default
Internal rating PD Wholesale Banking PD Banks
9.3
0.018 % 0.013 %
9.2
0.020 % 0.014 %
9.0
0.024 % 0.018 %
8.5
0.037 % 0.029 %
8.0
0.060 % 0.049 %
7.5
0.095 % 0.083 %
7.0
0.151 % 0.139 %
6.5
0.240 % 0.232 %
6.0
0.382 % 0.390 %
5.5
0.607 % 0.653 %
5.0
0.965 % 1.095 %
4.5
1.535 % 1.835 %
4.0
2.442 % 3.076 %
3.5
3.884 % 5.157 %
3.0
6.178 % 8.645 %
2.5
9.826 % 14.492 %
2.0
15.627 % 24.294 %
1.5
24.855 % 40.725 %
1.0
39.532 % 68.268 %
These PDs are applied uniformly throughout the Group in accordance with the global management of these portfolios. As can be seen, the PD assigned to the internal rating is not exactly equal for a same rating in both portfolios, although it is very similar in the tranches where most of the exposure is concentrated (i.e. in tranches of rating of more than six).

212

Table of Contents

D. Distribution of EaD and expected loss (EL) associated
The table below sets out the distribution by segments of the outstanding credit exposure to customers in terms of EaD, PD, LGD and EL. Approximately 83% of total risk with clients (excluding sovereign, and counterparty risks and other assets) corresponds to companies, SMEs and loans to individuals, underlining the retail focus of Santander’s business and risks. The expected loss from customer exposure is 1.09% (0.90% for the Group’s total credit exposure), which can be considered as a mediumtolow risk profile.
Segmentation of credit risk exposure
Average Average
EaD 1 % PD LGD EL
Sovereign debt
104,457 11.0 % 0.23 % 14.54 % 0.03 %
Counterparty
76,888 8.1 % 0.29 % 70.34 % 0.21 %
Public sector
3,129 0.3 % 0.70 % 21.32 % 0.15 %
Corporate
131,703 13.8 % 0.51 % 39.68 % 0.20 %
SMEs
186,321 19.5 % 4.65 % 28.11 % 1.31 %
Mortgages (individuals)
302,395 31.7 % 3.30 % 7.04 % 0.23 %
Consumer loans (individuals)
111,452 11.7 % 6.51 % 52.42 % 3.41 %
Credit cards of individuals
24,297 2.5 % 6.73 % 64.94 % 4.37 %
Other assets
13,066 1.4 % 2.47 % 29.73 % 0.74 %
Memorandum item customers 2
759,296 79.6 % 3.72 % 29.32 % 1.09 %
Total
953,707 100.00 % 3.04 % 29.52 % 0.90 %
Data at December 09
(1)
Excluding doubtful loans.
(2)
Excluding sovereign, counterparty and other assets.
4.4. Loss observed: measurements of credit cost
As well as using these advanced models, other usual measures are employed which provide prudent and effective management of credit risk on the basis of the loss observed.
Our cost of credit is measured by various means: change in net entries (final doubtful loans – initial doubtful loans + write offs – recovered write offs); net loan-loss provisions (specific provisions – recovered write-offs); and net write-offs (write offs – recovered write-offs).
(PIE CHART)

213

Table of Contents

The three approaches measure the same reality and, consequently, converge in the long term although they represent successive moments in credit cost measurement: flows of non-performing loans (non-performing loans management variation, NPLMV), coverage of doubtful loans (net loan-loss provisions, NLLPs) and becoming write-offs (net write-offs), respectively. However in the long term and within the same economic cycle, the three show differences at certain times which are particularly significant at the start of a change of cycle. These differences are due to the different moments at which the losses are calculated, which are basically determined by accounting rules (for example, mortgages have a calendar of coverage and become write-offs more “slowly” than consumer loans). In addition, the analysis can be complicated by changes in the policy of coverage and entry into write-offs, composition of the portfolio, doubtful loans of entities acquired, changes in accounting rules, sale of portfolios, etc.
The following charts reflect the cost of our credit risk in its main areas of activity in 2009 and prior years, measured in various ways:
(PIE CHART)
The year-on-year change includes the exchange-rate impact which for Latin America was around 31.8% in net write offs, 3.2% in net provisions and 14.6% in net entries.

214

Table of Contents

The general trend over the past few years has been to maintain the cost of our credit at low levels. In 2009, there was a rise in the cost of credit due to the economic downturn and growth in retail profiles which, with a higher expected loss, have higher levels of direct return (financial margin less cost of provisions) and indirect return (induced business) and greater attractiveness because of the more predictable nature of this type of risk.
4.5 Credit risk cycle
Risk management consists of identifying, measuring, analyzing, controlling, negotiating and acting on the risks incurred by the Group’s operations. The process involves risk takers and senior management, as well as the risk areas.
The process emanates from senior management, via the board of directors, the executive committee and the risk committee; they set the risk policies and procedures, the limits and delegating of powers, and approve and supervise the framework of the risks function.
The risk cycle has three phases: pre-sale, sale and after sale:
• Pre-sale: this includes the planning and setting of objectives, determining the appetite for risk, approving new products, studying the risk and rating loans, and establishing limits.
• Sale: this covers the phase of decision-making both for operations under pre-classification as well as one-off transactions.
• After sale: monitoring, measurement, control and recovery management.
A. Planning and setting limits
Setting limits is a dynamic process which identifies the Group’s risk appetite by discussing business proposals and the opinion of risks.
The Global Plan of Limits, the document drawn up on the basis of consensus which provides complete management of the balance sheet and of the inherent risks, establishes the risk appetite in the various factors.
The limits are based on two structures: customers/segments and products.
The most basic level is the customer and when certain features are present –generally of relative importance– an individual limit (pre-classification) is set.
A pre-classification model based on a system for measuring and monitoring economic capital is used for large corporate groups. A more simplified version is used for those companies who meet certain requirements (high knowledge, rating, etc).
In the sphere of standardized risk, the planning and setting of limits is done through Credit Management Programs (CMPs), a document reached by consensus between the business and risk areas and approved by the risk committee or committees delegated by it. The CMPs set out the expected results of business in terms of risk and return, as well as the limits to which activity is subject and management of the associated risks.
B. Risk study and process of credit rating
The study of risk is obviously a prior requirement for authorizing customer operations. It consists of analyzing the capacity of the customer to meet their contractual obligations with the Bank. This entails analyzing the customer’s credit quality, risk transactions, solvency and return in accordance with the risk assumed.

215

Table of Contents

The risk study is carried out every time there is a new customer or transaction or with a pre-established regularity, depending on the segment. In addition, the rating is studied and reviewed every time there is an alert or something that affects the customer/operation.
C. Decisions on operations
The purpose of the decision-making process is to analyze and resolve transactions, taking into consideration both the risk appetite as well as those elements of the operation that are relevant in the search for the appropriate balance between risk and return.
We have been using RORAC methodology (return on risk adjusted capital) since 1993 to analyze and set prices for operations and businesses.
D. Monitoring and control
As well as the tasks carried out by the internal auditing division, the risk division, through local and global teams, controls credit quality by monitoring the risks and has the resources and specific people dedicated to it.
The monitoring is based on a continuous process of permanent observation, which enables incidents to be detected in advance in the evolution of risk, transactions, customers, and their environment in order to take steps to mitigate them. The monitoring is conducted on the basis of customer segmentation.
We have a system called Companies in Special Watch (FEVE) which identifies four levels on the basis of the degree of concern arising from the circumstances observed (extinguish, secure, reduce, monitor). The inclusion of a company in FEVE does not mean there have been defaults, but rather the advisability of adopting a specific policy toward that company and establishing the period for it. Clients in FEVE are reviewed at least every six months, and every quarter for the most serious cases. A company can end up in special watch as a result of monitoring, a review conducted by internal auditing, a decision of the person responsible for the company or the entry into functioning of the system established for automatic warnings.
Ratings of risk balances according
to the FEVE monitoring system
Million euros at December 2009
Extinguish Secure Reduce Monitor Total FEVE
Retail Banking Spain
4,425 1,065 11,956 12,137 29,583
Banesto
9,230 1,290 2,582 11,447 24,549
Portugal
425 130 787 1,690 3,031
UK
1,225 86 387 3,259 4,957
Latin America
480 93 818 2,377 3,768
Total
15,785 2,664 16,531 30,908 65,888
Note:
excluding Sovereign.
The risk classifications in FEVE are independent in each institution and respond to the different criteria for rating these risks and the management of them on the basis of the category in which they are classfied.
Ratings are reviewed at least every year, but if weaknesses are detected, or on the basis of the rating, it is done more regularly.
As regards the risks of standardized clients, the main indicators are monitored in order to detect shifts in the performance of the loan portfolio with respect to the forecasts made in the credit management programs.

216

Table of Contents

Spain’s credit portfolio
General view of the portfolio
At the end of 2009, Spanish credit risk amounted to € 284,307 million (37.49% of the Group’s total).
This exposure has a high degree of diversification, both by product as well as by customer segment. The aggregate branch network of Banco Santander and Banesto have 48% of their credit portfolio in companies under individualized management, 32% in the residential mortgage portfolio and 6% in public institutions.
(PIE CHART)
In accordance with the Bank of Spain’s rules, the Group regards as doubtful loans those which have not been serviced for more than 90 days and includes the total debt of the customer when the unpaid part represents more than 25% of it or when pre-judicial actions are taken. Also considered as doubtful loans are those which, without entering into non-compliance, have reasonable doubts of being fully repaid.
Under this definition, the non-performing loan (NPL) ratio in Spain was 3.41%, well below the aggregate of commercial banks as a whole, according to the Bank of Spain, and with a more moderate growth trend.
NPL coverage was 73.4%.
In addition, and in line with the Bank of Spain’s rules and indications, loans classified as substandard are those which, while being up to date on payments and with no reason to be classified as doubtful, show some weakness which could lead to non-payments and losses, as they involve the weakest customers from certain collectives or sectors affected by extraordinary circumstances of greater risk. This category has € 6,724 million of classified risks.
(PIE CHART)

217

Table of Contents

Analysis of the mortgage portfolio of individual customers
Of note, within standardized risks because of their importance in the Group’s total lending in Spain, is the portfolio of mortgage loans to individuals.
This portfolio has been affected by the gradual downturn in the real economy, which caused demand for loans to drop in 2008 and in 2009. The following charts, however, show that in the retail networks in Spain the number of mortgage loan requests showed signs of picking up in the fourth quarter of 2009. In this context, Santander continued to apply its established admission criteria and policies (the authorization rate remained at average levels of around 70%).
(PIE CHART)

218

Table of Contents

The measures taken in admission improved the credit quality and maintained the authorization rates. For new loans between 2007 and 2009, the quarterly maturity of vintages was as follows.
(PIE CHART)
At the end of 2009, the non-performing loan ratio of the Group’s residential mortgage portfolio in Spain was 2.46%, higher than at December 2008, but below the average rates in the Spanish financial system.
In the face of the deterioration in the scenario, the medium low risk profile of this portfolio enables one to estimate a small impact at Group level and a low estimated final loss, thanks to real guarantees. The portfolio, and thus its risk profile, is characterized by a predominance of first homes, an average loan-to-value (LTV) of 52% (with values updated on the basis of the house price index of the Housing Ministry) and an affordability rate in admission of 31%.
Residential mortgage loans account for 31.8% of the total credit risk of Santander Retail Banking and Banesto, with a LTV below 80% for 85% of the portfolio of residential mortgages.
Santander Spain: Portfolio
Million euros
Dec. 09
Portfolio %
Residential mortgages
68,601 31.8
First home
64,403 93.9
Second home and others
4,198 6.1

219

Table of Contents

(PIE CHART)

220

Table of Contents

Lending to the construction and real estate activity sectors in Spain
These two sectors are among the most affected by the downturn.
Lending to these sectors in Spain (Banco Santander and Banesto) amounted to € 42,256 million. This portfolio includes the financing of activities as diverse as the tourism sector, sale and leaseback operations, development of companies that depend on local and regional governments and insurance firms, among others.
The non-performing loan ratio of this portfolio, on the basis of the criteria already indicated, was 6.2%, higher than the Group’s average ratio. Coverage stood at 45%.
In addition, and in accordance with Bank of Spain guidelines, there is € 4,332 million of risks classified as sub-standard.
A particularly important product in the real estate portfolio is mortgage loans to real estate developers. At the end of 2009, this amounted to € 12,207 million and represented around 1.6% of Grupo Santander’s global credit portfolio. The exposure to this product was 9.3% less than in 2008 and 13.8% lower than in 2007.
At the end of 2009, this portfolio of loans to real estate developers had a large number of customers, with a low degree of concentration and an appropriate level of guarantees and coverage.
The distribution was as follows:
•
Developments completed and with the final certificate of work: 66.7% of outstanding risk.
•
Developments more than 80% completed: 14.5% of outstanding risk.
•
Developments between 50% and 80% completed: 8.9% of outstanding risk.
•
Developments less than 50% completed: 9.8%.
These figures show that this portfolio has a high degree of completion progress, with 81.2% of buildings underway with the construction risk already surpassed or close to it.
In addition to the constant control by our monitoring teams, there is a technical unit specialized in monitoring and controlling this portfolio in relation to building progress, fulfillment of plans and controlling sales, as well as validation and control of disbursements by certifications.
This portfolio of credit to the construction sector and real estate development has been submitted to the Group’s usual stress testing exercises, the results of which are set out on page 223 of this report.
Acquisition of property assets (Spain)
One of the mechanisms used in Spain to manage risk more efficiently is to acquire real estate assets. The volume of acquisitions was reduced significantly in 2009 and the net balance of property acquired at the end the year was € 2,935 million. The net initial balance was € 3,768 million and during 2009 purchases amounted to € 908 million, mostly in the first half of the year, and provisions and writedowns amounted to € 947 million.
The reasons for this option as opposed to initiating legal proceedings are as follows:
•
The length of legal proceedings as against the immediate availability of these assets.
•
Cost savings.

221

Table of Contents

•
It facilitates the viability of companies as liquidity is injected into their activity.
•
Reduction in the possible loss of value in the loans of these clients.
•
Reduction in exposure and in expected loss.
Furthermore, and as part of normal banking practice in risk management, we were awarded properties during 2009 for a gross amount of € 1,357 million. The net balance of the awarded assets is € 1,595 million.
At the end of 2009, the gross amount of acquired properties was € 4,304 million and those awarded € 2,217 million.
It should also be noted that this process is conducted with a policy of provisions that follows the Group’s usual criteria. The value of these assets is assessed regularly in order to guarantee an appropriate level of provisions (31% coverage at the end of 2009, clearly above the regulatory requirements).
As well as the usual structure for management of these assets, there are specialized firms to manage and sell the properties so that the acquired and awarded assets can be treated more efficiently.
Analysis of the potentially problematic exposure
Given the economic circumstances affecting these sectors and the need for adjustments in them, and taking as a basis the aforementioned figures, the potentially problematic exposure –the combined figure of doubtful and sub-standard assets plus the total assets acquired and awarded plus write-offs– in the construction and real estate development sectors is € 13,961 million.
The specific provisions for this portfolio amount to € 4,024 million (coverage of 29%), in line with the banking sector’s average as they are regulatory provisions. If we add to these provisions the general ones available in Spain coverage is 50%.
Coverage would be 93% if we take into account the Group’s net operating income in Spain (Banco Santander plus Banesto) at the end of 2009(1).
These coverage levels are higher than the sector’s average, given the higher amount of both available general provisions as well as our net operating income in Spain.
(1)
This information is given in order to follow the systematics of the Bank of Spain’s March 2010 Financial Stability Report. For the whole system, this report puts coverage at 71%.

222

Table of Contents

Exposure and coverage of the construction and real estate development sectors. December 2009
Total System Grupo Santander Spain
Million euros % Million euros %
Exposure
445,000 48,299 1
Non-performing loans
42,800 9.6 2,972 6.2
Sub-standard
59,000 13.3 4,332 9.0
Acquired and awarded (gross)
59,700 11.8 2 6,521 11.9 2
Write-offs
4,000 0.9 137 3 0.3
Potentially problematic exposure
165,500 33 2 13,961 25 2
Coverage
Specific provisions
42,300 26 4,024 29
Non-performing loans
17,700 41 1.323 45
Sub-standard
7,600 13 573 13
Acquired and awarded (gross)
13,000 22 1,991 31
Write-offs 4
4,000 137
Specific plus generic
35 50
(1)
Consolidated figure of EUR 42,256 million.
(2)
The percentage is calculated over total non-consolidated investment+acquired and awarded assets.
(3)
Data for 2009.
(4)
Fully covered with provisions.
Refinancing
Refinancing is one of the management tools used to adjust maturity structures of principal and interest payments to the new payment capacity of customers.
At Grupo Santander, these transactions are restricted, on the basis of rigorous and selective criteria, to:
•
viable transactions,
•
where the customer intends to pay,
•
which improve the Bank’s position in terms of expected loss, and
•
where the refinancing does not discourage additional effort by the customer.
The Corporate Policy of Restructurings ensures homogeneous and rigorous application of these criteria in the various units:
•
The customer’s risk is assessed overall, irrespective of the situation of each individual contract, and all the risks are provided with the highest possible level of guarantees.
•
As a general rule, the risk with the customer is not increased.
•
All the alternatives to the refinancing and its effects are evaluated, ensuring that the results of it are better than what might have been obtained if nothing was done.
•
Particular attention is paid to collateral and the possible future evolution of its value.

223

Table of Contents

•
Its use is restricted, giving precedence to the renewal of risks with additional efforts by the customer and avoiding situations that only postpone the problem.
•
The refinanced transactions are put under special watch.
These criteria are mainly aimed at those situations of low impact on the customer’s payment capacity, which are estimated to be of medium/long duration. On a more restrictive basis, more serious cases where the payment difficulty is estimated to not last long can also be considered. The severest cases are not susceptible to refinancing and other solutions to recover the appropriate amount are sought.
In addition to close monitoring of these portfolios by our risk management teams, the various supervisory authorities to which the Group is subject as well as internal auditing pay particular attention to controlling and assessing the refinanced portfolios.
Refinancing does not mean the release of provisions or the classification of these loans as normal, unless:
•
They meet the criteria in the regulations based on Bank of Spain circulars (payment of ordinary interest pending and new effective guarantees or reasonable certainty of payment capacity).
•
They fulfill the precautions which under prudent criteria are set out in the Group’s Corporate Policy (sustained payment for between 3 and 12 months, on the basis of the operation’s features and the type of guarantees).
(LINE GRAPH)
In the case of Spain (Santander branch network plus Banesto), the balance of refinancing at the end of 2009 was € 1,449 million, of which € 950 million were company operations and € 499 million were with individuals.
Of the total refinancing, € 1,028 million met the requirements set by the Bank of Spain in appendix IX of its Circular 4/2004 for being regularized to the normal situation at the time of formalization. At the end of 2009, the non-performing loan ratio of these operations was 8.2%.
The remaining € 421 million is refinancing which, following the conditions defined by the Bank of Spain, was maintained as non-performing loans at formalization.
The chart above shows the monthly volume of refinancing in 2009, mostly concentrated in the first half, as well as the evolution of the non-performing loan ratio of this portfolio.

224

Table of Contents

Stress testing exercises
Grupo Santander regularly conducts stress testing exercises on its main credit portfolios (see further on). These theoretical exercises, required by the regulator, simulate the effect on the Bank’s credit portfolios of the different scenarios of a country’s main economic and financial variables. In the case of Spain, the exercise affects all credit portfolios.
Among the hypotheses handled, the severest one assumes an intense shrinkage of the Spanish economy in 2010 and 2011 and slight growth in 2012, with decreases in housing prices, in addition to those already seen (41% cumulative). In this scenario, very far from any historical experience and assigned a very small chance of happening, the expected loss in 2010, 2011 or 2012 for the portfolios of Santander and Banesto would not surpass 80% of recurrent net operating income in 2009. The net operating income of the Santander Branch Network and Banesto in 2009 was € 4,803 million.
Of this figure, € 4,208 million of expected loss would correspond to the construction and real estate development sectors for the next three years.
In addition, Grupo Santander had general provisions of € 6,727 million at the end of 2009.
Analysis of the UK’s mortgage portfolio
As well as the risk portfolio in Spain, of note in standardized risks and because of its importance in Grupo Santander’s total lending is the UK mortgage portfolio.
This portfolio is focused on first home mortgages, with a high quality of risk in terms of Loan to Value (average value of 56%). The mortgages with the highest risk profile (buy-to-let) account for a small percentage of the total (barely 1%).
The following table shows the distribution by type of loan:
Mortgage portfolio United Kingdom Dec. 09
Million euros Portfolio % of loans
Residential mortgages
180,694 75.9 *
First home buyer
26,540 14.7
Mover
66,171 36.6
Remortgage
87,983 48.7
(*)
the total UK portfolio.
First time buyer: customers who buys home for the first time.
Mover: customers who change home with or without changing the bank that granted the mortgage.
Remortgage: customers who Transfer their mortgage from another bank.

225

Table of Contents

(PIE CHART)

226

Table of Contents

E. Control function
The management process is also aided during the various phases of the risk cycle by the control function. This provides a global vision of our portfolio of loans with the sufficient level of detail, enabling the current risk position and its evolution to be assessed.
The evolution of risk with regard to budgets, limits and standards of reference is constantly and systematically controlled and the impact in the face of future situations, both exogenous and arising from strategic decisions, assessed in order to establish measures that put the profile and volume of the portfolio of risks within the parameters set by the Group.
The control function is conducted by assessing risks from various perspectives and establishing as the main elements control by countries, business areas, management models, products and processes. This facilitates detection and focuses specific attention for decision-making.
In the context of 2009, one of the focuses of the function was to ensure compliance with the corporate criteria for classifying refinanced portfolios, as well as to monitor the volumes of new lending and their performance.
In 2006, under the corporate framework established in the Group for complying with the Sarbanes-Oxley Act of 2002, a tool was created in the Group’s intranet to document and certify all sub processes, operational risks and controls that mitigate them. The risk division, as part of the Group, evaluates every year the efficiency of internal control of its activities.
Analysis of scenarios
As part of its continuous monitoring and control, we conduct simulations of our portfolio using adverse scenarios and stress testing in order to assess our solvency in the face of certain situations in the future. These simulations cover all of the Group’s most relevant portfolios and are done systematically using a corporate methodology which:
•
Determines the sensitivity of risk factors (PD and LGD) in the face of certain macroeconomic variables.
•
Defines reference scenarios (at the global level as well as for each of the Group’s units).
•
Identifies “rupture scenarios” (levels as of which the sensitivity of risk factors to macroeconomic variables is more accentuated) and the distance of these scenarios from the current situation and the reference scenarios.
•
Estimates the expected loss of each scenario and the evolution of the risk profile of each portfolio in the face of movements in certain macroeconomic variables.
The simulation models use the data of a complete economic cycle to measure the performance of risk factors in the face of changes in macroeconomic variables.
In the wholesale sphere, as they are low default portfolios, there is not sufficient data on defaults to conduct this measurement and expert criteria are used.
The scenarios take into account the vision of each unit as well as the global outlook. The variables include:
•
The unemployment rate
•
Property prices
•
GDP
•
Interest rates
•
Inflation

227

Table of Contents

The analysis of scenarios enables senior management to better understand the foreseeable evolution of the portfolio in the face of market conditions and changing situations, and it is a key tool for assessing the sufficiency of the provisions established for stress scenarios.
The analysis of the baseline and acid scenarios for the whole Group and for each unit, with a time frame of five years, shows the strength of the balance sheet in the face of different market and macroeconomic situations.
F. Recovery activity
Santander’s recovery management is a strategic, integral and business activity.
We have a global model which is applied and executed locally and takes into account the business features in each sphere.
The purpose of recovery activity is to:
•
Obtain payment and regularization of the pending balances so that an account returns to its normal state; if this is not possible the objective is total or partial recovery of debts, in any of the accounting or management situations in which they find themselves.
•
Maintain and strengthen our relations with the customer and nurture the payment performance.
Recovery activity is part of business and is based on the relation with the customer and on the contribution to results. Santander has created its own management model, associating and exploiting management capacities and commercial and risk intelligence in order to improve results and maintain our traditional culture regarding quality and sensitivity to risk.
This model operates in all phases of management: both before default, through preventative management which helps the customer or detects early on possible problems, as well as in the subsequent phases of the recovery process: management of irregular loans, of non-performing loans and of write-offs.
Clients in this process are segmented (massive or standardized and those under individualized management with specific management models in each case), in accordance with basic specialization criteria. Recovery management is shared with other business areas.
The segment for individualized management is managed by specialized managers who, as they have a limited number of clients in their portfolios, provide tailored treatment, define strategies, action plans and special ways of recovery (as appropriate) in order to receive payment. There is also a regular review of the issues to assess their handling, the recovery periods and the envisaged amounts to be recovered, on the basis of the greater or lesser recovery capacity (total or partial).
Management of standardized customers is articulated by defining in each unit rules by segment/product from which are derived management circuits with pre-determined activity times, players or structures and differentiated management strategies. Management takes advantage of the capacities of the multi-channel systems (recovery centers, letters, text messages, pre-recorded messages left on answering machines, messages in commercial documents, ATMs, web page, etc) where new strategies with identified elements (score, guarantees, products, market, etc) are applied.
In the next phase and depending on the recovery capacity, there is individualized or massive management.
In the first case, matters are treated by internal or external managers, and in the second externally and maintaining the methodology of the aforementioned management and accompanied by supervisors dedicated to effectiveness and quality of management.

228

Table of Contents

In those cases where it is deemed opportune judicial actions are started and at the same time non-judicial processes continued in order to always try to resolve the situation on a friendly and negotiated basis.
This model also includes the possibility of selling a portfolio, thereby establishing an exit point.
The recovery managers at Santander are the key element. Quality, training and incentives are the pillars that sustain the management model. Every year a specific training plan for all levels of the management structure is designed in order to increase skills and foment professional development. A system of objectives and incentives at all levels (including externally) is also being put into place.
Santander’s recoveries model encourages the identification, transfer and implementation of best practices, taking advantage of our knowledge and experience acquired in the many markets and businesses in which we operate. This privileged situation has enabled management models previously tested in other units to be transferred, problems to be detected early on, and effective solutions anticipated.
The recovery business area, part of the Spain Retail Banking Division and using the criteria, policies and guidelines of Santander in risks and recovery matters, which emanate from the corresponding governance bodies, and from the Risks Division, focuses integrally on managing bad loans in all customer segments and combines commercial and risk skills.
In 2009, the area oversaw the installation of the recoveries model in Santander Consumer Spain.
Recovery management in Spain resulted in notably more recoveries, both in absolute terms, as well as in a higher relative share of gross entries of bad loans (64% against 53% in 2008) for all activity in Spain.
The model was also applied in Brazil, Mexico and Chile, taking into account each country’s features.
4.6. Other standpoints of credit risk
There are spheres and/or specific points in credit risk that deserve specialized attention and which complement global management.
A. Risk of concentration
Control of risk concentration is a vital part of management. We continuously track the degree of concentration of our credit risk portfolios using various criteria: geographic areas and countries, economic sectors, products and groups of clients.
The board’s risk committee establishes the policies and reviews the appropriate exposure limits for appropriate management of the degree of concentration of credit risk portfolios.
The Group is subject to the Bank of Spain regulation on large risks. In accordance with Circular 3/2008, no individual or economic group exposure, including all types of credit risks and equities, can exceed 25% of the Group’s shareholders’ equity. The total of large risks (those that exceed 10% of eligible equity) cannot be more than eight times higher than equity (excluded from this are exposures to OECD governments and central banks).
At December 31, 2009, there was only one economic group classified as a large risk (11.15% of equity) and it corresponded to a British financial group with an internal rating equivalent to A. After applying risk mitigation techniques and the rules for large risks, the percentage came down to 1.67% of eligible equity (consumption of 6.7% of the limit of 25% established by the Bank of Spain).

229

Table of Contents

At December 31, 2009, the 20 largest economic and financial groups, excluding AAA governments and sovereign securities denominated in local currency, represented 6.7% of the outstanding credit risk of the Group’s clients (lending plus guarantees).
The distribution of the portfolio of companies by sectors is adequately diversified. The chart below shows the distribution of the credit exposure in the Group’s main units (excluding Sovereign).
(PIE CHART)
Our risk division works closely with the financial division to actively manage credit portfolios. Its activities include reducing the concentration of exposures through various techniques such as using credit derivatives and securitization to optimize the risk-return relation of the whole portfolio.
B. Credit risk by activities in financial markets
This section covers credit risk generated in treasury activities with clients, mainly credit institutions. This is developed through financing products in the money market with different financial institutions, as well as derivatives with our clients.
Risk is controlled through an integrated system and in real time, which enables us to know at any moment the exposure limit available with any counterparty, in any product and maturity and in all of our units.
Risk is measured by its prevailing market as well as potential value (value of risk positions taking into account the future variation of underlying market factors in contracts). The equivalent credit risk (ECR) is the net replacement value plus the maximum potential value of these contracts in the future. The capital at risk or unexpected loss is also calculated (i.e. the loss which, once the expected loss is subtracted, constitutes the economic capital, net of guarantees and recovery).
The total exposure to credit risk from activities in the financial markets was 70.1% with credit institutions. By product type, the exposure to derivatives was 48.6%, mainly products without options, and 51.4% to liquidity products and traditional financing.
Derivative operations are concentrated in high credit quality counterparties; 68.4% of risk with counterparties has a rating equal to or more than A–. The total exposure in 2009 in terms of equivalent credit risk amounted to € 38,704 million.

230

Table of Contents

OTC derivatives distribution by net replacement value and equivalent credit risk*
Million euros at December 31, 2009
Total ECR Total net replacement value
Trading Hedging Total Trading Hedging Total
CDS protection acquired
812 822 1,634 462 614 1,076
CDS protection sold
95 71 166 (679 ) 33 (646 )
TRS total return swap
— 142 142 — 511 511
CDS options
— — — — — —
Total credit derivatives
907 1,034 1,941 (217 ) 1,159 942
Equity forwards
2 55 57 — (163 ) (163 )
Equity options
407 1,524 1,931 (195 ) (208 ) (403 )
Equity swaps
— 816 816 — 208 208
Equity spot
— — — — — —
Total equity derivative
409 2,396 2,805 (195 ) (163 ) (358 )
Fixed-income forwards
6 24 29 1 — 1
Fixed-income options
1 — 1 — — —
Fixed-income spot
— — — — — —
Total fixed income derivatives
6 24 30 1 — 1
Asset swaps
1,011 2,812 3,822 (752 ) 486 (266 )
Exchange-rate options
240 159 399 1 (37 ) (36 )
Exchange-rate swaps
5,222 12,079 17,301 1,257 2,834 4,092
Other exchange-rate derivative
— 3 3 — 1 1
Total exchange rates
6,473 15,053 21,525 506 3,285 3,791
Asset swaps
— 279 279 — (40 ) (40 )
Call money swaps
176 31 207 (160 ) (60 ) (220 )
IRS
8,367 8,379 16,746 (865 ) 3,032 2,167
Forward interest rates
2 13 15 (25 ) (10 ) (35 )
Other interest-rate derivatives
580 1,193 1,772 412 (798 ) (386 )
Interest rate structures
75 620 695 46 (79 ) (33 )
Total interest-rate derivatives
9,199 10,514 19,714 (593 ) 2,047 1,454
Commodities
103 35 138 202 9 211
Total commodity derivatives
103 35 138 202 9 211
Total OTC derivatives
17,097 29,055 46,153 (296 ) 6,337 6,041
Collateral
— (7,449 ) (7,449 )
Total
17,097 21,606 38,704
(*)
Excluding A&L and Sovereign.

231

Table of Contents

Notional OTC derivative products by maturity*
Million euros at December 31, 2009
1 year 1-5 years 5-10 years over 10 years total rec
Trading Hedging Total Trading Hedging Total Trading Hedging Total Trading Hedging Total Trading Hedging Total
CDS protection acquired
3 13 16 123 65 188 41 52 94 645 692 1,337 812 822 1,634
CDS protection sold
5 2 7 77 1 78 13 — 13 — 67 67 95 71 166
TRS total return swap
— — — — 1 1 — 5 5 — 136 136 — 142 142
CDS options
— — — — — — — — — — — — — — —
Total credit derivatives
8 15 23 200 68 267 54 57 111 645 894 1,540 907 1,034 1,941
Equity forwards
2 55 57 — — — — — — — — — 2 55 57
Equity options
193 363 555 192 1,050 1,242 22 105 127 — 6 6 407 1,524 1,931
Equity swaps
— 80 80 — 364 364 — 315 315 — 58 58 — 816 816
Equity spot
— — — — — — — — — — — — — — —
Total equity derivative
195 498 692 192 1,414 1,606 22 420 442 — 64 64 409 2,396 2,805
Fixed-income towards
6 1 7 — 22 22 — — — — — — 6 24 29
Fixed-income options
1 — 1 — — — — — — — — — 1 — 1
Fixed-income spot
— — — — — — — — — — — — — — —
Total fixed income derivatives
6 1 7 — 22 22 — — — — — — 6 24 30
Asset swaps
605 2,647 3,252 313 165 478 37 — 37 55 — 55 1.011 2,812 3,822
Exchange-rate options
157 148 306 82 11 93 — — — — — — 240 159 399
Exchange-rate swaps
2,299 3,195 5,495 1,787 4,833 6,620 1,136 2,935 4,071 1 1,116 1,116 5,222 12,079 17,301
Other exchange-rate derivative
— 3 3 — — — — — — — — — — 3 3
Total exchange rates
3,062 5,994 9,055 2,182 5,009 7,191 1,174 2,935 4,108 55 1,116 1,171 6,473 15,053 21,525
Asset swaps
— 5 5 — 22 22 — 27 27 — 225 225 — 279 279
Call money swaps
55 30 85 118 1 118 3 — 3 1 — 1 176 31 207
IRS
299 1,022 1,320 2,220 3,400 5,621 1,520 2,101 3,621 4,328 2,324 6,652 8,367 8,846 17,213
Forward interest rates
2 13 15 — — — — — — — — — 2 13 15
Other interest-rate derivatives
1 287 288 30 548 579 94 130 225 454 227 681 580 1,193 1,772
Interest rate structures
4 2 7 49 11 60 19 23 42 2 120 122 75 156 231
Total interest-rate derivatives
361 1,358 1,719 2,418 3,982 6,400 1,636 2,281 3,917 4,785 2,896 7,681 9,199 10,518 19,718
Commodities
37 5 42 42 26 68 24 — 24 — — — 103 31 134
Total commodity derivatives
37 5 42 42 26 68 24 — 24 — — — 103 31 134
Total OTC derivatives
3,669 7,870 11,539 5,033 10,522 15,554 2,911 5,693 8,604 5,485 4,970 10,456 17,097 22,055 46,153
Collateral
— (7,449 ) (7,449 )
Total
17,097 21,606 38,704
(*)
Excluding A&L and Sovereign.

232

Table of Contents

Distribution of risk in OTC derivatives by type of counterparty
Rating %
AAA
4.6
AA
12.6
A
51.2
BBB
21.3
BB
5.3
B
2.2
Rest
2.8
The distribution of risk in derivatives by type of counterparty was 52% with banks, 37% with large companies and 5% with SMEs.
(PIE CHART)
Activity in credit derivatives
Grupo Santander uses credit derivatives to cover loans, customer business in financial markets and, to a lesser extent, within trading operations. The volume of this activity is small compared to that of our peers and, moreover, is subject to a solid environment of internal controls and minimizing operational risk.
The risk of these activities is controlled via a broad series of limits such as VaR, nominal by rating, sensitivity to the spread by rating and name, sensitivity to the rate of recovery and to correlation. Jump-to-default limits are also set by individual name, geographic area, sector and liquidity.
At December 31, 2009, for the Group’s trading activity, the sensitivity of lending to increases in spreads of one basis point was € 1.9 million, and the average VaR during the year was € 12.3 million.
In notional terms, the position in CDS incorporates € 83,791 million of acquired protection and € 73,684 million of sold protection.

233

Table of Contents

C. Country risk
Country risk is a credit risk component in all cross-border credit transactions for circumstances different to the usual commercial risk. Its main elements are sovereign risk, the risk of transfer and other risks which could affect international financial activity (such as wars, natural disasters, balance of payments crisis, etc).
The exposure susceptible to country-risk provisions at the end of 2009 was € 444 million, of which € 37 million corresponded to intragroup operations. At the end of 2008, the total country risk in need of provisions was € 5,422 million. Total provisions in 2009 stood at € 65 million compared with € 612 million in 2008.
The decline was largely due to Brazil where transactions stopped being considered as risk in need of provisions. This did not mean relevant changes in our level of exposure in Brazil.
(BAR GRAPH)
The principles of country risk management continued to follow criteria of maximum prudence; country risk is assumed very selectively in operations that are clearly profitable for the Bank and which enhance the global relation with customers.
D. Sovereign risk
As a general criterion, sovereign risk is that contracted in transactions with a central bank (including the regulatory cash reserve requirement), the issuer risk of the Treasury or the Republic (portfolio of state debt) and that arising from transactions with public institutions with the following features: their funds only come from institutions directly integrated into the state sector; and their activities are of a noncommercial nature.
At December 31, 2009, Europe accounted for 58.5% of total risk, Latin America 36.9%, the US 4.1% and others 0.5%. Of note were Spain (31.4% of the total), the UK (21.2%), Brazil (23.3%) and Mexico (7.0%). It was higher than in 2008, mainly as a result of increased positions in the UK, Brazil, Spain and Chile and the incorporation of Miami and Sovereign to the perimeter of consolidation, which was partly offset by the reduction in the perimeter as a result of Santander’s exit from Venezuela.
Latin America’s exposure to sovereign risk mainly comes from the obligations to which our subsidiary banks are subject for constituting certain deposits in the corresponding central banks as well as from fixed-income portfolios maintained as part of the structural interest rate risk management strategy. These exposures are in local currency and are financed on the basis of locally captured customer deposits, also denominated in local currency. The exposure to sovereign risk of Latin American issuers denominated in currencies other than the official one of the country of issue amounted to € 2,595 million (5.5% of total sovereign risk with Latin American issuers).

234

Table of Contents

E. Environmental risk
Analysis of the environmental risk of credit transactions is one of the main aspects of the strategic plan of corporate social responsibility. It revolves around the following two large points:
• Equator principles: this is an initiative of the World Bank’s International Finance Corporation. It is an international standard for analyzing the social and environmental impact of project finance operations. By assuming these principles Santander commits itself to assessing, using a sequential methodology, the social and environmental risks of projects it finances in developing countries. All project financing transactions include filling out a questionnaire designed to determine their sensitivity to social and environmental issues and the degree of compliance with them.
• VIDA tool: used since 2004, its main purpose is to assess the environmental risk of corporate clients, both current and potential, through a system that classifies in seven categories each of the companies on the basis of the environmental risk contracted. In 2009, 38,510 companies were assessed by this tool in Spain.
(BAR GRAPH)
Part 5. Operational risk
Definition and objectives
We define operational risk (OR) as the risk of losses from defects or failures in our internal processes, employees or systems, or those arising from unforeseen circumstances. They are, in general, purely operational events, which makes them different from market or credit risks, although they also include external risks, such as natural disasters.
The objective in control and management of operational risk is to identify, measure/valuate, control/mitigate and monitor this risk.
Our priority is to identify and eliminate risk focuses, regardless of whether they produce losses or not. Measurement also helps to establish priorities in management of operational risk.

235

Table of Contents

We opted, in principle, to use the standard method for calculating regulatory capital by operational risk, envisaged in the BIS II rules. We are weighing up the best moment to adopt the focus of Advanced Models (AMs), bearing in mind that: a) the short-term priority in management of operational risk centers on its mitigation; and b) most of the regulatory requirements established for being able to adopt the AMs must already be incorporated into the standard model (already achieved in the case of Grupo Santander’s operational risk management model).
Management model
The organizational model for controlling and managing risks is the result of adapting to the new BIS II environment, which establishes three levels of control:
• First level: control functions conducted by the Group’s units.
• Second level: functions carried out by the corporate areas.
• Third level: integral control functions by the risk division-integral control area and internal validation of risk.
The technology and operations division is responsible for management and control of operational risk. Within this division, the corporate area of technological and operational risk, established in 2008, defines policies as well as managing and controlling these risks. The implementation, integration and local adjustment of the policies and guidelines established by this area is the responsibility of local executives in each unit.
This structure for operational risk management is based on the knowledge and experience of executives and professionals of our various units. Particular importance is attached to the role of local executives.
Management is based on the following elements:
(PIE CHART)
The different phases of the technological and operational risk management model entail:
• Identifying the operational risk inherent in all activities, products, processes and banking systems.
• Measuring and assessing the operational risk objectively, continuously and in line with the regulatory standards (Basel II, Bank of Spain) and the banking industry, establishing risk tolerance levels.
• Continuously monitoring the exposure of operational risk in order to detect the levels of unassumed risk, implement control procedures, improve internal knowledge and mitigate losses.

236

Table of Contents

• Establishing mitigation measures that eliminate or minimize operational risk.
• Producing regular reports on the exposure to operational risk and the level of control for senior management and the Group’s areas/units, as well as inform the market and regulatory bodies.
• Defining and implementing systems that enable operational risk exposures to be watched over and controlled and integrated into the Group’s daily management, taking advantage of existing technology and seeking the maximum computerization of applications.
• Defining and documenting operational risk management policies, and establishing methodologies for managing this risk in accordance with regulations and best practices.
Our operational risk management model contributes the following advantages:
• Integral and effective management of operational risk (identification, measurement/assessment, control/mitigation and information).
• Better knowledge of existing and potential operational risks and assigning responsibility for them to the business and support lines.
• Operational risk information helps to improve the processes and controls, reduce losses and the volatility of revenues.
Implementing the model: global initiatives and results
The corporate function for management and control of operational risk, part of the risk division, has been operating since 2001. Its main functions, activities and global initiatives are to:
• Designate coordinators and create operational risk departments.
• Training and interchange of experiences: continuation of best practices within the Group.
• Foster mitigation plans: ensure implementation of corrective measures as well as ongoing projects.
The corporate function has strengthened management of technological risk since 2008, including the following aspects:
• The security of the information systems.
• The contingency and business continuity plans.
• Management of risk associated with the use of technologies (development and maintenance of applications, design, implementation and maintenance of technology platforms, output of computer processes, etc).
The management model for operational risk began to be installed in our different entities in 2002. Almost all these units have been incorporated to the project with a high degree of uniformity. However, due to the different paces of implementation, phases, schedules and the historical depth of the respective data bases, the degree of progress varies from country to country.

237

Table of Contents

On a general basis:
• Data bases of operational incidents that are classified are received every month. The capturing of events related to operational risk are not truncated (i.e. without exclusions for reasons of amount and with both the accounting impact –including positive effects– as well as the non-accounting impact).
• Self-assessment questionnaires filled out by almost all the Group’s units are received and analyzed.
• A corporate system of operational risk indicators is in place.
• The main events are identified and analyzed, and mitigation measures taken which, in significant cases, are disseminated to the Group’s other units as a Best Practices guide.
• Processes are conducted to reconcile data bases with accounting data.
By consolidating the total information received, the Group’s operational risk profile is reflected in the following charts:
(BAR GRAPH)
There was an increase in the third and fourth categories in 2009, mainly due to the incorporation of Banco Real’s operational events as well as the greater information available on legal risk. As regards the latter, most were civil actions (complaints by employees) in Brazil, a very frequent practice in that country.

238

Table of Contents

Below, as an example of Grupo Santander’s practice, are self assessment questionnaires regarding coverage of operational risk consolidated in 2009.
(BAR GRAPH)
In addition to this risk profile, the Group, via approval in the risk committee, formalized for 2010 the establishment of operational risk profiles, appetite and limits. A risk appetite is also established which must be in low and medium-low profiles on the basis of the measurement of various ratios. During 2010 limits will come into force by country and limits for the Group on the basis of the gross loss/gross income ratio and the percentage of coverage of risk on the basis of self-evaluation exercises. The limits for the Group must not exceed 2% for the first ratio and coverage has to be no lower than 75%, both of which represent a threshold higher than the profile defined as medium-low.
Analysis and monitoring of controls in market operations
The complexity of financial instruments makes it necessary for the Group to continuously strengthen operating control of this activity, enhancing the very demanding and conservative risk and operating principles that we have been regularly applying.
Over and above regular tracking of all aspects regarding operating control, all of the Group’s units paid more attention to the following aspects, so that the review is validated every month by each unit’s management committee. Of note are the following:
• Review of the valuation models and in general the valuation of portfolios.
• Capturing processes and independent validation of prices.
• Appropriate confirmation of operations with counterparties.
• Reviewing cancellations/modifications of transactions.
• Reviewing and monitoring the effectiveness of guarantees, collateral and mitigation of risks.

239

Table of Contents

Corporate Information
The corporate area of operational risk has a system for integral management of operational risk information, which every quarter consolidates the information available from each country/unit in the operational risk sphere and gives a global vision with the following features:
• Two levels of information: one corporate and the other individualized for each country/unit.
• Dissemination of the best practices among countries/units of Grupo Santander, obtained from the combined study of the results of qualitative and quantitative analysis of operational risk.
Information is also prepared on the following aspects:
• Grupo Santander’s management model for operational risk
• Human resources and perimeter of action
• Analysis of the data base of errors and events
• Operational risk cost and accounting reconciliation
• Self-assessment questionnaires
• Indicators
• Mitigating measures/asset management
• Contingency plans
• Regulatory framework: BIS II
• Insurance
This information acts as the basis for meeting the needs of reporting to the board’s risk committee, senior management, regulators, rating agencies, etc.
Insurance in the management of operational risk
Grupo Santander regards insurance as a key element in the management of operational risk. The area responsible for operational risk has been closely cooperating with the Group’s insurance area since 2004 in all those activities that entail improvements in both areas. For example:
• Cooperation in the exposure of the Group’s operational risk control and management model with insurance and reinsurance companies.
• Analysis and monitoring of recommendations and suggestions to improve operational risks made by insurance companies, via prior audits conducted by specialized companies, as well as their subsequent implementation.
• Exchange of information generated in both areas in order to strengthen the quality of the data bases of errors and the perimeter of coverage of the insurance policies for the various operational risks.
• Close cooperation between local operational risk executives and local coordinators of insurance to strengthen mitigation of operational risk.
• Regular meetings on specific activities, states of situation and projects in both areas.
• Active participation of both areas in global sourcing of insurance, the Group’s maximum technical body for defining coverage strategies and contracting insurance.

240

Table of Contents

Part 6. Reputational risk
We define reputational risk as that linked to the perception of the Bank by our various stakeholders, both internal and external, of our activity, and which could have an adverse impact on results, capital or business development expectations. This risk relates to legal, economic-financial, ethical, social and environmental aspects, among others.
The board, as part of its supervisory function, is responsible for defining the Group’s risk policies. In the case of reputational risk, its assessment corresponds to the risk committee as the body responsible for the Group’s global risk management.
Various of the Group’s governance structures are involved in reputational risk management, depending on where the risk comes from. The audit and compliance committee helps the board to supervise compliance with the Group’s code of conduct in the securities markets, the manuals and the procedures to prevent money-laundering and, in general, the Bank’s rules of governance and compliance. It formulates the proposals needed for their improvement.
This section deals with the reputational risk that could come from inadequate sale of products or incorrect provision of services.
Corporate project of marketing products and services
Under the new corporate framework for the compliance function, a corporate project of marketing was launched in 2009, which will lead to reinforce in the Group: (1) the marketing policies; (ii) the map of governance for authorizing and tracking products; and (iii) the systems and processes, strengthening in all of them the customer’s vision.
i) Marketing policies
The policies for marketing products and services which cover all phases (admission, pre-sale, sale and monitoring) are being reviewed and with a corporate scope.
ii) Governance bodies
The global committee of new products (GCNP) was redefined and a corporate committee of marketing (CCM) was created, which has been assigned powers of approval as well as those for monitoring of products after their sale.
A global consultative committee (GCC) was established comprising representatives of areas that contribute vision of regulatory and market risks. The GCC can recommend the review of products which are affected by changes in markets, deterioration of solvency (country, sectors and companies) or by changes in the Group’s vision of markets in the medium and long term.
The review of the map of corporate control in the sphere of marketing led to the creation in 2009 of the office for reputational risk management. The purpose of this office is to facilitate to the corresponding governance bodies the information needed to: (1) adequately analyze risk in the approval stage, with a two-pronged approach: impact on the Bank and on the customer; and (ii) monitor products during their life cycle.
In its first three months, this office tracked derivatives, mutual funds and funds with a certain level of risk or complexity.

241

Table of Contents

iii) Systems and processes
The improved systems and processes will facilitate adapting some marketing processes to the new commercial policies and also enable automated monitoring and in remote of their compliance.
The global committee of new products and the manual of procedures for selling financial products in 2009
Global Committee of New Products (GCNP)
The committee held 15 meetings in 2009 at which 170 products or families of products were analyzed.
In 2009, the areas that participated in the GCNP, chaired by the secretary general, were: tax advice, legal advice, customer service, internal auditing, retail banking, global corporate banking, integral control of risks, compliance, financial control and management control, technology and global business operations, technology and ECB operations, global wholesale banking risks management, corporate risks and IFIs, credit risks, market risks, risks-methodology, solvency risk, corporate technology risk and operational risk, Santander private banking, technology, global treasury, universities and, lastly, the unit proposing the new product or a representative of the local committee of new products.
Before a new product or service can be launched, these areas, as well as, where applicable, other independent experts needed to evaluate the risks incurred, exhaustively analyze the aspects that could affect the process, stating their opinion on each product or service.
The GCNP, in light of the documentation received, and after checking that all the requirements for approving the new product or service have been met and bearing in mind the risk guidelines set by the board’s risk committee approves, rejects or sets conditions for the new product or service.
The GCNP gives particular consideration to the suitability of the new product or service to the framework where it is going to be marketed. Particular importance is attached to ensuring that:
• Each product or service is sold by those who know how to sell it.
• The client knows what he or she is investing in and the risk of each product or service and this can be accredited with the relevant documents.
• The product or service fits the customer’s risk profile.
• Each product or service is sold where it can be, not only for legal or tax reasons (i.e. it fits into the legal and tax regime of each country), but also on the basis of the prevailing financial culture.
• When a product or service is approved the maximum limits for placement are set.
Manual of Procedures for the Sale of Financial Products
The manual, which has been used by Banco Santander since 2004 for the retail marketing of financial products in Spain, covers investment services for financial products including securities and other fixed-income or equity instruments, money market instruments, participations in collective investment institutions, savings and investment insurance, traded derivatives and OTC and atypical financial contracts. The GCNP can also include other instruments in the sphere of the manual of procedures, as has been the case with structured deposits, savings insurance and pension plans.
In 2009, 115 products subject to the manual were submitted for approval. Of them, 38 were new products submitted to the GCNP and 77 were products that were not new and were submitted to the office of the manual (specifically created to vouch for the manual’s implementation and integrated into the corporate area of compliance).

242

Table of Contents

Part 7. Adjustment to the new regulatory framework
Santander has been firmly committed right from the start to the principles that inspired the Basel II rules. This framework enables institutions to make internal estimates of capital to ensure solvency in the event of circumstances caused by different types of risk. As a result of this commitment, Grupo Santander has assigned all the human and material resources needed to ensure Basel II is successfully implemented. Several years ago a Basel II team was formed from the Group’s different areas: financial controller, risks, technology and operations, financial management and internal auditing. Grupo Santander’s senior management actively participates in monitoring the progress in implementing Basel II at the corporate level, and fostering the measures needed to extend the new culture and its implications for everyone. Both for credit and market risk, Basel II means recognizing, for regulatory capital purposes, the internal models that have been used for management purposes.
Grupo Santander has proposed adopting, during the next few years, the advanced internal ratings based (AIRB) models of Basel II for almost all its banks (covering close to 100% of net exposure of the credit portfolio under these models). Santander continued during 2009 to gradually install the technological platforms and methodological developments in order to allow it to progressively apply the advanced internal models for calculating regulatory capital in the rest of the Group’s units.
Grupo Santander has been authorized to use the advanced models for calculating regulatory capital requirements by credit risk for the parent Bank and the main subsidiaries in Spain, the UK and Portugal (two thirds of its total exposure at the end of 2009). The strategy of implementing Basel II in the Group will be focused as of now on the main institutions in the Americas and consumer banking in Europe.
Given the medium-low risk profile characteristic of Santander’s businesses, very focused on retail banking (SMEs and individual customers), the Bank of Spain’s authorization has enabled, on the basis of the Group’s real profile of risk, optimization of the capital required in Pillar I. Equally, the significant diversification of the Group’s risk profile and businesses enabled additional requirements of capital arising from the process of self-assessment of capital (which develops Pillar II) to be offset. This takes into account the impact of the risks not considered in Pillar I, as well as the benefits related to diversification by risks, businesses and geographic areas.
As regards the rest of risks explicitly envisaged in Pillar I of Basel II, market risk obtained authorization to use its internal model for treasury trading activity in Madrid, and like credit risk a plan for gradual implementation for the rest of units was presented to the Bank of Spain.
In operational risk, we decided for the moment to adopt the standard focus for calculating regulatory capital. The advanced focus (Advanced Measurement Approaches) may be adopted in the medium term.
Pillar II is another important line of work of the Basel II corporate project. Grupo Santander worked during 2009 on applying the proposed improvements as a result of the reviews made by an international team of supervisors of the committee of European banking supervisors (CEBS) at the end of 2008, and by internal auditing and validation teams on the corporate model of economic capital.
In addition, utilization of the technology platform supporting Pillar I was completed. This will enable the units with internal models authorized in Pillar I to use an integrated and robust information system to cover both regulatory and economic capital needs.
Grupo Santander, in accordance with the capital requirements set out in the European Directive and the regulations of the Bank of Spain, published for the second time the Report with Prudential Relevance at December 31, 2009. This report, published for the first time in June 2009 with data at December 31, 2008, clearly shows the transparency requirements requested by the Bank of Spain regarding Pillar III. With its publication, Grupo Santander meets the requirements of providing the market with information which is particularly relevant to Basel II and serves as a reference so that market agents can assess the capital sufficiency of banks.

243

Table of Contents

Internal validation of internal risk models
Internal validation is a prerequisite for supervisory validation. A specialized unit of Santander, with complete independence, obtains a technical opinion on whether the internal model is appropriate for the purposes used (internal and regulatory) and concludes on its usefulness and effectiveness.
As well as the regulatory requirement, internal validation also provides fundamental support for the board’s risk committee and local committees of risks in their responsibilities of authorizing the use (management and regulatory) of models and their periodic review.
Santander’s internal validation covers both credit and market risk models and those that set the prices of financial assets as well as the economic capital model. The scope of validation includes not only the most theoretical or methodological aspects but also the technology systems and the quality of data that make implementation effective and, in general, all relevant aspects for management of risk (controls, reporting, uses, involvement of senior management, etc).
The function of internal validation is located, at the corporate level, within the area of integral control and Internal Validation of risk which reports directly to the Group’s third vice-chairman and chairman of the board’s risk committee. The function is global and corporate in order to ensure homogeneous application. This is done via three regional centers in Madrid, London and Sao Paulo. These centers report to the corporate centre, which ensures uniformity in the development of their activities. This facilitates application of a common methodology supported by a series of tools developed internally which provide a robust corporate framework for use in all the Group’s units and which automate certain verifications in order to ensure the reviews are conducted efficiently.
Moreover, Grupo Santander’s corporate framework of internal validation is fully aligned with the criteria for internal validation of advanced models issued by the Bank of Spain. The criterion of separation of functions is maintained between the units of internal validation and internal auditing which, as the last element of control in the Group, is responsible for reviewing the methodology, tools and work done by internal validation and to give its opinion on its degree of effective independence.
Part 8. Economic capital
The concept of economic capital has traditionally been contrasted with that of regulatory capital, as this is the one required for the regulation of solvency. The new Basel II capital framework clearly brings both concepts closer together. While Pillar I determines the minimum regulatory capital requirements, Pillar II quantifies, via economic capital, our global solvency position.
Our model of economic capital quantifies the consolidated risk profile taking into account all the significant risks of activity, as well as the substantial diversification effect on a multinational and multi-business group like Santander. This economic capital model serves as the Group’s base for preparing its proposal of self-assessment of capital in accordance with Bank of Spain regulations under the Basel II Pillar II framework.
The concept of diversification is fundamental for appropriately measuring the risk profile of a global activity group. Although it is an intuitive concept and one present in risk management since banking began, we can also explain diversification as the fact that the correlation between various risks is imperfect and so the largest events of losses do not happen simultaneously in all portfolios or by types of risk. The sum of the economic capital of the different portfolios and types of risk, considered in isolation, is more than the Group’s total economic capital. In other words, the Group’s overall risk is less than the sum of its parts considered separately.
In addition, within the framework of the model for measurement and aggregation of economic capital, the risk of concentration for wholesale portfolios (large companies, banks and sovereigns) is also considered both in its dimension of exposure as well as concentration by sectors and countries. The existence of concentration in a country or a product in retail portfolios is captured by applying an appropriate model of correlations.

244

Table of Contents

Global risk analysis profile
The Group’s risk profile at December 31, 2009, measured in terms of economic capital, is distributed by types of risk and the main business units, is reflected below:
(PIE CHART)
The distribution of economic capital among the main business units reflects the diversification of the Group’s activity and risk, something which increased in 2009 after the acquisition of Sovereign in the US (5% of the Group’s capital).
Continental Europe and Latin America each account for around one third of risk, the UK for 8%, while financial management and equity stakes, which assumes the risk from the structural exchange-rate position (derived from stakes in subsidiaries abroad denominated in non-euro currencies) and most of the equity stakes account for 19%.
The economic capital at December 31, 2009 was € 43,045 million, including minority interests.
The Group’s geographic diversification, understood as the difference between the ratio of the sum of the capital of the business units taken on their own and the Group’s total diversified capital, is 21.6%.
The Group also conducts capital planning with the main objective of obtaining future projections of economic and regulatory capital and so be able to assess situations of capital sufficiency in various scenarios. Each scenario incorporates the forecasts of results in a coherent way, both with their strategic objectives (organic growth, M&A, pay-out ratio, etc) as well as with the evolution of the economic situation and in the face of stress situations. Possible capital management strategies are identified that enable the Bank’s solvency situation to be optimized as well as the return on capital.

245

Table of Contents

Return on risk adjusted capital (RORAC) and creation of value
Grupo Santander has been using RORAC methodology in its credit risk management since 1993 in order to:
• Calculate the consumption of economic capital and the return on it of our business units, as well as segments, portfolios and customers, in order to facilitate optimum assigning of economic capital.
• Budget the capital consumption and RORAC of our business units, including them in their remuneration plans.
• Analyze and set prices during the decision-taking process for operations (admission) and clients (monitoring).
RORAC methodology enables one to compare, on a like-for-like basis, the return on operations, customers, portfolios and businesses, identifying those that obtain a risk adjusted return higher than the cost of the Group’s capital, aligning management of risk and business with the intention to maximize the creation of value, the ultimate aim of senior management.
We regularly assess the level and evolution of value creation (VC) and the risk adjusted return (RORAC) of its main business units. The VC is the profit generated above the cost of the economic capital (EC) employed, and is calculated as follows:
Value creation =profit – (average EC x cost of capital)
The economic profit is obtained by making the necessary adjustments to attributable profit so as to extract just the recurrent profit that each unit generates in the year of its activity.
The minimum return on capital that an operation must attain is determined by the cost of capital, which is the minimum required by shareholders. It is calculated objectively by adding to the risk-free return, the premium that shareholders demand to invest in our Group. This premium depends essentially on the degree of volatility in the price of our shares in relation to the market’s performance. The cost of capital in 2009 applied to the Group’s various units was 12.03%.
A positive return from an operation or portfolio means it is contributing to the Group’s profits, but it is not really creating shareholder value unless that return exceeds the cost of capital.
All the main business units obtained in 2009 a RORAC higher than the cost of capital. The creation of value and the RORAC for the Group’s main business areas are shown below:
Million euros
Main segments RORAC Creation of value
Continental Europe
32.3 % 3,243
United Kingdom
37.2 % 1,168
Latin America
29.7 % 2,479
Sovereign
-1.5 % (225 )
Subtotal of operating areas
30.4 % 6,665
Financial management & equity stakes
-22.2 % (2,484 )
Group total
21.6 % 4,180

246

Table of Contents

The Group’s RORAC comfortably exceeded the cost of capital estimated for 2009 and stood at 21.6%. The creation of value (i.e. the economic profit less the average cost of capital used to achieve it) amounted to € 4,180 million.
Part 9. Risk training activities
Santander has a corporate school of risks. Its purpose is to help to consolidate the risk management culture in Santander and ensure that all employees in the risks area are trained and developed with the same criteria.
The school, which gave a total of 21,479 hours of training to 3,067 employees in 2009, is the base for strengthening Santander’s leadership in this sphere and continuously enhancing the skills of its staff.
It also trains staff in other business segments, particularly in the retail banking area, and aligns the requirements of risk management with business goals.

247

Table of Contents

Part 10. Market Risk
Generally
The perimeter for measuring, controlling and monitoring the area of Market Risks covers those operations where equity risk is assumed. This risk comes from the change in risk factors – interest rates, exchange rates, shares, the credit spread, raw material prices and the volatility of these elements– as well as the liquidity risk of the various products and markets in which the Group operates. Two new factors are given differentiated treatment in 2009 compared to 2008: the credit spread (previously integrated partly in interest rates) and the price of commodities (previously integrated in equities, with a small relative share compared to the rest of factors).
We are exposed to market risk mainly as a result of the following activities:
•
Trading in financial instruments, which involves interest rate, foreign exchange rate, equity price, commodity price and volatility risks.
•
Engaging in retail banking activities, which involves interest rate risk since a change in interest rates affects interest income, interest expense and customer behavior. This interest rate risk arises from the gap (maturity and repricing) between assets and liabilities.
•
Investing in assets (including subsidiaries) whose returns or accounts are denominated in currencies other than the Euro, which involves foreign exchange rate risk between the Euro and such other currencies.
•
Investing in subsidiaries and other companies, which subject us to equity price risk; and
•
Trading and non-trading activities which entail liquidity risk.
Primary Market Risks and How They Arise
The primary market risks to which we are exposed are interest rate risk, foreign exchange rate risk, equity price risk, volatility risk and liquidity risk. We are exposed to interest rate risk whenever there is a mismatch between interest rate sensitive assets and liabilities, subject to any hedging with interest rate swaps or other off-balance sheet derivative instruments. Interest rate risk arises in connection with both our trading and non-trading activities.
We are exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities, and off-balance sheet items denominated in different currencies, either as a result of trading or in the normal course of business. We maintain non-trading open currency positions arising from our investments in overseas subsidiaries, affiliates and their currency funding. The principal non-trading currency exposures are the euro to the US dollar and the British pound and the euro to the main Latin American currencies. Trading foreign exchange rate open risk is not material compared to non-trading foreign exchange risk.
We are exposed to equity price risk in connection with both our trading and non-trading investments in equity securities.
We are also exposed to liquidity risk. Market depth is the main liquidity driver in our trading portfolio, even though our policy is to trade the most liquid assets. Our liquidity risk also arises in non-trading activity due to the maturity gap between assets and liabilities in the retail banking business.
We use derivatives for both trading and non-trading activities. Trading derivatives are used to eliminate, to reduce or to modify risk in trading portfolios (interest rate, foreign exchange and equity), and to provide financial services to clients. Our principal counterparties for this activity are financial institutions. The principal types of derivatives used are: interest rate swaps, future rate agreements, interest rate options and futures, foreign exchange forwards, foreign exchange futures, foreign exchange options, foreign exchange swaps, cross currency swaps, equity index futures and equity options. The Group also has an incipient activity in commodity derivatives.

248

Table of Contents

Derivatives are also used in non-trading activity in order to manage the interest rate risk and foreign exchange risk arising from asset and liability management activity. Interest rate and foreign exchange non-optional derivatives are used in non-trading activity.
The Group also uses credit derivatives both to hedge credit risk in fixed income portfolios and to provide financial services to clients. To a lesser extent, they are used in proprietary trading and to diversify the global credit portfolio. Most of the activity is made in credit default swaps on individual names or indices.
Procedures for Measuring and Managing Market Risk
Our board, through its risk committee, is responsible for establishing our policies, procedures and limits with respect to market risks, including which businesses to enter and maintain. The committee also monitors our overall performance in light of the risks assumed. Together with the local and global assets and liabilities committees (“ALCO”), each Market Risk Unit measures and monitors our market risks, and provides figures to ALCO to use in managing such risks, as well as liquidity risk.
Our market risk policy is to maintain a medium to low risk profile in business units. The risk activity is regulated and controlled through certain policies, documented in our Market and Liquidity Risk Management Policies Manual (as described below), and through a limit structure on our exposure to these market and liquidity risks which includes global limits for the entire Group (total risk limit unit) to specific portfolio limits; in addition, authorized products are listed and reviewed periodically.
These policies, procedures and limits on market risk are applicable to all units, businesses or portfolios susceptible to market risk.
1. Market and Liquidity Risk Management Policies Manual
The Market and Liquidity Risk Management Policies Manual is a compilation of policies that describe the control framework used by our Group to identify, measure and manage market risk exposures inherent to our activities in the financial markets. The Manual is employed for market risk management purposes at all involved levels in the Group and subsidiaries, providing a general and global action framework and establishing risk rules for all levels.
The Manual’s main objective is to describe and report all risk policies and controls that our board of directors has established as well as its risk predisposition.
All Group managers must ensure that each business activity is performed in accordance with the policies established in the Manual. The Manual is applied to all business units and activities, directly or indirectly, related to market risk decision-making.
2. Market Risk Management Procedures
All the functions developed by a risk manager are documented and regulated by different procedures, including measurement, control and reporting responsibilities. Internal and external auditors audit the compliance with this internal regulation control in order to ensure that our market risk policies are being followed.
3. Market Risk Limit Structure
The market risk limit structure can be defined as the board of director’s risk “appetite” and is managed by the Global Market Risk Function that accounts for all Group business units.

249

Table of Contents

Its main functions are to:
•
Identify and define the main types of risk incurred efficiently and comprehensively to be consistent with the management and strategy of the business.
•
Quantify and inform the business areas of the risk levels and profile that senior management believes can be assumed, in order to avoid undesired risks.
•
Give flexibility to the business areas to build risk positions efficiently and on a timely basis according to changes in the market and in the business strategies, and always within the risk levels regarded as acceptable by the Group.
•
Allow the generators of business to take prudent risks which are sufficient to attain budgeted results.
•
Establish investment alternatives by limiting equity consumption.
•
Define the range of products and underlying assets with which each unit of Treasury can operate, taking into consideration features such as the model and valuation systems, the liquidity of the tools used, etc. This will help to constrain all market risk within the business management and defined risk strategy.
The Global Market Risk Function defines the limit structure while the risk committee reviews and approves it. Business managers then administer their activities within these limits. The limit structure covers both our trading and non-trading portfolios and it includes limits on fixed income instruments, equity securities, foreign exchange and other derivative instruments.
Limits considered to be global limits refer to the business unit level. Local business managers set lower level limits, such as portfolio or trader limits. To date, system restrictions prevent intra-day limits.
Business units must always comply with approved limits. Potential excesses will require a range of actions carried out by the Global Market Risk Function unit including:
•
Providing risk reducing levels suggestions and controls. These actions are the result of breaking “alarm” limits.
•
Taking executive actions that require risk takers to close out positions to reduce risk levels.
Statistical Tools for Measuring and Managing Market Risk
1. Trading activity
The Trading Portfolio is defined as proprietary positions in financial instruments held for resale and/or bought to take advantage of current and/or expected differences between purchase and sale prices. These portfolios also include positions in financial instruments deriving from market-making, sale and brokering activity.
As a result of trading fixed income securities, equity securities and foreign exchange, we are exposed to interest rate, equity price and foreign exchange rate risks. We are also exposed to volatility when derivatives (options) are used.
Market risk arising from proprietary trading and market-making activities is actively managed through the use of cash and derivative financial instruments traded in OTC and organized markets.
Interest rate risk derived from market-making is typically hedged by buying or selling very liquid cash securities such as government bonds, or futures contracts listed in organized markets like Liffe, Eurex, Meff and CBOT.
Foreign exchange rate risk is managed through spot transactions executed in the global foreign exchange inter-bank market, as well as through forward foreign exchange, cross currency swaps and foreign exchange options.
Equity price risk is hedged by buying or selling the underlying individual stocks in the organized equity markets in which they are traded or futures contracts on individual stocks listed in organized markets like Meff and Liffe.
In the case of equity indexes such as S&P 500, Euro STOXX 50, or IBEX 35, the hedging is done through futures contracts listed in the aforementioned organized markets.

250

Table of Contents

Volatility risk arising from market-making in options and option-related products is hedged by, either buying and selling option contracts listed in organized markets like Eurex, Meff, and CBOT, or entering risk reversal transactions in the inter-bank OTC market.
Credit risk is managed through the use of credit derivatives.
We use Value at Risk (“VaR”) to measure our market risk associated with all our trading activity.
1.1 VaR Model
We use a variety of mathematical and statistical models, including VaR models, historical simulations, stress testing and evaluations of Return on Risk Adjusted Capital (“RORAC”) to measure, monitor, report and manage market risk. We call our VaR figures daily or annual “capital at risk” figures (“DCaR” or “ACaR”), depending on their time horizon, since we use them to allocate economic capital to various activities in order to evaluate the RORAC of such activities.
As calculated by us, DCaR is an estimate of the expected maximum loss in the market value of a given portfolio over a one-day time horizon at a 99% confidence interval. It is the maximum one-day loss that we estimate we would suffer on a given portfolio 99% of the time, subject to certain assumptions and limitations discussed below. Conversely, it is the figure that we would expect to exceed only 1% of the time, or approximately three days per year. DCaR provides a single estimate of market risk that is comparable from one market risk to the other.
The standard methodology used is based on historical simulation (520 days). In order to capture recent market volatility in the model, our DCaR figure is the maximum between the 1% percentile and the 1% weighted percentile of the simulated profit and loss distribution. This loss distribution is calculated by applying an exponential decline factor, which accords less weight to the observations furthest away in time.
We use DCaR estimates to alert senior management whenever the statistically estimated losses in our portfolios exceed prudent levels. Limits on DCaR are used to control exposure on a portfolio-by-portfolio basis. DCaR is also used to calculate the RORAC for a particular activity in order to make risk-adjusted performance evaluations.
Finally, in order to control derivative activities and credit management, because of their atypical nature, specific measures are evaluated daily. First, we look at the sensitivity to price movements of the underlying asset (delta and gamma), volatility (vega) and time (theta) and then measures are enacted such as the spread sensitivity, jump-to-default, and concentration of positions by rating levels.
To address the credit risk inherent in trading portfolios in accord with the recommendations of the Basel Committee on Banking Supervision, we also calculate an additional measurement (incremental default risk, IDR), in order to cover the risk of default that is not adequately captured in the VaR, via changes in lending spreads. The instruments affected are basically fixed-rate bonds, both public and private sector, derivatives on bonds (forwards, options, etc) and credit derivatives (credit default swaps, asset backed securities, etc). The method for calculating the IDR, in essence similar to that of the credit risk of positions outside trading, is based on direct measurements of the tails of the distribution of losses to the appropriate percentile (99.9%). The “saddle point” model is used, which provides estimates of total risk and the contributions of each counterparty to it. The calculations are also supplemented and calibrated with Monte Carlo simulations.
1.2 Assumptions and Limitations
Our DCaR and VaR methodology should be interpreted in light of the limitations of our model, which include:
•
A one-day time horizon may not fully capture the market risk of positions that cannot be liquidated or hedged within one day.
•
At present, we compute DCaR at the close of business and trading positions may change substantially during the course of the trading day.

251

Table of Contents

1.3 Scenario Analysis and Calibration Measures
Because of these limitations in DCaR and VaR methodology, in addition to historical simulation, we use stress testing to analyze the impact of extreme market movements and to adopt policies and procedures in an effort to protect our capital and results of operation against such contingencies.
In order to calibrate our VaR model, we use back testing processes. Back testing is a comparative analysis between VaR estimates and the daily clean P&L (theoretical result generated assuming the Mark-to-Market daily variation of the portfolio only considering the movement of the market variables). The purpose of these tests is to verify and measure the precision of the models used to calculate VaR.
The analyses of our back testing comply, at a minimum, with the BIS recommendations regarding the verification of the internal systems used to measure and manage market risks.
2. Non Trading activity
2.1 Foreign Exchange Risk and Equity Price Risk
Due to its nature, changes in strategic positions have to be approved by local/global functions in ALCO committee. Position limits with respect to these investments are established, although they will be measured under VaR and other methods that attempt to implement immediate action plans if a particular loss level is reached.
Our foreign exchange rate risk with respect to our non-trading activity can be either permanent or temporary. The permanent risk reflects the book value of investments net of the initial goodwill, while the temporary risk basically stems from purchase/sale operations made to hedge the exchange rate risk derived from dividend flows and expected results. The exchange rate differences generated for each position are recorded in reserves and in profit and loss account respectively.
In order to manage the exchange rate risk of the book value of permanent investments, our general policy is to finance the investment in local currency, provided there is a deep market which allows it and that the cost of doing so is justified by the expected depreciation. If local markets were not deep enough, our investments in foreign currency would be financed in euros and so would generate an exchange-rate risk. Certain one-off hedges of permanent investments are made when it is believed that a local currency could weaken against the euro more quickly than the market is discounting. In addition, operations are carried out to hedge the currency risk of the Group’s results and dividends in Latin America.
Our equity price risk arises from our portfolio of investments in industrial and strategic shareholdings. However, in the last few years the Group’s equity price risk has decreased due to divestments in the industrial and strategic equity portfolio.
2.2 Interest Rate Risk
The Group analyzes the sensitivity of net interest margin and market value of equity to changes in interest rates. This sensitivity arises from gaps in maturity dates and review of interest rates in the different asset and liability accounts. Certain re-pricing hypotheses are used for products without explicit contractual maturities based on the economic environment (financial and commercial).
On the basis of the positioning of balance sheet interest rates, as well as the market situation and outlook, the financial measures are agreed to adjust the positioning to levels desired by the Group. These measures range from taking positions in markets to defining the interest rate features of commercial products. We manage investments by determining a target range for each sensitivity and providing the appropriate hedge (mainly with government debt, interest rate swaps and interest rate options) in order to maintain these sensitivities within that range.

252

Table of Contents

The measures used to control interest rate risk are the interest rate gap and the sensitivity of net interest margin and market value to changes in interest rates, VaR and analysis of scenarios.
a) Interest rate gap of assets and liabilities
Interest rate gap analysis focuses on lags or mismatches between changes in the value of asset, liability and off-balance sheet items. Gap analysis provides a basic representation of the balance sheet structure and allows for the detection of interest rate risk by concentration of maturities. It is also a useful tool for estimating the impact of eventual interest rate movements on net interest margin or equity.
All on- and off-balance sheet items must be broken down by their flows and analyzed at in terms of repricing and maturity. In the case of those items that do not have a contractual maturity, an internal model of analysis is used and estimates are made of their duration and sensitivity.
b) Net interest margin sensitivity (NIM)
The sensitivity of net interest margin measures the change in the short/medium term in the accruals expected over a particular period (12 months), in response to a shift in the yield curve.
It is calculated by simulating the net interest margin, both for a scenario of a shift in the yield curve as well as for the current scenario. The sensitivity is the difference between the two margins calculated.
c) Market value of equity sensitivity (MVE)
Net worth sensitivity measures in the long term (the whole life of the operation) the interest risk implicit in net worth (equity) on the basis of the effect that a change in interest rates has on the current values of financial assets and liabilities. This is an additional measure to the sensitivity of the net interest margin.
d) Value at Risk (VaR)
The Value at Risk for balance sheet activity and investment portfolios is calculated with the same standard as for trading, historical simulation with a confidence level of 99% and a time frame of one day. Statistical adjustments are made, which effectively and quickly incorporates the latest developments that condition the risk levels assumed.
e) Analysis of scenarios
Two scenarios for the performance of interest rates are established: maximum volatility and sudden crisis. These scenarios are applied to the balance sheet, obtaining the impact on net worth as well as the projections of net interest revenue for the year.
2.3 Liquidity risk
Liquidity risk is associated with our capacity to finance our commitments, at reasonable market prices, as well as to carry out our business plans with stable sources of funding. We permanently monitor maximum gap profiles.
We have a diversified portfolio of assets that are liquid or can be made so in the short term. We also have an active presence in a wide and diversified series of financing and securitization markets, limiting our dependence on specific markets and keeping open the capacity of recourse to alternative markets.

253

Table of Contents

The measures used to control liquidity risk are the liquidity gap, liquidity ratio, stress scenarios and contingency plans.
a) Liquidity gap
The liquidity gap provides information on contractual and expected cash inflows and outflows for a certain period of time, for each of the currencies in which we operate. The gap measures the net need or excess of funds at a particular date, and reflects the level of liquidity maintained under normal market conditions.
b) Liquidity ratios
The liquidity coefficient compares liquid assets available for sale (after applying the relevant discounts and adjustments) with total liabilities to be settled, including contingencies. This coefficient shows, for currencies that cannot be consolidated, the level of immediate response of the entity to firm commitments.
Net accumulated liquidity is defined as the 30-day accumulated gap obtained from the modified liquidity gap. The modified contractual liquidity gap is calculated on the basis of the contractual liquidity gap and by placing liquid assets or repos at the point of settlement and not at their point of maturity.
In addition, we use the following other ratios or metrics regarding the structural liquidity position:
•
Loans / net assets
•
Customer deposits, insurance and medium and long-term financing / lending
•
Customer deposits, insurance and medium and long-term financing, shareholders’ funds and other liabilities / sum of credits and fixed assets.
•
Short-term financing / net liabilities.
c) Analysis of scenarios/contingency plan
Our liquidity management focuses on preventing a crisis. Liquidity crises, and their immediate causes, cannot always be predicted. Consequently, our contingency plan concentrates on creating models of potential crises by analyzing different scenarios, identifying crisis types, internal and external communications and individual responsibilities.
As a crisis can occur locally or globally, each local unit must prepare a plan of contingency financing. Each unit must inform the central unit of its plan at least every six months so that it can be reviewed and updated. These plans, however, must be updated more frequently if market circumstances make it advisable.

254

Table of Contents

Lastly, Grupo Santander is actively participating in the process opened by the Basel Committee to strengthen bank liquidity 1 , with a two-pronged approach: participating in the analysis of the impact of the regulatory changes raised — including, the introduction of two new ratios: Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) – and, participating in various forums (European Banking Federation, etc.), to discuss and comment on the issue, maintaining in both cases close co-operation with the Bank of Spain.
Quantitative analysis
A. Trading activity 2
Quantitative analysis of daily VaR in 2009
Our risk performance regarding trading activity in financial markets during 2009, measured by daily Value at Risk “VaR”, is shown in the following graph.
(LINE GRAPH)
VaR during 2009 fluctuated more than 95% of the time in a range of between € 20 million and € 40 million. The exception was March when it was temporarily higher, because of the increased positions in the treasuries of Brazil (fixed income and equities) and Mexico (fixed income and exchange rates). It reached a high of € 45.2 million in the middle of March. It then declined, mainly due to the reduced positions in Brazil and Mexico
The average VaR of the Group’s trading portfolio in 2009 ( € 30.2 million) was lower than in 2008. This was due to the increased global volatility in financial markets in 2008 following the collapse of Lehman Brothers rather than to reduced risk taking. Compared to other financial groups, Grupo Santander has a low trading risk profile. Its dynamic management enables the Group to adopt changes of strategy in order to exploit opportunities in an environment of uncertainty.
VaR risk histogram
The histogram below shows the distribution of average risk in terms of VaR during 2009. It was between € 25 million and € 34 million on 70.2% of days. Of note were the levels of more than € 40 million, due to the increased positions in Brazil and Mexico.
1 .
The “International framework for liquidity risk measurement, standards and monitoring” (Basel Committee on Banking Supervision, Consultative Document, December 2009)
2 .
Including Banesto and Sovereign. Venezuela was excluded from the perimeter as of April 1.

255

Table of Contents

(BAR GRAPH)
Risk by factor 3
For enhanced presentation, two new factors are given differentiated treatment in 2009 compared to 2008: the credit spread (previously integrated partly in interest rates) and the price of commodities (previously integrated in equities, with a small relative share compared to the rest of factors). The minimum, maximum, average and year-end 2009 risk values in VaR terms were as follows:
3 .
Total Trading VaR includes operations that are not assigned to any particular country, such as Active Credit Portfolio Management and Non-core Legacy Portfolio

256

Table of Contents

Minimum Average Maximum Last
TOTAL TRADING
Total VaR 21.9 30.2 45.1 27.5
Diversification effect (19.2 ) (24.8 ) (31.4 ) (29.2 )
Fixed-Income VaR 11.3 20.0 31.9 18.3
Equity VaR 4.2 6.9 11.6 5.9
FX VaR 10.5 15.5 23.1 16.1
Credit Spread VaR 8.2 11.9 15.8 15.0
Commodities VaR 0.1 0.8 1.6 1.4
LATIN AMERICA
VaR Total 9.0 19.6 33.8 16.6
Diversification effect (6.3 ) (12.3 ) (16.8 ) (7.7 )
Fixed-Income VaR 8.9 16.6 29.2 16.0
Equity VaR 0.7 3.9 10.3 2.8
FX VaR 1.7 7.1 16.7 6.0
USA and Asia
VaR Total 1.0 3.3 11.0 1.2
Diversification effect (0.0 ) (1.0 ) (2.6 ) (0.3 )
Fixed-Income VaR 0.7 3.1 11.2 0.9
Equity VaR 0.0 0.3 2.1 0.0
FX VaR 0.3 0.9 5.9 0.6
EUROPE
VaR Total 11.2 14.6 23.9 13.5
Diversification effect (10.3 ) (16.5 ) (23.2 ) (18.1 )
Fixed-Income VaR 5.2 8.6 19.1 6.6
Equity VaR 3.2 5.5 8.8 5.2
FX VaR 6.1 11.6 18.7 13.8
Credit Spread VaR 1.9 4.6 8.3 4.7
Commodities VaR 0.1 0.8 1.6 1.4
This report includes for the first time a more detailed breakdown by factors, including the credit spread VaR and the commodities VaR. Until now, the risk of these factors was included in fixed income and equities, respectively. In Latin America, the US and Asia these factors are not shown separately because they are immaterial.
The average VaR was € 9.8 million lower than in 2008, due to the lower volatility in markets. The reduction was mainly in fixed income/credit spread, which dropped from € 34.4 million to € 23.3 million (taking the joint VaR of both factors in 2009).
The average levels of VaR in currency and equities remained virtually unchanged: the first remained at € 15.5 million and the second increased slightly (from € 6.4 million to € 6.9 million). The decline in fixed income risk, considering the combined VaR of both fixed income and credit spread factors, was divided between Latin America (from € 26.2 million to € 16.6 million) and Europe (from € 24.7 million to € 9.8 million).

257

Table of Contents

(LINE GRAPH)
The VaR performance during 2009 underlined the Group’s flexibility and agility in adapting its risk profile on the basis of changes in strategy caused by a different perception of expectations in the markets. Unlike in 2008, when there were three exceptions of VaR at 99% (days when the gross loss was higher than the VaR), in 2009 there were none. This was due to the significant decline in volatility.
Distribution of risks and results
•
Geographic distribution
Latin America contributed on average 45.1% of the Group’s total VaR in trading activity and 27.1% in economic results. Europe, with 25.0% of global risk, contributed 60.6% of results, as most of its treasury activity focused on professional and institutional clients.

258

Table of Contents

(BAR GRAPH)
Monthly distribution of risks and results
The following chart shows that both the risk assumption profile (in terms of VaR) and the results followed a relatively downward path, particularly in the case of the latter. The result in the first half of the year was higher than in the second, which also corresponds to somewhat higher risk levels.

259

Table of Contents

(BAR GRAPH)
Histogram of daily Marked-to-Market (“MtM”) results
The following histogram of frequencies shows the distribution of daily economic results on the basis of size. The daily yield 4 was between - € 5 and + € 15 million on 78% of trading days.
(BAR GRAPH)
Risk management of structured derivatives
Our structured derivatives activity (non-organized markets) is mainly focused on structuring investment and hedging products for clients. These transactions include options on equities, currencies and fixed-income instruments.
Test and calibration measures
In accordance with the BIS recommendations for gauging and monitoring the effectiveness of internal market risk measurement and management systems, in 2009 we carried out regular analysis and contrasting measures which confirmed the reliability of the model.
4
Yields “clean” of commissions and results of intraday operations

260

Table of Contents

Unlike in 2008, when there were three exceptions of VaR at 99% (days when the gross loss was higher than the VaR), in 2009 there were none. This was due to the significant decline in volatility.
Scenario analysis
Different stress test scenarios were analyzed during 2009. A scenario of maximum volatility, which applies six standard deviations to different market factors as of December 31, 2009, generated results that are presented below.
Maximum volatility scenario
The table below shows, at December 31, 2009, the results of each product (fixed income, equities, exchange rates, spreads on loans and the volatility of each one of them), in a scenario in which a volatility equivalent to six standard deviations in a normal distribution is applied. This scenario is based on taking for each risk factor the movement that represents a greater potential loss in the global portfolio. For 2009 this scenario involved rises in interest rates in Latin American markets and falls in core markets (“flight into quality”), declines in stock markets, the dollar’s slide against all currencies except the euro, greater volatility and spreads on loans.
Maximum volatility Stress Test
€ million Interest rate Equities Exchange rate Credit Spread Commodities Total
Total Trading
(52.6 ) 4.8 (62.1 ) (122.0 ) (2.2 ) (234.0 )
Europe
(10.2 ) 20.3 (51.5 ) (64.4 ) (2.2 ) (136.7 )
Latin America
(40.2 ) (15.4 ) (10.5 ) 0.0 0.0 (66.1 )
USA (New York)
(1.0 ) (0.1 ) 0.0 0.0 0.0 (1.1 )
Global Activities
(1.2 ) 0.0 (0.1 ) (57.6 ) 0.0 (58.9 )
The stress test shows that the economic loss suffered by the Group in its trading portfolios, in terms of the Mark to Market (MtM) result would be € 234.0 million if the stress movements defined in the scenario materialized. The loss would be distributed between Europe (exchange rates and spreads on loans), Latin America (fixed income) and global activities (spreads on loans).
B. Non-Trading Activity
B.1. Asset and liability management
We actively manage the market risks inherent in retail banking. Management addresses the structural risks of interest rates, liquidity, exchange rates and credit.
The purpose of financial management is to make net interest revenue from our commercial activities more stable and recurrent, maintaining adequate levels of liquidity and solvency.
The Financial Management Area analyzes structural interest rate risk derived from mismatches in maturity and revision dates for assets and liabilities in each of the currencies in which we operate. For each currency, the risk measured is the interest gap, the sensitivity of net interest revenue, the economic value and the duration of equity.
The Financial Management Area manages structural risk on a centralized basis. This allows the use of homogenous methodologies, adapted to each local market where we operate.

261

Table of Contents

In the euro-dollar area, the Financial Management Area directly manages the risks of the Parent Bank and coordinates management of the rest of the units that operate in convertible currencies. There are local teams in the banks in Latin America that manage balance sheet risks under the same frameworks, in coordination with the global Financial Management Area.
The Asset and Liability Committees (ALCOs) of each country and, where necessary, the markets committee of the Parent Bank, are responsible for the risk management decisions.
B.1.1. Quantitative analysis of interest rate risk in 2009
a) Convertible currencies
At the end of 2009, the sensitivity of net interest margin at one year to parallel rises of 100 basis points was concentrated in the euro interest rate curve ( € 209.7 million), with the Parent Bank contributing the most, and in the sterling interest rate curve (£34.1 million negative). The sensitivity of the rest of convertible currencies was not very significant.
At the same date, the sensitivity of equity to parallel rises in the yield curve of 100 basis points in the euro interest rate curve was € 743.4 million, most of it in the Parent Bank. As regards the curve in sterling it was £11.2 million negative.
Sovereign is included within the perimeter in 2009, with no considerable impact on the sensitivity of the interest rate curve in dollars.
In accordance with the current environment of low interest rates, the Bank maintains as lightly positive sensitivity, both in net interest margin (NIM) and market value equity (MVE), to interest rate rises.
Structural Gap. Santander Parent Company (December 31, 2009)
Up to 1 More than 5
€ million Not sensitive year 1-3 years 3-5 years years TOTAL
Money and securities market
40,570 9,101 1,093 12,104 62,868
Loans
112 117,973 10,833 1,498 1,758 132,174
Permanent equity stakes
58,783 58,783
Other assets
15,847 49,367 51 52 120 65,437
Total assets
74,742 207,910 19,985 2,643 13,982 319,262
Money market
— 34,081 125 1,500 300 36,006
Customer deposits
— 32,917 10,318 8,099 13,016 64,350
Debt Issues and securitizations
— 85,021 18,761 11,979 11,150 126,911
Stockholders’ equity and other liabilities
77,502 39,923 1,100 830 1,370 120,725
Total liabilities
77,502 191,942 30,304 22,408 25,836 347,992
Balance sheet Gap
(2,761 ) 15,968 (10,320 ) (19,765 ) (11,854 ) (28,732 )
Off-balance sheet structural Gap
— 645 17,041 9,808 4,333 31,827
Total structural Gap
(2,761 ) 16,613 6,721 (9,957 ) (7,521 ) 3,095
Accumulated Gap
— 16,613 23,334 13,378 5,857 —
b) Latin America
The interest rate risk of Latin America’s balance sheet management portfolios, measured by the sensitivity of market value of the net interest margin (NIM) to a parallel movement of 100 basis points, remained during 2009 at low levels and within a narrow band (maximum of € 96 million in September). In terms of equity sensitivity, it fluctuated in a wider range of € 250 million to € 750 million, and increased in the second half of the year, mainly because of purchases in Brazil to cover the interest rate risk of the balance sheet.

262

Table of Contents

(BAR GRAPH)
At the end of 2009, the region’s risk consumption, measured by the market value of equity sensitivity to a parallel movement of 100 basis points, was € 704 million ( € 430 million in 2008), while that of the net interest margin at one year, measured by its sensitivity to a parallel movement of 100 basis points, was € 64 million ( € 27 million in 2008).
Interest rate risk profile at December 31, 2009
The tables below show the distribution of risk by maturity in Latin America as of December 31, 2009 (figures in millions of euros).
Gaps in Local Not
Currency sensitive 0-6 months 6-12 months 1-3 years > 3 years TOTAL
Assets
42,421 74,918 18,703 21,685 21,661 179,467
Liabilities
57,326 83,356 14,585 14,353 6,469 176,090
Off-balance Sheet
2 1,894 (2,590 ) (1,109 ) (783 ) (2,586 )
Gap
(14,626 ) (6,828 ) 2,384 5,692 14,169 792
Gaps in Foreign Not
Currency sensitive 0-6 months 6-12 months 1-3 years > 3 years TOTAL
Assets
2,591 21,752 2,229 2,359 3,767 32,698
Liabilities
1,466 24,461 3,404 3,625 3,119 36,075
Off-balance Sheet
0 (2,221 ) 704 1,951 2,152 2,586
Gap
1,125 (4,930 ) (471 ) 685 2,800 (792 )

263

Table of Contents

Net Interest Margin (NIM) sensitivity
For the whole of Latin America, the consumption at the end of 2009 was € 64 million (sensitivity of the financial margin at one year to a parallel rises of 100 basis points). The geographic distribution is shown below.
More than 80% of the risk was concentrated in three countries: Brazil, Chile and Mexico.
NIM Sensitivity by countries
(PIE CHART)
Others: Colombia, Panama, Santander Overseas and Uruguay

264

Table of Contents

Market Value of Equity (MVE) sensitivity
For the whole of Latin America, the consumption at the end of 2009 was € 704 million (sensitivity of MVE to rises of 100 basis points in interest rates). The geographic distribution is shown below.
More than 90% of risk is concentrated in three countries: Brazil, Chile and Mexico.
MVE Sensitivity by countries
(PIE CHART)
Others: Colombia, Panama, Santander Overseas and Uruguay
B.1.2. Structural management of credit risk
The purpose of structural management of credit risk is to reduce the credit risk concentrations that can naturally occur as a result of business activity through the sale of assets. These operations are offset by acquiring other assets that diversify the credit portfolio. The Financial Management Area analyzes these strategies and makes proposals to the ALCO to minimize the exposure to credit risk and help create value.
During 2009:
•
€ 16 billion of assets were securitized. Given the difficulties of the securitization market since August 2007, all the issues were retained by the Group’s various units. These securitizations significantly increased the Group’s liquidity position through its discounting capacity in central banks, and
•
Repurchases were made in the secondary market of AAA securitization bonds by Group issuers ( € 2 billion).
B.1.3. Management of structural liquidity
Management of financing and liquidity risk, fully consolidated before the onset of the financial turbulence, has been one of the main pillars behind the success of Banco Santander’s business model during this critical period.
This framework of liquidity management has not required changes to make it function correctly and has given Santander a significant competitive advantage. Specifically, it has enabled the Group and its subsidiaries to successfully tackle the business liquidity needs during the worst moments of the crisis and take advantage of growth opportunities that the market has offered.

265

Table of Contents

On the one hand, the lack of liquidity restrictions made it possible to finance the organic growth of existing units and businesses to surpass many of our competitors. This produced gains in market share in businesses as demanding as mortgage lending in the UK and wholesale business in Europe.
On the other hand, the acquisition of new units in the last few years was made possible by the Group’s excellent access to liquidity. This also helped to boost the Bank’s capacity to create value, while further diversifying the sources of financing and achieving a better positioning in attracting deposits.
The liquidity management framework in the Group and its situation at the end of 2009 is set out below.
B.1.3.1. Management framework
Liquidity management is based on three fundamental pillars:
•
Organizational and governance model: a solid model of governance that ensures the involvement of senior management and the board in taking decisions and facilitating their integration with the Group’s global strategy.
•
Management: adapted to each business’s liquidity needs, in accordance with the decentralized organizational model.
•
Balance sheet analysis and liquidity risk management: profound analysis of the balance sheet and its evolution in order to support decisions.
a. Organizational and governance model
Decision-taking regarding structural risks is done by local ALCO committees in coordination with the markets committee. The latter is the highest decision-making body and coordinates all global decisions that influence measurement, management and control of liquidity risk.
The markets committee is headed by the chairman of the Bank, and is composed of the second vice-chairman and CEO, the third vice-chairman, the chief financial officer and the executive vice-president of risk and those responsible for the business and analysis units.
The financial management and global market risk areas manage and control the structural and liquidity risks, respectively, and they support the ALCO committees, presenting analysis and proposals and ensuring compliance with the established limits.
In line with the best governance practices, the Group establishes a clear division between executing the financial management strategy (the responsibility of the financial management area) and monitoring and control (the responsibility of market risk).
b. Management
Structural liquidity management aims to finance the Group’s recurring activity in optimum conditions of maturity and cost and avoid assuming undesired liquidity risks.
Liquidity and financing management is based on the following principles:
• Broad and stable base of customer deposits: more than 90% are retail and are captured in the Group’s core markets by various units.

266

Table of Contents

• Financing via medium and long-term issues to cover the balance sheet’s liquidity needs (the gap between loans and deposits), establishing a surplus of structural financing in order to be able to meet possible adverse situations.
• Diversification of financing sources to reduce the risk in relation to:
• instruments/investors
• markets/currencies
• maturities
• Strict control of short-term financing needs, within the Group’s policy of minimizing the degree of recourse to short-term funds.
• Autonomy and responsibility of subsidiaries in managing the financing of liquidity, with no structural support from the Parent bank (except for a small part of consumer business, whose financing is done at the market price).
In practice, and applying these principles, our liquidity management consists of:
• Drawing up every year the liquidity plan based on the financing needs derived from the budgets of each business. On the basis of these needs and bearing in mind prudent limits on recourse to short-term markets, the year’s issuance and securitization plan is established by Financial Management.
• During the year the evolution of the balance sheet and financing needs is regularly monitored, giving rise to changes to the plan.
• An active presence is maintained in a broad and diversified series of financing markets. The Group has eight significant and independent issuance units, which are not dependent on any one market and maintain available a wide capacity of issuance in various markets.
In addition, the Group has an adequate structure of medium and long-term issues, well diversified by products (senior debt, subordinated, preferred shares, bonds, securitization) with a moderately conservative maturity (4.5 years at the end of 2009).
All of this results in moderate needs of recourse to short-term wholesale financing at the Group level, which, as reflected in the balance of liquidity, only represented 5% of net funds in 2009, down from 7% in 2008.
The subsidiaries have a large degree of autonomy to manage their liquidity within Grupo Santander’s decentralized financing model. Each one must budget their liquidity needs and assess their own capacity of recourse to the wholesale markets in order to establish the issuance and securitization plan in coordination with the Parent bank.
Only in the case of Santander Consumer Finance does the parent Bank provide the necessary liquidity and always at the market price taking into account the maturity of the financing and the rating of the relevant unit.
c. Analysis of the balance sheet and measurement of liquidity risk
Decisions on financing and liquidity are based on a deep understanding of the Group’s current situation (environment, strategy, balance sheet and liquidity), the future liquidity needs of businesses (projection of liquidity), as well as access to and the situation of financing sources in the wholesale markets.
The objective is to ensure the Group maintains optimum levels of liquidity to cover its short and long-term financing needs, optimizing the impact of its cost on the income statement.
This requires monitoring of the structure of balance sheets, forecasting short and medium-term liquidity needs and establishing the basic metrics, in line with those reported in the next section.

267

Table of Contents

Stress testing is also conducted taking into account the additional needs that could arise from various extreme, although possible, events. These could affect the various items of the balance sheet and/or sources of financing differently (degree of renewal of wholesale financing, deposit outflows, deterioration in the value of liquid assets, etc), whether for global market reasons or specific ones of the Group.
All of this enables the Group to respond to a spectrum of potential, adverse circumstances, anticipating the corresponding contingency plans.
These actions are in line with the framework of principles and metrics being developed by the Basel Committee to strengthen Banks’ liquidity.
B.1.3.2. Current state of liquidity
The Group has an excellent structural liquidity position, with the capacity to meet the new conditions of stress in the markets. This is underscored by the robust balance sheet and the dynamics of financing.
a. Robust balance sheet
The balance sheet at the end of 2009 was solid, as befits the Group’s retail nature. Lending, which accounted for 79% of net assets, was entirely financed by customer deposits and medium and long-term financing. Equally, the structural needs of liquidity, represented by loans and fixed assets, were also totally financed by structural funds (deposits, medium and long-term financing and capital).
As regards financing in wholesale markets, the Group’s structure is largely based on medium and long-term instruments (81% of the total). Short-term financing is a marginal part of the structure (5% of total funds) and is amply covered by liquid assets. Of note is that the parent Bank, probably the unit most demanding of liquidity, comfortably meets the recommendations of liquidity horizons pointed out by CEBS.
Lastly, the Bank has significant availability of recourse to central banks to obtain immediate liquidity. At the end of 2009, total eligible assets which could be discounted in the various central banks to which the Group has access via its subsidiaries amounted to more than € 100 billion, more than double the short term financing outstanding at the time.
We now set out the framework of the balance of liquidity, consolidated as the main metrics for monitoring the structural position of liquidity:
(BAR GRAPH)
Monitoring metrics
Metrics 2009 2008
Loans/net assets
79 % 79 %
Customer deposits, insurance and medium and long-term financing/loans
106 % 104 %
Customer deposits, insurance and medium and long-term financing, shareholders’ funds and other liabilities/total loans and fixed assets
110 % 103 %
Short-term financing/net liabilities
5 % 7 %

268

Table of Contents

As in the Group, the balance sheets of the units of convertible currencies and of Latin America maintain the same principles, within the philosophy of independence and responsibility in their financing.
b. Dynamics of financing
The evolution of 2009 enabled Santander to continue to improve its structural liquidity position, backed by two drivers which proved to be very effective in the recession.
The first one was that the Group was able to increase its customer deposit base very significantly -by more than € 170 billion since the onset of the crisis in June 2007 (+52%).
This growth was due to two effects. On the one hand, the effort made to attract deposits via the branch networks benefited from the customers’ confidence in the Group’s liquidity and solvency, which made Santander the brand chosen by depositors in many markets during the crisis: the so called flight to quality effect.
On the other hand, growth also benefited from the acquisitions made in the last few years: the assets from ABN AMRO (basically, Banco Real in Brazil and Uruguay), Alliance & Leicester, the deposits of Bradford & Bingley and Sovereign. Overall, these acquisitions produced a substantial rise in the Group’s base of stable deposits and improved financing ratios.
This increase occurred in an environment of deleveraging in which deposits were spurred by the higher rate of household and corporate savings, while lending slowed, reflecting the lower rates of consumption and investment in various countries.
As a result, in 2009 the Group’s deposits grew 8% and lending declined 2%, both excluding the perimeter and exchange-rate effects. Furthermore, it is likely that this will continue in coming years in the mature markets where the Group operates, given the deleveraging in these markets.
The second driver was the high capacity of access to wholesale financing markets. This was well shown during the worst moments of the financial crisis when Santander played a leadership role in “opening” some markets to other domestic issuers.
As a result, the Group during 2009 issued € 18 billion in medium and long-term senior debt and mortgage bonds. This capacity is backed by the Group’s excellent credit quality (AA from Standard & Poor’s and Aa2 from Moody’s). Moreover, in all cases the appetite for securities by investors is adjusted to placement prices that recognize the superior credit quality of the Group and its subsidiaries.
In short, a big rise in deposits, good access to medium and long-term wholesale markets and the generation of liquidity by businesses in scenarios such as today’s explain the improvement in the Group’s structural liquidity in the last 12 months.
B.2. Exchange rate risk; Portfolio of industrial and strategic shareholdings
B.2.1. Exchange rate risk
Structural exchange rate risk arises from our operations in currencies, mainly permanent financial investments, results and the dividends of these investments.
This exchange rate risk management is dynamic and seeks to limit the impact on equity of currency depreciations and to optimize the financial cost of hedging.
As regards the exchange-rate risk of permanent investments, the general policy is to finance them in the currency of the investment provided the depth of the market allows it and the cost is justified by the expected depreciation. One-off hedging is also done when a local currency could weaken against the euro beyond what the market estimates.

269

Table of Contents

At the end of 2009, the largest exposures of a permanent nature (with potential impact on net worth) were concentrated in Brazilian reais, followed by sterling, Mexican pesos and Chilean pesos. The Group covers part of these positions of a permanent nature with exchange-rate derivatives.
In addition, Financial Management at the consolidated level is responsible for exchange-rate management of the Group’s expected results and dividends in those units whose currency is not the euro.
B.2.2. Portfolio of industrial and strategic shareholdings
In 2009, our exposure in industrial and strategic equity portfolios decreased 48% in mark to market terms, mainly due to the sale of some significant positions, such as that of the Spanish utility CEPSA (Santander previously owned 31.6%) and Interbanca, and to the integration of Sovereign, after acquiring the remaining part of it in the beginning of 2009. All in all, the risk of the structural equity portfolio, measured in terms of VaR, decreased € 152.1 million as compared to the end of 2008, to € 369.4 million.
The average daily VaR for the structural equity portfolio for the year 2009 was € 358.4 million, with a minimum of € 322.6 million and a maximum of € 399 million, occurring in November and March 2009, respectively.
C. Exposures related to complex structured assets
Grupo Santander continued to have highly limited exposure to complex structured instruments or vehicles, reflecting a management culture in which prudent risk management is one of the main identifying features. Specifically, at 2009 year-end, the Group had:
•
CDOs/CLOs: exposure amounting to € 637 million, mainly as a result of the integration of the Alliance&Leicester portfolio in 2008. 56% of this portfolio was rated AAA and 85% had a rating of A or above.
•
Non-Agency CMOs and pass-throughs with underlying mortgage alt-A 5 : exposure of € 730 million at 2009 year-end.
•
Hedge funds: the total exposure was not material ( € 549 million at 2009 year-end) and consisted largely of the financing provided to these funds ( € 342 million), the remainder being direct portfolio investment. This exposure involved low levels of loan-to-value risk -around 50% (collateral of € 1,095 million at year-end). The risk exposure to this type of counterparty is analyzed on a case-by-case basis, and the percentages of collateral are established according to the features and assets of each fund. Exposure decreased significantly -by 52%-with respect to the previous year.
•
Conduits: the only exposure resulted from the acquisition of Alliance&Leicester, which gave rise to the integration of a conduit, with assets amounting to € 657 million at 2009 year-end, of which 42% had an AAA rating and 83% a rating of A or above.
•
Monolines: Santander’s exposure to monoline insurers amounted to € 396 million 6 in December 2009, and related mainly to indirect exposure, totaling € 191 million, by virtue of the guarantee provided by entities of this kind for various traditional financing or securitization transactions. The exposure was to double-default risk in this case. The primary underlying aspects had high credit ratings, mostly “AA”. The small remainder was direct exposure (e.g. through the purchase of a credit default swap to protect it against the risk of default of these insurance companies).
5
Alternative A-paper: mortgages originated in the US market which for various reasons are considered as having an intermediate risk level between prime and subprime mortgages (not having all the necessary information, loan-to-value levels higher than usual, etc).
6
Guarantees provided by monolines for bonds issued by US states (municipal bonds) are not considered as exposure. As a result of the acquisition of Sovereign Bank, the Group integrated a € 1,260 million portfolio of these bonds.

270

Table of Contents

Overall, it can be asserted that the exposure to these instruments arising from the Group’s ordinary operations has decreased. The only increases are due to the integration of exposures at entities acquired by the Group, such as Alliance&Leicester and Sovereign (in 2008 and 2009, respectively). These exposures were known at the time of the purchase and adequate provisions were recognized.
Santander’s policy for the approval of new transactions in these products continues to be very prudent and conservative, and is subject to strict supervision by the Group’s senior management. Before approval is given for a new transaction, product or underlying asset, the risk division checks:
•
whether there is an adequate valuation model (mark-to-market, mark-to-model or mark-to-liquidity) to monitor the value of each exposure.
•
whether the inputs enabling application of this valuation model are observable in the market.
Provided the two aforementioned conditions are met, the risk division ascertains:
•
the availability of adequate systems duly adapted for the calculation and daily monitoring of the results, positions and risks of the new transactions.
•
the degree of liquidity of the product or underlying asset, with a view to arranging the related hedge on a timely basis.
E. Internal model
The Bank of Spain approved at the end of 2008 the use of our internal market risk model for calculating regulatory capital. Although the approval was first effective for treasury trading activity of the Parent bank, the Group’s objective is to gradually increase approval to the rest of the units.
As a result of this approval, the regulatory capital of trading activity is now calculated via advanced methods instead of the previous standard methods. The VaR calculated for the Market Risks Area is the fundamental metric and incorporates an incremental default risk.
We closely co-operate with the Bank of Spain in order to advance in the perimeter permitted to utilize the Internal Model (at the geographic and operational levels), as well as analysis of the impact of possible future changes, in line with the consultative documents published by the Basel Committee in December 2009 to strengthen the capital of banks 7 .
F. Structured financing transactions
In its usual operations, Grupo Santander’s exposure is low and its activity is diversified by product, sector and number of operations. The committed exposure at the end of 2009 was € 13,983 million corresponding to 422 transactions, broken down as follows: € 8,138 million (296 transactions) in project finance; € 3,712 million (39 transactions) in acquisition finance and the rest leveraged buy-outs (LBOs) and other forms (87 transactions). No writedowns were considered necessary in the investment portfolio, beyond € 79 million of loan-loss provisions. There were no significant LBOs during 2009. The Group’s exposure to structured finance operations was 28.7% lower than in 2008.
As a result of integrating Alliance & Leicester into the group in 2008, a portfolio of structured operations is maintained. It is a diversified portfolio of specialized financing operations. The exposure at the end of 2009 was 20.1% lower than in 2008 at £5,872 million ( € 6,621 million).
Of note in December was an operation of € 308 million which should reach € 850 million within two years.
7
“Strengthening the resilience of the banking sector” and “International framework for liquidity risk measurement, standards and monitoring.”

271

Table of Contents

G. Capital Management
The objective of capital management is to optimize its structure and its cost, from the regulatory and economic perspectives. Therefore, different tools and policies are utilized, such as capital increases and computable issuances (preferred and subordinated), results, dividend policy and securitizations.
At December 31, 2009, our eligible stockholders’ equity was € 69,731 million and exceeded the minimum required by the Bank of Spain by over € 25,026 million. Our capital ratios remained at comfortable levels. The BIS II ratio was 14.2%, Tier I Capital was 10.1% and core capital was 8.6%.
As regards rating agencies, Fitch Ratings confirmed in June 2009 its AA rating and moved from negative rating watch to stable outlook. This was due to the good management of integrating the acquisitions in Brazil, the UK, Europe and the US, which generated revenue and cost synergies. Another factor was core capital of 7.3% at the end of the first quarter. Fitch also highlighted the Group’s good position in the current complex environment due to the diversification of its businesses, its capacity to generate recurring commercial revenues and its strict cost control policy.
Although S&P positively assessed Banco Santander’s overcoming of the crisis, in April 2009 it changed its outlook from stable to negative because of the deteriorating credit conditions in some of the markets where the Group does business.
Moody’s, as part of a general revision of countries, gave us a long-term rating of Aa2, with negative outlook and B- for financial strength. The reasons for the revision were Santander’s exposure to the Spanish, UK and US markets, although it stated that in the long term the UK and the US would provide profits. Moody’s said in its note that Santander remained among the global banks with the best ratings.
Lastly, DBRS confirmed in February 2010 its AA rating, based on the strength of Santander’s franchise and the capacity to generate recurring profits, which are expected to enable Santander to cope with the weak economic conditions and the still unstable global financial markets.
H. Market Risk: VaR Consolidated Analysis
Our total daily VaR as of December 31, 2008, and December 31, 2009, broken down by trading and structural (non-trading) portfolios, were as set forth below.
Figures in millions of EUR
December 31, 2009
December 31, 2008 Low Average High Period End
TOTAL
782.0 612.5 785.9 983.6 983.6
Trading
31.9 21.9 30.2 45.1 27.5
Non-Trading
807.4 614.7 783.4 1,015.0 1,015.0
Diversification Effect
(57.3 ) (24.0 ) (27.7 ) (76.6 ) (58.9 )
Our daily VaR estimates of interest rate risk, foreign exchange rate risk and equity price risk, were as set forth below 8 .
8
Risk factors such as credit spread and commodities are not shown in this table because they are not relevant in comparative terms and affect only to the trading portfolio. They will be shown in a table below along with the rest of the trading factors.

272

Table of Contents

Interest Rate Risk
Figures in millions of EUR
December 31, 2009
December 31, 2008 Low Average High Period End
Interest Rate Risk
Trading
29.8 11.3 20.0 31.9 18.3
Non-Trading
154.9 151.6 187.5 242.8 210.6
Diversification Effect
(26.9 ) (10.8 ) (18.9 ) (29.8 ) (17.5 )
TOTAL
157.7 152.0 188.6 244.9 211.4
Foreign Exchange Rate Risk
Figures in millions of EUR
December 31, 2009
December 31, 2008 Low Average High Period End
Exchange Rate Risk
Trading
12.4 10.5 15.5 23.1 16.1
Non-Trading
382.5 356.8 493.8 619.9 579.8
Diversification Effect
(12.2 ) (10.3 ) (15.3 ) (22.6 ) (15.9 )
TOTAL
382.7 357.0 494.1 620.4 580.0
Figures in millions of EUR
December 31, 2009
December 31, 2008 Low Average High Period End
Equity Price Risk
Trading
4.9 4.2 6.9 11.6 5.9
Non-Trading
521.5 322.6 358.4 399.0 369.4
Diversification Effect
(4.9 ) (4.2 ) (6.8 ) (11.5 ) (5.8 )
TOTAL
521.5 322.7 358.4 399.1 369.5
Equity Price Risk
Our daily VaR estimates by activity, were as set forth below 9 .
9
Two new factors in Trading are given differentiated treatment in 2009 compared to 2008: the credit spread (previously integrated partly in interest rates) and the price of commodities (previously integrated in equities, with a small relative share compared to the rest of factors).

273

Table of Contents

Figures in millions of EUR
December 31, 2009
December 31, 2008 Low Average High Period End
Trading
Interest Rate
29.8 11.3 20.0 31.9 18.3
Exchange Rate
12.4 10.5 15.5 23.1 16.1
Equity
4.9 4.2 6.9 11.6 5.9
Credit Spread
8.2 11.9 15.8 15.0
Commodities
0.1 0.8 1.6 1.4
TOTAL
31.9 21.9 30.2 45.1 27.5
Non-Trading Interest Rate
Interest Rate
154.9 151.6 187.5 242.8 210.6
Non-Trading Foreign Exchange
Exchange Rate
382.5 356.8 493.8 619.9 579.8
Non-Trading Equity
Equity
521.5 322.6 358.4 399.0 369.4
TOTAL
782.0 612.5 785.9 983.6 983.6
Interest Rate
157.7 152.0 188.6 244.9 211.4
Exchange Rate
382.7 357.0 494.1 620.4 580.0
Equity
521.5 322.7 358.4 399.1 369.5

274

Table of Contents

Item 12. Description of Securities Other than Equity Securities.
A. Debt Securities
Not Applicable
B. Warrants and Rights
Not Applicable
C. Other Securities
Not Applicable
D. American Depositary Shares
Our Depositary is J.P. Morgan Chase & Co., with its principal executive office located at 270 Park Avenue, New York, NY 10017-2070.
Each ADS represents the right to receive one share of Capital Stock of Banco Santander, S.A., par value € 0.50 each.
•
Fees charged to investors as outlined in the deposit agreement are the following:
Category of Service Depositary Actions Associated Fee
(a) Deposit or
substituting the
underlying shares
Each person to whom ADSs are issued against deposits of shares, including deposits in respect of share distributions, rights and other distributions. 1
Each person surrendering ADRs for the withdrawal of deposited securities. 		$5.00 for each 100 ADSs (or portion thereof) delivered or surrendered.
(b) Receiving or
distributing
dividends
Distribution of dividends. $0.01 per ADS.
(c) Selling or
Exercising Rights
Distribution or sale of securities, the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities. $5.00 for each 100 ADSs (or portion thereof).
(d) Withdrawing an
underlying security
Acceptance of ADRs surrendered for withdrawal of deposited securities. $5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs surrendered.
(d) Expenses of the Depositary
Expenses incurred on behalf of Holders in connection with:

i) Stock transfer or other taxes and other governmental charges.
ii) Cable, telex and facsimile transmission and delivery.
iii) Expenses of the Depositary in connection with the conversion of foreign currency into US dollars (which are paid out of such foreign currency).
iv) Such fees and expenses as are incurred by the Depositary (including without limitation expenses incurred on behalf of Holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in delivery of deposited securities or otherwise in connection with the Depositary’s or its Custodian’s compliance with applicable law, rule or regulation. 		Expenses payable at the sole discretion of the depositary.
1
The Depositary may sell (by public or private sale) sufficient securities and property received in respect of such share distributions, rights and other distributions prior to such deposit to cover such charge.

275

Table of Contents

•
Fees received from our depositary in connection with the ADR program are the following:
Contracted contribution:
Fixed: $1.9 million fixed
Dividend fees collected that Santander gets as per 90% revenue share: $1,674,219.71
Total: $3,574,219.71
Actually paid:
Fixed: $1.2 million — ($700,000 written down as part of negotiations)
Dividend fees collected: $1,674,219.71
Total: $2,874,219.71
Waived fees:
Ongoing program maintenance per contract year: $150,000
Annual meeting services: $15,000
Investor Relations advisory services: $185,000
Total: $350,000
Our depositary is not allowed to collect fees and charges by offsetting them against dividends and deposited securities.

276

Table of Contents

PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not Applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
A. Not Applicable
B. Not Applicable
C. Not Applicable
D. Not Applicable
E. Not Applicable
Item 15. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of December 31, 2009, Banco Santander, S.A., under the supervision and with the participation of its management, including its disclosure committee, its chief executive officer, chief financial officer, and chief accounting officer, performed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15 (e) under the Exchange Act). There are, as described below, inherent limitations to the effectiveness of any control system, including disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives.
Based on such evaluation, Banco Santander, S.A’s chief executive officer, chief financial officer and chief accounting officer concluded that Banco Santander, S.A.’s disclosure controls and procedures are effective in ensuring that information Banco Santander, S.A. is required to disclose in the reports it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to Banco Santander, S.A.’s management, including its disclosure committee, chief executive officer, chief financial officer and the chief accounting officer, as appropriate to allow timely decisions regarding required disclosures.
(b) Management’s Report on Internal Control over Financial Reporting
The management of Banco Santander, S.A. is responsible for establishing and maintaining an adequate internal control over financial reporting as defined in Rule 13a-15 (f) under the Exchange Act.
Our internal control over financial reporting is a process designed by, or under the supervision of, the Bank’s principal executive and principal financial officers and effected by the Bank’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes, in accordance with generally accepted accounting principles. For Banco Santander, S.A., generally accepted accounting principles refer to the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”).

277

Table of Contents

Our internal control over financial reporting includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We have adapted our internal control over financial reporting to the most rigorous international standards and comply with the guidelines set by the Committee of Sponsoring Organizations of the Treadway Commission in its Enterprise Risk Management Integrated Framework. These guidelines have been extended and installed in our Group companies, applying a common methodology and standardizing the procedures for identifying processes, risks and controls, based on the Enterprise Risk Management Integrated Framework.
The documentation process in the Group’s companies has been constantly directed and monitored by a global coordination team, which set the guidelines for its development and supervised its execution at the unit level.
The general framework is consistent, as it assigns to management specific responsibilities regarding the structure and effectiveness of the processes related directly and indirectly with the production of consolidated financial statements, as well as the controls needed to mitigate the risks inherent in these processes.
Under the supervision and with the participation of the management of the Group, including our chief executive officer, our chief financial officer and our chief accounting officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Enterprise Risk Management — Integrated Framework . Based on this assessment, management believes that, as of December 31, 2009, its internal control over financial reporting was effective based on those criteria.
Our independent registered public accounting firm has issued an audit report on the effectiveness of our internal control over financial reporting as of December 31, 2009. This report follows below.
(c) Attestation report of the registered public accounting firm

278

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Banco Santander, S.A.:
We have audited the internal control over financial reporting of Banco Santander, S.A. (the “Bank”) and Companies composing, together with the Bank, the Santander Group (the “Group”) as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting . Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the consolidated financial statements as of and for the year ended December 31, 2009 of the Group and our report dated June 10, 2010 expressed an unqualified opinion on those consolidated financial statements.
/s/ Deloitte, S.L.
DELOITTE, S.L.
Madrid — Spain
June 10, 2010
(d) Changes in internal controls over financial reporting . There was no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

279

Table of Contents

Item 16. [Reserved]
Item 16A. Audit committee financial expert
The audit and compliance committee has five members, all of whom are non-executive independent directors (as defined by Article 6.2 c) of the Rules and Regulations of the Board). All members of the audit and compliance committee also meet the independence criteria set by the NYSE for foreign private issuers. Our Rules and Regulations of the Board provide that all members of the audit and compliance must have knowledge, aptitude and experience in the areas of accounting, auditing or risk management. Currently, the chairman of the audit and compliance committee is Luis Ángel Rojo. Our standards for director independence may not necessarily be consistent with, or as stringent as, the standards for director independence established by the NYSE.
Our board of directors has determined that Manuel Soto is an “Audit Committee Financial Expert” in accordance with SEC rules and regulations.
Item 16B. Code of Ethics
We have adopted a code of ethics (the “General Code of Conduct”) that is applicable to all members of the boards of the companies of the Group, to all employees subject to the Code of Conduct of the Securities Market, including the Bank’s chairman, chief executive officer, chief financial officer and chief accounting officer, and to all those employees designated by the Human Resources Division that have been specifically informed of their subjection to this General Code of Conduct. This Code establishes the principles that guide these officers’ and directors’ respective actions: ethical conduct, professional standards and confidentiality. It also establishes the limitations and defines the conflicts of interest arising from their status as senior executives or directors.
At its meeting of November 18, 2009, the audit and compliance committee was informed of and approved the corresponding proposal for amendment of the Group’s General Code of Conduct. The amendment primarily provided for the addition of a new Section II, which sets forth the ethical principles of the organization that must govern all acts by the employees. At its meeting of December 21, 2009, the board approved the proposed amendment submitted by the audit and compliance committee.
This Code is available on our website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—corporate governance—internal code of conduct”.

280

Table of Contents

Item 16C. Principal Accountant Fees and Services
Amounts paid to the firms belonging to the Deloitte worldwide organization, the Group’s principal auditor, for statutory audit and other services were as follows:
2009 2008 2007
(in millions of euros)
Audit fees (1)
19.6 18.3 15.9
Audit related fees (2)
11.0 10.4 9.9
Non-audit related fees (excluding tax services) (3)
1.5 3.4 2.8
Tax fees (4)
3.2 1.9 2.5
Other fees paid (5)
3.7 3.8 3.7
39.0 37.8 34.8
(1)
In 2009, € 14.6 million was paid for the audit of annual financial statements considering that the Group had the same composition as in the previous year, and € 5.0 million was paid for the annual audit of the companies that became part of the Group in this year.
(2)
Comprising € 4.7 million in 2009, € 5.9 million in 2008 and € 6.2 million in 2007 for the audit of internal control pursuant to the requirements of the Sarbanes-Oxley Act and the calculation of regulatory capital (Basel) and € 6.3 million in 2009, € 4.5 million in 2008 and € 3.7 million in 2007 for other reports required by legal regulations issuing from the national supervisory bodies of the countries where the Group does business, notably the semi-annual audits and the reports prepared in compliance with the requirements of the US securities market (other than those required by the Sarbanes-Oxley Act).
(3)
The amounts invoiced for services other than audit which, during the past fiscal year, were principally those relating to securitization processes and preparation of financial studies.
(4)
All tax services have been approved by the audit and compliance committee of the board of directors.
(5)
Amounts invoiced for audits on purchases and other corporate transactions (due diligence).
The services commissioned from the Group’s auditors meet the independence requirements stipulated by Law 44/2002, of November, 22 on Financial System Reform Measures and by the Sarbanes-Oxley Act of 2002, and they did not involve the performance of any work that is incompatible with the audit function.
The audit and compliance committee proposes to the board the fees to be paid to the external auditor and the scope of its professional mandate.
The audit and compliance committee is required to pre-approve the main audit contract of the Bank or of any other company of the Group with its principal auditing firm. This main contract sets forth the scope of the audit services and audit-related services to be provided by the auditing firm, the term (typically, three years), the fees to be paid and the Group companies to which it will be applied. Once the term of the first contract expires, it can be rolled over by subsequent periods of one year upon approval by the audit and compliance committee.
If a new Group company is required to engage an auditing firm for audit and audit-related services, those services have to be pre-approved by the audit and compliance committee.
All non-audit services provided by the Group’s principal auditing firm or other auditing firms in 2009 were approved by the audit and compliance committee, and all such non-audit services to be provided in the future will also require approval from the audit and compliance committee.
The audit and compliance committee is regularly informed of all fees paid to the auditing firms by the Group companies.

281

Table of Contents

Item 16D. Exemption from the Listing Standards for Audit Companies
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table shows the repurchases of shares made by the Bank or any of its Affiliated Purchasers during 2009:
(c) Total number of (d) Maximum number (or
shares (or units) approximate dollar value) of
(a) Total number of (b) Average purchased as part of shares (or units) that may yet be
shares (or units) price paid per publicly announced purchased under the plans or
2009 purchased share (or unit) in euros plans or programs programs
January
106,770,816 6.36 — —
February
75,465,757 5.49 — —
March
76,056,976 4.72 — —
April
342,956,241 6.17 — —
May
126,408,973 7.14 — —
June
140,328,484 8.16 — —
July
86,770,535 9.51 — —
August
88,740,880 10.12 — —
September
37,489,370 9.45 — —
October
71,689,779 10.35 — —
November
47,593,919 9.05 — —
December
40,287,486 9.89 — —
Total
1,240,559,216 7.47
During 2009, all purchases and sales of equity securities were made in open-market transactions.
Item 16F. Changes in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
The following is a summary of the significant differences between our corporate governance practices and those applicable to domestic issuers under the New York Stock Exchange (“NYSE”) listing standards.
Independence of the directors on the board of directors
Under the NYSE corporate governance rules, a majority of the board of directors must be composed of independent directors, the independence of whom is determined in accordance with highly detailed rules promulgated by the NYSE. Spanish law does not contain any such requirements although there is a non-binding recommendation for listed companies in Spain that the number of independent directors be at least one third of the total size of the Board. Article 42.1 of our By-laws establishes that the shareholders at the general shareholders’ meeting shall endeavor to ensure that independent directors represent at least one-third of the total number of directors. Article 6.1 of the Rules and Regulations of the Board of Directors establishes

282

Table of Contents

likewise that the board shall endeavor that the number of independent directors represent at least one-third of all directors. The board of directors of Santander has ten independent directors (out of nineteen directors total), as defined in Article 6.2. c) of the Rules and Regulations of the Board. We have not determined whether or not the directors on the Santander Board would be considered independent under the NYSE rules except in the case of the members of our audit and compliance committee where we have determined that all of them meet the NYSE independence criteria for foreign private issuers. Article 6.2. c) of the Rules and Regulations of the Board defines the concept of an independent director as follows:
“External or non-executive Directors who have been appointed based on their personal or professional status and who perform duties not conditioned by relationships with the Company, or with the significant shareholders or management thereof shall be considered independent directors.
In no event may there be a classification as independent directors of those who:
a) Have been employees or executive directors of the Group’s companies, except after the passage of 3 or 5 years, respectively, since the cessation of such relationship.
b) Receive from the Company, or from another Group company, any amount or benefit for something other than director compensation, unless it is immaterial. For purposes of the provisions of this sub-section, neither dividends nor pension supplements that a director receives by reason of the director’s prior professional or employment relationship shall be taken into account, provided that such supplements are unconditional and therefore, the Company paying them may not suspend, modify or revoke the accrual thereof without breaching its obligations.
c) Are, or have been during the preceding 3 years, a partner of the external auditor or the party responsible for auditing the Company or any other Group company during such period.
d) Are executive directors or senior managers of another company in which an executive director or senior manager of the Company is an external director.
e) Maintain, or have maintained during the last year, a significant business relationship with the Company or with any Group company, whether in their own name or as a significant shareholder, director or senior manager of an entity that maintains or has maintained such relationship. Business relationships shall be considered the relationships of a provider of goods or services, including financial, advisory or consulting services.
f) Are significant shareholders, executive directors or senior managers of an entity that receives, or has received during the preceding 3 years, significant donations from the Company or the Group. Those who are merely members of the board of a foundation that receives donations shall not be considered included in this letter.
g) Are spouses, persons connected by a similar relationship of affection, or relatives to the second degree of an executive director or senior manager of the Company.
h) Have not been proposed, whether for appointment or for renewal, by the appointments and remuneration committee.
i) Are, as regards a significant shareholder or shareholder represented on the board, in one of the circumstances set forth in letters (i), (v), (vi) or (vii) of this sub-section 2(c) . In the event of a kinship relationship set forth in item (vii), the limitation shall apply not only with respect to the shareholder, but also with respect to the related proprietary directors thereof in the affiliate company”.

283

Table of Contents

The above independence criteria are the same as those set forth by the Unified Code of Good Governance, which is a non-binding code approved by the Spanish CNMV in 2006.
The 2010 annual general meeting will be held on June 11, 2010. At that meeting, a new director, Ángel Jado, is proposed for appointment as independent director. If approved, the board size will increase from 19 to 20 members and the number of independent directors from ten to eleven.
Independence of the directors on the audit and compliance committee
Under the NYSE corporate governance rules, all members of the audit committee must be independent. Independence is determined in accordance with highly detailed rules promulgated by the NYSE. Such independence criteria are met by all members of our audit and compliance committee.
The audit and compliance committee of the board of directors of Santander is composed of five directors. All members are non-executive independent directors and its chairman is independent in accordance with the standards set forth in the previously mentioned Article 6.2. c) of the Rules and Regulations of the Board. These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. Under Spanish law, a majority of the members and the chairman of the audit committee must be non-executive. The composition of the audit and compliance committee is described under “—Audit and compliance committee and appointments and remuneration committee”.
Independence of the directors on the appointments and remuneration committee
In accordance with the NYSE corporate governance rules, all US companies listed on the NYSE must have a compensation committee and a nominating and corporate governance committee and all members of such committees must be independent in accordance with highly detailed rules promulgated by the NYSE. Under Spanish law, these committees are not required, though there is a non-binding recommendation for listed companies in Spain to have these committees and for them to be composed of non-executive directors and chaired by a non-executive independent director. Santander satisfies this non-binding recommendation. The appointments and remuneration committee of the board of directors of Santander is composed of five directors. All members are non-executive independent directors and its chairman is independent in accordance with the standards set forth in the previously mentioned Article 6.2. c) of the Rules and Regulations of the Board. These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. The composition of the appointments and remuneration committee is described under “—Audit and compliance committee and appointments and remuneration committee”.
During the fiscal year 2009, none of the members of the appointments and remuneration committee was an executive director, member of senior management or a Bank employee, and no executive director or member of senior management has held a position on the board (or its remuneration committee) of companies that employ members of the appointments and remuneration committee.
Separate meetings for non-management directors
In accordance with the NYSE corporate governance rules, non-management directors must meet periodically outside of the presence of management. Under Spanish law, this practice is not required and as such, the non-management directors on the board of directors of Santander do not meet outside of the presence of the directors who also serve in a management capacity.
The audit and compliance committee and the appointments and remuneration committee of the Bank’s board of directors consist entirely of non-management independent directors.

284

Table of Contents

The audit and compliance committee and the appointments and remuneration committee met 11 and 8 times, respectively, in 2009.
Code of ethics
Under the NYSE corporate governance rules, all US companies listed on the NYSE must adopt a Code of Business Conduct and Ethics which contains certain required topics. In March 2000, Santander adopted a General Code of Conduct , which applies to all members of the boards of the companies of the Group, to all employees subject to the Code of Conduct in the Securities Market, including the Bank’s chairman, chief executive officer, chief financial officer and chief accounting officer, and to all those employees designated by the human resources division that have been specifically informed of their subjection to this General Code of Conduct. On July 28, 2003, the board approved amendments to the General Code of Conduct to conform it to the requirements of Law 44/2002 (November 2, 2002) on reform measures of the financial system. The new Code came into force on August 1, 2003 and replaced the previous one. The General Code of Conduct establishes the principles that guide the actions of officers and directors including ethical conduct, professional standards and confidentiality.
At its meeting of November 18, 2009, the audit and compliance committee was informed of and approved the corresponding proposal for amendment of the Group’s General Code of Conduct. The amendment primarily provided for the addition of a new Section II, which sets forth the ethical principles of the organization that must govern all acts by the employees. At its meeting of December 21, 2009, the board approved the proposed amendment submitted by the audit and compliance committee.
The obligations of directors and the regulations concerning their conflict of interests are governed by the Rules and Regulations of the Board.
As of December 31, 2009, no waivers with respect to the General Code of Conduct had been applied for or granted.
In addition, the Group abides by a Code of Conduct in the Securities Market, which was also updated on July 28, 2003. This code establishes standards and obligations in relation to securities trading, conflicts of interest and the treatment of price sensitive information.
Both codes are available to the public on our website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Internal code of conduct”.

285

Table of Contents

PART III
Item 17. Financial Statements
We have responded to Item 18 in lieu of this item.
Item 18. Financial Statements
Reference is made to Item 19 for a list of all financial statements filed as part of this Form 20-F.
Item 19. Exhibits
(a) Index to Financial Statements
Page
Report of Deloitte, S.L.
F-1
Consolidated Balance Sheets as of December 31, 2009, 2008 and 2007
F-2
Consolidated Statements of Income for the Years Ended December 31, 2009, 2008 and 2007
F-3
Consolidated Statements Of Changes In Stockholders’ Equity for the Years Ended December 31, 2009, 2008 and 2007
F-5
Consolidated Cash Flow Statement for the Years Ended December 31, 2009, 2008 and 2007
F-8
Notes to the Consolidated Financial Statements
F-9
(b) List of Exhibits.
Exhibit
Number Description
1.1
By-laws (Estatutos) of Banco Santander, S.A.
1.2
By-laws (Estatutos) of Banco Santander, S.A., (English translation of By-laws set forth in Exhibit 1.1 hereto).
4.1 *
Restated Consortium and Shareholders Agreement dated April 1, 2010, among the Royal Bank of Scotland Group plc, Banco Santander, S.A., the State of the Netherlands and RFS Holdings B.V.
4.2
Transaction Agreement dated as of October 13, 2008 by and between Sovereign Bancorp, Inc. and Banco Santander, S.A. (incorporated by reference to Exhibit 2.1 to our Registration Statement on Form F-4, filed with the Securities and Exchange Commission on November 17, 2008).
8.1
List of Subsidiaries (incorporated by reference as Exhibits I, II and III of our Financial Statements filed with this Form 20-F).
12.1
Section 302 Certification by the chief executive officer.
12.2
Section 302 Certification by the chief financial officer.
12.3
Section 302 Certification by the chief accounting officer.
13.1
Section 906 Certification by the chief executive officer, the chief financial officer and the chief accounting officer.
15.1
Consent of Deloitte, S.L.
*
Pursuant to a request for confidential treatment filed with the Security and Exchange Commission, the confidential portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission.
We will furnish to the Securities and Exchange Commission, upon request, copies of any unfiled instruments that define the rights of holders of long-term debt of Banco Santander, S.A.

286

Table of Contents

SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
BANCO SANTANDER, S.A.
By: /s/ José Antonio Álvarez
Name: José Antonio Álvarez
Title: Chief financial officer
Date: June 10, 2010

Table of Contents

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Banco Santander, S.A.:
We have audited the accompanying consolidated balance sheets of Banco Santander, S.A. (the “Bank”) and Companies composing, together with the Bank, the Santander Group (the “Group”), as of December 31, 2009, 2008 and 2007, and the related consolidated income statements, statements of recognized income and expense, changes in total equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Bank’s directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Banco Santander, S.A. and Companies composing, together with the Bank, the Santander Group as of December 31, 2009, 2008 and 2007, and the results of their operations, their changes in equity, and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IFRS-IASB”).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the Group’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 10, 2010 expressed an unqualified opinion on the Group’s internal control over financial reporting.
/s/ Deloitte, S.L.
DELOITTE, S.L.
Madrid-Spain
June 10, 2010

Table of Contents

SANTANDER GROUP
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2009, 2008 AND 2007 (NOTES 1 TO 4)
(Thousands of euros)
Note 2009 2008 2007
ASSETS
CASH AND BALANCES WITH CENTRAL BANKS
34,889,413 45,781,345 31,062,775
FINANCIAL ASSETS HELD FOR TRADING:
135,054,321 151,817,192 158,806,860
Loans and advances to credit institutions
6 5,952,956 5,149,584 12,294,559
Loans and advances to customers
10 10,076,412 684,348 23,704,481
Debt instruments
7 49,920,518 43,895,548 66,330,811
Equity instruments
8 9,248,022 6,272,403 9,744,466
Trading derivatives
9 59,856,413 95,815,309 46,732,543
OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS:
37,813,669 25,817,138 24,829,441
Loans and advances to credit institutions
6 16,242,609 8,911,906 6,865,073
Loans and advances to customers
10 8,328,516 8,972,707 8,021,623
Debt instruments
7 7,365,213 5,154,732 7,072,423
Equity instruments
8 5,877,331 2,777,793 2,870,322
AVAILABLE-FOR-SALE FINANCIAL ASSETS:
86,620,503 48,920,306 44,348,907
Debt instruments
7 79,289,337 42,547,677 34,187,077
Equity instruments
8 7,331,166 6,372,629 10,161,830
LOANS AND RECEIVABLES:
736,746,371 699,614,727 579,523,720
Loans and advances to credit institutions
6 57,641,042 64,730,787 38,482,972
Loans and advances to customers
10 664,145,998 617,231,380 539,372,409
Debt instruments
7 14,959,331 17,652,560 1,668,339
HELD-TO-MATURITY INVESTMENTS
— — —
CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK
36 1,419,841 2,402,736 297,131
HEDGING DERIVATIVES
11 7,833,850 9,698,132 3,063,169
NON-CURRENT ASSETS HELD FOR SALE
12 5,789,189 9,267,486 10,156,429
INVESTMENTS:
164,473 1,323,453 15,689,127
Associates
13 164,473 1,323,453 15,689,127
Jointly controlled entities
— — —
INSURANCE CONTRACTS LINKED TO PENSIONS
14 2,356,151 2,446,989 2,525,550
REINSURANCE ASSETS
15 416,822 458,388 309,774
TANGIBLE ASSETS:
8,995,735 8,501,552 9,459,033
Property, plant and equipment-
7,904,819 7,630,935 8,998,308
For own use
16 6,202,162 5,664,616 4,287,612
Leased out under an operating lease
16 1,702,657 1,966,319 4,710,696
Investment property
16 1,090,916 870,617 460,725
INTANGIBLE ASSETS:
25,643,414 20,623,267 16,033,042
Goodwill
17 22,865,056 18,836,199 13,830,708
Other intangible assets
18 2,778,358 1,787,068 2,202,334
TAX ASSETS:
20,654,815 16,953,613 12,698,072
Current
4,827,554 2,309,465 1,845,310
Deferred
27 15,827,261 14,644,148 10,852,762
OTHER ASSETS:
19 6,130,891 6,005,226 4,111,941
Inventories
518,833 620,774 231,734
Other
5,612,058 5,384,452 3,880,207
TOTAL ASSETS
1,110,529,458 1,049,631,550 912,914,971
LIABILITIES AND EQUITY
FINANCIAL LIABILITIES HELD FOR TRADING:
115,516,474 136,620,235 123,398,293
Deposits from central banks
20 2,985,488 9,109,857 —
Deposits from credit institutions
20 43,131,718 26,841,854 23,254,111
Customer deposits
21 4,658,372 4,896,065 27,992,480
Marketable debt securities
22 586,022 3,569,795 17,090,935
Trading derivatives
9 58,712,624 89,167,433 49,447,533
Short positions
9 5,139,730 3,035,231 5,613,234
Other financial liabilities
24 302,520 — —
OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS:
42,371,301 28,639,359 39,718,002
Deposits from central banks
20 10,103,147 4,396,901 6,562,328
Deposits from credit institutions
20 12,744,848 9,733,268 12,207,579
Customer deposits
21 14,636,466 9,318,117 10,669,058
Marketable debt securities
22 4,886,840 5,191,073 10,279,037
Subordinated liabilities
— — —
Other financial liabilities
— — —
FINANCIAL LIABILITIES AT AMORTIZED COST:
823,402,745 770,007,599 646,411,202
Deposits from central banks
20 22,345,110 9,211,957 22,185,751
Deposits from credit institutions
20 50,781,276 70,583,533 48,687,539
Customer deposits
21 487,681,399 406,015,268 316,744,981
Marketable debt securities
22 206,490,311 227,642,422 205,916,716
Subordinated liabilities
23 36,804,601 38,873,250 36,192,737
Other financial liabilities
24 19,300,048 17,681,169 16,683,478
CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK
36 806,418 440,136 (516,725 )
HEDGING DERIVATIVES
11 5,191,077 5,957,611 4,134,571
LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE
293,512 49,688 63,420
LIABILITIES UNDER INSURANCE CONTRACTS
15 16,916,446 16,849,511 13,033,617
PROVISIONS:
17,532,739 17,736,259 16,570,899
Provisions for pensions and similar obligations
25 10,628,684 11,198,117 11,819,748
Provisions for taxes and other legal contingencies
25 3,283,339 2,363,706 1,715,967
Provisions for contingent liabilities and commitments
25 641,620 678,584 636,316
Other provisions
25 2,979,096 3,495,852 2,398,868
TAX LIABILITIES:
7,003,945 5,768,665 6,156,365
Current
3,337,444 2,304,599 2,412,133
Deferred
27 3,666,501 3,464,066 3,744,232
OTHER LIABILITIES
26 7,624,159 7,560,995 6,387,176
TOTAL LIABILITIES
1,036,658,816 989,630,058 855,356,820
EQUITY
SHAREHOLDERS’ EQUITY:
30 71,831,688 65,886,582 54,477,846
Share capital
31 4,114,413 3,997,030 3,127,148
Registered
4,114,413 3,997,030 3,127,148
Less: Uncalled capital
— — —
Share premium
32 29,305,257 28,103,802 20,370,128
Reserves
33 24,607,287 20,868,406 16,371,430
Accumulated reserves (losses)
33 24,539,624 21,158,869 15,475,993
Reserves (losses) of entities accounted for using the equity method
33 67,663 (290,463 ) 895,437
Other equity instruments
34 7,188,465 7,155,566 7,086,881
Equity component of compound financial instruments
— — —
Other
7,188,465 7,155,566 7,086,881
Less: Treasury shares
34 (29,755 ) (421,198 ) (192 )
Profit for the year attributable to the Parent
8,942,538 8,876,414 9,060,258
Less: Dividends and remuneration
4 (2,296,517 ) (2,693,438 ) (1,537,807 )
VALUATION ADJUSTMENTS:
(3,165,104 ) (8,299,696 ) 722,036
Available-for-sale financial assets
29 645,345 79,293 1,393,202
Cash flow hedges
11 (255,498 ) (309,883 ) (31,051 )
Hedges of net investments in foreign operations
29 296,686 1,467,289 638,474
Exchange differences
29 (3,851,826 ) (9,424,871 ) (1,276,749 )
Non-current assets held for sale
189 36,878 —
Entities accounted for using the equity method
29 — (148,402 ) (1,840 )
Other valuation adjustments
— — —
MINORITY INTERESTS:
28 5,204,058 2,414,606 2,358,269
Valuation adjustments
45,228 (371,310 ) (73,622 )
Other
5,158,830 2,785,916 2,431,891
TOTAL EQUITY
73,870,642 60,001,492 57,558,151
TOTAL LIABILITIES AND EQUITY
1,110,529,458 1,049,631,550 912,914,971
MEMORANDUM ITEMS:
CONTINGENT LIABILITIES
35 59,256,076 65,323,194 76,216,585
CONTINGENT COMMITMENTS
35 163,530,756 131,725,006 114,676,563
The accompanying Notes 1 to 54 and Appendices are an integral part of the consolidated balance sheet at December 31, 2009.

F-2

Table of Contents

SANTANDER GROUP
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 (NOTES 1 TO 4)
(Thousands of euros)
(Debit) Credit
Notes 2009 2008 2007
Interest and similar income
38 53,173,004 55,043,546 45,512,258
Interest expense and similar charges
39 (26,874,462 ) (37,505,084 ) (31,069,486 )
INTEREST INCOME / (CHARGES)
26,298,542 17,538,462 14,442,772
Income from equity instruments
40 436,474 552,757 419,997
Income from companies accounted for using the equity method
41 (520 ) 791,754 438,049
Fee and commission income
42 10,726,368 9,741,400 9,290,043
Fee and commission expense
43 (1,646,234 ) (1,475,105 ) (1,421,538 )
Gains/losses on financial assets and liabilities (net)
44 3,801,645 2,892,249 2,306,384
Held for trading
2,098,449 566,828 1,407,938
Other financial instruments at fair value through profit or loss
197,993 607,309 125,774
Financial instruments not measured at fair value through profit or loss
1,630,858 1,722,651 873,018
Other
(125,655 ) (4,539 ) (100,346 )
Exchange differences (net)
45 444,127 582,215 648,528
Other operating income
7,928,538 9,436,308 6,739,670
Income from insurance and reinsurance contracts issued
46 7,112,856 8,385,788 5,529,987
Sales and income from the provision of non-financial services
46 377,800 586,872 771,027
Other
46 437,882 463,648 438,656
Other operating expenses
(7,784,621 ) (9,164,487 ) (6,449,120 )
Expenses of insurance and reinsurance contracts
46 (6,773,996 ) (8,134,199 ) (5,300,054 )
Changes in inventories
46 (237,396 ) (469,154 ) (618,955 )
Other
46 (773,229 ) (561,134 ) (530,111 )
TOTAL INCOME
40,204,319 30,895,553 26,414,785
Administrative expenses
(14,824,605 ) (11,665,857 ) (10,776,670 )
Personnel expenses
47 (8,450,283 ) (6,813,351 ) (6,434,343 )
Other general administrative expenses
48 (6,374,322 ) (4,852,506 ) (4,342,327 )
Depreciation and amortization
16 and 18 (1,596,445 ) (1,239,590 ) (1,247,207 )
Provisions (net)
25 (1,792,123 ) (1,640,561 ) (895,552 )
Impairment losses on financial assets (net)
(11,578,322 ) (6,283,052 ) (3,430,122 )
Loans and receivables
10 (11,087,996 ) (5,896,888 ) (3,420,596 )
Other financial instruments not measured at fair value through profit or loss
8 (490,326 ) (386,164 ) (9,526 )
Impairment losses on other assets (net)
(164,630 ) (1,049,226 ) (1,548,218 )
Goodwill and other intangible assets
17 and 18 (31,249 ) (983,929 ) (1,162,872 )
Other assets
(133,381 ) (65,297 ) (385,346 )
Gains/(losses) on disposal of assets not classified as non-current assets held for sale
49 1,565,013 101,156 1,810,428
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations
50 (1,225,407 ) 1,730,902 643,050
OPERATING PROFIT / (LOSS) BEFORE TAX
10,587,800 10,849,325 10,970,494
Income tax
27 (1,206,610 ) (1,836,052 ) (2,322,107 )
PROFIT FROM CONTINUING OPERATIONS
9,381,190 9,013,273 8,648,387
PROFIT / (LOSS) FROM DISCONTINUED OPERATIONS (Net)
37 30,870 319,141 987,763
CONSOLIDATED PROFIT FOR THE YEAR
9,412,060 9,332,414 9,636,150
Profit attributable to the Parent
8,942,538 8,876,414 9,060,258
Profit attributable to minority interests
28 469,522 456,000 575,892
EARNINGS PER SHARE
From continuing and discontinued operations
Basic earnings per share (euros)
4 1.0454 1.2207 1.3320
Diluted earnings per share (euros)
4 1.0382 1.2133 1.3191
From continuing operations
Basic earnings per share (euros)
4 1.0422 1.1780 1.2003
Diluted earnings per share (euros)
4 1.0350 1.1709 1.1887
The accompanying Notes 1 to 54 and Appendices are an integral part of the consolidated income statement
for the year ended December 31, 2009.

F-3

Table of Contents

SANTANDER GROUP
CONSOLIDATED STATEMENTS OF RECOGNIZED INCOME AND EXPENSE
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 (NOTES 1 TO 4)
(Thousands of euros)
2009 2008 2007
CONSOLIDATED PROFIT FOR THE YEAR
9,412,060 9,332,414 9,636,150
OTHER RECOGNIZED INCOME AND EXPENSE
5,551,130 (9,319,420 ) (2,285,213 )
Available-for-sale financial assets:
1,253,709 (2,043,666 ) (766,544 )
Revaluation gains/(losses)
2,132,897 (3,539,079 ) 851,460
Amounts transferred to income statement
(777,149 ) 1,571,044 (1,618,004 )
Other reclassifications
(102,039 ) (75,631 ) —
Cash flow hedges:
73,172 (374,700 ) (185,603 )
Revaluation gains/(losses)
160,387 (479,905 ) (170,537 )
Amounts transferred to income statement
(40,852 ) 15,060 (15,066 )
Amounts transferred to initial carrying amount of hedged items
— — —
Other reclassifications
(46,363 ) 90,145 —
Hedges of net investments in foreign operations:
(1,170,603 ) 828,815 811,977
Revaluation gains/(losses)
(1,221,590 ) 828,815 811,977
Amounts transferred to income statement
50,987 — —
Other reclassifications
— — —
Exchange differences:
5,914,974 (8,423,459 ) (2,062,211 )
Revaluation gains/(losses)
5,943,755 (8,640,444 ) (2,122,207 )
Amounts transferred to income statement
(28,781 ) 216,985 59,996
Other reclassifications
— — —
Non-current assets held for sale:
(36,830 ) 36,878 —
Revaluation gains/(losses)
(36,830 ) — —
Amounts transferred to income statement
— — —
Other reclassifications
— 36,878 —
Actuarial gains/(losses) on pension plans
— — —
Entities accounted for using the equity method:
148,402 (146,562 ) (59,277 )
Revaluation gains/(losses)
— (149,073 ) (59,277 )
Amounts transferred to income statement
— 43,728 —
Other reclassifications
148,402 (41,217 ) —
Other recognized income and expense
— — —
Income tax
(631,694 ) 803,274 (23,555 )
TOTAL RECOGNIZED INCOME AND EXPENSE
14,963,190 12,994 7,350,937
Attributable to the Parent
14,077,130 (145,318 ) 6,911,537
Attributable to minority interests
886,060 158,312 439,400
The accompanying Notes 1 to 54 and Appendices are an integral part of the consolidated statement of recognized income and expense for the year ended December 31, 2009.

F-4

Table of Contents

SANTANDER GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 (NOTES 1 TO 4)
(Thousands of euros)
Equity Attributable to the Parent
Shareholders’ Equity
Reserves
Reserves
(Losses) of
Entities Profit
Accumulated Accounted for Other Less: for the Year Less: Total Non-
Share Share Reserves Using the Equity Equity Treasury Attributable to Dividends and Shareholders’ Valuation Controlling Total
Capital Premium (Losses) Method Instruments Shares the Parent Remuneration Equity Adjustments Total Interests Equity
Ending balance at 12/31/08
3,997,030 28,103,802 21,158,869 (290,463 ) 7,155,566 (421,198 ) 8,876,414 (2,693,438 ) 65,886,582 (8,299,696 ) 57,586,886 2,414,606 60,001,492
Adjustments due to changes in accounting policies
— — — — — — — — — — — — —
Adjustments due to errors
— — — — — — — — — — — — —
Adjusted beginning balance
3,997,030 28,103,802 21,158,869 (290,463 ) 7,155,566 (421,198 ) 8,876,414 (2,693,438 ) 65,886,582 (8,299,696 ) 57,586,886 2,414,606 60,001,492
Total recognized income and expense
— — — — — — 8,942,538 — 8,942,538 5,134,592 14,077,130 886,060 14,963,190
Other changes in equity
117,383 1,201,455 3,380,755 358,126 32,899 391,443 (8,876,414 ) 396,921 (2,997,432 ) — (2,997,432 ) 1,903,392 (1,094,040 )
Capital increases
117,383 1,224,930 (88,431 ) — (3,769 ) — — — 1,250,113 — 1,250,113 2,187,547 3,437,660
Capital reductions
— — — — — — — — — — — — —
Conversion of financial liabilities into equity
— — — — — — — — — — — — —
Increases in other equity instruments
— — — — 147,805 — — — 147,805 — 147,805 — 147,805
Reclassification of financial liabilities to other equity instruments
— — — — — — — — — — — — —
Reclassification of other equity instruments to financial liabilities
— — — — — — — — — — — — —
Distribution of dividends
— — (2,118,895 ) — — — — (2,296,517 ) (4,415,412 ) — (4,415,412 ) (232,948 ) (4,648,360 )
Transactions involving own equity instruments (net)
— — 320,761 — — 391,443 — — 712,204 — 712,204 — 712,204
Transfers between equity items
— (23,475 ) 5,890,770 358,126 (42,445 ) — (8,876,414 ) 2,693,438 — — — — —
Increases (decreases) due to business combinations
— — — — — — — — — — — (10,330 ) (10,330 )
Equity-instrument-based payments
— — — — (76,252 ) — — — (76,252 ) — (76,252 ) — (76,252 )
Other increases/(decreases) in equity
— — (623,450 ) — 7,560 — — — (615,890 ) — (615,890 ) (40,877 ) (656,767 )
Ending balance at 12/31/09
4,114,413 29,305,257 24,539,624 67,663 7,188,465 (29,755 ) 8,942,538 (2,296,517 ) 71,831,688 (3,165,104 ) 68,666,584 5,204,058 73,870,642
The accompanying Notes 1 to 54 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended December 31, 2009.

F-5

Table of Contents

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 (NOTES 1 TO 4) (Continued)
(Thousands of euros)
Equity Attributable to the Parent
Shareholders’ Equity
Reserves
Reserves
(Losses) of
Entities Profit Non-
Accumulated Accounted for Other Less: for the Year Less: Total Controlling Total
Share Share Reserves Using the Equity Equity Treasury Attributable to Dividends and Shareholders’ Valuation Interests Equity
Capital Premium (Losses) Method Instruments Shares the Parent Remuneration Equity Adjustments Total (*) (*)
Ending balance at 12/31/07
3,127,148 20,370,128 15,475,993 895,437 7,086,881 (192 ) 9,060,258 (1,537,807 ) 54,477,846 722,036 55,199,882 2,358,269 57,558,151
Adjustments due to changes in accounting policies
— — — — — — — — — — — — —
Adjustments due to errors
— — — — — — — — — — — — —
Adjusted beginning balance
3,127,148 20,370,128 15,475,993 895,437 7,086,881 (192 ) 9,060,258 (1,537,807 ) 54,477,846 722,036 55,199,882 2,358,269 57,558,151
Total recognized income and expense
— — — — — — 8,876,414 — 8,876,414 (9,021,732 ) (145,318 ) 158,312 12,994
Other changes in equity
869,882 7,733,674 5,682,876 (1,185,900 ) 68,685 (421,006 ) (9,060,258 ) (1,155,631 ) 2,532,322 — 2,532,322 (101,975 ) 2,430,347
Capital increases
869,882 7,907,651 (134,197 ) — — — — — 8,643,336 — 8,643,336 73,975 8,717,311
Capital reductions
— — — — — — — — — — — — —
Conversion of financial liabilities into equity
— — — — — — — — — — — — —
Increases in other equity instruments
— — — — 107,644 — — — 107,644 — 107,644 — 107,644
Reclassification of financial liabilities to other equity instruments
— — — — — — — — — — — — —
Reclassification of other equity instruments to financial liabilities
— — — — — — — — — — — — —
Distribution of dividends
— — (4,070,179 ) — — — — (1,155,631 ) (5,225,810 ) — (5,225,810 ) (240,620 ) (5,466,430 )
Transactions involving own equity instruments (net)
— — 12,249 — — (421,006 ) — — (408,757 ) — (408,757 ) — (408,757 )
Transfers between equity items
— (173,977 ) 10,421,154 (1,185,900 ) (1,019 ) — (9,060,258 ) — — — — — —
Increases (decreases) due to business combinations
— — — — — — — — — — — — —
Equity-instrument-based payments
— — — — (37,940 ) — — — (37,940 ) — (37,940 ) — (37,940 )
Other increases/(decreases) in equity
— — (546,151 ) — — — — — (546,151 ) — (546,151 ) 64,670 (481,481 )
Ending balance at 12/31/08
3,997,030 28,103,802 21,158,869 (290,463 ) 7,155,566 (421,198 ) 8,876,414 (2,693,438 ) 65,886,582 (8,299,696 ) 57,586,886 2,414,606 60,001,492
The accompanying Notes 1 to 54 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended December 31, 2009.

F-6

Table of Contents

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 (NOTES 1 TO 4) (Continued)
(Thousands of euros)
Equity Attributable to the Parent
Shareholders’ Equity
Reserves
(Losses) of
Entities Profit Non-
Accumulated Accounted for Other Less: for the Year Less: Total Controlling Total
Share Share Reserves Using the Equity Equity Treasury Attributable to Dividends and Shareholders’ Valuation Interests Equity
Capital Premium (Losses) Method Instruments Shares the Parent Remuneration Equity Adjustments Total (*) (*)
Ending balance at 12/31/06
3,127,148 20,370,128 11,491,670 797,810 62,118 (126,801 ) 7,595,947 (1,337,218 ) 41,980,802 2,870,757 44,851,559 2,220,743 47,072,302
Adjustments due to changes in accounting policies
— — — — — — — — — — — — —
Adjustments due to errors
— — — — — — — — — — — — —
Adjusted beginning balance
3,127,148 20,370,128 11,491,670 797,810 62,118 (126,801 ) 7,595,947 (1,337,218 ) 41,980,802 2,870,757 44,851,559 2,220,743 47,072,302
Total recognized income and expense
— — — — — — 9,060,258 — 9,060,258 (2,148,721 ) 6,911,537 439,400 7,350,937
Other changes in equity
— — 3,984,323 97,627 7,024,763 126,609 (7,595,947 ) (200,589 ) 3,436,786 — 3,436,786 (301,874 ) 3,134,912
Capital increases
— — — — — — — — — — — 220,356 220,356
Capital reductions
— — — — — — — — — — — — —
Conversion of financial liabilities into equity
— — — — — — — — — — — — —
Increases in other equity instruments
— — — — 7,048,548 — — — 7,048,548 — 7,048,548 — 7,048,548
Reclassification of financial liabilities to other equity instruments
— — — — — — — — — — — — —
Reclassification of other equity instruments to financial liabilities
— — — — — — — — — — — — —
Distribution of dividends
— — (3,117,057 ) (139,086 ) — — — (200,589 ) (3,456,732 ) — (3,456,732 ) (360,478 ) (3,817,210 )
Transactions involving own equity instruments (net)
— — 4,575 — — 126,609 — — 131,184 — 131,184 — 131,184
Transfers between equity items
— — 7,376,694 231,371 (12,118 ) — (7,595,947 ) — — — — — —
Increases (decreases) due to business combinations
— — — — — — — — — — — — —
Equity-instrument-based payments
— — — — — — — — — — — — —
Other increases/(decreases) in equity
— — (279,889 ) 5,342 (11,667 ) — — — (286,214 ) — (286,214 ) (161,752 ) (447,966 )
Ending balance at 12/31/07
3,127,148 20,370,128 15,475,993 895,437 7,086,881 (192 ) 9,060,258 (1,537,807 ) 54,477,846 722,036 55,199,882 2,358,269 57,558,151
The accompanying Notes 1 to 54 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended December 31, 2009.

F-7

Table of Contents

SANTANDER GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 (NOTES 1 TO 4)
(Thousands of euros)
2009 2008 2007
A. CASH FLOWS FROM OPERATING ACTIVITIES
(18,035,526 ) 15,827,165 31,645,675
Consolidated profit for the year
9,412,060 9,332,414 9,636,150
Adjustments made to obtain the cash flows from operating activities:
15,558,115 10,254,304 9,603,413
Depreciation and amortization charge
1,596,445 1,269,527 1,267,880
Other adjustments
13,961,670 8,984,777 8,335,533
Net increase/decrease in operating assets:
23,749,168 70,560,851 47,926,000
Financial assets held for trading
(10,145,789 ) (8,175,164 ) (11,285,918 )
Other financial assets at fair value through profit or loss
11,553,038 (453,996 ) (3,578,501 )
Available-for-sale financial assets
30,417,303 (3,249,597 ) 6,392,745
Loans and receivables
(11,195,718 ) 79,907,831 53,841,742
Other operating assets
3,120,334 2,531,777 2,555,932
Net increase/decrease in operating liabilities:
(17,729,540 ) 68,246,416 63,513,210
Financial liabilities held for trading
(14,436,807 ) 11,080,000 (1,197,432 )
Other financial liabilities at fair value through profit or loss
6,729,640 (11,078,643 ) 1,682,061
Financial liabilities at amortized cost
(10,206,053 ) 70,455,437 61,529,461
Other operating liabilities
183,680 (2,210,378 ) 1,499,120
Income tax recovered/paid
(1,526,993 ) (1,445,118 ) (3,181,098 )
B. CASH FLOWS FROM INVESTING ACTIVITIES
7,968,968 950,026 (21,144,056 )
Payments:
5,340,862 4,241,797 26,303,306
Tangible assets
1,879,565 2,737,784 2,797,760
Intangible assets
3,222,774 750,440 1,862,422
Investments
13,523 753,573 12,285,132
Subsidiaries and other business units
225,000 — —
Non-current assets held for sale and associated liabilities
— — 9,357,992
Held-to-maturity investments
— — —
Other payments related to investing activities
— — —
Proceeds:
13,309,830 5,191,823 5,159,250
Tangible assets
1,175,834 1,509,291 3,496,430
Intangible assets
1,320,677 — —
Investments
13,888 44,607 978,584
Subsidiaries and other business units
5,840,956 828,346 —
Non-current assets held for sale and associated liabilities
4,958,475 2,809,579 684,236
Held-to-maturity investments
— — —
Other proceeds related to investing activities
— — —
C. CASH FLOWS FROM FINANCING ACTIVITIES
(4,651,696 ) 432,327 6,897,537
Payments:
18,281,063 14,321,999 17,056,690
Dividends
4,386,550 4,243,021 3,456,732
Subordinated liabilities
4,245,272 1,315,190 2,434,893
Redemption of own equity instruments
— — —
Acquisition of own equity instruments
9,263,615 7,842,820 8,473,038
Other payments related to financing activities
385,626 920,968 2,692,027
Proceeds:
13,629,367 14,754,326 23,954,227
Subordinated liabilities
3,653,548 311,835 8,329,817
Issuance of own equity instruments
— 7,020,677 —
Disposal of own equity instruments
9,975,819 7,421,814 8,599,647
Other proceeds related to financing activities
— — 7,024,763
D. EFFECT OF FOREIGN EXCHANGE RATE CHANGES
3,826,322 (2,490,948 ) (171,530 )
E. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
(10,891,932 ) 14,718,570 17,227,626
F. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
45,781,345 31,062,775 13,835,149
G. CASH AND CASH EQUIVALENTS AT END OF YEAR
34,889,413 45,781,345 31,062,775
COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF YEAR
Cash
5,171,858 4,407,124 3,292,536
Cash equivalents at central banks
29,717,555 41,374,221 27,770,239
Other financial assets
— — —
Less: Bank overdrafts refundable on demand
— — —
TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR
34,889,413 45,781,345 31,062,775
The accompanying Notes 1 to 54 and Appendices are an integral part of the consolidated statement of cash flows
for the year ended December 31, 2009.

F-8

Table of Contents

Notes to the consolidated financial statements
for the year ended December 31, 2009
1.
Introduction, basis of presentation of the consolidated financial statements and other information
a)
Introduction
Banco Santander, S.A. (the Bank or Banco Santander) is a private-law entity subject to the rules and regulations applicable to banks operating in Spain. The Bylaws and other public information on the Bank can be consulted on the website of the Bank www.santander.com and at its registered office at Paseo de Pereda 9-12, Santander.
In addition to the operations carried on directly by it, the Bank is the head of a group of subsidiaries that engage in various business activities and which compose, together with it, Santander Group (the Group or Santander Group). Therefore, the Bank is obliged to prepare, in addition to its own separate financial statements, the Group’s consolidated financial statements, which also include the interests in joint ventures and investments in associates.
The Group’s consolidated financial statements for 2007 were approved by the shareholders at the Bank’s general shareholders’ meeting on June 21, 2008. The Group’s consolidated financial statements for 2008 were approved by the shareholders at the Bank’s general shareholders’ meeting on June 19, 2009. The 2009 consolidated financial statements of the Group and the 2009 financial statements of the Bank and of substantially all the Group companies have not yet been approved by their shareholders at the respective general shareholder’s meetings. However, the Bank’s board of directors considers that the aforementioned financial statements will be approved without any material changes.
b)
Basis of presentation of the consolidated financial statements
Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the Law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements for the years beginning on or after January 1, 2005 in conformity with the International Financial Reporting Standards (IFRSs) previously adopted by the European Union.
In order to adapt the accounting system of Spanish credit institutions to the new standards, the Bank of Spain issued Circular 4/2004, of 22 December, on Public and Confidential Financial Reporting Rules and Formats.
The Group’s consolidated financial statements for 2009, 2008 and 2007 were formally prepared by the Bank’s directors (at the board meeting on March 22, 2010) in accordance with International Financial Reporting Standards as adopted by the European Union and with Bank of Spain Circular 4/2004 and in compliance with IFRS as issued by the International Accounting Standards Board (“IFRS-IASB” and together with IFRS adopted by the European Union, “IFRS”), using the basis of consolidation, accounting policies and measurement bases set forth in Note 2 to these consolidated financial statements and, accordingly, they present fairly the Group’s equity and financial position at December 31, 2009, 2008 and 2007 and the consolidated results of its operations, the changes in the consolidated equity and the consolidated cash flows in 2009, 2008 and 2007. These consolidated financial statements were prepared from the separate accounting records of the Bank and of each of the companies composing the Group, and include the adjustments and reclassifications required to unify the accounting policies and measurement bases applied by the Group.
The notes to the consolidated financial statements contain supplementary information to that presented in the consolidated balance sheet, consolidated income statement, consolidated statement of recognized income and expense, consolidated statement of changes in total equity and consolidated statement of cash flows. The notes provide, in a clear, relevant, reliable and comparable manner, narrative descriptions and breakdowns of these financial statements.
All accounting policies and measurement bases with a material effect on the consolidated financial statements were applied in their preparation.

F-9

Table of Contents

Adoption of new standards and interpretations issued
•
The following standards and interpretations, which were adopted in full by the European Union, came into force in 2009:
•
IFRS 8, Operating Segments: this standard replaces IAS 14. A management approach is adopted for reporting on the financial performance of the business segments. The information to be reported will be that used internally by management to assess the performance of the segments and to allocate resources among them.
•
Revision of IAS 23, Borrowing Costs: the option of the immediate recognition as an expense of the borrowing costs relating to assets that take a substantial period of time to get ready for use or sale is eliminated and, therefore, these borrowing costs must be capitalized.
•
Revision of IAS 1, Presentation of Financial Statements: introduces certain changes in the presentation of financial statements. The statement of changes in equity will only include changes in equity arising from transactions with owners acting in their capacity as owners. As regards non-owner changes (e.g. transactions with third parties or income and expenses recognized directly in equity), the revised standard provides the option of presenting income and expense items and components of other comprehensive income either in a single statement of comprehensive income with subtotals or in two separate statements. IAS 1 also introduces new reporting requirements when the entity applies a change in accounting policy retrospectively, makes a restatement or reclassifies items in previously issued statements.
Paragraph 10 of the revised IAS 1 establishes the possibility of changing the titles of the financial statements. The new terminology for referring to the financial statements would be as follows:
•
The balance sheet becomes the statement of financial position.
•
The income statement becomes the separate income statement.
•
The statement of recognized income and expense becomes the statement of comprehensive income.
•
The statement of changes in total equity becomes the statement of changes in equity.
•
The title of the statement of cash flows remains unchanged.
In the preparation of these consolidated financial statements the Group has maintained the titles of the financial statements that it has been using to date in order to facilitate their comprehension.
•
Amendment to IFRS 2, Share-based Payment: the objective of the amendment is basically to clarify the concepts of vesting conditions and cancellations in share-based payments.
•
Amendments to IAS 32, Financial Instruments: Presentation and IAS 1, Presentation of Financial Statements: the amendments will permit certain financial instruments, whose features include that of being redeemable, to be classified as equity, provided that they meet certain criteria including that of being the most subordinated class, and provided that they evidence a residual interest in the net assets of the entity.
•
Amendments to IFRS 7, Financial Instruments — Disclosures: the objective of these amendments is basically to enhance the disclosure requirements with respect to fair value measurements and liquidity risk.
•
Amendments to IAS 39 and IFRIC 9, clarifying the treatment of embedded derivatives for companies that have applied the amendment to IAS 39 on reclassifications. These amendments clarify that when a financial asset is reclassified out of the fair value through profit or loss category, all the embedded derivatives must be assessed and, if necessary, accounted for separately in the financial statements. The Group did not apply these amendments, since it has not performed any such reclassifications.

F-10

Table of Contents

•
IFRIC 14 IAS 19, The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction: this interpretation provides general guidance on how to ascertain the limit in IAS 19, Employee Benefits, on the amount of the surplus that can be recognized as an asset. It also explains how pension assets or liabilities can be affected when there is a statutory or contractual minimum funding requirement and establishes that the entity needs to recognize an additional liability if it has a contractual obligation to make additional contributions to the plan and its capacity to recover them is restricted. The interpretation standardizes the practice and ensures that the entities recognize an asset in relation to a surplus on a consistent basis.
•
IFRIC 15, Agreements for the Construction of Real Estate: this interpretation clarifies the recognition of revenue and expenses associated with the construction of real estate.
•
IFRIC 16, Hedges of a Net Investment in a Foreign Operation: this interpretation clarifies the following matters: firstly, the exposure to foreign exchange differences between the functional currency of the foreign operation and the presentation currency of the parent cannot be designated as a hedged risk, and only the foreign currency exposure arising between the functional currency of the parent and that of its foreign operation qualifies for hedge accounting; secondly, the hedging instrument used to hedge the net investment may be held by any entity within the group, not necessarily by the parent of the foreign operation; and, lastly, it addresses how an entity should determine the amounts to be reclassified from equity to profit or loss on disposal of the foreign operation.
The application of these accounting standards and interpretations did not have a material effect on the Group’s consolidated financial statements.
•
Also, at the date of preparation of these consolidated financial statements the following standards and interpretations with effective dates subsequent to December 31, 2009 were in force:
•
Amendments to IFRS 2, Share-based Payment: these amendments relate to the recognition of share-based payment transactions among group entities. The main change is that the amendments supersede IFRIC 8 and IFRIC 11 and, accordingly, these interpretations will be repealed since their content is included in the main body of the standard. It is clarified that an entity that receives services from employees or suppliers should account for the transaction even if another group entity settles the arrangement and irrespective of whether it is cash-settled or equity-settled.
•
Revision of IFRS 3, Business Combinations and Amendment to IAS 27, Consolidated and Separate Financial Statements (obligatory for years beginning on or after July 1, 2009): introduce significant changes in several matters relating to accounting for business combinations. These changes include most notably the following: acquisition costs must be expensed, rather than recognized as an increase in the cost of the business combination; in step acquisitions the acquirer must remeasure at fair value the investment held prior to the date that control is obtained; and there is an option to measure at fair value the non-controlling interests of the acquire, as opposed to the single current treatment of measuring them as the proportionate share of the fair value of the net assets acquired. Since the standard will be applied prospectively, and is applicable from January 1, 2010, in general the directors do not expect it to have a significant effect on the business combinations performed.
•
Amendment to IAS 39, Eligible Hedged Items (obligatory for years beginning on or after July 1, 2009): this amendment establishes that inflation may only be designated as a hedged item if it is a contractually specified portion of the cash flows to be hedged. Only the intrinsic value and not the time value of a purchased option may be used as a hedging instrument.
•
Amendment to IAS 32, Classification of Rights Issues (obligatory for years beginning on or after February 1, 2010): this amendment relates to the classification of foreign currency denominated rights issues (rights, options or warrants). Pursuant to this amendment, when these rights are to acquire a fixed number of shares in exchange for a fixed amount, they are equity instruments, irrespective of the currency in which that fixed amount is denominated and provided that other requirements of the standard are fulfilled.
•
IFRIC 12, Service Concession Arrangements (obligatory following its adoption by the European Union for years beginning on or after April 1, 2009): owing to the nature of this interpretation, its application does not affect the consolidated financial statements.
•
IFRIC 17, Distributions of Non-cash Assets to Owners (obligatory for years beginning on or after July 1, 2009): this interpretation addresses the accounting treatment of the distribution of non-cash assets to owners (dividends payable), although its scope does not include distributions of assets within a group or between entities under common control. The interpretation requires an entity to measure such liabilities at the fair value of the asset to be distributed and to recognize any difference between the carrying amount of the dividend payable and the carrying amount of the asset distributed in profit or loss.
•
IFRIC 18, Transfers of Assets from Customers (obligatory for years beginning on or after July 1, 2009): this interpretation clarifies the requirements for agreements in which an entity receives from customers items of property, plant or equipment (or cash to construct such items) that must be used to connect those customers to a network (e.g. electricity, gas or water supply).

F-11

Table of Contents

•
At the date of preparation of these consolidated financial statements, the following standards and interpretations had not yet been adopted by the European Union:
•
Revision of IAS 24, Related Party Disclosures: the revised IAS 24 addresses related party disclosures in financial statements. There are two new basic features. Firstly, it provides a partial exemption from certain disclosure requirements when the transactions are between State-controlled entities or government-related entities (or equivalent government institution) and, secondly, it simplifies the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition.
•
Amendments to IFRIC 14, Prepayments of a Minimum Funding Requirement: these amendments remedy the fact that in some circumstances entities could not recognize certain voluntary prepayments as assets.
•
IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments: this interpretation addresses the accounting by a debtor when all or part of a financial liability is extinguished through the issue of equity instruments to the creditor. The interpretation does not apply to transactions in situations where the counterparties in question are shareholders or related parties, acting in their capacity as such, or where extinguishing the financial liability by issuing equity instruments is in accordance with the original terms of the financial liability. In this case, the equity instruments issued are measured at fair value at the date the liability is extinguished and any difference between this value and the carrying amount of the liability is recognized in profit or loss.
•
Lastly, it should be noted that the adoption of IFRS 9, Financial Instruments: Classification and Measurement, which will in the future replace the part of the current IAS 39 relating to the classification and measurement of financial assets, has been postponed by the European Union. IFRS 9 presents significant differences with respect to the current standard, including the approval of a new classification model based on only two categories, namely instruments measured at amortized cost and those measured at fair value, the disappearance of the current Held-to-maturity investments and Available-for-sale financial assets categories, impairment analyses only for assets measured at amortized cost and the non-separation of embedded derivatives in financial contracts.
In light of the exceptional circumstances that arose in the financial markets, mainly in the second half of 2008, European governments undertook to preserve the stability of the international financial system. The main objectives of these measures were as follows: to ensure the appropriate liquidity conditions for the operation of financial institutions; to facilitate financial institutions’ access to financing; to establish the mechanisms required to permit, where appropriate, the provision of additional capital resources to the financial institutions in order to ensure the proper performance of the economy; to guarantee that accounting regulations are sufficiently flexible so as to take into account the exceptional circumstances in the market; and to strengthen and improve the mechanisms for coordination among European countries. Within this general framework, in the last quarter of 2008 the following measures were approved in Spain:
•
Royal Decree-Law 6/2008, of 10 October, creating the Fund for the Acquisition of Financial Assets (FAAF), and Ministry of Economy and Finance Order EHA/3118/2008, of 31 October, implementing the aforementioned Royal Decree-Law. The purpose of the FAAF is to use Public Treasury money and market criteria to acquire, by means of the auction procedure, financial instruments issued by Spanish credit institutions and securitization special-purpose vehicles, backed by loans granted to individuals, companies and non-financial entities.

F-12

Table of Contents

•
Royal Decree-Law 7/2008, of 13 October, on Urgent Economic Measures in relation to the Concerted European Action Plan of the Euro Area Countries, and Ministry of Economy and Finance Order EHA/3364/2008, of 21 November, implementing Article 1 of the aforementioned Royal Decree-Law, which includes the following measures, applicable until December 31, 2009. Firstly, the grant of State guarantees for the issues of promissory notes, bonds and debentures launched by credit institutions resident in Spain which meet certain requirements; and, secondly, the exceptional authorization for the Ministry of Economy and Finance to acquire securities, including preferred participating securities and non-voting equity units, issued by credit institutions resident in Spain which need to strengthen their capital and request such acquisition.
Other regulatory changes
On November 26, 2008, the Bank of Spain approved Circular 6/2008, amending Bank of Spain Circular 4/2004, of 22 December, on Public and Confidential Financial Reporting Rules and Formats. The most significant amendment introduced by Bank of Spain Circular 6/2008 relates to the formats of the statements to be presented. Accordingly, the consolidated balance sheet, consolidated income statement, consolidated statement of recognized income and expense, consolidated statement of changes in total equity and consolidated statement of cash flows for 2007 presented in these consolidated financial statements differ, solely as regards the basis of presentation of certain items and margins, from those presented in the statutory consolidated financial statements of the Group for that year, since they were prepared using the formats contained in the aforementioned Bank of Spain Circular 6/2008.
The main differences between the financial statement formats presented with respect to the formats included in the statutory consolidated financial statements of the Group for 2007 are as follows:
Consolidated balance sheet
•
Other assets and Other liabilities group together the balance sheet line items Prepayments and accrued income and Other assets, and Accrued expenses and deferred income and Other liabilities, respectively, included in the Group’s consolidated financial statements for 2007.
•
The balance of Equity having the substance of a financial liability (because it is not refundable on demand) was transferred to financial liabilities at amortized cost on the liability side of the consolidated balance sheet.
•
A new item included in the valuation adjustments in consolidated equity entitled Entities accounted for using the equity method was created, which includes separately the valuation adjustments recognized in equity originating from associates accounted for using the equity method.
•
Balances with central banks are classified in the corresponding portfolios.
Consolidated income statement
•
A new Interest income margin is introduced which is calculated as the difference between Interest and similar income and Interest expense and similar charges. The aforementioned interest currently also includes financial income and expenses from insurance activities and other non-financial activities that used to be presented separately.
•
Income and expenses from the Group’s insurance activity are no longer grouped together as a separate item and are recognized, according to their nature, under the various consolidated income statement items, with the consequent effect on each margin and item in this statement.
•
A new margin entitled Total income is presented which is similar to the former Gross income (now eliminated), except, basically, for the fact that it includes other operating income and expenses, which formerly were not part of total income, and for the effect of including the interest expenses and financial charges from non-financial activities according to their nature.
•
Sales and income from the provision of non-financial services and Cost of sales are excluded and these items are recognized mainly under Other operating income and Other operating expenses, respectively.

F-13

Table of Contents

•
The balance of Impairment losses (net) is split into two line items: Impairment losses on financial assets (net), which includes net impairment losses on financial assets other than equity instruments classified as Investments; and Impairment losses on other assets (net), which includes the net impairment losses on equity instruments classified as Investments and on other non-financial assets.
•
Net operating income is eliminated and Profit from operations is created. The difference between the two margins is basically that the latter includes the finance income and costs from the Group’s non-financial activities, the net charge to impairment losses on financial instruments and the net charge to provisions.
•
The line items Other gains and Other losses are eliminated. They are replaced by the line items: Gains/(losses) on disposal of assets not classified as non-current assets held for sale and Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations, which include mainly the balances of the excluded line items mentioned above. The remaining gains or losses which were recognized in the two eliminated line items and are not now included in the aforementioned two new line items have been classified according to their nature in the consolidated income statement.
Consolidated statement of changes in equity
The consolidated statement of changes in equity consists of two parts: the consolidated statement of recognized income and expense, which was already presented as a statement under the previous formats, and the consolidated statement of changes in total equity, which includes all the changes in equity previously disclosed in the notes to the financial statements.
Statement of recognized income and expense: the main change affecting the Group is the separate presentation under Income tax of the tax effect of the changes in the items recognized directly in equity, except for Entities accounted for using the equity method, which is presented net of the related tax effect. Previously, all the items were presented net of the related tax effect.
All accounting policies and measurement bases with a material effect on the 2009 consolidated financial statements were applied in their preparation.
c)
Use of estimates
The consolidated results and the determination of consolidated equity are sensitive to the accounting policies, measurement bases and estimates used by the directors of the Bank in preparing the consolidated financial statements. The main accounting policies and measurement bases are set forth in Note 2.
In the consolidated financial statements estimates were occasionally made by the senior management of the Bank and of the consolidated entities in order to quantify certain of the assets, liabilities, income, expenses and commitments reported herein. These estimates, which were made on the basis of the best information available, relate basically to the following:
•
The impairment losses on certain assets (see Notes 6, 7, 8, 10, 12, 13, 16, 17 and 18);
•
The assumptions used in the actuarial calculation of the post-employment benefit liabilities and commitments and other obligations (see Note 25);
•
The useful life of the tangible and intangible assets (see Notes 16 and 18);
•
The measurement of goodwill arising on consolidation (see Note 17); and
•
The fair value of certain unquoted assets (see Notes 7, 8, 9 and 11).
d)
Other matters
i.
Disputed corporate resolutions
The directors of the Bank and their legal advisers consider that the objection to certain resolutions adopted by the Bank’s shareholders at the general shareholders’ meetings on January 18, 2000, March 4, 2000, March 10, 2001, February 9, 2002, June 24, 2002, June 21, 2003, June 19, 2004 and June 18, 2005 will have no effect on the financial statements of the Bank and the Group.

F-14

Table of Contents

The status of these matters at the date of preparation of the consolidated financial statements is detailed below:
On April 25, 2002, the Santander Court of First Instance number 1 dismissed in full the claim contesting the resolutions adopted by the shareholders at the general shareholders’ meeting on January 18, 2000. The plaintiff filed an appeal against the judgment. On December 2, 2002, the Cantabria Provincial Appellate Court dismissed the appeal. The Bank appeared as a party to the cassation appeal and filed pleadings with respect to the inadmissibility of the appeal. In the order dated November 4, 2008 the Supreme Court considered the appeal to have been withdrawn in view of the decease of the appellant and the failure to appear of his heirs.
On November 29, 2002, the Santander Court of First Instance number 2 dismissed in full the claims contesting the resolutions adopted at the general shareholders’ meeting on March 4, 2000. The plaintiffs filed an appeal against the judgment. On July 5, 2004, the Cantabria Provincial Appellate Court dismissed the appeal. One of the appellants prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of July 31, 2007.
On March 12, 2002, the Santander Court of First Instance number 4 dismissed in full the claims contesting the resolutions adopted at the general shareholders’ meeting on March 10, 2001. The plaintiffs filed an appeal against the judgment. On April 13, 2004, the Cantabria Provincial Appellate Court dismissed the appeals. One of the appellants prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of November 6, 2007.
On September 9, 2002, the Santander Court of First Instance number 5 dismissed in full the claim contesting the resolutions adopted by the shareholders at the general shareholders’ meeting on February 9, 2002. The plaintiff filed an appeal against the judgment. On January 14, 2004, the Cantabria Provincial Appellate Court dismissed the appeal. The appellant prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of May 8, 2007.
On May 29, 2003, the Santander Court of First Instance number 6 dismissed in full the claim contesting the resolutions adopted by the shareholders at the general shareholders’ meeting on June 24, 2002. The plaintiffs filed an appeal against the judgment. On November 15, 2005, the Cantabria Provincial Appellate Court dismissed the appeal in full. The appellants filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment. The Bank appeared as a party to the two appeals and filed pleadings with respect to the inadmissibility thereof. In the order dated September 23, 2008 the Supreme Court refused leave to proceed with the aforementioned appeals.
On November 23, 2007, the Santander Court of First Instance number 7 dismissed in full the claims contesting the resolutions adopted at the general shareholders’ meeting on June 21, 2003. The plaintiffs filed an appeal against the judgment. The court was notified of the decease of one of the appellants and the court considered his appeal to have been withdrawn on the grounds of his decease and the failure to appear of his heirs. The other three appeals filed were dismissed in full by the Cantabria Provincial Appellate Court on June 30, 2009. The appellants filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against this judgment, and the appeal filed by one of the three appellants was refused leave to proceed by the Provincial Appellate Court. The appeals filed by other two appellants are still being processed at the Supreme Court.
On October 28, 2005, the Santander Court of First Instance number 8 dismissed in full the claims contesting the resolutions adopted at the general shareholders’ meeting on June 19, 2004. The plaintiffs filed an appeal against the judgment. In a Judgment dated June 28, 2007 the Cantabria Provincial Appellate Court dismissed the appeals in full. Against this judgment the plaintiffs prepared and filed a cassation appeal and an extraordinary appeal on the grounds of procedural infringements. The cassation appeal and extraordinary appeal for procedural infringement filed by one of the appellants were refused leave to proceed due to the decease of the appellant and the failure to appear of his heirs. The other two appeals were refused leave to proceed by the Supreme Court on October 27, 2009.
On July 13, 2007, the Santander Court of First Instance number 10 dismissed in full the claims contesting the resolutions adopted at the general shareholders’ meeting on June 18, 2005. The plaintiffs filed an appeal against the judgment. In a Judgment dated May 14, 2009 the Cantabria Provincial Appellate Court dismissed the appeals in full. Against this judgment the plaintiffs prepared and filed a cassation appeal and an extraordinary appeal on the grounds of procedural infringements, and these appeals are still being processed at the Supreme Court.

F-15

Table of Contents

ii.
Credit assignment transactions
Following the prolonged investigations carried out since 1992 by the Madrid Central Examining Court number 3, and the repeated applications by the Public Prosecutor’s Office and the Government Lawyer, as the representative of the Public Treasury, to have the case against the Bank and its executives dismissed and struck out, the trial commenced at Panel One of the Criminal Chamber of the National Appellate Court and after the debate on preliminary issues was held at the end of November 2006, without the appearance of the Government Lawyer, in which the Public Prosecutor’s Office reiterated its appeal to set aside the trial and interrupt the proceedings, on December 20, 2006, the Criminal Chamber of the National Appellate Court ordered the dismissal of the proceedings, as requested by the Public Prosecutor’s Office and the private prosecution.
A cassation appeal was filed against the aforementioned order by the Association for the Defense of Investors and Customers and Iniciativa per Catalunya Verds and, following the opposition by the Public Prosecutor’s Office, the Government Lawyer and the remaining appearing parties, it was dismissed by a Supreme Court Decision handed down on December 17, 2007.
In an interlocutory order of April 15, 2008, the Supreme Court dismissed the request filed by the Association for the Defense of Investors and Customers for the decision handed down in the judgment of December 17, 2007 to be set aside.
e)
Capital management
The Group’s capital management is performed at regulatory and economic levels.
Regulatory capital management is based on the analysis of the capital base and the capital ratios using the criteria of Bank of Spain Circular 3/2008. The aim is to achieve a capital structure that is as efficient as possible in terms of both cost and compliance with the requirements of regulators, ratings agencies and investors. Active capital management includes securitizations, sales of assets, issues of equity instruments (preference shares and subordinated debt) and hybrid instruments.
From an economic standpoint, capital management seeks to optimize value creation at the Group and at its different business units. To this end, the economic capital, RORAC and value creation data for each business unit are generated, analyzed and reported to the management committee on a quarterly basis. Within the framework of the internal capital adequacy assessment process (Pillar 2 of the Basel Capital Accord), the Group uses an economic capital measurement model with the objective of ensuring that there is sufficient capital available to support all the risks of its activity in different economic scenarios, with the solvency levels agreed upon by the Group.
In order to adequately manage the Group’s capital, it is essential to estimate and analyze future needs, in anticipation of the various phases of the business cycle. Projections of regulatory and economic capital are made based on reference to the budgetary information (balance sheet, income statement, etc.) and on macroeconomic scenarios defined by the Group’s economic research and public policy service. These estimates are used by the Group as a reference to plan the management actions (issues, securitizations, etc.) required to achieve its capital targets.
In addition, certain stress scenarios are simulated in order to assess the availability of capital in adverse situations. These scenarios are based on sharp fluctuations in macroeconomic variables, GDP, interest rates, stock market indexes, etc. that mirror historical crises that could happen again.
With respect to minimum capital requirements for credit institutions, Bank of Spain Circular 3/2008 on the calculation and control of minimum capital requirements came into force on June 11, 2008. This circular completes the transposition into Spanish legislation of the guidelines on capital requirements established by the Basel Committee on Banking Supervision (BIS II), after their adoption by the European Union.

F-16

Table of Contents

The new circular included new developments as regards capital requirements (Pillar 1) relating to the possibility of using internal ratings and models (IRB approach) to calculate the risk-weighted exposures, and to the inclusion of operational risk in these exposures. The objective is to render the regulatory requirements more sensitive to the risks actually borne by the entities in the performance of their business activities. Also, the new circular established a supervisory review system to improve internal risk management and internal capital adequacy assessment (Pillar 2), and incorporates elements relating to disclosures and market discipline (Pillar 3).
In this connection, on June 25, 2008 Santander Group obtained authorization from the Bank of Spain to adopt the internal ratings-based approach (IRB) for calculating the capital requirements for credit risk of Banco Santander (the Parent), Banesto and Abbey, in conjunction with the UK Financial Services Authority (FSA) in the case of Abbey. Additionally, the acquisition of Alliance & Leicester by Santander Group led to the inclusion of new portfolios under the advanced approach, since prior to the acquisition this entity had obtained the related supervisory approval for the use of internal risk models. Also, on June 30, 2009 the Group obtained the approval of the advanced approaches of its Portuguese subsidiary Santander Totta.
At year-end these entities represented a substantial portion of the significant net credit risk exposure at consolidated level. Santander Group has undertaken with the Bank of Spain to gradually apply, in the coming years, the internal models for determining capital for credit risk at substantially all the Group’s banks, until it reaches coverage levels of close to 100% of net loan portfolio exposure under IRB models. This entire process will be validated in a coordinated manner between the Bank of Spain and the supervisors of each country in which the Group has an international presence, mainly Europe and the US.
The Bank of Spain valued particularly highly the efforts made in the implementation of advanced approaches, and indicated that this implementation had been possible due both to the robust and consistent technological platforms, advanced internal model methodologies and risk information systems that the Group has had in place for several years and to the high level of integration in management.
The implementation of the new regulatory standards has a positive impact on Santander Group’s capital ratios, since as a result of the application of internal models the risk-weighted exposure better reflects the levels of capital required on the basis of the risks assumed.
In short, Santander Group’s eligible capital at 2009 and 2008 year-end exceeded the minimum requirements.
f)
Environmental impact
In view of the business activities carried on by the Group entities, the Group does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its consolidated equity, financial position or results. Therefore, no specific disclosures relating to environmental issues are included in these notes to the consolidated financial statements.
g)
Events after the reporting period
It should be noted that from December 31, 2009 to the date on which these financial statements were authorized for issue, the following significant events occurred in Santander Group:
On January 11, 2010, Banco Santander, S.A. invited the holders of subordinated bonds relating to 13 different series issued by various Santander Group entities, with a combined outstanding principal amount of approximately € 3,300 million, to submit offers for the sale of all or part of their securities for their purchase in cash by Banco Santander. The invitation acceptance rate was approximately 60% and the total face value of the securities accepted for purchase was approximately € 2 billion.
Also, on February 17, 2010, Banco Santander, S.A. invited the holders of subordinated perpetual bonds issued by Santander Perpetual, S.A.U., with a combined outstanding principal amount of approximately USD 1,500 million (of which Santander holds approximately USD 350 million), to submit offers for the sale of all or part of their securities for their purchase in cash by Banco Santander. The face value accepted was USD 1,093 million, i.e. 95% of the total targeted by the invitation.
On February 22, 2010, Banco Santander, S.A. placed among institutional investors a package of shares of Bolsas y Mercados Españoles (BME) representing approximately 2.5% of that company’s share capital at a price of € 20 per share, resulting in total proceeds of € 42 million. This transaction gave rise to a gain of € 30.4 million for the Group. Following this placement, the Group holds an ownership interest of 2.5% in the share capital of BME and will continue to be represented on its board of directors.

F-17

Table of Contents

On March 10, 2010, Santander Private Banking UK Limited completed the sale of James Hay Holdings Limited (including its five subsidiaries) through the transfer of all the shares of James Hay Holdings Limited to IFG UK Holdings Limited, a subsidiary of the IFG Group, for a total of GBP 39 million.
On April 25, 2010, we announced that we had reached an agreement with Banco do Brasil S.A. and Banco Bradesco S.A. for the sale of the entire stake held by Grupo Santander in the companies Companhia Brasileira de Soluções e Serviços (15.33% of the capital), and Cielo S.A. — formerly Visanet — (7.20% of the capital). The total sale price agreed was R$200 million (approximately € 85.3 million) for the 15.33% of CBSS and R$1,464 million (approximately € 624.3 million) for the 7.20% of Cielo. The net capital gain generated for Grupo Santander is approximately € 233 million. The closing of the transactions is subject to final documentation.
On June 9, 2010, we announced that Banco Santander had reached an agreement with Bank of America to acquire the 24.9% stake held by the latter in Grupo Financiero Santander (“Banco Santander Mexico”) for an amount of 2,500 million dollars Following this transaction, our holding in Banco Santander Mexico will amount to 99.9%. In 2003, Bank of America acquired this 24.9% stake from Santander for an amount of 1.600 million dollars. The transaction is subject to regulatory authorization and is expected to be completed in the third quarter of 2010.
h)
Comparative information
As indicated in Note 1-b above, the comparative information for 2007 was modified in 2008 to adapt its presentation to the presentation formats of the main financial statements established in Bank of Spain Circular 6/2008, of 26 November.
Also, the consolidated income statements for 2008 and 2007 included in these consolidated financial statements differ from those published in the statutory consolidated financial statements for those years, since, as a result of the Group’s divestment of the business in Venezuela through the sale of Banco de Venezuela, S.A., Banco Universal (see Note 3), the results arising from the consolidation of this company ( € 332 million and € 191 million in 2008 and 2007, respectively) were reclassified, pursuant to current accounting regulations, from each of the line items in which they were previously recognized to Profit from discontinued operations.
Additionally, in order to facilitate the comparison of information, mention should be made of the following:
•
Banco Real has been fully consolidated in the Group’s consolidated financial statements since the fourth quarter of 2008; until then, it had been accounted for using the equity method through the ownership interest in RFS Holdings. Also, in the second half of 2008 the Group acquired, inter alia, Alliance & Leicester and the distribution channels and retail deposits of Bradford & Bingley, and in the first half of 2009 it acquired various companies (see Note 3), including most notably Sovereign Bancorp (which changed its name to Santander Holdings USA, Inc. on February 1, 2010), all of which have been fully consolidated since their respective acquisition dates.
•
In 2009 the Group obtained extraordinary gains totaling € 2,587 million, net of tax, which were allocated in full to extraordinary write-downs. Accordingly, the net gains arising from the public offering of Banco Santander Brasil ( € 1,499 million, recognized under Gains/(losses) on disposal of assets not classified as non-current assets held for sale — see Note 49) and from the exchange of issues ( € 724 million — see Note 44), and other gains on the sale of 10% of Attijariwafa Bank and other transactions ( € 364 million) were allocated to provisions to credit loss allowances ( € 1,041 million), to the write-down of assets acquired ( € 554 million — see Note 50), to the write-down of the ownership interest held in Metrovacesa ( € 269 million — see Note 8), to additions to provisions for restructuring costs ( € 260 million, recognized under Provisions (net)) and to other provisions and write-downs ( € 463 million, including provisions for early retirement benefits recognized under Provisions (net)), all net of taxes and minority interests.
•
In 2008 the Group obtained extraordinary gains totaling € 3,572 million, net of tax, which were allocated in full to extraordinary write-downs. Accordingly, the net gains arising from the sale of the Business Campus ( € 586 million, recognized gross under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations — see Note 50), ABN’s liabilities ( € 741 million, recognized under Gains/losses on financial assets and liabilities (net) — see Note 44) and the Italian businesses acquired from ABN ( € 2,245 million, recognized gross under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations - see Note 50) were allocated to the write-down of the ownership interests in Fortis and The Royal Bank of Scotland ( € 1,430 million, recognized gross under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations — see Note 50), to the write-down of the intangible assets of Abbey ( € 904 million, recognized under Impairment losses on other assets (net) — see Note 18), to additions to provisions for restructuring costs and for early retirement benefits ( € 386 million and € 382 million, respectively, recognized under Provisions (net)), to the amortization of goodwill at the Santander Consumer Finance Group and portfolio write-downs ( € 295 million) and to other period provisions ( € 175 million).

F-18

Table of Contents

•
The gains arising in 2007 on the disposal of the investment in Intesa Sanpaolo and of the properties in Spain ( € 566 million and € 1,620 million, respectively, recognized under Gains on disposal of non-current assets held for sale not classified as discontinued operations and Gains on disposal of assets not classified as non-current assets held for sale — see Notes 50 and 49), the proceeds from the divestment of the pensions business in Latin America ( € 831 million, recognized under Profit/loss from discontinued operations - see Note 37) and the gains on the disposal of the investment in Banco Português do Investimento ( € 107 million, recognized under Gains/losses on financial assets and liabilities — see Note 44) were allocated to the write-down of the investment in Sovereign ( € 1,053 million — see Note 13.c), to the write-down of intangible assets ( € 542 million — see Note 18), to the recognition of special provisions for retirement and pension plans ( € 317 million — see Note 25) and to other provisions and write-downs ( € 117 million). Therefore, the gross gains obtained in 2007 ( € 3,124 million) contributed € 950 million, after the aforementioned allocations and net of tax and non-controlling interests, to Profit attributable to the Parent.
2.
Accounting policies and measurement bases
The accounting policies and measurement bases applied in preparing the consolidated financial statements were as follows:
a)
Foreign currency transactions
i.
Functional currency
The Group’s functional currency is the euro. Therefore, all balances and transactions denominated in currencies other than the euro are deemed to be denominated in foreign currency.
ii.
Translation of foreign currency balances
Foreign currency balances are translated to euros in two consecutive stages:
•
Translation of foreign currency to the functional currency (currency of the main economic environment in which the Group operates), and
•
Translation to euros of the balances held in the functional currencies of entities whose functional currency is not the euro.
Translation of foreign currency to the functional currency
Foreign currency transactions performed by consolidated entities (or entities accounted for using the equity method) not located in EMU countries are initially recognized in their respective currencies. Monetary items in foreign currency are subsequently translated to their functional currencies using the closing rate.
Furthermore:
•
Non-monetary items measured at historical cost are translated to the functional currency at the exchange rate at the date of acquisition.
•
Non-monetary items measured at fair value are translated at the exchange rate at the date when the fair value was determined.
•
Income and expenses are translated at the average exchange rates for the period for all the transactions performed during the year. When applying this criterion, the Group considers whether there have been significant changes in the exchange rates in the year which, in view of their materiality with respect to the consolidated financial statements taken as a whole, would make it necessary to use the exchange rates at the transaction date rather than the aforementioned average exchange rates.
•
The balances arising from non-hedging forward foreign currency/foreign currency and foreign currency/euro purchase and sale transactions are translated at the closing rates prevailing in the forward foreign currency market for the related maturity.

F-19

Table of Contents

Translation of functional currencies to euros
If the functional currency is not the euro, the balances in the financial statements of the consolidated entities (or entities accounted for using the equity method) are translated to euros as follows:
•
Assets and liabilities, at the closing rates.
•
Income and expenses, at the average exchange rates for the year.
•
Equity items, at the historical exchange rates.
iii.
Recognition of exchange differences
The exchange differences arising on the translation of foreign currency balances to the functional currency are generally recognized at their net amount under Exchange differences in the consolidated income statement, except for exchange differences arising on financial instruments at fair value through profit or loss, which are recognized in the consolidated income statement without distinguishing them from other changes in fair value, and for exchange differences arising on non-monetary items measured at fair value through equity, which are recognized under Valuation adjustments — Exchange differences.
The exchange differences arising on the translation to euros of the financial statements denominated in functional currencies other than the euro are recognized under Valuation adjustments — Exchange differences in the consolidated balance sheet, whereas those arising on the translation to euros of the financial statements of entities accounted for using the equity method are recognized under Valuation adjustments — Entities accounted for using the equity method, until the related item is derecognized, at which time they are recognized in the consolidated income statement.
iv.
Entities located in hyperinflationary economies
As indicated in Note 3, in 2009 the Group sold substantially all its businesses in Venezuela and at December 31, 2009 its net assets in that country amounted to only € 27 million.
In view of the foregoing, at December 31, 2009, 2008 and 2007 none of the functional currencies of the consolidated entities and associates located abroad related to hyperinflationary economies as defined by International Financial Reporting Standards as adopted by the European Union. Accordingly, at 2009, 2008 and 2007 year-end it was not necessary to adjust the financial statements of any of the consolidated entities or associates to correct for the effect of inflation.
v.
Exposure to foreign currency risk
At December 31, 2009, the Group’s largest exposures on temporary positions (with a potential impact on the income statement) were concentrated, in descending order, on the pound sterling and the Chilean peso. At that date, its largest exposures on permanent positions (with a potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso and the Chilean peso. The Group hedges a portion of these permanent positions using foreign exchange derivative financial instruments (see Note 36.a).
At December 31, 2008, the Group’s largest exposures on temporary positions (with a potential impact on the income statement) were concentrated, in descending order, on the pound sterling and the Brazilian real. At that date, its largest exposures on permanent positions (with a potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso and the Chilean peso. The Group hedges a portion of these permanent positions using foreign exchange derivative financial instruments (see Note 36.a).
At December 31, 2007, the Group’s largest exposures on temporary positions (with a potential impact on the income statement) were concentrated, in descending order, on the US dollar and the pound sterling. At that date, its largest exposures on permanent positions (with a potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso and the Chilean peso. The Group hedges a portion of these permanent positions using foreign exchange derivative financial instruments (see Note 36.a).

F-20

Table of Contents

The following tables show the sensitivity of consolidated profit and consolidated equity to changes in the Group’s foreign currency positions due to 1% variations in the various foreign currencies in which the Group has material balances.
The estimated effect on the Group’s consolidated equity and consolidated profit of a 1% appreciation of the euro against the related currency is as follows:
Millions of euros
Effect on consolidated equity Effect on consolidated profit
Currency 2009 2008 2007 2009 2008 2007
US dollar
— — — 2.8 3.9 20.1
Chilean peso
(12.7 ) (12.4 ) (13.7 ) 7.0 3.1 —
Pound sterling
(21.5 ) (5.2 ) (4.3 ) 16.2 14.4 12.2
Mexican peso
(20.5 ) (23.1 ) (16.3 ) 4.7 3.6 —
Brazilian real
(111.4 ) (60.1 ) (68.5 ) — 13.6 —
Similarly, the estimated effect on the Group’s consolidated equity and consolidated profit of a 1% depreciation of the euro against the related currency is as follows:
Millions of euros
Effect on consolidated equity Effect on consolidated profit
Currency 2009 2008 2007 2009 2008 2007
US dollar
— — — (2.8 ) (4.0 ) (20.5 )
Chilean peso
12.9 12.6 14.6 (7.2 ) (3.0 ) —
Pound sterling
21.9 5.3 8.5 (16.5 ) (14.7 ) (12.5 )
Mexican peso
16.5 26.8 16.5 (4.8 ) (3.6 ) —
Brazilian real
81.9 65.2 69.4 — (13.4 ) —
The foregoing data were obtained by calculating the possible effect of a variation in the exchange rates on the various asset and liability items, excluding the foreign exchange positions arising from goodwill, and on other foreign currency-denominated items, such as the Group’s derivative instruments, considering the offsetting effect of the various hedging transactions on these items. This effect was estimated using the exchange difference recognition methods set forth in Note 2.a.iii above.
Also, the estimated effect on the Group’s consolidated equity of a 1% appreciation or depreciation of the euro against the foreign currencies in which goodwill is denominated at December 31, 2009 would be a decrease or increase, respectively, in equity due to valuation adjustments of € 82.8 million and € 84.5 million in the case of the pound sterling (2008: € 68.5 million and € 69.9 million), € 76.3 million and € 77.8 million in the case of the Brazilian real (2008: € 67.8 million and € 69.2 million), and € 31.3 million and € 32 million for the other currencies (2008: € 15.9 million and € 16.2 million). These changes are offset by a decrease or increase, respectively, in the balance of goodwill at that date and, therefore, they have no impact on the calculation of the Group’s equity.
The estimates used to obtain the foregoing data were performed taking into account the effects of the exchange rate fluctuations isolated from the effect of the performance of other variables, the changes in which would affect equity and profit, such as variations in the interest rates of the reference currencies or other market factors. Accordingly, all variables other than the exchange rate fluctuations remained unchanged with respect to their positions at December 31, 2009, 2008 and 2007.

F-21

Table of Contents

b)
Basis of consolidation
i.
Subsidiaries
Subsidiaries are defined as entities over which the Bank has the capacity to exercise control; this capacity is, in general but not exclusively, presumed to exist when the Parent owns directly or indirectly half or more of the voting power of the investee or, even if this percentage is lower or zero, when, as in the case of agreements with shareholders of the investee, the Bank is granted control. Control is the power to govern the financial and operating policies of an entity, as stipulated by the law, the Bylaws or agreement, so as to obtain benefits from its activities.
The financial statements of the subsidiaries are fully consolidated with those of the Bank. Accordingly, all balances and transactions between consolidated entities are eliminated on consolidation.
On acquisition of a subsidiary, its assets, liabilities and contingent liabilities are recognized at fair value at the date of acquisition. Any positive differences between the acquisition cost and the fair values of the identifiable net assets acquired are recognized as goodwill (see Note 17). Negative differences are charged to income on the date of acquisition.
Additionally, the share of third parties of the Group’s equity is presented under minority interests in the consolidated balance sheet (see Note 28). Their share of the profit for the year is presented under Profit attributable to minority interests in the consolidated income statement.
The results of subsidiaries acquired during the year are included in the consolidated income statement from the date of acquisition to year-end. Similarly, the results of subsidiaries disposed of during the year are included in the consolidated income statement from the beginning of the year to the date of disposal.
The Appendices contain significant information on these entities.
ii.
Interests in joint ventures (jointly controlled entities)
Joint ventures are deemed to be ventures that are not subsidiaries but which are jointly controlled by two or more unrelated entities. This is evidenced by contractual arrangements whereby two or more entities (ventures) acquire interests in entities (jointly controlled entities) or undertake operations or hold assets so that strategic financial and operating decisions affecting the joint venture require the unanimous consent of the ventures.
The financial statements of investees classified as joint ventures are proportionately consolidated with those of the Bank and, therefore, the aggregation of balances and subsequent eliminations are made only in proportion to the Group’s ownership interest in the capital of these entities.
The Appendices contain significant information on these entities.
iii.
Associates
Associates are entities over which the Bank is in a position to exercise significant influence, but not control or joint control, usually because it holds 20% or more of the voting power of the investee.
In the consolidated financial statements, investments in associates are accounted for using the equity method, i.e. at the Group’s share of net assets of the investee, after taking into account the dividends received therefrom and other equity eliminations. The profits and losses resulting from transactions with an associate are eliminated to the extent of the Group’s interest in the associate.
The Appendices contain significant information on these entities.

F-22

Table of Contents

iv.
Special purpose entities
When the Group incorporates special purpose entities, or holds ownership interests therein, to enable its customers to access certain investments, or for the transfer of risks or other purposes, it determines, using internal criteria and procedures, and taking into consideration the applicable legislation, whether control (as defined above) exists and, therefore, whether these entities should be consolidated. These criteria and procedures take into account, inter alia, the risks and rewards retained by the Group and, accordingly, all relevant matters are taken into consideration, including any guarantees granted or any losses associated with the collection of the related assets retained by the Group. These entities include the securitization special purpose vehicles, which are fully consolidated in the case of the SPVs over which, based on the aforementioned analysis, it is considered that the Group continues to exercise control.
v.
Other matters
The companies less than 50% owned by the Group that constituted a decision-making unit at December 31, 2009 and which, therefore, were accounted for as subsidiaries are: (i) Luri 1, S.A., (ii) Luri 2, S.A., (iii) Luri 3, S.A. and (iv) Luri Land, S.A., in which the Group held ownership interests of 5.58%, 4.81%, 9.62% and 5.15%, respectively, at that date (see Appendix I).
vi.
Business Combinations
A business combination is the bringing together of two or more separate entities or economic units into one single entity or group of entities.
Business combinations performed on or after January 1, 2004 whereby the Group obtains control over an entity are recognized for accounting purposes as follows:
•
The Group measures the cost of the business combination, defined as the fair value of the assets given, the liabilities incurred and the equity instruments issued, if any, by the entity, plus any cost directly attributable to the business combinations, including the fees paid to the auditors, legal advisers, investment banks and other consultants. In 2009 € 5.7 million were paid to the auditors for the half-yearly audits required by the Group (in 2008 € 6.2 million were recognized as an increase in the cost of the business combinations effected in that year).
•
The fair values of the assets, liabilities and contingent liabilities of the acquired entity or business, including any intangible assets which might not have been recognized by the acquired, are estimated and recognized in the consolidated balance sheet.
•
Any negative difference between the net fair value of the assets, liabilities and contingent liabilities of the acquired and the cost of the business combination is recognized as discussed in Note 2-m; any positive difference is recognized in Negative goodwill on business combinations in the consolidated income statement.
vii.
Acquisitions and disposals
Note 3 provide information on the most significant acquisitions and disposals in 2009, 2008 and 2007.
c)
Definitions and classification of financial instruments
i.
Definitions
A financial instrument is any contract that gives rise to a financial asset of one entity and, simultaneously, to a financial liability or equity instrument of another entity.
An equity instrument is any agreement that evidences a residual interest in the assets of the issuing entity after deducting all of its liabilities.

F-23

Table of Contents

A financial derivative is a financial instrument whose value changes in response to the change in an observable market variable (such as an interest rate, foreign exchange rate, financial instrument price, market index or credit rating), whose initial investment is very small compared with other financial instruments with a similar response to changes in market factors, and which is generally settled at a future date.
Hybrid financial instruments are contracts that simultaneously include a non-derivative host contract together with a derivative, known as an embedded derivative, that is not separately transferable and has the effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone derivative.
Compound financial instruments are contracts that simultaneously create for their issuer a financial liability and an own equity instrument (such as convertible bonds, which entitle their holders to convert them into equity instruments of the issuer).
The following transactions are not treated for accounting purposes as financial instruments:
•
Investments in subsidiaries, jointly controlled entities and associates (see Note 13).
•
Rights and obligations under employee benefit plans (see Note 25).
•
Rights and obligations under insurance contracts (see Note 15).
•
Contracts and obligations relating to employee remuneration based on own equity instruments (see Note 34).
ii.
Classification of financial assets for measurement purposes
Financial assets are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Non-current assets held for sale or they relate to Cash and balances with central banks, Changes in the fair value of hedged items in portfolio hedges of interest rate risk (asset side), Hedging derivatives and Investments, which are reported separately.
Financial assets are included for measurement purposes in one of the following categories:
•
Financial assets held for trading (at fair value through profit or loss): this category includes the financial assets acquired for the purpose of generating a profit in the near term from fluctuations in their prices and financial derivatives that are not designated as hedging instruments.
•
Other financial assets at fair value through profit or loss: this category includes hybrid financial assets not held for trading that are measured entirely at fair value and financial assets not held for trading that are included in this category in order to obtain more relevant information, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial assets or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Group’s key management personnel. Financial assets may only be included in this category on the date they are acquired or originated.
•
Available-for-sale financial assets: this category includes debt instruments not classified as Held-to-maturity investments, Loans and receivables or Financial assets at fair value through profit or loss, and equity instruments issued by entities other than subsidiaries, associates and jointly controlled entities, provided that such instruments have not been classified as Financial assets held for trading or as Other financial assets at fair value through profit or loss.
•
Loans and receivables; this category includes the investment arising from ordinary lending activities, such as the cash amounts of loans drawn down and not yet repaid by customers or the deposits placed with other institutions, whatever the legal instrument, unquoted debt securities and the debt incurred by the purchasers of goods, or the users of services, constituting part of the Group’s business.
The consolidated entities generally intend to hold the loans and credits granted by them until their final maturity and, therefore, they are presented in the consolidated balance sheet at their amortized cost (which includes any reductions required to reflect the estimated losses on their recovery).

F-24

Table of Contents

•
Held-to-maturity investments: this category includes debt instruments traded in an active market, with fixed maturity and with fixed or determinable payments, for which the Group has both the intention and proven ability to hold to maturity.
iii.
Classification of financial assets for presentation purposes
Financial assets are classified by nature into the following items in the consolidated balance sheet:
•
Cash and balances with central banks: cash balances and balances receivable on demand relating to deposits with the Bank of Spain and other central banks.
•
Loans and advances: includes the debit balances of all credit and loans granted by the Group, other than those represented by securities, as well as finance lease receivables and other debit balances of a financial nature in favor of the Group, such as cheques drawn on credit institutions, balances receivable from clearing houses and settlement agencies for transactions on the stock exchange and organized markets, bonds given in cash, capital calls, fees and commissions receivable for financial guarantees and debit balances arising from transactions not originating in banking transactions and services, such as the collection of rentals and similar items. They are classified, depending on the institutional sector to which the borrower belongs, under:
•
Loans and advances to credit institutions: credit of any nature, including credit received and money market operations in the name of credit institutions.
•
Loans and advances to customers: includes the debit balances of all the remaining credit and loans granted by the Group, other than those represented by securities, including money market operations through central counterparties.
•
Debt instruments: bonds and other securities that represent a debt for their issuer, that generate an interest return, and that are in the form of certificates or book entries.
•
Other equity instruments: financial instruments issued by other entities, such as shares, which have the nature of equity instruments for the issuer, unless they are investments in subsidiaries, jointly controlled entities or associates. Investment fund units are included in this item.
•
Trading derivatives: includes the fair value in favor of the Group of derivatives which do not form part of hedge accounting, including embedded derivatives separated from hybrid financial instruments.
•
Changes in the fair value of hedged items in portfolio hedges of interest rate risk: this item is the balancing entry for the amounts credited to the consolidated income statement in respect of the measurement of the portfolios of financial instruments which are efficiently hedged against interest rate risk through fair value hedging derivatives.
•
Hedging derivatives: includes the fair value in favor of the Group of derivatives designated as hedging instruments in hedge accounting, including the embedded derivatives separated from hybrid financial instruments designated as hedging instruments in hedge accounting.
•
Investments: includes the investments in the share capital of associates.
iv.
Classification of financial liabilities for measurement purposes
Financial liabilities are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Liabilities associated with non-current assets held for sale or they relate to Hedging derivatives or Changes in the fair value of hedged items in portfolio hedges of interest rate risk (liability side), which are reported separately.
Financial liabilities are classified for measurement purposes into one of the following categories:
•
Financial liabilities held for trading (at fair value through profit or loss): this category includes the financial liabilities issued for the purpose of generating a profit in the near term from fluctuations in their prices, financial derivatives not considered to qualify for hedge accounting and financial liabilities arising from the outright sale of financial assets purchased under resale agreements or borrowed (short positions).

F-25

Table of Contents

•
Other financial liabilities at fair value through profit or loss: financial liabilities are included in this category when more relevant information is obtained, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial liabilities or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Group’s key management personnel.
•
Financial liabilities at amortized cost: financial liabilities, irrespective of their instrumentation and maturity, not included in any of the above-mentioned categories which arise from the funding-taking activities carried on by financial institutions.
v.
Classification of financial liabilities for presentation purposes
Financial liabilities are classified by nature into the following items in the consolidated balance sheet:
•
Deposits: includes all repayable balances received in cash by the Group, other than instruments such as renegotiable securities and those having the substance of subordinated liabilities. This item also includes cash bonds and cash consignments the amount of which may be invested without restriction. Deposits are classified on the basis of the creditor’s institutional sector into:
•
Deposits from central banks: deposits of any nature, including credit received and money market operations received from the Bank of Spain or other central banks.
•
Deposits from credit institutions: deposits of any nature, including credit received and money market operations in the name of credit institutions.
•
Customer deposits: includes all repayable balances received in cash by the Group, other than those represented by marketable securities, money market operations through central counterparties, subordinated liabilities and deposits from central banks and credit institutions.
•
Marketable debt securities: includes the amount of bonds and other debt represented by marketable securities, other than subordinated liabilities. This item includes the component considered to be a financial liability of issued securities that are compound financial instruments.
•
Trading derivatives: includes the fair value, with a negative balance for the Group, of derivatives, including embedded derivatives separated from the host contract, which do not form part of hedge accounting.
•
Short positions: includes the amount of financial liabilities arising from the outright sale of financial assets purchased under reverse repurchase agreements or borrowed.
•
Subordinated liabilities: amount of financing received which, for the purposes of payment priority, ranks behind ordinary debt. This category also includes the financial instruments issued by the Group which, although equity for legal purposes, do not meet the requirements for classification as equity, such as certain preference shares issued.
•
Other financial liabilities: includes the amount of payment obligations having the nature of financial liabilities not included in other items, and liabilities under financial guarantee contracts, unless they have been classified as doubtful.
•
Changes in the fair value of hedged items in portfolio hedges of interest rate risk: this item is the balancing entry for the amounts charged to the consolidated income statement in respect of the measurement of the portfolios of financial instruments which are efficiently hedged against interest rate risk through fair value hedging derivatives.
•
Hedging derivatives: includes the fair value of the Group’s liability in respect of derivatives, including embedded derivatives separated from hybrid financial instruments, designated as hedging instruments in hedge accounting.

F-26

Table of Contents

d)
Measurement of financial assets and liabilities and recognition of fair value changes
In general, financial assets and liabilities are initially recognized at fair value which, in the absence of evidence to the contrary, is deemed to be the transaction price. Financial instruments not measured at fair value through profit or loss are adjusted by the transaction costs. Financial assets and liabilities are subsequently measured at each period-end as follows:
i.
Measurement of financial assets
Financial assets are measured at fair value, without deducting any transaction costs that may be incurred on their disposal, except for loans and receivables, held-to-maturity investments, equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those equity instruments as their underlying and are settled by delivery of those instruments.
The fair value of a financial instrument on a given date is taken to be the amount for which it could be bought or sold on that date by two knowledgeable, willing parties in an arm’s length transaction acting prudently. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an organized, transparent and deep market (quoted price or market price).
If there is no market price for a given financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.
All derivatives are recognized in the balance sheet at fair value from the trade date. If the fair value is positive, they are recognized as an asset and if the fair value is negative, they are recognized as a liability. The fair value on the trade date is deemed, in the absence of evidence to the contrary, to be the transaction price. The changes in the fair value of derivatives from the trade date are recognized in Gains/losses on financial assets and liabilities in the consolidated income statement. Specifically, the fair value of standard financial derivatives included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price and if, for exceptional reasons, the quoted price cannot be determined on a given date, these financial derivatives are measured using methods similar to those used to measure OTC derivatives.
The fair value of OTC derivatives is taken to be the sum of the future cash flows arising from the instrument, discounted to present value at the date of measurement (present value or theoretical close) using valuation techniques commonly used by the financial markets: net present value (NPV), option pricing models and other methods.
Loans and receivables and Held-to-maturity investments are measured at amortized cost using the effective interest method. Amortized cost is understood to be the acquisition cost of a financial asset or liability plus or minus, as appropriate, the principal repayments and the cumulative amortization (taken to the income statement) of the difference between the initial cost and the maturity amount. In the case of financial assets, amortized cost furthermore includes any reductions for impairment or uncollectibility. In the case of loans and receivables hedged in fair value hedges, the changes in the fair value of these assets related to the risk or risks being hedged are recognized.
The effective interest rate is the discount rate that exactly matches the carrying amount of a financial instrument to all its estimated cash flows of all kinds over its remaining life. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date plus, where applicable, the fees and transaction costs that, because of their nature, form part of their financial return. In the case of floating rate financial instruments, the effective interest rate coincides with the rate of return prevailing in all connections until the next benchmark interest reset date.
Equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those instruments as their underlying and are settled by delivery of those instruments are measured at acquisition cost adjusted, where appropriate, by any related impairment loss.

F-27

Table of Contents

The amounts at which the financial assets are recognized represent, in all material respects, the Group’s maximum exposure to credit risk at each reporting date. Also, the Group has received collateral and other credit enhancements to mitigate its exposure to credit risk, which consist mainly of mortgage guarantees, cash collateral, equity instruments and personal security, assets leased out under leasing and renting agreements, assets acquired under repurchase agreements, securities loans and credit derivatives.
ii.
Measurement of financial liabilities
In general, financial liabilities are measured at amortized cost, as defined above, except for those included under Financial liabilities held for trading and Other financial liabilities at fair value through profit or loss and financial liabilities designated as hedged items (or hedging instruments) in fair value hedges, which are measured at fair value.
iii.
Valuation techniques
The following table shows a summary of the fair values, at 2009, 2008 and 2007 year-end, of the financial assets and liabilities indicated below, classified on the basis of the various measurement methods used by the Group to determine their fair value:
Millions of euros
2009 2008 2007
Published Published Published
price price price
quotations quotations quotations
in active Internal in active Internal in active Internal
markets models Total markets models Total markets models Total
Financial assets held for trading
61,056 73,998 135,054 51,947 99,870 151,817 76,310 82,497 158,807
Other financial assets at fair value through profit or loss
8,938 28,876 37,814 6,137 19,680 25,817 6,945 17,884 24,829
Available-for-sale financial assets
75,469 11,152 86,621 43,747 5,173 48,920 37,908 6,441 44,349
Hedging derivatives (assets)
1,226 6,608 7,834 244 9,454 9,698 — 3,063 3,063
Financial liabilities held for trading
12,013 103,503 115,516 12,265 124,355 136,620 24,447 98,951 123,398
Other financial liabilities at fair value through profit or loss
— 42,371 42,371 — 28,639 28,639 117 39,601 39,718
Hedging derivatives (liabilities)
318 4,873 5,191 261 5,697 5,958 111 4,024 4,135
Liabilities under insurance contracts
5,006 11,910 16,916 5,286 11,564 16,850 5,678 7,356 13,034
Financial instruments at fair value, determined on the basis of public price quotations in active markets (Level 1), include government debt securities, private-sector debt securities, securitized assets, shares, short positions and fixed-income securities issued.
In cases where price quotations cannot be observed, management makes its best estimate of the price that the market would set using its own internal models. In most cases, these models use data based on observable market parameters as significant inputs (Level 2) and, in very specific cases, they use significant inputs not observable in market data (Level 3). In order to make these estimates, various techniques are employed, including the extrapolation of observable market data. The best evidence of the fair value of a financial instrument on initial recognition is the transaction price, unless the fair value of the instrument can be obtained from other market transactions performed with the same or similar instruments or can be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates. In accordance with the standards in force (IFRSs), any difference between the transaction price and the fair value based on valuation techniques is not initially recognized in the income statement.
The Group did not make any material transfers of financial instruments between one measurement method and another in 2009.

F-28

Table of Contents

The main techniques used at December 31, 2009 by the Group’s internal models to determine the fair value of the financial instruments detailed in the foregoing table are as follows:
•
In the valuation of financial instruments permitting static hedging (basically forwards and swaps) and in the valuation of loans and advances to customers, the present value method is used. Estimated future cash flows are discounted using the interest rate curves of the related currencies. The interest rate curves are generally observable market data.
•
In the valuation of financial instruments requiring dynamic hedging (basically structured options and other structured instruments), the Black-Scholes model is normally used. Where appropriate, observable market inputs are used to obtain factors such as the bid-offer spread, exchange rates, volatility, correlation between indices and market liquidity. In certain very specific cases, unobservable market inputs can be used, such as the volatility of the UK Halifax House Price Index (HPI), the estimated future HPI growth, the HPI spot rate, and mortality.
•
In the valuation of certain financial instruments exposed to interest rate risk, such as interest rate futures, caps and floors, the present value method (futures) and the Black-Scholes model (plain vanilla options) are used; in the case of more structured instruments requiring dynamic hedging, the Heath-Jarrow-Morton and Hull-White models are used. The main inputs used in these models are basically observable market data, including the related interest rate curves, volatilities, correlations and exchange rates. In certain very specific cases, unobservable market inputs can be used, such as the volatility of the UK Halifax House Price Index (HPI), the estimated future HPI growth, the HPI spot rate, mortality, and the credit spread for the specific financial instrument.
•
In the case of linear instruments (e.g. credit risk and fixed-income derivatives), credit risk is measured using dynamic models similar to those used in the measurement of interest rate risk. In the case of non-linear instruments, if the portfolio is exposed to credit risk (e.g. credit derivatives), the joint probability of default is determined using the Standard Gaussian Copula model. The main inputs used to determine the underlying cost of credit of credit derivatives are quoted credit risk premiums and the correlation between the quoted credit derivatives of various issuers.
The fair value of the financial instruments that are not traded on active markets arising from the aforementioned internal models takes into account, inter alia, the contract terms and observable market data, which include interest rates, credit risk, exchange rates, the quoted market price of raw materials and shares, volatility and prepayments. The valuation models are not significantly subjective, since these methodologies can be adjusted and gauged, as appropriate, through the internal calculation of the fair value of actively traded instruments and the subsequent comparison with the related price observable on the market.

F-29

Table of Contents

Set forth below are the financial instruments at fair value whose measurement was based on internal models (Levels 2 and 3) at December 31, 2009, 2008 and 2007 and the potential effect on their measurement at December 31, 2009 of a shift towards other reasonably probable scenarios in the main assumptions that are not based on observable market data:
Figures in millions of euros
Fair values Fair values Fair values
calculated calculated calculated Effect of reasonable
using using using assumptions on fair
internal internal internal values at 12/31/09
models at models at models at More Less
12/31/09 12/31/08 12/31/07 Valuation techniques Main assumptions favorable favorable
ASSETS:
Financial assets held for trading
73,998 99,870 82,490
Loans and advances to credit institutions
5,953 5,150 12,295 Present Value Method Observable market data 352 (255 )
Loans and advances to customers (b)
10,076 684 23,704 Present Value Method Observable market data — —
Debt and equity interests
4,898 6,074 2,087 Present Value Method Observable market data, HPI 1 (1 )
Trading derivatives
53,070 87,962 44,404 350 (253 )
Swaps
26,390 72,693 28,312 Present Value Method, Gaussian Copula (c) Observable market data, liquidity 17 (e) (17 )(e)
Exchange rate options
818 3,524 375 Black-Scholes Model Observable market data, liquidity 3 (e) (3 )(e)
Interest rate options
17,185 4,926 8,683 Black-Scholes Model
Heath-Jarrow-Morton Model 		Observable market data, liquidity, correlation 130 (e) (122 )(e)
Interest rate futures
2,109 339 1,039 Present Value Method Observable market data — —
Index and securities options
3,849 6,127 3,799 Black-Scholes Model Observable market data, dividends, correlation, liquidity, HPI 83 (65 )
Equity futures
— — 28 Present Value Method Observable market data — —
Other
2,720 353 2,168 N/A N/A 117 (47 )
Hedging derivatives
6,608 9,454 3,063
Swaps
6,465 9,029 2,614 Present Value Method Observable market data — —
Exchange rate options
47 265 359 Black-Scholes Model Observable market data — —
Interest rate options
56 157 86 Black-Scholes Model Observable market data — —
Other
40 3 4 N/A N/A — —
Other financial assets at fair value through profit or loss
28,876 19,681 17,884
Loans and advances to credit institutions
16,243 8,912 6,865 Present Value Method Observable market data — —
Loans and advances to customers (d)
8,329 8,973 8,022 Present Value Method Observable market data, HPI — —
Debt and equity interests
4,304 1,796 2,997 Present Value Method Observable market data — —
Available-for-sale financial assets
11,152 5,173 6,441 154 (154 )
Debt and equity interests
11,152 5,173 6,441 Present Value Method Observable market data 154 154
LIABILITIES:
Financial liabilities held for trading
103,503 124,355 98,307 68 (40 )
Deposits from central banks
2,985 9,110 — Present Value Method Observable market data — —
Deposits from credit institutions
43,132 26,842 23,254 Present Value Method Observable market data — —
Customer deposits
4,658 4,896 27,992 Present Value Method Observable market data — —
Debt and equity interests
586 1,075 — Present Value Method Observable market data, liquidity (a) (a)
Trading derivatives
52,141 82,432 47,061 68 (40 )
Swaps
35,916 67,288 39,204 Present Value Method, Gaussian Copula (c) Observable market data, liquidity, HPI (e) (e)
Exchange rate options
898 3,515 907 Black-Scholes Model Observable market data, liquidity (e) (e)
Interest rate options
3,974 5,402 1,325 Black-Scholes Model,
Heath-Jarrow-Morton Model 		Observable market data, liquidity, correlation (e) (e)
Index and securities options
4,518 4,694 2,527 Black-Scholes Model Observable market data, dividends, correlation, liquidity, HPI 68 (40 )
Forward purchase and sale contracts
— — 1,411 N/A N/A — —
Interest rate and equity futures
2,596 1,189 1,100 Present Value Method Observable market data — —
Other
4,239 344 587 N/A N/A — —
Hedging derivatives
4,873 5,697 4,024
Swaps
4,558 5,586 3,924 Present Value Method Observable market data — —
Exchange rate options
175 20 27 Black-Scholes Model Observable market data — —
Interest rate options
67 91 73 Black-Scholes Model Observable market data — —
Other
72 — — N/A N/A
Other financial liabilities at fair value through profit or loss
42,371 28,639 33,039 Present Value Method Observable market data — —
Liabilities under insurance contracts
11,910 11,564 7,356 Note 15
TOTAL
283,290 304,433 252,604 574 (449 )
(a)
The sensitivity of the issued debt and equity instruments in liabilities calculated using HPI assumptions is not detailed, since these instruments are perfectly hedged. Consequently, any change in the valuation of these issued instruments would be offset exactly by an equal and opposite change in the valuation of the associated foreign currency derivatives.
(b)
Includes mainly short-term loans and reverse repurchase agreements with corporate customers (mainly brokerage and investment companies).
(c)
Includes credit risk derivatives with a positive net fair value of € 1,165 million recognized in the consolidated balance sheet (December 31, 2008: € 900 million). These assets and liabilities are measured using the aforementioned Standard Gaussian Copula Model.
(d)
Includes home mortgage loans to financial institutions in the UK (which are regulated and partly financed by the Government). The fair value of these loans was obtained using observable market variables, including current market transactions with similar amounts and collateral facilitated by the UK Housing Association. Since the Government is involved in these financial institutions, the credit risk spreads have remained stable and are homogenous in this sector. The results arising from the valuation model are checked against current market transactions.
(e)
The Group calculates the potential impact on the measurement of each instrument on a joint basis, regardless of whether the individual value is positive (assets) or negative (liabilities), disclosing the joint effect associated with the related instruments classified on the asset side of the consolidated balance sheet.

F-30

Table of Contents

The use of observable market data assumes that the markets in which the Group operates are functioning efficiently and, therefore, that these data are representative. The main assumptions used in the measurement of the financial instruments included in the foregoing table that were valued by means of internal models employing unobservable market data are as follows:
•
Correlation: the assumptions relating to the correlation between the value of quoted and unquoted assets are based on historical correlations between the impact of adverse changes in market variables and the corresponding valuation of the associated unquoted assets. The measurement of the assets will vary depending on whether a more or less conservative scenario is selected.
•
Dividends: the estimates of the dividends used as inputs in the internal models are based on the expected dividend payments of the issuers. Since the dividend expectations can change or vary depending on the source of the price (normally historical data or market consensus for the measurement of options) and the companies’ dividend policies can vary, the valuation is adjusted to the best estimate of the reasonable dividend level expected in more or less conservative scenarios.
•
Liquidity: the assumptions include estimates in response to market liquidity. For example, they take market liquidity into consideration when very long-term estimates of exchange rates or interest rates are used, or when the instrument is part of a new or developing market where, due to the absence of market prices that reflect a reasonable price for these products, the standard valuation methods and the estimates available might give rise to less precise results in the measurement of these instruments at that time.
•
Halifax House Price Index (HPI): the assumptions include estimates of the future growth and the volatility of the HPI, mortality and the credit spreads of the specific financial instruments in relation to home mortgage loans to financial institutions in the UK (which are regulated and partially financed by the Government), credit derivatives and property asset derivatives.
The unobservable market data that constitute significant inputs of the internal models (Level 3) are, basically, those related to the House Price Index. The detail of the financial assets and liabilities measured using these models, included in the foregoing table, is as follows:
Fair values calculated using
internal models
Millions of euros
2009 2008
ASSETS:
Level 2
118,001 132,861
Level 3
2,632 1,316
120,633 134,177
LIABILITIES:
Level 2
162,179 169,630
Level 3
477 626
162,656 170,256
283,290 304,433
The measurements obtained using the internal models might have been different had other methods or assumptions been used with respect to interest rate risk, to credit risk, market risk and foreign currency risk spreads, or to their related correlations and volatilities. Nevertheless, Group management considers that the fair value of the financial assets and liabilities recognized in the consolidated balance sheet and the gains and losses arising from these financial instruments are reasonable.
The increase in 2009 in the assets classified as Level 3 arose as a result of the inclusion of Santander Holdings USA, Inc (formerly Sovereign Bancorp, Inc) as a Group company. This subsidiary contributes certain mortgage securitization SPV units not traded on deep markets and, accordingly, the Group determines their fair value by analyzing the prices obtained from various sources, such as prices given by third parties (brokers, rating agencies, etc.). In order to analyze the reasonableness of these valuations, they are compared with the quoted price of other securities with similar characteristics that are traded on more active markets. The fair value ultimately assigned by the Group to these assets assumes the orderly settlement of these assets in normal circumstances. Given the current situation in the credit and liquidity markets, the market value of these assets is sensitive to changes in market assumptions and volatility.

F-31

Table of Contents

As detailed in the foregoing tables, at December 31, 2009 the potential effect on the measurement of the financial instruments of a change in the main assumptions (liquidity, correlations, dividends and HPI) to less favorable reasonably probable assumptions, taking the lowest value within the range that is considered probable, would be to reduce gains or increase losses by € 449 million (December 31, 2008: € 169 million; December 31, 2007: € 178 million). The effect of using other more favorable reasonably probable assumptions, taking the highest value within the range that is considered probable, would be to increase gains or reduce losses by € 574 million (December 31, 2008: € 218 million; December 31, 2007: € 211 million).
The net gain recognized in the consolidated income statement for 2009 arising from the aforementioned valuation models amounted to € 1,133 million (2008: net loss of € 1,624 million; 2007: net loss of € 479 million), of which a gain of € 102 million related to models whose significant inputs are unobservable market data.
iv.
Recognition of fair value changes
As a general rule, changes in the carrying amount of financial assets and liabilities are recognized in the consolidated income statement, distinguishing between those arising from the accrual of interest and similar items -which are recognized under Interest and similar income or Interest expense and similar charges, as appropriate- and those arising for other reasons, which are recognized at their net amount under Gains/losses on financial assets and liabilities.
Adjustments due to changes in fair value arising from:
•
Available-for-sale financial assets are recognized temporarily in equity under Valuation adjustments — Available-for-sale financial assets, unless they relate to exchange differences, in which case they are recognized in Valuation adjustments — Exchange differences (exchange differences arising on monetary financial assets are recognized in Exchange differences in the consolidated income statement).
•
Items charged or credited to Valuation adjustments — Available-for-sale financial assets and Valuation adjustments — Exchange differences remain in the Group’s consolidated equity until the related assets are derecognized, whereupon they are charged to the consolidated income statement.
•
Unrealized gains on available-for-sale financial assets classified as Non-current assets held for sale because they form part of a disposal group or a discontinued operation are recognized in Valuation adjustments — Non-current assets held for sale.
v.
Hedging transactions
The consolidated entities use financial derivatives for the following purposes: i) to facilitate these instruments to customers who request them in the management of their market and credit risks; ii) to use these derivatives in the management of the risks of the Group entities’ own positions and assets and liabilities (hedging derivatives); and iii) to obtain gains from changes in the prices of these derivatives (trading derivatives).
Financial derivatives that do not qualify for hedge accounting are treated for accounting purposes as trading derivatives.
A derivative qualifies for hedge accounting if all the following conditions are met:
1.
The derivative hedges one of the following three types of exposure:
a.
Changes in the fair value of assets and liabilities due to fluctuations, among others, in the interest rate and/or exchange rate to which the position or balance to be hedged is subject (fair value hedge);
b.
Changes in the estimated cash flows arising from financial assets and liabilities, commitments and highly probable forecast transactions (cash flow hedge);
c.
The net investment in a foreign operation (hedge of a net investment in a foreign operation).

F-32

Table of Contents

2.
It is effective in offsetting exposure inherent in the hedged item or position throughout the expected term of the hedge, which means that:
a.
At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (prospective effectiveness).
b.
There is sufficient evidence that the hedge was actually effective during the whole life of the hedged item or position (retrospective effectiveness).
3.
There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this effective hedge was expected to be achieved and measured, provided that this is consistent with the Group’s management of own risks.
The changes in value of financial instruments qualifying for hedge accounting are recognized as follows:
a.
In fair value hedges, the gains or losses arising on both the hedging instruments and the hedged items attributable to the type of risk being hedged are recognized directly in the consolidated income statement.
In fair value hedges of interest rate risk on a portfolio of financial instruments, the gains or losses that arise on measuring the hedging instruments are recognized directly in the consolidated income statement, whereas the gains or losses due to changes in the fair value of the hedged amount (attributable to the hedged risk) are recognized in the consolidated income statement with a balancing entry under Changes in the fair value of hedged items in portfolio hedges of interest rate risk on the asset or liability side of the balance sheet, as appropriate.
b.
In cash flow hedges, the effective portion of the change in value of the hedging instrument is recognized temporarily in equity under Valuation adjustments — Cash flow hedges until the forecast transactions occur, when it is recognized in the consolidated income statement, unless, if the forecast transactions result in the recognition of non-financial assets or liabilities, it is included in the cost of the non-financial asset or liability.
c.
In hedges of a net investment in a foreign operation, the gains and losses attributable to the portion of the hedging instruments qualifying as an effective hedge are recognized temporarily in equity under Valuation adjustments — Hedges of net investments in foreign operations until the gains or losses on the hedged item are recognized in the consolidated income statement.
d.
The ineffective portion of the gains and losses on the hedging instruments of cash flow hedges and hedges of a net investment in a foreign operation are recognized directly under Gains/losses on financial assets and liabilities in the consolidated income statement.
If a derivative designated as a hedge no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, the derivative is classified as a trading derivative.
When fair value hedge accounting is discontinued, the adjustments previously recognized on the hedged item are transferred to profit or loss at the effective interest rate re-calculated at the date of hedge discontinuation. The adjustments must be fully amortized at maturity.
When cash flow hedges are discontinued, any cumulative gain or loss on the hedging instrument recognized in equity under Valuation adjustments (from the period when the hedge was effective) remains recognized in equity until the forecast transaction occurs at which time it is recognized in profit or loss, unless the transaction is no longer expected to occur, in which case any cumulative gain or loss is recognized immediately in profit or loss.
vi.
Derivatives embedded in hybrid financial instruments
Derivatives embedded in other financial instruments or in other host contracts are accounted for separately as derivatives if their risks and characteristics are not closely related to those of the host contracts, provided that the host contracts are not classified as Other financial assets/liabilities at fair value through profit or loss or as Financial assets/liabilities held for trading.

F-33

Table of Contents

e)
Derecognizing of financial assets and liabilities
The accounting treatment of transfers of financial assets depends on the extent to which the risks and rewards associated with the transferred assets are transferred to third parties:
1.
If the Group transfers substantially all the risks and rewards to third parties -unconditional sale of financial assets, sale of financial assets under an agreement to repurchase them at their fair value at the date of repurchase, sale of financial assets with a purchased call option or written put option that is deeply out of the money, securitization of assets in which the transferor does not retain a subordinated debt or grant any credit enhancement to the new holders, and other similar cases-, the transferred financial asset is derecognized and any rights or obligations retained or created in the transfer are recognized simultaneously.
2.
If the Group retains substantially all the risks and rewards associated with the transferred financial asset -sale of financial assets under an agreement to repurchase them at a fixed price or at the sale price plus interest, a securities lending agreement in which the borrower undertakes to return the same or similar assets, and other similar cases-, the transferred financial asset is not derecognized and continues to be measured by the same criteria as those used before the transfer. However, the following items are recognized:
a.
An associated financial liability, which is recognized for an amount equal to the consideration received and is subsequently measured at amortized cost, unless it meets the requirements for classification under Other financial liabilities at fair value through profit or loss.
b.
The income from the transferred financial asset not derecognized and any expense incurred on the new financial liability, without offsetting.
3.
If the Group neither transfers nor retains substantially all the risks and rewards associated with the transferred financial asset -sale of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitization of assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases- the following distinction is made:
a.
If the transferor does not retain control of the transferred financial asset, the asset is derecognized and any rights or obligations retained or created in the transfer are recognized.
b.
If the transferor retains control of the transferred financial asset, it continues to recognize it for an amount equal to its exposure to changes in value and recognizes a financial liability associated with the transferred financial asset. The carrying amount of the transferred asset and the associated liability is the amortized cost of the rights and obligations retained, if the transferred asset is measured at amortized cost, or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value.
Accordingly, financial assets are only derecognized when the rights on the cash flows they generate have been extinguished or when substantially all the inherent risks and rewards have been transferred to third parties. Similarly, financial liabilities are only derecognized when the obligations they generate have been extinguished or when they are acquired, with the intention either to cancel them or to resell them.
f)
Offsetting of financial instruments
Financial asset and liability balances are offset, i.e. reported in the consolidated balance sheet at their net amount, only if the subsidiaries currently have a legally enforceable right to set off the recognized amounts and intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

F-34

Table of Contents

g)
Impairment of financial assets
i.
Definition
A financial asset is considered to be impaired -and therefore its carrying amount is adjusted to reflect the effect of impairment- when there is objective evidence that events have occurred which:
•
In the case of debt instruments (loans and debt securities), give rise to an adverse impact on the future cash flows that were estimated at the transaction date.
•
In the case of equity instruments, mean that their carrying amount may not be fully recovered.
As a general rule, the carrying amount of impaired financial instruments is adjusted with a charge to the consolidated income statement for the period in which the impairment becomes evident, and the reversal, if any, of previously recognized impairment losses is recognized in the consolidated income statement for the period in which the impairment is reversed or reduced.
Balances are deemed to be impaired, and the interest accrual is suspended, when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts and on the dates initially agreed upon, after taking into account the guarantees received by the consolidated entities to secure (fully or partially) collection of the related balances. Collections relating to impaired loans and advances are used to recognize the accrued interest and the remainder, if any, to reduce the principal amount outstanding. The amount of the financial assets that would be deemed to be impaired had the conditions thereof not been renegotiated is not material with respect to the Group’s financial statements taken as a whole.
When the recovery of any recognized amount is considered unlikely, the amount is written off, without prejudice to any actions that the consolidated entities may initiate to seek collection until their contractual rights are extinguished due to expiry of the statute-of-limitations period, forgiveness or any other cause.
ii.
Debt instruments carried at amortized cost
The amount of an impairment loss incurred on a debt instrument measured at amortized cost is equal to the difference between its carrying amount and the present value of its estimated future cash flows, and is presented as a reduction of the balance of the asset adjusted.
In estimating the future cash flows of debt instruments the following factors are taken into account:
•
All the amounts that are expected to be obtained over the remaining life of the instrument; including, where appropriate, those which may result from the collateral provided for the instrument (less the costs for obtaining and subsequently selling the collateral). The impairment loss takes into account the likelihood of collecting accrued past-due interest receivable;
•
The various types of risk to which each instrument is subject; and
•
The circumstances in which collections will foreseeable be made.
These cash flows are subsequently discounted using the instrument’s effective interest rate (if its contractual rate is fixed) or the effective contractual rate at the discount date (if it is variable).
Specifically as regards impairment losses resulting from materialization of the insolvency risk of the obligors (credit risk), a debt instrument is impaired due to insolvency:
•
When there is evidence of a deterioration of the obligor’s ability to pay, either because it is in arrears or for other reasons; and/or
•
When country risk materializes: country risk is considered to be the risk associated with debtors resident in a given country due to circumstances other than normal commercial risk.
*      *       *      *       *
The Group has certain policies, methods and procedures for covering its credit risk arising both from insolvency allocable to counterparties and from country risk.
These policies, methods and procedures are applied in the granting, examination and documentation of debt instruments, and contingent liabilities and commitments, the identification of their impairment and the calculation of the amounts necessary to cover the related credit risk.

F-35

Table of Contents

The Bank of Spain requires that we develop internal models to calculate the allowances for both credit risk and country-risk based on historical experience. As of July 2008, the Bank of Spain had approved for regulatory capital calculation purposes the Group’s internal models affecting the vast majority of the Group’s credit risk net exposure. Bank of Spain will continue to review the models for the purpose of calculating allowances for loan losses. The calculation obtained based on the output parameters of internal models is consistent with the best estimate of the Group as to the probable losses using possible scenarios which rely on the approved internally developed models, and which constitute an appropriate basis for determining loan loss allowances. While these models are not yet approved by the Bank of Spain for loan loss allowance calculation, we are required to calculate the allowances according to the instructions described below. The difference between loan loss provisions calculated using internal models and those calculated under Bank of Spain Guidance, was not material for any of the three years ending December 31, 2009.
With respect to the allowance for loss arising from credit risk, the Group makes the following distinction:
1. Specific credit risk allowance:
a.
Specific allowance:
The impairment of debt instruments not measured at fair value through profit or loss that are classified as doubtful are generally recognized in accordance with the criteria set forth below:
i.
Assets classified as doubtful due to counterparty arrears:
Debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually, taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors.
ii.
Assets classified as doubtful for reasons other than counterparty arrears:
Debt instruments which are not classifiable as doubtful due to arrears but for which there are reasonable doubts as to their repayment under the contractual terms are assessed individually, and their allowance is the difference between the amount recognized in assets and the present value of the cash flows expected to be received.
b.
General allowance for inherent losses:
The Group covers its losses inherent in debt instruments not measured at fair value through profit or loss and in contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, inherent losses are losses incurred at the reporting date, calculated using statistical methods, that have not yet been allocated to specific transactions.
The Group uses the concept of incurred loss to quantify the cost of the credit risk and include it in the calculation of the risk-adjusted return of its transactions. The parameters necessary for its calculation are also used to calculate economic capital and to calculate BIS II regulatory capital under internal models (see Note 1.f).
The incurred loss is the expected cost of the credit risk of a transaction, considering the characteristics of the counterparty and the guarantees and collateral associated with the transaction.
The loss is calculated by multiplying three factors: exposure at default, probability of default and loss given default.
•
Exposure at default (EAD) is the amount of risk exposure at the date of default by the counterparty.
•
Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The probability of default is associated with the rating/scoring of each counterparty/transaction.
PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year. The definition of default used includes past-dues by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective doubtful assets).

F-36

Table of Contents

•
Loss given default (LGD) is the loss arising in the event of default. It depends mainly on the guarantees associated with the transaction.
The calculation of the expected loss also takes into account the adjustment to the cycle of the aforementioned factors, especially PD and LGD.
The methodology for determining the general allowance for incurred loan losses seeks to identify the amounts of incurred losses as of the balance sheet date of loans have not yet been identified as impaired, but that we estimate based on our past history and specific facts that will manifest whitin a one year lead time period from the balance sheet date. The above demonstrates those loans were having problems as of the balance sheet date. That is what we call inherent losses in the context of our internal models in which loan loss allowances are calculated.
The approach described above is used as a general rule. However, in certain cases, as a result of its particular characteristics, this approach is not applied and alternative approaches are used.
1.
Low default portfolios
In certain portfolios (sovereign risk, credit institutions or large corporations) the number of defaults observed is very small or zero. In these cases, the Group opted to use the data contained in the credit derivative spreads to estimate the expected loss discounted by the market and break it down into PD and LGD.
2.
Top-down units
In the exceptional cases in which the Group does not have sufficient data to construct a sufficiently robust credit risk measurement model, the expected loss on the loan portfolios is estimated based on a top-down approximation in which the historically observed average cost of the loan portfolios is used as the best estimate of the expected loss. As the credit models are developed and bottom-up measurements are obtained, the top-down measurements used for these units are gradually replaced.
*       *       *       *       *
However, as required by the Bank of Spain, until the Spanish regulatory authority has verified and approved these internal models for the calculation of the general allowance for inherent losses (to date it has only approved the internal models to be used to calculate regulatory capital), the inherent losses must be calculated as set forth below.
In 2009 there were no significant changes in the policies, methods and procedures followed by the Group to determine the credit risk coverage.
2. Country risk allowance:
Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, the Group classifies all the transactions performed with third parties into six different groups, from group 1 (transactions with ultimate obligors resident in European Union countries, Norway, Switzerland, Iceland, the United States, Canada, Japan, Australia and New Zealand) to group 6 (transactions the recovery of which is considered remote due to circumstances attributable to the country), assigning to each group the credit loss allowance percentages resulting from the aforementioned analyses.
However, due to the size of the Group and to the proactive management of its country risk exposure, the allowances recognized in this connection are not material with respect to the credit loss allowances recognized.

F-37

Table of Contents

iii. Debt or equity instruments classified as available for sale
The amount of the impairment losses on these instruments is the positive difference between their acquisition cost (net of any principal repayment or amortization in the case of debt instruments) and their fair value, less any impairment loss previously recognized in the consolidated income statement.
When there is objective evidence at the date of measurement of these instruments that the aforementioned differences are due to permanent impairment, they are no longer recognized in equity under Valuation adjustments — Available-for-sale financial assets and are reclassified, for the cumulative amount at that date, to the consolidated income statement.
If all or part of the impairment losses are subsequently reversed, the reversed amount is recognized, in the case of debt instruments, in the consolidated income statement for the year in which the reversal occurred (or in equity under Valuation adjustments — Available-for-sale financial assets in the case of equity instruments).
iv. Equity instruments measured at cost
The impairment loss on equity instruments measured at cost is the difference between the carrying amount and the present value of the expected future cash flows discounted at the market rate of return for similar securities.
Impairment losses are recognized in the consolidated income statement for the period in which they arise as a direct reduction of the cost of the instrument. These losses can only be reversed subsequently if the related assets are sold.
h)
Repurchase agreements and reverse repurchase agreements
Purchases (sales) of financial assets under a non-optional resale (repurchase) agreement at a fixed price (repos) are recognized in the consolidated balance sheet as financing granted (received), based on the nature of the debtor (creditor), under Balances with central banks, Loans and advances to credit institutions or Loans and advances to customers (Deposits from central banks, Deposits from credit institutions or Customer deposits).
Differences between the purchase and sale prices are recognized as interest over the contract term.
i)
Non-current assets held for sale and Liabilities associated with non-current assets held for sale
Non-current assets held for sale includes the carrying amount of individual items or disposal groups or items forming part of a business unit earmarked for disposal (Discontinued operations), whose sale in their present condition is highly probable and is expected to occur within one year from the reporting date. Therefore, the carrying amount of these items -which can be of a financial nature or otherwise- will foreseeable be recovered through the proceeds from their disposal. Specifically, property or other non-current assets received by the consolidated entities as total or partial settlement of their debtors’ payment obligations to them are deemed to be non-current assets held for sale, unless the consolidated entities have decided to make continuing use of these assets.
Liabilities associated with non-current assets include the credit balances arising from assets or disposal groups and from discontinued operations.
Non-current assets held for sale are generally measured at the lower of fair value less costs to sell and their carrying amount at the date of classification in this category. Non-current assets held for sale are not depreciated as long as they remain in this category.
Impairment losses on an asset or disposal group arising from a reduction in its carrying amount to its fair value (less costs to sell) are recognized under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations in the consolidated income statement. The gains on a non-current asset held for sale resulting from subsequent increases in fair value (less costs to sell) increase its carrying amount and are recognized in the consolidated income statement up to an amount equal to the impairment losses previously recognized.

F-38

Table of Contents

j)
Reinsurance assets and Liabilities under insurance contracts
Insurance contracts involve the transfer of a certain quantifiable risk in exchange for a periodic or one-off premium. The effects on the Group’s cash flow will arise from a deviation in the payments forecast and/or an insufficiency in the premium set.
The Group controls its insurance risk as follows:
•
By applying of a strict methodology in the launch of products and in the assignment of value thereto.
•
By using deterministic and stochastic models for measuring commitments.
•
By using reinsurance as a risk mitigation technique as part of the credit quality guidelines in line with the Group’s general risk policy.
•
By establishing an operating framework for credit risks.
•
By actively managing asset and liability matching.
•
By applying security measures in processes.
Reinsurance assets includes the amounts that the consolidated entities are entitled to receive for reinsurance contracts with third parties and, specifically, the reinsurer’s share of the technical provisions recorded by the consolidated insurance entities.
At least once a year these assets are reviewed for impairment (if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract and the amount that will not be received can be reliably measured), and any impairment loss is recognized in the consolidated income statement and the assets are derecognized.
Liabilities under insurance contracts include the technical provisions recorded by the consolidated entities to cover claims arising from insurance contracts in force at year-end.
Insurers’ results relating to their insurance business are recognized, according to their nature, under the related consolidated income statement items.
In accordance with standard accounting practice in the insurance industry, the consolidated insurance entities credit to the income statement the amounts of the premiums written and charge to income the cost of the claims incurred on final settlement thereof. Insurance entities are therefore required to accrue at period-end the unearned revenues credited to their income statements and the accrued costs not charged to income.
At least at each reporting date the Group assesses whether the insurance contract liabilities recognized in the consolidated balance sheet are adequately measured. For this purpose, it calculates the difference between the following amounts:
•
Current estimates of future cash flows under the insurance contracts of the consolidated entities. These estimates include all contractual cash flows and any related cash flows, such as claims handling costs; and
•
The value recognized in the consolidated balance sheet for insurance liabilities (see Note 15), net of any related deferred acquisition costs or related intangible assets, such as the amount paid to acquire, in the event of purchase by the entity, the economic rights held by a broker deriving from policies in the entity’s portfolio.
If the calculation results in a positive amount, this deficiency is charged to the consolidated income statement. When unrealized gains or losses on assets of the Group’s insurance companies affect the measurement of liabilities under insurance contracts and/or the related deferred acquisition costs and/or the related intangible assets, these gains or losses are recognized directly in equity. The corresponding adjustment in the liabilities under insurance contracts (or in the deferred acquisition costs or in intangible assets) is also recognized in equity.

F-39

Table of Contents

k)
Tangible assets
Tangible assets includes the amount of buildings, land, furniture, vehicles, computer hardware and other fixtures owned by the consolidated entities or acquired under finance leases. Tangible assets are classified by use as follows:
i.
Property, plant and equipment for own use
Property, plant and equipment for own use -including tangible assets received by the consolidated entities in full or partial satisfaction of financial assets representing receivables from third parties which are intended to be held for continuing use and tangible assets acquired under finance leases- are presented at acquisition cost, less the related accumulated depreciation and any impairment losses (carrying amount higher than recoverable amount).
Depreciation is calculated, using the straight-line method, on the basis of the acquisition cost of the assets less their residual value. The land on which the buildings and other structures stand has an indefinite life and, therefore, is not depreciated.
The period tangible asset depreciation charge is recognized in the consolidated income statement and is calculated using the following depreciation rates (based on the average years of estimated useful life of the various assets):
Annual
rate
Buildings for own use
2
Furniture
7.5 to 10
Fixtures
6 to 10
Office and IT equipment
10 to 25
Leasehold improvements
5 to 10
The consolidated entities assess at the reporting date whether there is any indication that an asset may be impaired (i.e. its carrying amount exceeds its recoverable amount). If this is the case, the carrying amount of the asset is reduced to its recoverable amount and future depreciation charges are adjusted in proportion to the revised carrying amount and to the new remaining useful life (if the useful life has to be re-estimated).
Similarly, if there is an indication of a recovery in the value of a tangible asset, the consolidated entities recognize the reversal of the impairment loss recognized in prior periods and adjust the future depreciation charges accordingly. In no circumstances may the reversal of an impairment loss on an asset raise its carrying amount above that which it would have if no impairment losses had been recognized in prior years.
The estimated useful lives of the items of property, plant and equipment for own use are reviewed at least at the end of the reporting period with a view to detecting significant changes therein. If changes are detected, the useful lives of the assets are adjusted by correcting the depreciation charge to be recognized in the consolidated income statement in future years on the basis of the new useful lives.
Upkeep and maintenance expenses relating to property, plant and equipment for own use are recognized as an expense in the period in which they are incurred, since they do not increase the useful lives of the assets.
ii.
Investment property
Investment property reflects the net values of the land, buildings and other structures held either to earn rentals or for capital appreciation.
The criteria used to recognize the acquisition cost of investment property, to calculate its depreciation and its estimated useful life and to recognize any impairment losses thereon are consistent with those described in relation to property, plant and equipment for own use.

F-40

Table of Contents

iii.
Assets leased out under an operating lease
Property, plant and equipment — Leased out under an operating lease reflects the amount of the tangible assets, other than land and buildings, leased out by the Group under an operating lease.
The criteria used to recognize the acquisition cost of assets leased out under operating leases, to calculate their depreciation and their respective estimated useful lives and to recognize the impairment losses thereon are consistent with those described in relation to property, plant and equipment for own use.
l)
Accounting for leases
i.
Finance leases
Finance leases are leases that transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee.
When the consolidated entities act as the lessors of an asset, the sum of the present value of the lease payments receivable from the lessee plus the guaranteed residual value -which is generally the exercise price of the purchase option of the lessee at the end of the lease term- is recognized as lending to third parties and is therefore included under Loans and receivables in the consolidated balance sheet.
When the consolidated entities act as the lessees, they present the cost of the leased assets in the consolidated balance sheet, based on the nature of the leased asset, and, simultaneously, recognize a liability for the same amount (which is the lower of the fair value of the leased asset and the sum of the present value of the lease payments payable to the lessor plus, if appropriate, the exercise price of the purchase option). The depreciation policy for these assets is consistent with that for property, plant and equipment for own use.
In both cases, the finance income and finance expense arising from these contracts is credited and debited, respectively, to Interest and similar income and Interest expense and similar charges in the consolidated income statement so as to achieve a constant rate of return over the lease term.
ii.
Operating leases
In operating leases, ownership of the leased asset and substantially all the risks and rewards incidental thereto remain with the lessor.
When the consolidated entities act as the lessors, they present the acquisition cost of the leased assets under Tangible assets (see Note 16). The depreciation policy for these assets is consistent with that for similar items of property, plant and equipment for own use and income from operating leases is recognized on a straight-line basis under Other operating income in the consolidated income statement.
When the consolidated entities act as the lessees, the lease expenses, including any incentives granted by the lessor, are charged on a straight-line basis to Other general administrative expenses in their consolidated income statements.
iii.
Sale and leaseback transactions
In the case of sale at fair value and operating leasebacks, the profit or loss generated is recognized at the time of sale. In the case of finance leasebacks, the profit or loss generated is amortized over the lease term.
In accordance with IFRSs (IAS 17), in determining whether a sale and leaseback transaction results in an operating lease, the Group should analyze, inter alia, whether at the inception of the lease there are purchase options whose terms and conditions make it reasonably certain that they will be exercised, and to whom the gains or losses from the fluctuations in the fair value of the residual value of the related asset will accrue. In this connection, when the Group performed the transactions described in Note 16, it carried out the aforementioned analysis and concluded that there was no reasonable certainty that the related options would be exercised, since their exercise price was linked to fair value and there were no other indicators that could force the Group to exercise these options; therefore, under IFRSs, it was required to recognize the gain or loss on the sale.

F-41

Table of Contents

m)
Intangible assets
Intangible assets are identifiable non-monetary assets (separable from other assets) without physical substance which arise as a result of a legal transaction or which are developed internally by the consolidated entities. Only assets whose cost can be estimated reliably and from which the consolidated entities consider it probable that future economic benefits will be generated are recognized.
Intangible assets are recognized initially at acquisition or production cost and are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses.
i.
Goodwill
Any excess of the cost of the investments in the consolidated entities and entities accounted for using the equity method over the corresponding underlying carrying amounts acquired, adjusted at the date of first-time consolidation, is allocated as follows:
•
If it is attributable to specific assets and liabilities of the companies acquired, by increasing the value of the assets (or reducing the value of the liabilities) whose fair values were higher (lower) than the carrying amounts at which they had been recognized in the acquired entities’ balance sheets.
•
If it is attributable to specific intangible assets, by recognizing it explicitly in the consolidated balance sheet provided that the fair value of these assets within 12 months following the date of acquisition can be measured reliably.
•
The remaining amount is recognized as goodwill, which is allocated to one or more specific cash-generating units (a cash generating unit is the smallest identifiable group of assets that, as a result of continuing operation, generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets). The cash-generating units represent the Group’s geographical and/or business segments.
Goodwill is only recognized when it has been acquired for consideration and represents, therefore, a payment made by the acquirer in anticipation of future economic benefits from assets of the acquired entity that are not capable of being individually identified and separately recognized.
At the end of each reporting period or whenever there is any indication of impairment goodwill is reviewed for impairment (i.e. a reduction in its recoverable amount to below its carrying amount) and, if there is any impairment, the goodwill is written down with a charge to Impairment losses on other assets (net) — Goodwill and other intangible assets in the consolidated income statement.
An impairment loss recognized for goodwill is not reversed in a subsequent period.
ii.
Other intangible assets
Other intangible assets includes the amount of identifiable intangible assets (such as purchased customer lists and computer software).
Other intangible assets can have an indefinite useful life -when, based on an analysis of all the relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the consolidated entities- or a finite useful life, in all other cases.
Intangible assets with indefinite useful lives are not amortized, but rather at the end of each reporting period or whenever there is any indication of impairment the consolidated entities review the remaining useful lives of the assets in order to determine whether they continue to be indefinite and, if this is not the case, to take the appropriate steps.
Intangible assets with finite useful lives are amortized over those useful lives using methods similar to those used to depreciate tangible assets.

F-42

Table of Contents

The intangible asset amortization charge is recognized under Depreciation and amortization charge in the consolidated income statement.
In both cases the consolidated entities recognize any impairment loss on the carrying amount of these assets with a charge to Impairment losses on other assets in the consolidated income statement. The criteria used to recognize the impairment losses on these assets and, where applicable, the reversal of impairment losses recognized in prior years are similar to those used for tangible assets (see Note 2.k).
Internally developed computer software
Internally developed computer software is recognized as an intangible asset if, among other requisites (basically the Group’s ability to use or sell it), it can be identified and its ability to generate future economic benefits can be demonstrated.
Expenditure on research activities is recognized as an expense in the year in which it is incurred and cannot be subsequently capitalized.
n)
Other assets
Other assets in the consolidated balance sheet includes the amount of assets not recorded in other items, the breakdown being as follows:
•
Inventories: this item includes the amount of assets, other than financial instruments, that are held for sale in the ordinary course of business, that are in the process of production, construction or development for such purpose, or that are to be consumed in the production process or in the provision of services. Inventories includes land and other property held for sale in the property development business.
Inventories are measured at the lower of cost and net realizable value, which is the estimated selling price of the inventories in the ordinary course of business, less the estimated costs of completion and the estimated costs required to make the sale.
Any write-downs of inventories -such as those due to damage, obsolescence or reduction of selling price- to net realizable value and other impairment losses are recognized as expenses for the year in which the impairment or loss occurs. Subsequent reversals are recognized in the consolidated income statement for the year in which they occur.
The carrying amount of inventories is derecognized and recognized as an expense in the period in which the revenue from their sale is recognized.
•
Other: this item includes the balance of all prepayments and accrued income (excluding accrued interest), the net amount of the difference between pension plan obligations and the value of the plan assets with a balance in the entity’s favor, when this net amount is to be reported in the consolidated balance sheet, and the amount of any other assets not included in other items.
ñ)
Other liabilities
Other liabilities includes the balance of all accrued expenses and deferred income, excluding accrued interest, and the amount of any other liabilities not included in other categories.
o)
Provisions and contingent assets and liabilities
When preparing the financial statements of the consolidated entities, their respective directors made a distinction between:
•
Provisions: credit balances covering present obligations at the reporting date arising from past events which could give rise to a loss for the entities, which is considered to be likely to occur and certain as to its nature but uncertain as to its amount and/or timing; and
•
Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the control of the consolidated entities. They include the present obligations of the consolidated entities when it is not probable that an outflow of resources embodying economic benefits will be required to settle them.

F-43

Table of Contents

•
Contingent assets: possible assets that arise from past events and whose existence is conditional on, and will be confirmed only by, the occurrence or non-occurrence of events beyond the control of the Group. Contingent assets are not recognized in the consolidated balance sheet or in the consolidated income statement, but rather are disclosed in the notes, provided that it is probable that these assets will give rise to an increase in resources embodying economic benefits.
The Group’s consolidated financial statements include all the material provisions with respect to which it is considered that it is more likely than not that the obligation will have to be settled. In accordance with accounting standards, contingent liabilities must not be recognized in the consolidated financial statements, but must rather be disclosed in the notes. In this respect, the financial statements of Santander UK, plc disclose the developments arising from the claims made by the customers of the main UK financial institutions in relation to certain fees and commissions charged by them.
Provisions, which are quantified on the basis of the best information available on the consequences of the event giving rise to them and are reviewed and adjusted at the end of each year, are used to cater for the specific obligations for which they were originally recognized. Provisions are fully or partially reversed when such obligations cease to exist or are reduced.
Provisions are classified according to the obligations covered as follows:
•
Provisions for pensions and similar obligations: includes the amount of all the provisions made to cover post-employment benefits, including obligations to early retirees and similar obligations.
•
Provisions for contingent liabilities and commitments: includes the amount of the provisions made to cover contingent liabilities -defined as those transactions in which the Group guarantees the obligations of a third party, arising as a result of financial guarantees granted or contracts of another kind- and contingent commitments -defined as irrevocable commitments that may give rise to the recognition of financial assets.
•
Provisions for taxes and other legal contingencies and Other provisions: include the amount of the provisions recognized to cover tax and legal contingencies and litigation and the other provisions recognized by the consolidated entities. Other provisions includes, inter alia, any provisions for restructuring costs and environmental measures (see Note 25).
p)
Litigation and/or claims in process
In addition to the disclosures made in Note 1, at the end of 2009 certain litigation and claims were in process against the consolidated entities arising from the ordinary course of their operations (see Note 25).
q)
Own equity instruments
Own equity instruments are those meeting both of the following conditions:
•
The instruments do not include any contractual obligation for the issuer: (i) to deliver cash or another financial asset to a third party; or (ii) to exchange financial assets or financial liabilities with a third party under conditions that are potentially unfavorable to the issuer.
•
The instruments will or may be settled in the issuer’s own equity instruments and are: (i) a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or (ii) a derivative that will be settled by the issuer through the exchange of a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.
Transactions involving own equity instruments, including their issuance and cancellation, are deducted from equity.
Changes in the value of instruments classified as own equity instruments are not recognized in the consolidated financial statements. Consideration received or paid in exchange for such instruments is directly added to or deducted from equity.

F-44

Table of Contents

r)
Equity-instrument-based employee remuneration
Equity instruments delivered to employees in consideration for their services, if the instruments are delivered once the specific period of service has ended, are recognized as an expense for services (with the corresponding increase in equity) as the services are rendered by employees during the service period. At the grant date the services received (and the related increase in equity) are measured at the fair value of the equity instruments granted. If the equity instruments granted are vested immediately, the Group recognizes in full, at the grant date, the expense for the services received.
When the requirements stipulated in the remuneration agreement include external market conditions (such as equity instruments reaching a certain quoted price), the amount ultimately to be recognized in equity will depend on the other conditions being met by the employees (normally length of service requirements), irrespective of whether the market conditions are satisfied. If the conditions of the agreement are met but the external market conditions are not satisfied, the amounts previously recognized in equity are not reversed, even if the employees do not exercise their right to receive the equity instruments.
s)
Recognition of income and expenses
The most significant criteria used by the Group to recognize its income and expenses are summarized as follows:
i.
Interest income, interest expenses and similar items
Interest income, interest expenses and similar items are generally recognized on an accrual basis using the effective interest method. Dividends received from other companies are recognized as income when the consolidated entities’ right to receive them arises.
However, the recognition of accrued interest in the consolidated income statement is suspended for debt instruments individually classified as impaired and for the instruments for which impairment losses have been assessed collectively because they have payments more than three months past due. This interest is recognized as income, when collected, as a reversal of the related impairment losses.
ii.
Commissions, fees and similar items
Fee and commission income and expenses are recognized in the consolidated income statement using criteria that vary according to their nature. The main criteria are:
•
Fee and commission income and expenses relating to financial assets and financial liabilities measured at fair value through profit or loss are recognized when paid.
•
Those arising from transactions or services that are performed over a period of time are recognized over the life of these transactions or services.
•
Those relating to services provided in a single act are recognized when the single act is carried out.
iii.
Non-finance income and expenses
These are recognized for accounting purposes on an accrual basis.
iv.
Deferred collections and payments
These are recognized for accounting purposes at the amount resulting from discounting the expected cash flows at market rates.
v.
Loan arrangement fees
Loan arrangement fees, mainly loan origination, application and information fees, are accrued and recognized in income over the term of the loan. In the case of loan origination fees, the portion relating to the associated direct costs incurred in the loan arrangement is recognized immediately in the consolidated income statement.

F-45

Table of Contents

t)
Financial guarantees
Financial guarantees are defined as contracts whereby an entity undertakes to make specific payments on behalf of a third party if the latter fails to do so, irrespective of the various legal forms they may have, such as guarantees, insurance policies or credit derivatives.
The Group initially recognizes the financial guarantees provided on the liability side of the consolidated balance sheet at fair value, which is generally the present value of the fees, commissions and similar interest receivable from these contracts over the term thereof, and simultaneously the Group recognizes a credit on the asset side of the consolidated balance sheet for the amount of the fees, commissions and interest received at the start of the transactions and the amounts receivable at the present value of the fees, commissions and interest outstanding.
Financial guarantees, regardless of the guarantor, instrumentation or other circumstances, are reviewed periodically so as to determine the credit risk to which they are exposed and, if appropriate, to consider whether a provision is required. The credit risk is determined by application of criteria similar to those established for quantifying impairment losses on debt instruments carried at amortized cost (described in Note 2.g above).
The provisions made for these transactions are recognized under Provisions — Provisions for contingent liabilities and commitments in the consolidated balance sheet (see Note 25). These provisions are recognized and reversed with a charge or credit, respectively, to Provisions (net) in the consolidated income statement.
If a specific provision is required for financial guarantees, the related unearned commissions recognized under Financial liabilities at amortized cost — Other financial liabilities in the consolidated balance sheet are reclassified to the appropriate provision.
u)
Assets under management and investment and pension funds managed by the Group
Assets owned by third parties and managed by the consolidated entities are not presented on the face of the consolidated balance sheet. Management fees are included in Fee and commission income in the consolidated income statement. Note 36.b contains information on the third-party assets managed by the Group.
The investment funds and pension funds managed by the consolidated entities are not presented on the face of the Group’s consolidated balance sheet since the related assets are owned by third parties. The fees and commissions earned in the year for the services rendered by the Group entities to these funds (asset management and custody services) are recognized under Fee and commission income in the consolidated income statement.
v)
Post-employment benefits
Under the collective agreements currently in force and other arrangements, the Spanish banks included in the Group and certain other Spanish and foreign consolidated entities have undertaken to supplement the public social security system benefits accruing to certain employees, and to their beneficiary right holders, for retirement, permanent disability or death, the benefits and indemnity payments payable, the contributions to employee welfare systems for early retirees and the post-employment welfare benefits.
The Group’s post-employment obligations to its employees are deemed to be defined contribution plans when the Group makes pre-determined contributions (recognized in Personnel expenses in the consolidated income statement) to a separate entity and will have no legal or effective obligation to make further contributions if the separate entity cannot pay the employee benefits relating to the service rendered in the current and prior periods. Post-employment obligations that do not meet the aforementioned conditions are classified as defined benefit plans (see Note 25).

F-46

Table of Contents

Defined contribution plans
The contributions made in this connection in each year are recognized under Personnel expenses in the consolidated income statement. The amounts not yet contributed at each year-end are recognized, at their present value, under Provisions — Provisions for pensions and similar obligations on the liability side of the consolidated balance sheet.
Defined benefit plans
The Group recognizes under Provisions — Provisions for pensions and similar obligations on the liability side of the consolidated balance sheet (or under Other assets on the asset side, as appropriate) the present value of its defined benefit post-employment obligations, net of the fair value of the plan assets and of the net unrecognized cumulative actuarial gains and/or losses disclosed in the valuation of these obligations, which are deferred using a corridor approach, and net of the past service cost, which is deferred over time, as explained below.
Plan assets are defined as those that will be directly used to settle obligations and that meet the following conditions:
•
They are not owned by the consolidated entities, but by a legally separate third party that is not a party related to the Group.
•
They can only be used to pay or finance post-employment benefits and cannot be returned to the consolidated entities unless the assets remaining in the plan are sufficient to meet all obligations of the plan and of the entity relating to current or former employee benefits, or to reimburse employee benefits already paid by the Group.
If the Group can look to an insurer to pay part or all of the expenditure required to settle a defined benefit obligation, and it is practically certain that said insurer will reimburse some or all of the expenditure required to settle that obligation, but the insurance policy does not qualify as a plan asset, the Group recognizes its right to reimbursement as an asset item in the consolidated balance sheet under Insurance contracts linked to pensions, which, in all other respects, is treated as a plan asset.
Actuarial gains and losses are defined as those arising from differences between the previous actuarial assumptions and what has actually occurred and from the effects of changes in actuarial assumptions. The Group uses, on a plan-by-plan basis, the corridor method and recognizes in the consolidated income statement the amount resulting from dividing by five the net amount of the cumulative actuarial gains and/or losses not recognized at the beginning of each year which exceeds 10% of the present value of the obligations or 10% of the fair value of the plan assets at the beginning of the year, whichever amount is higher. The maximum five-year allocation period, which is required by the Bank of Spain for all Spanish financial institutions, is shorter than the average number of remaining years of active service relating to the employees participating in the plans, and is applied systematically.
The past service cost -which arises from changes to current post-employment benefits or from the introduction of new benefits- is recognized on a straight-line basis in the consolidated income statement over the period from the time the new commitments arise to the date on which the employee has an irrevocable right to receive the new benefits.
Post-employment benefits are recognized in the consolidated income statement as follows:
•
Current service cost -defined as the increase in the present value of the obligations resulting from employee service in the current period-, under Personnel expenses.
•
Interest cost -defined as the increase during the year in the present value of the obligations as a result of the passage of time-, under Interest expense and similar charges. When obligations are presented on the liability side of the consolidated balance sheet, net of the plan assets, the cost of the liabilities recognized in the income statement relates exclusively to the obligations recognized as liabilities.
•
The expected return on plan assets and the gains or losses on the value of the plan assets under Interest and similar income.
•
The actuarial gains and losses calculated using the corridor approach and the unrecognized past service cost, under Provisions (net) in the consolidated income statement.

F-47

Table of Contents

w)
Other long-term employee benefits
Other long-term employee benefits, defined as obligations to early retirees -taken to be those who have ceased to render services at the entity but who, without being legally retired, continue to have economic rights vis-à-vis the entity until they acquire the legal status of retiree-, long-service bonuses, obligations for death of spouse or disability before retirement that depend on the employee’s length of service at the entity and other similar items, are treated for accounting purposes, where applicable, as established above for defined benefit post-employment plans, except that all past service costs and actuarial gains and losses are recognized immediately (see Note 25).
x)
Termination benefits
Termination benefits are recognized when there is a detailed formal plan identifying the basic changes to be made, provided that implementation of the plan has begun, its main features have been publicly announced or objective facts concerning its implementation have been disclosed.
y)
Income tax
The expense for Spanish corporation tax and other similar taxes applicable to the foreign consolidated entities is recognized in the consolidated income statement, except when it results from a transaction recognized directly in equity, in which case the tax effect is also recognized in equity.
The current income tax expense is calculated as the sum of the current tax resulting from application of the appropriate tax rate to the taxable profit for the year (net of any deductions allowable for tax purposes), and of the changes in deferred tax assets and liabilities recognized in the consolidated income statement.
Deferred tax assets and liabilities include temporary differences, which are identified as the amounts expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their related tax bases, and tax loss and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled.
Tax assets includes the amount of all tax assets, which are broken down into current -amounts of tax to be recovered within the next twelve months- and deferred -amounts of tax to be recovered in future years, including those arising from unused tax losses or tax credits.
Tax liabilities includes the amount of all tax liabilities (except provisions for taxes), which are broken down into current -the amount payable in respect of the income tax on the taxable profit for the year and other taxes in the next twelve months- and deferred -the amount of income tax payable in future years.
Deferred tax liabilities are recognized in respect of taxable temporary differences associated with investments in subsidiaries, associates or joint ventures, except when the Group is able to control the timing of the reversal of the temporary difference and, in addition, it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets are only recognized for temporary differences to the extent that it is considered probable that the consolidated entities will have sufficient future taxable profits against which the deferred tax assets can be utilized, and the deferred tax assets do not arise from the initial recognition (except in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit or accounting profit. Other deferred tax assets (tax loss and tax credit carry forwards) are only recognized if it is considered probable that the consolidated entities will have sufficient future taxable profits against which they can be utilized.
Income and expenses recognized directly in equity are accounted for as temporary differences.
The deferred tax assets and liabilities recognized are reassessed at each reporting date in order to ascertain whether they still exist, and the appropriate adjustments are made on the basis of the findings of the analyses performed.

F-48

Table of Contents

z)
Residual maturity periods and average interest rates
The analysis of the maturities of the balances of certain items in the consolidated balance sheets and the average interest rates at 2009, 2008 and 2007 year-end is provided in Note 51.
aa)
Consolidated statements of cash flows
The following terms are used in the consolidated statements of cash flows with the meanings specified:
•
Cash flows: inflows and outflows of cash and cash equivalents, which are short-term, highly liquid investments that are subject to an insignificant risk of changes in value, irrespective of the portfolio in which they are classified.
The Group classifies as cash and cash equivalents the balances recognized under Cash and balances with central banks in the consolidated balance sheet.
•
Operating activities: the principal revenue-producing activities of credit institutions and other activities that are not investing or financing activities.
•
Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents.
•
Financing activities: activities that result in changes in the size and composition of the equity and liabilities that are not operating activities.
ab)
Consolidated statement of recognized income and expense
This statement presents the income and expenses generated by the Group as a result of its business activity in the year, and a distinction is made between the income and expenses recognized in the consolidated income statement for the year and the other income and expenses recognized directly in consolidated equity.
Accordingly, this statement presents:
a.
Consolidated profit/loss for the year.
b.
The net amount of the income and expenses recognized temporarily in consolidated equity under Valuation adjustments.
c.
The net amount of the income and expenses recognized definitively in consolidated equity.
d.
The income tax incurred in respect of the items indicated in b) and c) above, except for the valuation adjustments arising from investments in associates or jointly controlled entities accounted for using the equity method, which are presented net.
e.
Total consolidated recognized income and expense, calculated as the sum of a) to d) above, presenting separately the amount attributable to the Parent and the amount relating to minority interests.
The amount of the income and expenses relating to entities accounted for using the equity method recognized directly in equity is presented in this statement, irrespective of the nature of the related items, under Entities accounted for using the equity method.
ac)
Consolidated statement of changes in total equity
This statement presents all the changes in equity, including those arising from changes in accounting policies and from the correction of errors. Accordingly, this statement presents a reconciliation of the carrying amount at the beginning and end of the year of all the consolidated equity items, and the changes are grouped together on the basis of their nature into the following items:
a.
Adjustments due to changes in accounting policies and to errors: include the changes in consolidated equity arising as a result of the retrospective restatement of the balances in the consolidated financial statements, distinguishing between those resulting from changes in accounting policies and those relating to the correction of errors.

F-49

Table of Contents

b.
Income and expense recognized in the year: includes, in aggregate form, the total of the aforementioned items recognized in the consolidated statement of recognized income and expense.
c.
Other changes in equity: includes the remaining items recognized in equity, including, inter alia, increases and decreases in capital, distribution of profit, transactions involving own equity instruments, equity-instrument-based payments, transfers between equity items and any other increases or decreases in consolidated equity.
3.
Santander Group
a)
Banco Santander, S.A. and international Group structure
The growth of the Group in the last decade has led the Bank to also act, in practice, as a holding entity of the shares of the various companies in its Group, and its results are becoming progressively less representative of the performance and earnings of the Group. Therefore, each year the Bank determines the amount of the dividends to be distributed to its shareholders on the basis of the consolidated net profit, while maintaining the Group’s traditionally high level of capitalization and taking into account that the transactions of the Bank and of the rest of the Group are managed on a consolidated basis (notwithstanding the allocation to each company of the related net worth effect).
At international level, the various banks and other subsidiaries, jointly controlled entities and associates of the Group are integrated in a corporate structure comprising various holding companies which are the ultimate shareholders of the banks and subsidiaries abroad.
The purpose of this structure, all of which is controlled by the Bank, is to optimize the international organization from the strategic, economic, financial and tax standpoints, since it makes it possible to define the most appropriate units to be entrusted with acquiring, selling or holding stakes in other international entities, the most appropriate financing method for these transactions and the most appropriate means of remitting the profits obtained by the Group’s various operating units to Spain.
The Appendices provide relevant data on the consolidated Group companies and on the companies accounted for using the equity method.
b)
Acquisitions and disposals
Following is a summary of the main acquisitions and disposals of ownership interests in the share capital of other entities and other significant corporate transactions performed by the Group in the last three years:
i.
ABN AMRO Holding N.V. (ABN AMRO)
On July 20, 2007, having obtained the regulatory authorizations required to publish the documentation on the takeover bid for ABN AMRO, the Bank, together with the Royal Bank of Scotland Group plc, Fortis N.V. and Fortis S.A./N.V. (together, the Banks) formally launched, through RFS Holdings B.V., the offer for all the ordinary shares, ADSs and previously convertible preference shares of ABN AMRO. The initial acceptance period of this offer (the Offer) ended on October 5, 2007.
On October 10, 2007, the Banks declared the Offer to be unconditional. At that date, the owners of 86% of the ordinary share capital of ABN AMRO had accepted the Offer (including certain shares that the Banks already owned and had undertaken to contribute to RFS Holdings B.V.).
On this same date the commencement of an additional offer period was announced, during which the holders of ordinary shares and ADSs of ABN AMRO could sell them, under the same terms and conditions as those of the Offer, until October 31, 2007.
Once the aforementioned additional offer period had ended, the owners of 98.8% of the ordinary share capital of ABN AMRO (excluding its treasury shares) had definitively accepted the Offer.

F-50

Table of Contents

At December 31, 2007, the investment made by the Bank amounted to € 20,615 million and consisted of the Bank’s 27.9% ownership interest in the share capital of RFS Holdings B.V., the holding entity of the shares of ABN AMRO.
Following all these actions, the spin-off of the business lines of ABN AMRO commenced with a view to their subsequent integration into each of the Banks. The following correspond to Banco Santander: the Latin American Business Unit of ABN AMRO -basically Banco ABN AMRO Real S.A. (Banco Real) in Brazil-, the Banca Antoniana Popolare Veneta Spa Banking Group (Antonveneta), the cash relating to the sale of the consumer banking unit of ABN AMRO in the Netherlands -Interbank and DMC Consumer Finance, plus 27.9% of the assets that were not allocated to any of the Banks of the consortium and which are intended to be disposed of. The spin-off process continued in 2008.
Accordingly, on March 4, 2008 the Dutch Central Bank expressed its acceptance of the overall spin-off plan, and in July 2008 it approved the individual spin-off plan for Banco Real and the business activities in Brazil. Subsequently, the Central Bank of Brazil approved the acquisition by Banco Santander, whereby it became effective.
The Group’s assets in Brazil also comprise those corresponding to the asset management business of ABN AMRO in Brazil, which were initially allocated to Fortis in the process of spinning off and integrating the assets of ABN AMRO and which were acquired therefrom by the Bank in the first half of 2008 for € 209 million.
As part of the asset spin-off, in December 2008 Banco Santander Uruguay acquired the assets and liabilities of the Montevideo branch of ABN AMRO, and subsequently proceeded to merge the businesses.
Also, on May 30, 2008 Banco Santander and Banca Monte dei Paschi di Siena announced the completion of the purchase and sale of Antonveneta (excluding Interbanca, its corporate banking subsidiary) for € 9 billion, in execution of the agreement announced on November 8, 2007 which was only subject to approval by the competent authorities.
On June 2, 2008, Banco Santander entered into a definitive agreement with General Electric whereby a General Electric Group company would acquire Interbanca and various Santander Group entities would acquire the GE Money units in Germany, Finland and Austria, GE’s card units in the UK and Ireland and its car finance unit in the UK. The base price agreed for the two transactions is € 1 billion each, subject to various adjustments. These transactions were completed with the acquisition of GE Germany in the fourth quarter of 2008 and the acquisition of the remaining GE units and the sale of Interbanca in the first quarter of 2009 (see Note 3.b.xv below).
In the third quarter of 2008 the Group sold 45% of ABN Amro Asset Management Italy SGR S.p.A. to Banca Monte di Paschi di Siena for € 35 million; Banca Monte di Paschi di Siena had already acquired the remaining 55% through the acquisition of Antonveneta.
The businesses shared by the members of the consortium included subordinated liabilities issued by ABN AMRO. The portion of these liabilities relating to Santander was transferred to RBS and Fortis at market prices, giving rise to gains for the Bank amounting to € 741 million which were recognized under Gains/losses on financial assets and liabilities (net) in the income statement for 2008.
On September 22, 2008, RFS completed the squeeze-out of the minority shareholders of ABN AMRO through the payment of € 712 million to these shareholders. Consequently, from that date RFS has been the sole shareholder of ABN AMRO. Banco Santander had to pay € 200 million to complete this process, on the basis of its ownership interest in RFS.
Banco Real was fully consolidated in the Group’s financial statements in the fourth quarter of 2008; previously it had been accounted for using the equity method through the ownership interest in RFS Holdings. Accordingly, the Group’s income statement for 2008 included all the results contributed to the Group by this entity from January 1, 2008. The volume of assets that Banco Real contributed to the Group amounted to approximately € 44 billion, based on the exchange rate ruling at 2008 year-end. The amounts of the main assets, liabilities and contingent liabilities contributed to the Group by this entity are detailed in the related notes to these consolidated financial statements.
The goodwill at the date of acquisition assigned to Banco Real following all the aforementioned transactions amounted to € 8 billion ( € 6,446 million at the exchange rate prevailing at 2008 year-end).

F-51

Table of Contents

In April 2009, ABN AMRO sold its branch in Asunción (Paraguay), after converting it into a subsidiary, to Banco Regional (40%-owned by the Rabobank group) for € 42.2 million, giving rise to a net gain of approximately € 5 million.
ii.
Interbanco, S.A. (Interbanco)
In September 2005 the Group and the Portuguese company SAG (Soluções Automóvel Globais) reached an agreement to jointly provide consumer finance and vehicle financing services in Portugal and operate the vehicle full-service lease (renting) business in Spain and Portugal.
In January 2006 the Group paid € 118 million for a 50.001% interest in the share capital of Interbanco.
At the beginning of 2007 the Group acquired an additional 9.999% of Interbanco through the integration in the latter of the branches of Santander Consumer EFC, S.A. and Santander Consumer Finance, S.A. located in Portugal. As a result, Interbanco changed its name to Banco Santander Consumer Portugal, S.A. Following this transaction, by virtue of the initial purchase agreements, the Group acquired the remaining 40% of this entity for € 138 million. These transactions gave rise to goodwill of € 74 million. At December 31, 2007, the Group owned all the shares of Banco Santander Consumer Portugal, S.A.
iii.
Compañía Española de Petróleos, S.A. (Cepsa)
In 2003 the Bank launched a takeover bid for up to 42,811,991 Cepsa shares, and the offer was accepted for 32,461,948 shares, representing an investment of € 909 million.
Total, S.A. considered that the takeover bid breached historical shareholder agreements between it (or its subsidiary, Elf Aquitaine, S.A.-Elf) and the Bank in relation to Cepsa and, accordingly, filed a request for arbitration at the Netherlands Court of Arbitration.
On April 3, 2006, the partial award rendered by the Arbitral Tribunal which, in the framework of the Netherlands Arbitration Institute, resolved the request for arbitration filed by Total, S.A. against the Bank was notified to the parties. The Tribunal considered that the shareholder agreements contained in the agreements relating to Cepsa between the Bank and Total, S.A. (or its subsidiary, Elf) were rendered invalid by application of Transitional Provision Three of Law 26/2003, of 17 July. However, the fact that the Bank launched the aforementioned takeover bid without prior consultation with Total, S.A. caused, in the opinion of the Tribunal, an insurmountable disagreement between the two parties which, in application of the part of the agreements that was not rendered invalid, entitled Total, S.A. to repurchase from the Bank a 4.35% ownership interest in Cepsa at the price established in the agreements.
Also, the aforementioned partial award ordered the dissolution of Somaen-Dos, S.L. (Sole-Shareholder Company), the sole company object of which was the holding of ownership interests in Cepsa, with a view to each shareholder recovering direct ownership of their respective Cepsa shares, in accordance with the agreements entered into between the Bank and Total, S.A. (or its subsidiary, Elf). To this end, on August 2, 2006, Banco Santander, S.A. and Riyal, S.L. entered into two agreements with Elf Aquitaine, S.A. and Odival, S.A., on the one hand, and with Unión Fenosa, S.A., on the other, to enforce the partial award and separate the ownership interests that they each held in Cepsa through Somaen-Dos, S.L.
On October 13, 2006, Elf received notification from the European Commission communicating the authorization of the concentration resulting from the acquisition by Elf of shares representing 4.35% of the share capital of Cepsa. Consequently, the Group sold 11,650,893 Cepsa shares to Elf for € 53 million. This disposal gave rise to a loss of € 158 million which was covered by a provision recognized for this purpose.
At December 31, 2008, the directors of the Bank classified the 32.5% ownership interest held in Compañía Española de Petróleos, S.A. (Cepsa) as a non-current asset held for sale, since it intended to recover the value of the investment through the sale thereof in the short term. This ownership interest was sold in 2009 (see Note 12).
iv.
Drive Consumer USA, Inc. (Drive) (Santander Consumer USA)
In 2006 the Group entered into an agreement to acquire 90% of Drive for USD 637 million in cash (approximately € 494 million), which is 6.8 times the estimated profit for 2006.
The transaction gave rise to goodwill of USD 544 million.

F-52

Table of Contents

The agreement established that the price paid by the Group could be increased by up to USD 175 million if the company meets certain profit targets for 2007 and 2008. In July 2007, an agreement was reached for this payment to be made early in exchange for a reduction in its amount from USD 175 million to USD 135 million ( € 97 million), giving rise to additional goodwill for the amount disbursed.
Drive was previously 64.5%-owned by HBOS plc and 35.5%-owned by management. Following the acquisition, the then chairman and COO of Drive has been acting as CEO, maintaining an ownership interest in the company of 9%, a percentage on which there are certain purchase and sale options which could lead to the Group acquiring this 9% stake between 2009 and 2013 at prices linked to the company’s earnings performance. In 2009 the Group acquired a further 0.5% stake.
v.
Santander Consumer Chile, S.A.
Santander Consumer Finance and the Bergé Group, through its Chilean subsidiary SKBergé, a company formed by Sigdo Koppers and Bergé (SKB), reached a strategic agreement to set up a finance company in Chile, whereby Santander Consumer Finance will subscribe to between 90% and 51% of the share capital and SKBergé will subscribe to between 10% and 49% of the share capital. The new company, which operates under the name of Santander Consumer Chile, engages in consumer finance, focusing both on the automotive and other durable consumer goods industry and on the credit cards business. At December 31, 2007, Santander Consumer Finance had subscribed to 89% of the share capital of Santander Consumer Chile S.A. (with a disbursement of € 13 million), the remaining 11% corresponding to SKBergé.
vi.
Orígenes AFJP, S.A. and Orígenes Seguros de Retiro, S.A.
In 2007 the Group entered into an agreement with ING Groep NV for the sale to the latter of the Group’s ownership interests in the pension fund manager Orígenes AFJP, S.A. and in Orígenes Seguros de Retiro, S.A., in Argentina, for USD 166 million ( € 112 million), giving rise to gross gains of € 84 million for the Group (see Note 37).
vii.
Pension fund managers
In 2007 the Group completed the sale of its obligatory pension fund managers in Latin America to ING Groep NV for USD 1,314 million ( € 906 million), giving rise to a gross gain of € 747 million (see Note 37). This transaction included the pension fund managers in Mexico (Afore Santander, S.A. de C.V.), Chile (AFP Bansander, S.A.), Colombia (AFP, Administradora de Fondos de Pensiones y Cesantías Santander, S.A.) and Uruguay (Afinidad AFAP, S.A.).
viii.
CB Extrobank
In 2007 the Group acquired all the shares of the Russian bank CB Extrobank (currently JSC Santander Consumer Bank) for € 48 million, giving rise to goodwill of € 37 million.
ix.
Acquisition of the European consumer finance business from The Royal Bank of Scotland (RBS)
On July 1, 2008, the Group completed the acquisition (announced in the first quarter of 2008) of the consumer finance business of The Royal Bank of Scotland (RBS) in continental Europe, including its business activities in Germany, the Netherlands, Belgium and Austria. The price of this transaction amounted to € 306 million, giving rise to goodwill of € 85 million.
At the time of the acquisition, the RBS consumer finance unit in Europe (RBS ECF) provided services to 2.3 million customers. RBS ECF facilitated installment sales directly and through its partners. It had a significant presence in the credit card business in terms of both individual and corporate customers, and provided consumer finance through various distribution channels. The business acquired in Germany was included in Santander Consumer Bank in December 2008.

F-53

Table of Contents

x.
Alliance & Leicester plc
On July 14, 2008, Banco Santander, S.A. and Alliance & Leicester plc entered into an agreement in relation to the terms of a recommended acquisition by Banco Santander, S.A. of the entire share capital, whether issued or yet to be issued, of Alliance & Leicester plc.
Under the aforementioned terms, the shareholders of Alliance & Leicester plc received one Banco Santander share for every three shares of Alliance & Leicester plc. Prior to the share exchange date, Alliance & Leicester approved and paid an interim dividend in cash amounting to 18 pence per share.
Key features of the acquisition
•
At the time of the announcement each Alliance & Leicester plc share was worth 299 pence, and the total issued share capital, approximately GBP 1,259 million, whereby the proposed exchange represented a premium of approximately 36.4% on the closing price at July 11, 2008. Considering the above interim dividend, the premium amounted to approximately 44.6% on the aforementioned closing price.
•
The acquisition affords the integration of the ancillary businesses of Alliance & Leicester and Abbey, thereby strengthening the competitive positioning of the products and services offered by the Group and benefiting its customers. It can be expected that the combined group will also benefit in terms of increased efficiency and that the borrowing costs relating to Alliance & Leicester may be reduced over time from the current high levels.
•
It will increase the critical mass of the Group’s business in the UK market, as part of our vertical strategy.
•
In-market cost synergies through the Group’s presence in the UK, estimated at GBP 180 million per year (before tax) at the end of 2011.
•
Complementary geographical nature of both distribution networks (Alliance & Leicester has a major presence in the Midlands and Abbey in the London area).
•
Abbey’s expansion process in the SMEs and retail business will be speeded up two to three years.
•
This transaction complies with Santander Group’s financial requirements.
The acquisition was completed on October 10, 2008 through the issuance of 140,950,944 new Banco Santander shares of € 0.50 par value each, with a share premium of € 10.73 per share, and the capital increase amounted to € 1,583 million (share capital: € 70 million; share premium: € 1,513 million), giving rise to initial goodwill of GBP 442 million ( € 554 million based on the exchange rate at the acquisition date).
This acquisition was performed by means of a scheme of arrangement and was approved by the shareholders of Banco Santander, S.A. (with respect to the capital increase) and of Alliance & Leicester plc. Additionally, the scheme of arrangement through which the acquisition was performed was approved by the competent UK court and the appropriate authorizations were obtained from the UK Financial Services Authority and the Bank of Spain.
Alliance & Leicester contributed total assets of approximately € 79 billion at 2008 year-end. The amounts of the main assets, liabilities and contingent liabilities contributed to the Group by this entity are detailed in the related notes to these consolidated financial statements.
In 2008 Alliance & Leicester did not contribute any results to the Group. The information on the results that this entity would have contributed to the Group had it been acquired on January 1, 2008 is not considered to be representative and, therefore, is not disclosed in these notes to the financial statements.
xi.
Acquisition of the distribution channels and retail deposits of Bradford & Bingley
On September 29, 2008, further to the notification by the UK Treasury that Bradford & Bingley plc (B&B) would be taken into public ownership, the Group announced that the retail deposits, the branch network and the related employees would be acquired by Abbey National plc, under the terms and conditions of the Banking (Special Provisions) Act 2008.

F-54

Table of Contents

According to the statements made by the UK Treasury, all the loans and advances to customers and treasury assets of B&B, including mortgage assets of GBP 41 billion, have been taken into public ownership.
The following were transferred to Abbey:
•
Retail deposits totaling GBP 20 billion; and
•
The direct distribution channels, including 197 commercial branches, 141 agencies (distribution points in third-party premises) and the related employees.
The acquisition price was GBP 612 million, including the transfer of GBP 208 million of capital relating to off-shore companies. The goodwill initially assigned to this business amounted to GBP 160 million ( € 202 million based on the exchange rate at the transaction date).
xii.
Sale of Porterbrook Leasing Company
On December 8, 2008, Abbey National plc completed the disposal of Porterbrook, its leasing business, through the sale of all the shares of Porterbrook Leasing Company and its subsidiaries to a consortium of investors including Antin Infrastructure Partners (the infrastructure fund sponsored by BNP Paribas), Deutsche Bank and Lloyds TSB, and received approximately GBP 1,600 million in cash. This disposal gave rise to a gain of € 50 million (GBP 40 million) recognized under Gains/(losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement for 2008 (see Note 49).
xiii.
Sovereign Bancorp Inc. (Sovereign)
In October 2005 the Group reached an agreement with Sovereign, an entity located in the United States, for the acquisition of a 19.8% stake in the US bank.
Under this agreement the Group subscribed to a USD 1,931 million capital increase and purchased treasury shares amounting to approximately USD 464 million, in both cases at USD 27 per share, giving rise to a total investment of USD 2,395 million (approximately € 1,883 million) and goodwill amounting to USD 760 million.
This agreement entitled the Group to increase its ownership interest to 24.99% through the purchase of shares in the market, but, unless expressly authorized otherwise by the shareholders of Sovereign at a general shareholders’ meeting, the shares purchased for the purpose of this increase had to be deposited in a voting trust and its votes exercised in the same proportion as the votes of the shareholders of Sovereign other than Santander and its shareholders. On May 3, 2007, Sovereign’s shareholders approved an amendment to the entity’s Bylaws which, inter alia, authorizes Santander to exercise the vote relating to the shares held in the voting trust and any other Sovereign shares that Santander might acquire in the future. On May 16, 2007, the voting trust held 4.9% of the voting shares of Sovereign. Santander and Sovereign took the appropriate steps to terminate the voting trust and to transfer the shares held therein to Santander. As from June 6, 2007, Santander could exercise the voting power on 24.7% of Sovereign shares. Except with the consent of the board of directors of Sovereign or through the procedures described below, Santander could not increase its percentage of ownership to over 24.99% until the end of the period established by the Investment Agreement (June 1, 2010, unless a takeover bid is launched by the Group or by a third party before that date).
In 2007 the Group measured its ownership interest in Sovereign and adjusted its value by € 1,053 million (see Note 13).
In May 2008 the Group participated in the capital increase carried out by Sovereign through the subscription of shares amounting to USD 312 million and, subsequently, in June 2008 the Bank acquired shares amounting to USD 43 million under the green shoe option.
On October 13, 2008, Banco Santander, S.A. (Santander) and Sovereign Bancorp Inc., the parent of Sovereign Bank, announced that Santander would acquire Sovereign through a share exchange. At the date of the announcement Santander held 24.35% of the outstanding ordinary shares of Sovereign, which were classified as Investments in the 2008 consolidated balance sheet (see Note 13). The capital and finance committee of Sovereign, composed of independent directors, requested that Santander consider acquiring the 75.65% of the company that it did not own. The committee assessed the transaction and recommended it to the company’s board of directors.

F-55

Table of Contents

Under the terms of the definitive transaction agreement, which was unanimously approved by the non-Santander directors of Sovereign and by the executive committee of Santander, Sovereign shareholders will receive 0.2924 Banco Santander American Depository Shares (ADSs) for every 1 ordinary Sovereign share they own (or 1 Banco Santander ADS for every 3.42 Sovereign shares). Based on the closing price of Santander ADSs on Friday, October 10, 2008, the transaction had an aggregate value of approximately USD 1,900 million ( € 1,400 million), or USD 3.81 per share, and met Santander’s criteria for acquisitions, both strategically, by significantly enhancing the geographical diversification of the Group, and financially, with a projected net profit for Sovereign of USD 750 million in 2011.
On January 26, 2009, Banco Santander held an extraordinary general meeting at which the shareholders approved the capital increase to cater for the acquisition of 75.65% of the US entity Sovereign Bancorp Inc., which was agreed upon in October 2008. The resolution was agreed with the vote of 96.9% of the capital present in person or by proxy.
On January 28, 2009, the shareholders at the general shareholders’ meeting of Sovereign approved the acquisition.
On January 30, 2009, the acquisition of Sovereign was completed and Sovereign became a wholly-owned subsidiary of Santander Group. The transaction involved the issue of 0.3206 ordinary shares of Banco Santander for each ordinary share of Sovereign (equivalent to the approved exchange of 0.2924 ADSs adjusted for the dilution arising from the capital increase carried out in December 2008). To this end, 161,546,320 ordinary shares were issued for a cash amount (par value plus share premium) of € 1,302,063,339.20.
The volume of assets contributed by the Sovereign business unit to the Group amounts to approximately € 48,791 million at the 2009 closing exchange rate, of which approximately € 9,568 million relate to Available-for-sale financial assets and € 34,605 million to loans and receivables. Also, at December 31, 2009 Sovereign contributed to the Group financial liabilities amounting to approximately € 45,364 million and Provisions amounting to € 401 million. In the process of allocation of the purchase price, the Group recognized initial goodwill of USD 2,053 million ( € 1,601 million at the exchange rate at the date of acquisition; € 1,425 million at the 2009 closing exchange rate). Additionally, various notes to these consolidated financial statements disclose the amounts of the main assets, liabilities and contingent liabilities contributed to the Group by this entity.
Since the Group obtained control over Sovereign at the end of January 2009, the Group’s income statement for 2009 includes substantially all the losses generated by Sovereign in the year ( € 25 million).
xiv.
Acquisition of Real Tokio Marine Vida e Previdência
In March 2009 the Santander Brasil Group acquired the 50% of the insurance company Real Tokio Marine Vida e Previdência that it did not already own from Tokio Marine for BRL 678 million ( € 225 million).
xv.
General Electric Money and Interbanca
The first quarter of 2009 saw the completion of the agreement reached by Banco Santander and GE in March 2008 (see Note 3.b.i above) whereby Banco Santander would acquire the units of GE Money in Germany (already acquired in the fourth quarter of 2008), Finland and Austria and its card (Santander Cards UK Limited) and vehicle financing units in the UK, and GE Commercial Finance would acquire Interbanca, an entity specializing in wholesale banking which was assigned to Banco Santander in the distribution of ABN AMRO’s assets. The initial goodwill arising from the acquisition of the GE business amounted to € 558 million at December 2009. The assets contributed by these units consist mainly of loans and advances to customers and represent approximately 1% of the Group’s lending.
xvi.
Banco de Venezuela
On May 22, 2009, Banco Santander announced that it had reached an agreement in principle for the sale of its stake in Banco de Venezuela to the Bolivarian Republic of Venezuela. On July 6, 2009 Banco Santander announced that it had closed the sale of the stake in Banco de Venezuela to Banco de Desarrollo Económico y Social de Venezuela, a public institution of the Bolivarian Republic of Venezuela, for USD 1,050 million, of which USD 630 million were received in cash on that date and the remainder was received before year-end. This sale did not have a material impact on the Group’s consolidated income statement.

F-56

Table of Contents

xvii.
Triad Financial Corporation
In June 2008 Banco Santander’s executive committee authorized the acquisition by Santander Consumer USA Inc. of the vehicle purchase loan portfolio and an Internet-based direct loan platform (roadloans.com) belonging to the US group Triad Financial Corporation. The acquisition price, USD 615 million, was determined on the basis of an analysis of each individual loan. In July 2009 the aforementioned executive committee authorized Santander Consumer USA Inc. to acquire Triad Financial SM LLC with its remaining portfolio for USD 260 million.
xviii.
Initial public offering of Banco Santander (Brasil) S.A.
On October 13, 2009, the Group subsidiary Banco Santander (Brasil) S.A. (Santander Brasil) closed its initial public offering of 525,000,000 units, each unit representing 55 ordinary shares and 50 preference shares, without par value. The offered securities (units) are share deposit certificates. The units were offered in a global offering consisting of an international tranche in the United States and in other countries other than Brazil, in the form of American depositary shares (ADSs), in which each ADS represented a unit, and a domestic tranche of units in Brazil.
The initial public offering price was BRL 23.50 per unit and USD 13.4033 per ADS.
Additionally, Santander Brasil granted the international underwriters an option, exercisable before November 6, 2009, to purchase an additional 42,750,000 ADSs to cover any over-allotments in connection with the international tranche. Santander Brasil also granted the domestic underwriters an option, exercisable during the same period, to purchase an additional 32,250,000 units to cover any over-allotments in connection with the Brazilian tranche.
Once the global offering was completed and after the underwriters exercised their options, the capital increase amount was BRL 13,182 million ( € 5,092 million). The free float of Santander Brasil is approximately 16.45% of its share capital, as compared with only 2.0% before the IPO. Santander Brasil undertook to raise the free float to at least 25% of its share capital within three years from the date of the initial public offering in order to maintain its listing on Level 2 of the Bolsa de Valores, Mercadorias e Futuros (BM&FBOVESPA). The ADSs are listed on the New York Stock Exchange.
Santander Group’s net gains from the placement amounted to € 1,499 million (see Note 1.h).
Prior to the public offering, on August 14, 2009, the Group transferred to Santander Brasil, through share exchange transactions, all the share capital of certain Brazilian asset management, insurance and banking companies (including Santander Seguros S.A. and Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A.) which were owned by Santander Group and certain minority shareholders. The total equity of the transferred businesses was valued at BRL 2,500 million. The purpose of these transactions was to consolidate in a single entity Santander Group’s investments in Brazil, thus streamlining the current corporate structure and grouping the ownership interests held by Santander Group and by the minority shareholders in those entities in the share capital of Santander Brasil. As a result of these transactions, the share capital of Santander Brasil was increased by approximately BRL 2,500 million through the issuance of 14,410,886,181 shares, of which 7,710,342,899 were ordinary shares and 6,700,543,282 were preference shares. Additionally, on September 17, 2009, Banco Santander sold to Santander Brasil a loan portfolio consisting of loans to Brazilian companies and their associates abroad for USD 806.3 million.
Santander Brasil agreed with the underwriters, subject to certain exceptions, not to offer, sell or dispose of any of its own shares or securities convertible into or exchangeable for its shares for a 180-day period from the date of the prospectus. Also, Banco Santander and the board members and senior management of Santander Brasil undertook to accept substantially similar lock-up provisions, subject to certain exceptions.
Santander Brasil intends to use the net proceeds from the global offering to expand its business in Brazil by growing its physical presence and increasing its capital base. Santander Brasil also intends to improve its funding structure and, along with its traditional funding sources, increase its credit transactions. In particular, Santander Brasil estimates that it will use the net proceeds from the public offering as follows: (i) 70% to expand its physical infrastructure, which will include the opening of new branches and the installation of additional ATMs, and to fund increased credit transactions in its retail and wholesale banking businesses more efficiently; (ii) 20% to improve its funding structure; and (iii) the remaining 10% to increase its capital base, improving its BIS capital ratio.

F-57

Table of Contents

Santander Brasil is the third largest private-sector bank in Brazil, the largest bank controlled by an international financial group and the fourth largest bank overall in the country, with a 10.2% market share in terms of assets. Santander Brasil carries on its business activity across the country, although it concentrates its presence in the Southern and South Eastern regions, which accounted for approximately 73.1% of Brazil’s GDP in 2006, where it has one of the largest branch networks, according to the Central Bank of Brazil. Per the consolidated financial statements of Santander Brasil, prepared in accordance with IFRSs, the entity obtained pre-tax profit of BRL 3,800 million in the six-month period ended June 30, 2009, its total assets amounted to BRL 288,900 million at that date and its equity to BRL 51,100 million. Santander Brasil’s BIS ratio was 17.0% at June 30, 2009.
In August 2008, Santander Brasil acquired Banco Real, which was then the fourth largest private-sector Brazilian bank in terms of assets. At the time of the purchase, Santander Brasil was the fifth largest private-sector bank in Brazil in terms of assets. As a result of the acquisition of Banco Real and organic growth, Santander Brasil’s net loan portfolio increased from BRL 44,600 million at June 30, 2008 to BRL 132,300 million at December 31, 2008, and total deposits rose from BRL 46,900 million at June 30, 2008 to BRL 124 billion at December 31, 2008, in both cases as reported in the financial statements of Santander Brasil, prepared in accordance with Brazilian GAAP. In the same period, the active current account holder base of Santander Brasil increased from approximately 3.5 million to around 7.7 million and the distribution channels (branches and on-site customer service units) rose from 1,546 to 3,603 units. The businesses of Banco Real and Santander Brasil were highly complementary before the acquisition. Santander Brasil considers that the acquisition provides considerable opportunities in terms of operational, commercial and technology synergies, building on the best practices of each bank. Banco Real’s strong representation in the states of Rio de Janeiro and Minas Gerais has further enhanced Santander Brasil’s position in the Southern and South Eastern regions of the country, adding to this entity’s already significant presence in those regions, particularly in the State of São Paulo. The acquisition of Banco Real consolidated Santander Brasil’s position as a full-service bank with nationwide coverage, whose size enables it to compete efficiently in its target markets.
The business segments in which Santander Brasil operates are as follows:
•
Commercial Banking, in which Santander Brasil provides a broad range of products and services and centralizes the banking operations of its customers in order to increase cross-selling. The main areas of this business segment are deposit-taking activities, lending, personal loans, credit cards, account overdraft loans, consumer finance, mortgages, corporate lending, BNDES on-lending facilities, agricultural lending, leasing and private banking.
•
Global Wholesale Banking: Santander Brasil is the wholesale banking leader in Brazil and offers financial services and sophisticated structured solutions to its customers. Santander Brasil is based on four core pillars: (1) strengthening customer relationships, (2) emphasis on performance and productivity as a means to ensure growth, (3) risk management and (4) consolidating the global recognition of its brand for product distribution. Santander Brasil’s wholesale banking business provides its customers with a broad range of domestic and international services as well as solutions tailored to the needs of each customer. The products and services of the Global Wholesale Banking segment are offered not only to GB&M (Global Banking & Markets) customers, but also to other corporate and SME customers. The main areas of this segment are global transaction banking, credit markets, corporate finance, equities, rates, market making, proprietary trading and correspondent banking.
•
Asset management and insurance: Santander Brasil engages in the discretionary and non-discretionary management and administration of third-party funds structured in investment funds, pension funds and individual and corporate investment portfolios. Additionally, Santander Brasil offers to its retail and SME customers insurance products, including life and personal injury insurance, homeowner’s insurance, credit insurance, credit card loss and theft insurance, and private retirement plans.
Santander Brasil’s distribution network provides integrated financial products and services to its customers through a variety of channels, including branches and on-site service units ( postos de atendimento bancário or PABs) and complementary distribution channels such as ATMs, call centers and direct sales distribution channels like Internet banking. As a result of the acquisition of Banco Real, Santander Brasil expanded its distribution network.
Santander Brasil is subject to certain claims and party to certain legal proceedings incidental to the normal course of its business (including those in connection with its lending activities, relationships with its employees and other commercial or tax matters). The main categories of lawsuits and administrative proceedings to which Santander Brasil is subject include: administrative and judicial actions relating to taxes; class actions involving agreements and settlement of debts with the public sector; suits brought by current or former employees and unions relating to alleged labor rights violations; and civil suits, including suits filed by depositors, relating to the alleged effects of the implementation of various government plans (due to differences regarding monetary adjustments to the remuneration of bank certificates of deposit, which affect the whole system) and consumer law (breach of contract and foreign currency indexation, including administrative proceedings) and to the privatization of Banespa.

F-58

Table of Contents

When there is a risk of possible loss, Santander Brasil usually settles. In such cases and where litigation arises from a claim, it recognizes a provision for the estimated probable loss based on historical experience for similar claims. Provisions are recognized (1) on a case-by-case basis based on the analysis and legal opinion of internal and external counsel and/or (2) considering the historical average amount of loss for such type of claims. Taking into account the provisions recognized and the legal opinions received, Santander Brasil believes that any liabilities arising from such lawsuits or legal proceedings will not have a material adverse effect on its financial position or results of operations.
Santander Brasil does not recognize contingency provisions when the risk of loss is remote. In this connection, in December 2008 the Brazilian tax authorities issued an infraction notice against Santander Brasil for a total amount of BRL 3,950.2 million (approximately € 1,200 million at the exchange rate then prevailing) with respect to income taxes (IRPJ and CSL) for 2002 to 2004. The tax authorities assert that Santander Brasil did not meet the legal requirements for deducting amortization of the goodwill arising from the acquisition of Banespa. Santander Brasil has filed an appeal to the Administrative Council of Tax Appeals ( Conselho Administrativo de Recursos Fiscais ) against the infraction notice and a ruling is expected within approximately one year. Santander Brasil believes, in accordance with the advice of its external legal counsel, that the Brazilian tax authorities’ position is incorrect, that the grounds to contest this infraction notice are well-founded, and, therefore, that the risk of loss is remote. Accordingly, Santander Brasil has not recognized any provisions in this connection since this issue should not have an impact on its financial statements.
Santander Brasil believes that adequate provisions have been recognized to cater for the costs that will foreseeable be incurred in connection with these various claims and legal proceedings. It also believes that any liability arising from such claims and proceedings will not have, overall, a material adverse effect on its business, financial position or results of operations. However, since the outcome of such claims and proceedings is uncertain, there is no assurance that the final judgments on these matters will not significantly exceed the provisions recognized. As a result, these final judgments might significantly affect the results for a particular period, depending, among other factors, upon the amount of the penalty imposed and the level of income for that period.
Santander Brasil’s share capital consists of 158,154,602,751 preference shares and 181,989,171,114 ordinary shares. At the time of the public offering, Santander Brasil did not have any treasury shares. Immediately after the offering, Santander Brasil had 212,841,731,754 ordinary shares and 186,202,385,151 preference shares. Following the offering, Banco Santander continues to own, indirectly, 84.2% of Santander Brasil ordinary shares, 82.8% of Santander Brasil preference shares and 83.5% of Santander Brasil’s total share capital.
Santander Brasil intends to recommend to its shareholders a policy to distribute 50% of its adjusted net profit for the year as dividends and/or interest attributed to shareholders’ equity, as required by the Brazilian Companies Law and its Bylaws. The amount of any distributions will depend on many factors, such as the results of operations, cash flow, financial position (including capital position), cash requirements, investment plans, prospects, legal requirements, economic climate and other factors deemed relevant by the board of directors and shareholders.
Before they decided to purchase Santander Brasil units and ADSs, potential investors in Santander Brasil were warned of the risks and other issues, including, among others, the risks relating to Brazil, to Santander Brasil and the Brazilian financial services industry and the risks relating to the units and ADSs themselves, since one or more of these matters could negatively impact Santander Brasil’s business or financial performance and its ability to implement its business strategy successfully.
*       *       *       *       *
The cost, total assets and total income of the other consolidated companies acquired and disposed of in the last three years were not material with respect to the related consolidated totals.

F-59

Table of Contents

c)
Off-shore entities
The Group currently has 23 subsidiaries resident in off-shore territories, including the remaining entities of Santander UK (formerly Abbey, Alliance & Leicester and Bradford & Bingley) and the entities included in the Group as a result of the acquisition of Santander Holding USA (formerly Sovereign Bank).
At present five of these subsidiaries are in liquidation, of which three are merely awaiting derecognizing, and the liquidation of a further four subsidiaries is expected to commence in 2010.
Following the above-mentioned planned disposals, the Group will have a total of 14 off-shore subsidiaries. These entities have 173 employees, located mainly in Jersey and the Isle of Man, and are classified by activity as detailed below:
i.
Operating subsidiaries engaging in banking or financial activities or in services:
•
Santander Trade Services Limited (Hong Kong), an intermediary in export documentary credits.
•
Abbey National International Limited in Jersey, which engages in remote banking for British customers not resident in the UK, to whom it offers traditional savings products.
•
Alliance & Leicester International Limited and Bradford & Bingley International Limited, two banks located in the Isle of Man which focus on attracting funds through savings accounts and deposits.
ii.
Scantly active, inactive or mere asset holding subsidiaries:
•
Alliance & Leicester International Holdings Limited, in the Isle of Man, whose only assets are the shares of Alliance & Leicester International Limited.
•
Banco Santander (Panamá), S.A., which conducts a scant banking activity.
•
Serfin International Bank and Trust, Limited (Cayman Islands), a bank which is virtually inactive.
•
Baker Street Risk and Insurance (Guernsey) Limited, an insurance company located in Guernsey which has a residual portfolio and is expected to be liquidated in the medium term.
•
Whitewick Limited, an inactive company located in Jersey.
iii.
Issuing companies
The Group has five issuing companies located in the following jurisdictions:
Issuers of preferred participating securities:
•
Banesto Holdings, Ltd. (Guernsey)
•
Totta & Açores Financing, Limited (Cayman Islands)
Issuers of debt:
•
Santander Central Hispano Financial Services, Ltd. (Cayman Islands)
•
Santander Central Hispano International, Ltd. (Cayman Islands)
•
Santander Central Hispano Issuances, Ltd. (Cayman Islands)
The preference share and subordinated debt issues launched by the aforementioned issuers were authorized by the Bank of Spain or the Bank of Portugal as computable for eligible capital calculation purposes. Once the issues launched by these issuers have been redeemed, these entities will be liquidated.

F-60

Table of Contents

The individual results of these subsidiaries, calculated in accordance with local accounting principles, are shown in the Appendixes to these notes to the consolidated financial statements together with other data thereon.
It should be noted that the individual results include transactions performed with other Group companies, such as dividend collection, recognition and reversal of provisions and corporate restructuring results which, in accordance with accounting standards, are eliminated on consolidation in order to avoid the duplication of profit or the recognition of intra-Group results. Individual results also include the profit attributable to the holders of preference shares securities. Therefore, they are not representative of the Group’s operations in these countries or of the results contributed to Santander Group.
The main banks and companies, whose activities are detailed above, contributed a profit of approximately € 24 million to the Group’s consolidated profit in 2009.
Additionally, the Group has seven branches, one located in Hong Kong, three in the Cayman Islands and three in the Isle of Man. Two of these branches are expected to be dissolved in 2010. These branches report to, and consolidate their balance sheets and income statements with, their respective parents, and have 81 employees.
Spain is expected to enter into information exchange agreements with the Cayman Islands, Hong Kong and Panama, as a result of which these countries and territories would cease to be considered tax havens for the purposes of Spanish legislation. Once these agreements become effective, the Group will have eight units (seven subsidiaries and one branch) resident for tax purposes in off-shore territories, namely the Isle of Man, Jersey and Guernsey. Although it is possible that agreements will also be entered into with these last-mentioned jurisdictions, it should be noted that, according to the list published by the OECD, none of these three jurisdictions is considered a tax haven.
Also, the Group controls, from Brazil, a securitization special-purpose vehicle in the Cayman Islands, called Brazil Foreign Diversified Payment Rights Finance Company, and it manages a protected cell company in Guernsey, called Guaranteed Investment Product 1 PCC, Ltd. Additionally, the Group has, directly or indirectly, various financial investments located in tax havens including, inter alia, Asiabridge Fund I LLC in Mauritius (21.14%), The HSH Coinvest (Cayman) Trust B in the Cayman Islands, Olivant Limited in Guernsey (9.00%), Algebris Global Financials Fund in the Cayman Islands (9.15%) and JC Flowers III in the Cayman Islands, and it holds a 7.2% ownership interest in the Cayman Islands branch of Companhia Brasileira de Meios de Pagamento S.A. (now Cielo S.A.).
The Group has 13 subsidiaries domiciled in off-shore territories that are not considered to be off-shore entities since they are resident for tax purposes in, and operate exclusively from, the UK. The Group also has six subsidiaries and one branch located in the Bahamas (three of which engage in banking activities) and it has financial investments in this country, which ceased to be considered a tax haven for the purposes of Spanish legislation as a result of the information exchange agreement entered into between the Kingdom of Spain and the Commonwealth of The Bahamas.
*       *       *       *       *
The Group has established the proper procedures and controls (risk management, supervision, verification and review plans and periodic reports) to prevent reputation and legal risk arising at these entities. Also, the Group has continued to implement its policy to reduce the number of off-shore units, as illustrated above. The financial statements of the Group’s off-shore units are audited by member firms of Deloitte.

F-61

Table of Contents

4.
Distribution of the Bank’s profit and Earnings per share
a)
Distribution of the Bank’s profit
The distribution of the Bank’s net profit for 2009 that the board of directors will propose for approval by the shareholders at the general shareholders’ meeting is as follows:
Millions
of euros
Distribution of dividends already paid prior to the general shareholders’ meeting ( € 3,939.9 million) and acquisition of bonus share rights from the shareholders which, under the Santander Dividendo Elección program, opted to receive in cash remuneration equivalent to the second interim dividend ( € 182.0 million)
4,122
Of which:
Distributed at December 31, 2009 (*)
1,285
Third interim dividend -declared in December 2009- (*)
1,012
Fourth interim dividend
1,825
To voluntary reserves
29
Net profit for the year
4,151
(*)
Recognized under Shareholders’ equity — Dividends and remuneration.
In addition to the € 4,122 million indicated above, a further € 797 million were allocated to the remuneration of shareholders under the new shareholder remuneration scheme (Santander Dividendo Elección) approved by the shareholders at the annual general meeting held on June 19, 2009, whereby the Bank offered shareholders the possibility to opt to receive an amount equivalent to the second interim dividend out of 2009 profit in cash or new shares. The other three interim dividends will be paid in cash. For these purposes, the executive committee of Banco Santander, at its meeting held on October 13, 2009, resolved to carry out a capital increase with a charge to voluntary reserves as approved by the shareholders at the annual general meeting of June 19, 2009 (see Note 31.a).
The provisional accounting statements prepared by the Bank pursuant to legal requirements evidencing the existence of sufficient funds for the distribution of the interim dividends were as follows:
Millions of euros
05/31/09 09/30/09 12/31/09 12/31/09
First Second Third (*) Fourth (*)
Profit after tax
1,630 3,328 4,151 4,151
Dividends paid
— (1,103 ) (1,285 ) (2,297 )
1,630 2,225 2,866 1,854
Interim dividends in cash
1,103 182 1,012 1,825
Accumulated interim dividends
1,103 1,285 2,297 4,122
Gross dividend per share (euros)
0.13523 0.12 0.12294 0.22183
Date of payment
08/01/09 11/01/09 02/01/10 05/01/10
(*)
Dividends not distributed at December 31, 2009.
The board of directors will propose to the shareholders at the general shareholders’ meeting that remuneration of € 0.60 per share be paid out of 2009 profit.

F-62

Table of Contents

b)
Earnings per share in ordinary activities and discontinued operations
i.
Basic earnings per share
Basic earnings per share are calculated by dividing the net profit attributable to the Group by the weighted average number of ordinary shares outstanding during the year, excluding the average number of treasury shares held in the year.
Accordingly:
12/31/09 12/31/08 12/31/07
Profit attributable to the Group (thousands of euros)
8,942,538 8,876,414 9,060,258
Profit from discontinued operations (net of minority interests) (thousands of euros)
27,431 310,804 896,222
Profit from continuing operations (net of minority interests) (thousands of euros)
8,915,107 8,565,610 8,164,036
Weighted average number of shares outstanding
8,075,814,950 6,802,545,788 6,693,869,621
Assumed conversion of convertible debt
478,409,443 468,923,871 108,029,643
Adjusted number of shares
8,554,224,393 7,271,469,659 6,801,899,264
Basic earnings per share (euros)
1.0454 1.2207 1.3320
Basic earnings per share from discontinued operations (euros)
0.0032 0.0427 0.1318
Basic earnings per share from continuing operations (euros)
1.0422 1.1780 1.2003
ii.
Diluted earnings per share
In calculating diluted earnings per share, the amount of profit attributable to ordinary shareholders and the weighted average number of shares outstanding, net of treasury shares, are adjusted to take into account all the dilutive effects inherent to potential ordinary shares (share options, warrants and convertible debt instruments).
Accordingly, diluted earnings per share were determined as follows:
12/31/2009 12/31/2008 12/31/2007
Profit attributable to the Group (thousands of euros)
8,942,538 8,876,414 9,060,258
Profit from discontinued operations (net of minority interests) (thousands of euros)
27,431 310,804 896,222
Profit from continuing operations (net of minority interests) (thousands of euros)
8,915,107 8,565,610 8,164,036
Dilutive effect of changes in profit for the year arising from potential conversion of ordinary shares
— — —
Weighted average number of shares outstanding
8,075,814,950 6,802,545,788 6,693,869,621
Assumed conversion of convertible debt
478,409,443 468,923,871 108,029,643
Dilutive effect of options
59,108,134 44,244,806 66,362,931
Adjusted number of shares
8,613,332,527 7,315,714,465 6,868,262,195
Diluted earnings per share (euros)
1.0382 1.2133 1.3191
Diluted earnings per share from discontinued operations (euros)
0.0032 0.0425 0.1305
Diluted earnings per share from continuing operations (euros)
1.0350 1.1709 1.1887
The calculation of the weighted average number of shares outstanding for 2008 included the adjustment arising from the capital increase with pre-emptive subscription rights carried out in December 2008 (see Note 31).

F-63

Table of Contents

5.
Remuneration and other benefits paid to the Bank’s directors and senior managers
a)
Remuneration of directors
i.
Bylaw-stipulated directors’ emoluments and attendance fees
Article 58 of the Bank’s current Bylaws approved by the shareholders at the general shareholders’ meeting held on June 21, 2008 provides that the share in the Bank’s profit for each year that the directors will be entitled to receive for discharging their duties as members of the board of directors -annual emolument and attendance fees- will be equal to 1% of the Bank’s net profit for the year. However, the board of directors may resolve to reduce this percentage. In the previous Bylaws, this percentage represented the limit only with respect to the annual emolument and did not include attendance fees.
The amount set by the board of directors for 2009, calculated pursuant to the aforementioned Article 58 of the Bylaws, was 0.144% of the Bank’s profit for 2009 (2008: 0.124% in like-for-like terms; 2007: 0.157% in like-for-like terms).
At the proposal of the appointments and remuneration committee, the directors at the board meeting held on December 21, 2009 resolved to set the annual emolument for 2009 at the same amounts as those paid out of the 2008 profit.
Previously, at the board meeting held on December 22, 2008, under the powers conferred on them, the directors had resolved to reduce by 10% the annual emolument corresponding to the directors for 2008, and established the following amounts in this connection (the respective proportional amounts were allocated to any directors who did not sit on the board for the whole year): each board member received a gross emolument of € 106.3 thousand in 2009 and 2008 (2007: € 118.1 thousand) and, additionally, each member of the following board committees received the following gross emoluments in 2009 and 2008: executive committee, € 213.2 thousand (2007: € 236.9 thousand); audit and compliance committee, € 50 thousand (2007: € 55 thousand); appointments and remuneration committee, € 30 thousand (2007: € 33 thousand). Also, the first deputy chairman and the fourth deputy chairman received a gross amount of € 36 thousand each in 2009 and 2008 (2007: € 40 thousand).
Furthermore, the directors receive fees for attending board and committee meetings, excluding executive committee meetings, since no attendance fees are received for this committee.
The amounts of the fees for attending the meetings of the board of directors and of the board committees (excluding the executive committee) were the same in 2009 and 2008 and will remain unchanged as from January 1, 2010, in accordance with the proposal made by the appointments and remuneration committee at its meeting on December 17, 2009 and approved by the directors at the board meeting on December 21, 2009. These attendance fees were approved by the directors at the board meeting held on December 17, 2007 in the following amounts:
•
Board of directors: € 2,540 for resident directors and € 2,057 for non-resident directors.
•
Risk committee and audit and compliance committee: € 1,650 for resident directors and € 1,335 for non-resident directors.
•
Other committees: € 1,270 for resident directors and € 1,028 for non-resident directors.

F-64

Table of Contents

ii.
Salaries
Following is the detail of the salaries received by the Bank’s executive directors: Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos, Mr. Alfredo Sáenz Abad, Mr. Matías Rodríguez Inciarte, Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, Mr. Francisco Luzón López and Mr. Juan Rodríguez Inciarte, who took office as member of the board of directors on March 24, 2008.
Thousands of euros
2009 2008 2007 (*)
Total salaries
25,784 25,489 24,315
Of which: variable remuneration in cash (or bonus)
15,240 15,240 16,088
(*)
The balances for 2007 do not include the remuneration for Mr. Juan Rodríguez Inciarte and, therefore, they are not comparable.
The amounts of fixed salary remuneration received by the executive directors in 2009 were approved by the directors at the board meeting held on December 22, 2008, at the proposal of the appointments and remuneration committee, with the exception of the fixed salary remuneration of Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, which was approved by the directors at the board meeting held on January 26, 2009, at the proposal of the appointments and remuneration committee.
Also, at the meeting held on December 17, 2009, the appointments and remuneration committee proposed to the board of directors that the variable salary remuneration to be received in cash (or bonus) by all the executive directors in 2009 be maintained at the same amounts as in 2008. This proposal was approved by the directors at the board meeting held on December 21, 2009. Previously, at the board meetings of December 22, 2008 and January 26, 2009, the directors had resolved to reduce these amounts by 15% with respect to 2007 (10% in the case of Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea).

F-65

Table of Contents

iii.
Detail by director
The detail, by director, of the remuneration earned by the Bank’s directors in 2009 is as follows:
Thousands of euros
2009 2008 2007
Bylaw-stipulated emoluments
Other
Annual emolument Attendance fees Salary of executive directors (1) remuneration
Variable
Appointments remuneration
Audit and and in cash (or Share
Executive compliance remuneration Other Fixed bonus) plan
Directors Board committee committee committee Board fees remuneration (a) Total (b) Other Total Total Total
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos
106 213 — — 25 5 1,344 1,987 3,331 310 1 3,992 5,420 3,910
Mr. Fernando de Asúa Álvarez
142 213 50 30 25 188 — — — — — 647 642 677
Mr. Alfredo Sáenz Abad
106 213 — — 25 5 3,703 4,745 8,447 837 602 10,237 9,295 9,604
Mr. Matías Rodríguez Inciarte
106 213 — — 25 162 1,710 2,503 4,213 398 221 5,339 6,541 5,154
Mr. Manuel Soto Serrano
142 — 50 30 25 31 — — — — — 277 274 306
Assicurazioni Generali, SpA.
123 — — — 10 — — — — — — 134 140 143
Mr. Antonio Basagoiti García-Tuñón
106 213 — — 25 158 — — — — 7 510 517 523
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea
106 213 — — 25 5 1,294 1,786 3,081 203 13 3,647 4,021 3,517
Mr. Francisco Javier Botín-Sanz de Sautuola y O’Shea (2)
106 — — — 23 — — — — — — 129 129 143
Lord Terence Burns
106 — — — 19 — — — — — — 125 123 135
Mr. Guillermo de la Dehesa Romero
106 213 — 30 25 11 — — — — — 386 384 427
Mr. Rodrigo Echenique Gordillo (**)
106 213 — 30 25 10 — — — — 33 418 443 562
Mr. Antonio Escámez Torres
106 213 — — 23 157 — — — — 38 537 535 550
Mr. Francisco Luzón López
106 213 — — 25 3 1,505 2,753 4,258 333 872 5,811 6,851 5,620
Mr. Abel Matutes Juan
106 — 50 — 20 16 — — — — — 192 194 213
Mr. Juan Rodríguez Inciarte (*)
106 — — — 25 106 987 1,466 2,453 322 108 3,121 3,830 —
Mr. Luis Ángel Rojo Duque
106 — 50 30 15 24 — — — — — 225 229 249
Mr. Luis Alberto Salazar-Simpson Bos
106 — 50 — 25 21 — — — — — 202 198 214
Ms. Isabel Tocino Biscarolasaga (***)
106 — — — 25 — — — — — — 132 129 103
Mutua Madrileña Automovilística (3)
— — — — — — — — — — — — — 153
Total 2009
2,108 2,132 248 149 440 900 10,544 15,240 25,784 2,403 1,897 36,061 — —
Total 2008
2,084 2,132 248 149 411 942 10,249 15,240 25,489 6,612 1,827 — 39,894 —
Total 2007
2,324 2,370 275 165 424 813 8,227 16,088 24,315 — 1,517 — — 32,203
(*)
Appointed as member of the Bank’s board of directors on January 28, 2008, Mr. Juan Rodríguez Inciarte took office on March 24, 2008. He was appointed as a member of the risk committee on March 24, 2008.
(**)
Ceased to be a member of the risk committee on March 24, 2008.
(***)
Appointed by co-optation by the board of directors at its meeting on March 26, 2007, Ms. Isabel Tocino Biscarolasaga took office at the meeting held on April 23, 2007. Her appointment was ratified by the shareholders at the annual general meeting held on June 23, 2007.
(a)
Relating to 2009.
(b)
Amounts received in 2009 in respect of the variable remuneration in shares granted through the Plan I09 approved by the shareholders at the general shareholders’ meeting held on June 23, 2007.
(1)
Recognized under Personnel expenses in the income statement of the Bank, except for the salary of Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, which is recognized at Banco Español de Crédito, S.A.
(2)
Amounts contributed to Marcelino Botín Foundation.
(3)
Ceased to be a director on December 19, 2007.

F-66

Table of Contents

iv.
Other remuneration
Remuneration under the share plan
The amount at December 31, 2009 relates to the variable remuneration received in the form of Banco Santander, S.A. shares by the Bank’s directors in 2009 under the I09 incentive plan (Plan I09) approved by the shareholders at the general shareholders’ meeting on June 23, 2007. As established in the aforementioned plan, the number of shares to be received was determined by the degree of achievement of the targets to which it was tied, and fell short of the maximum number established (see Note 5.d.ii).
Also, the amount at December 31, 2008 relates to the variable share-based remuneration received in 2008 by the Bank’s directors through the exercise of Banco Santander, S.A. share options granted under the I06 incentive plan (Plan I06) approved by the shareholders at the annual general meeting of Banco Santander, S.A. held on June 18, 2005 and, in the case of Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, through the delivery of shares of Banco Español de Crédito, S.A. under an incentive plan for executives of this entity approved by the shareholders at its annual general meeting held on February 28, 2006, for a total of € 6,612 thousand (see Note 5.d.i).
Other
The amounts recorded under Other remuneration — Other in the foregoing table include, inter alia, the life and medical insurance costs borne by the Group relating to the Bank’s directors.
b)
Remuneration of the board members as representatives of the Bank
By resolution of the executive committee, all the remuneration received by the Bank’s directors who represent the Bank on the boards of directors of listed companies in which the Bank has a stake (at the expense of those companies) and which relates to appointments made after March 18, 2002, will accrue to the Group. The remuneration received in respect of representation duties of this kind, relating to appointments agreed upon before March 18, 2002, was as follows:
Thousands of euros
Company 2009 2008 2007
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos
Shinsei Bank, Ltd. 30.1 53.0 50.1
Mr. Fernando de Asúa Álvarez
Cepsa 100.2 97.2 97.2
Mr. Antonio Escámez Torres
Attijariwafa Bank Société Anonyme 5.0 14.8 9.9
135.3 165.0 157.2
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos ceased to discharge his duties as director of Shinsei Bank, Ltd. on June 23, 2009 and received compensation of € 73.1 thousand.
Also, in 2008, 2007, 2006 and 2005 Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos had received, in each year, options to acquire shares of Shinsei Bank, Ltd. (Shinsei), the detail being as follows: 10,000 shares at a price of JPY 416 each in 2008; 10,000 shares at a price of JPY 555 each in 2007; 25,000 shares at a price of JPY 825 each in 2006; and JPY 601 each in 2005. At December 31, 2009, the market price of the Shinsei share was JPY 101 and, therefore, regardless of the stipulated exercise periods, the options granted in those years would not have given rise to any gains had they been exercised.
Mr. Fernando de Asúa ceased to discharge his duties as director of Cepsa on October 1, 2009 after the Group sold its ownership interest in that company.
Furthermore, other directors of the Bank earned a total of € 663 thousand in 2009 as members of the boards of directors of Group companies (2008: € 729 thousand; 2007: € 750 thousand), the detail being as follows: Lord Burns (Santander UK Plc), € 585 thousand; Mr. Rodrigo Echenique (Banco Banif, S.A.), € 36 thousand; and Mr. Matías Rodríguez Inciarte (U.C.I., S.A.), € 42 thousand.

F-67

Table of Contents

c)
Post-employment and other long-term benefits
The total balance of supplementary pension obligations assumed by the Group over the years to its current and retired employees (covered mostly by in-house provisions which amounted to € 10,629 million at December 31, 2009), includes the obligations to those who have been directors of the Bank during the year and who discharge (or have discharged) executive functions. The total pension obligations to these directors, together with the total sum insured under life insurance policies and other items, amounted to € 292 million at December 31, 2009 (December 31, 2008: € 311 million; December 31, 2007: € 264 million).
The following table provides information on: (i) the pension obligations assumed and covered by the Group; and (ii) other insurance -the premiums of which are paid by the Group, the related cost being included in the Other remuneration column in the table in Note 5.a.iii-, in both cases in respect of the Bank’s executive directors:
Thousands of euros
2009 2008 2007
Accrued Accrued Accrued
pension Other pension Other pension Other
obligations insurance obligations insurance obligations insurance
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos
24,642 — 25,579 — 22,926 —
Mr. Alfredo Sáenz Abad
85,740 11,108 80,049 10,785 68,070 9,378
Mr. Matías Rodríguez Inciarte
52,536 5,131 50,894 4,982 44,226 4,529
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea
23,775 1,403 21,737 1,403 17,975 1,403
Mr. Francisco Luzón López
53,513 9,031 53,083 7,624 45,468 7,624
Mr. Juan Rodríguez Inciarte
10,969 2,961 9,918 2,875 — —
251,175 29,634 241,260 27,669 198,665 22,934
The amounts in the Accrued pension obligations column in the foregoing table relate to the accrued present actuarial value of the future annual payments to be made by the Group. These amounts were obtained using actuarial calculations and cover the obligations to pay the respective calculated pension supplements. In the case of Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos, Mr. Alfredo Sáenz Abad, Mr. Matías Rodríguez Inciarte and Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, these supplements were calculated as 100% of the sum of the fixed annual salary received at the date of effective retirement plus 30% of the arithmetical mean of the last three variable remuneration payments received. In addition, in the case of Mr. Francisco Luzón López, to the amount thus calculated will be added the amounts received by him in the year before retirement or early retirement in his capacity as a member of the board of directors or the committees of the Bank or of other consolidable Group companies and, in the case of Mr. Juan Rodríguez Inciarte, 100% of the gross fixed annual salary received at the date of effective retirement.
On December 17, 2007, March 24, 2008, July 21, 2008 and April 28, 2009, the board of directors of the Bank resolved to authorize a change in the contracts of the executive directors and the other members of the Bank’s senior management -the senior management- granting them the right, on the date of retirement -or pre-retirement, as appropriate- to opt to receive their accrued pensions -or amounts similar thereto- in the form of an annuity or a lump sum i.e. in one single payment, in full but not in part. In order to maintain the financial neutrality for the Group, the amount to be received in the form of a lump sum by the commitment beneficiary at the date of retirement must be the aliquot part of the market value of the assets assigned to cover the mathematical provisions of the policy instrumenting these commitments to senior management. The senior management who are still in service on reaching the age of retirement -or who at the date of the contract entered into have passed the age of retirement- must state whether they wish to opt for this form of benefit. Should the senior management subsequently die whilst still in service and prior to retirement, the lump sum of the pension will correspond to his/her heirs. Also, by virtue of the aforementioned resolutions of the board of directors, these contracts were adapted to the current Bylaws (Articles 49.2 and 58.4) and to the new pensions regime.

F-68

Table of Contents

In 2009, Mr. Emilio Botín Sanz de Sautuola y García de los Ríos and Mr. Alfredo Sáenz Abad, who have passed the age of retirement, exercised the option to receive their respective accrued pensions as a lump sum on the date of effective retirement. The amounts included in the foregoing table in respect of the pensions accruing to these directors are those relating to the aforementioned lump sums, and no further amounts will accrue in respect of pensions after the retirement dates. The lump sums will be updated at the agreed-upon interest rate.
Furthermore, at the board meeting held on December 21, 2009, the Bank’s directors resolved that the executive directors -and other members of senior management who are beneficiaries or defined benefit plans and have not reached the age of retirement- may opt, upon reaching the age of 60 and on each of their following birthdays until they are 64 years of age, to receive their accrued pensions as a lump sum, which will be determined at the exercise date of this option and which they (or their heirs in the event of death) will be entitled to receive when they retire or are declared to be disabled. The exercise of this option will mean that no further pension benefit will accrue and the lump sum to be received, which will be updated at the agreed- upon interest rate, will be fixed. Also, any person who exercises this option must undertake not to retire early or to retire, in both cases at his/her own request, within two years from the exercise date.
Lastly, the board of directors resolution referred to in the preceding paragraph also regulated the impact of the deferral of the computable variable remuneration on the determination of the pension obligations (or similar amounts), in the form of an annuity or a lump sum, for pre-retirement, early retirement or normal retirement.
Pension provisions recognized and reversed in 2009 amounted to € 5,703 thousand and € 4 thousand, respectively (2008: € 26,974 thousand and € 11 thousand, respectively; 2007: € 21,615 thousand and € 580 thousand, respectively).
Additionally, other directors have life insurance policies the cost of which is borne by the Group, the related insured sum being € 3 million at December 31, 2009 (2008 and 2007: € 3 million each year). Also, the payments made in 2009 to the members of the board entitled to post-employment benefits amounted to € 2.6 million.

F-69

Table of Contents

d)
Deferred variable share-based remuneration systems
The detail of these plans granted to directors (see Note 47) is as follows:
i)
Plan I06 (see Note 47)
In 2004 a long-term incentive plan (I06) was designed which, consisting of options on shares of the Bank, is tied to the achievement of two targets which were achieved. The exercise period was from January 15, 2008 to January 15, 2009. The executive directors are beneficiaries of this plan; the number of Bank share options held by them is indicated below:
Rights Rights granted Rights exercised
at Number Market Remuneration Rights Rights Date of Date of
December 31, Exercise Number of of shares Exercise price allocated at Number of at Exercise commencement expiry of
2005, price rights acquired price applied (thousands December 31, rights December 31, price of exercise exercise
2006 and 2007 (euros) Number exercised (***) (euros) (euros) of euros) 2008 cancelled 2009 (euros) period period
Plan I06
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos
541,400 9.09 — (541,400 ) 541,400 9.09 12.40 1,780 — — — — — —
Mr. Alfredo Sáenz Abad
1,209,100 9.09 — — — — — 1,209,100 (1,209,100 ) — 9.09 01/15/08 01/15/09
Mr. Matías Rodríguez Inciarte
665,200 9.09 — (332,600 ) 67,901 9.09 14.12 1,661 332,600 (332,600 ) — 9.09 01/15/08 01/15/09
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)
293,692 9.09 — — — — — 293,692 (293,692 ) — 9.09 01/15/08 01/15/09
Mr. Francisco Luzón López
639,400 9.09 — (300,000 ) 60,656 9.09 14.04 1,473 339,400 (339,400 ) — 9.09 01/15/08 01/15/09
Mr. Juan Rodríguez Inciarte (**)
419,000 9.09 — (419,000 ) 419,000 9.09 11.72 1,090 — — — — — —
3,767,792 9.09 (1,593,000 ) 6,004 2,174,792 (2,174,792 ) — 9.09
(*)
Approved by Banesto’s shareholders at its general shareholders’ meeting on February 28, 2006.
(**)
Mr. Juan Rodríguez Inciarte was appointed as member of the board of directors in 2008. The data on his options for prior dates relate to the options granted to him as an executive prior to his appointment as director.
(***)
Under the three-year I06 incentive plan (see Note 47), each purchase option granted entitles the beneficiary to acquire one Bank share at a price of € 9.09, and the number of shares acquired on the exercise of the options is determined on the basis of the settlement method used, which can be cash for stock or cashless for cash. In the case of cash-for-stock settlements, the number of shares granted as consideration for the payment in cash of the exercise price is equal to the number of options exercised.

F-70

Table of Contents

As detailed in the foregoing table, the remuneration allocated to executive directors due to the exercise of Banco Santander, S.A. share options under the I06 incentive plan (see Note 47) amounted to € 6,004 thousand in 2008. Additionally, the remuneration allocated to Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea due to the delivery of Banesto shares under the incentive plan for executives approved by the shareholders at the general shareholders’ meeting of this entity on February 28, 2006 amounted to € 608 thousand. The share options under Plan I06 that had not been exercised at December 31, 2008 expired on January 15, 2009.
ii)
Performance share plan (see Note 47)
This plan, which provides for deferred variable remuneration in shares of the Bank, will involve successive three-year cycles of share deliveries to the beneficiaries, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end.
The table below shows the maximum number of rights granted to each executive director in each cycle and the number of shares received under the I09 incentive plan (Plan I09). As established in this plan, the number of shares received was determined by the degree of achievement of the targets to which the plan was tied, and fell short of the maximum number.
Rights Rights Shares Rights Rights
at December 31, granted delivered cancelled at December 31, Grant Share delivery
2008 (number) (number) (number) 2009 date deadline
Plan I09:
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos
41,785 — (37,937 ) (3,848 ) — 06/23/07 07/31/09
Mr. Alfredo Sáenz Abad
110,084 — (99,945 ) (10,139 ) — 06/23/07 07/31/09
Mr. Matías Rodríguez Inciarte
53,160 — (48,264 ) (4,896 ) — 06/23/07 07/31/09
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)
27,929 — (25,357 ) (2,572 ) — 06/23/07 07/31/09
Mr. Francisco Luzón López
44,749 — (40,628 ) (4,121 ) — 06/23/07 07/31/09
Mr. Juan Rodríguez Inciarte (**)
43,322 — (39,332 ) (3,990 ) — 06/23/07 07/31/09
321,029 — (291,463 ) (29,566 ) —
Plan I10:
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos
62,589 — — — 62,589 06/23/07 07/31/10
Mr. Alfredo Sáenz Abad
164,894 — — — 164,894 06/23/07 07/31/10
Mr. Matías Rodríguez Inciarte
79,627 — — — 79,627 06/23/07 07/31/10
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)
41,835 — — — 41,835 06/23/07 07/31/10
Mr. Francisco Luzón López
67,029 — — — 67,029 06/23/07 07/31/10
Mr. Juan Rodríguez Inciarte (**)
64,983 — — — 64,983 06/23/07 07/31/10
480,957 — — — 480,957
Plan I11:
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos
68,848 — — — 68,848 06/21/08 07/31/11
Mr. Alfredo Sáenz Abad
189,628 — — — 189,628 06/21/08 07/31/11
Mr. Matías Rodríguez Inciarte
87,590 — — — 87,590 06/21/08 07/31/11
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (***)
46,855 — — — 46,855 06/21/08 07/31/11
Mr. Francisco Luzón López
77,083 — — — 77,083 06/21/08 07/31/11
Mr. Juan Rodríguez Inciarte
50,555 — — — 50,555 06/21/08 07/31/11
520,559 — — — 520,559
Plan I12:
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos
— 82,941 — — 82,941 06/19/09 07/31/12
Mr. Alfredo Sáenz Abad
— 228,445 — — 228,445 06/19/09 07/31/12
Mr. Matías Rodríguez Inciarte
— 105,520 — — 105,520 06/19/09 07/31/12
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea
— 56,447 — — 56,447 06/19/09 07/31/12
Mr. Francisco Luzón López
— 92,862 — — 92,862 06/19/09 07/31/12
Mr. Juan Rodríguez Inciarte
— 60,904 — — 60,904 06/19/09 07/31/12
— 627,119 — — 627,119
(*)
Without prejudice to the Banesto shares relating to Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea by virtue of the Banesto Share-Based Payment Incentive Plan approved by the shareholders at the general shareholders’ meeting of Banesto held on June 27, 2007, the maximum number of shares shown in the foregoing table relates to the aforementioned executive director, based on the resolution adopted at the aforementioned general shareholders’ meeting.

F-71

Table of Contents

(**)
Mr. Juan Rodríguez Inciarte was appointed as member of the board of directors in 2008. The data on his rights include the rights granted to him as an executive prior to his appointment as director.
(***)
Without prejudice to the Banesto shares that might correspond to Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea by virtue of the Banesto Share-Based Incentive Plan approved by the shareholders at the general shareholders’ meeting of Banesto held on February 24, 2010, the maximum number of shares shown in the foregoing table relates to the aforementioned executive director in accordance with the resolution adopted at Banesto’s general shareholders’ meeting.
iii)
Obligatory investment share plan
Pursuant to the obligatory investment share plan (see Note 47), the current executive directors also acquired as deferred share-based variable remuneration, prior to February 29, 2008, February 28, 2009 and February 28, 2010, the number of Bank shares shown in the table below, which involved an investment of € 1.5 million in 2008, € 0.8 million in 2009 and € 1.5 million in 2010. Executive directors who hold the shares acquired through the obligatory investment and remain in the Group’s employ for three years from the date on which the obligatory investment is made will be entitled to receive the same number of Bank shares as that composing their initial obligatory investment.
The general shareholders’ meeting of June 19, 2009 introduced, for the third cycle, a requirement additional to that of remaining in the Bank’s employ, i.e. that in the three-year period from the investment in the shares none of the following circumstances should arise: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations (including, in particular, risks regulations) applicable to the executive in question; or (iii) a material restatement of the Entity’s financial statements, except when it is required pursuant to a change in accounting standards.
3rd cycle 2nd cycle 1st cycle
Executive directors 2010-2012 2009-2011 2008-2010
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos
20,515 19,968 16,306
Mr. Alfredo Sáenz Abad
49,000 47,692 37,324
Mr. Matías Rodríguez Inciarte
25,849 25,159 20,195
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)
18,446 16,956 13,610
Mr. Francisco Luzón López
28,434 27,675 22,214
Mr. Juan Rodríguez Inciarte
15,142 14,738 14,617
157,386 152,188 124,266
(*)
In accordance with the resolution adopted by the shareholders at the general shareholders’ meeting of Banco Santander held on June 23, 2007, the maximum number of shares relating to Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea for the 2008-2010 cycle is that shown in the foregoing table, as approved by the general shareholders’ meeting of Banesto held on June 27, 2007. Also, the maximum number of shares relating to Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea for the 2009-2011 and 2010-2012 cycles as beneficiary of this plan is in line with the resolution adopted by the shareholders at the general shareholders’ meeting of Banco Santander held on June 21, 2008 and by the shareholders at the general shareholders’ meeting of Banesto held on February 24, 2010.

F-72

Table of Contents

e)
Loans
The Group’s direct risk exposure to the Bank’s directors and the guarantees provided for them are detailed below. These transactions were made on an arm’s-length basis or the related compensation in kind was charged:
Thousands of euros
2009 2008 2007
Loans and Loans and Loans and
credits Guarantees Total credits Guarantees Total credits Guarantees Total
Mr. Alfredo Sáenz Abad
16 — 16 25 — 25 6 — 6
Mr. Matías Rodríguez Inciarte
7 10 17 20 10 30 18 10 28
Mr. Manuel Soto Serrano
— — — 5 — 5 4 — 4
Mr. Antonio Basagoiti García-Tuñón
47 1 48 66 1 67 94 1 95
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea
3 — 3 5 — 5 — — —
Mr. Javier Botín-Sanz de Sautuola y O’Shea
2 — 2 — — — — — —
Mr. Rodrigo Echenique Gordillo
9 — 9 12 — 12 7 — 7
Mr. Antonio Escámez Torres
1,488 — 1,488 1,473 — 1,473 309 — 309
Mr. Francisco Luzón López
5,004 — 5,004 1,649 — 1,649 722 — 722
Mr. Juan Rodríguez Inciarte
421 — 421 465 — 465 — — —
Mr. Luis Alberto Salazar-Simpson Bos
434 — 434 461 — 461 — — —
Ms. Isabel Tocino Biscarolasaga
40 — 40 49 — 49 — — —
7,471 11 7,482 4,231 11 4,242 1,160 11 1,171
f)
Senior managers
Following is a detail of the remuneration paid to the Bank’s executive vice presidents (*) in 2009, 2008 and 2007:
Thousands of euros
Number of Salary Other
Year managers (1) Fixed Variable Total remuneration Total
2007
26 19,504 42,768 62,272 10,092 72,364
2008
24 21,219 34,674 55,893 27,598 83,491
2009
24 21,512 36,468 57,980 16,745 74,725
(*)
Excluding executive directors’ remuneration, which is detailed above.
(1)
At some point in the year they occupied the position of executive vice president. The amounts reflect the annual remuneration regardless of the number of months in which the position of executive vice president was occupied.
The foregoing table includes all the items of remuneration paid to the senior managers, including the life insurance premiums ( € 1,148 thousand in 2009 and € 1,029 thousand in 2008), the termination or retirement benefits, and the share-based remuneration systems. The variable share-based remuneration, which amounted to € 5,982 thousand in 2009, related to the remuneration received by the executive vice presidents in the form of 746,756 Banco Santander, S.A. shares arising from the I09 incentive plan (see Note 47) approved by the shareholders at the general shareholders’ meeting held on June 23, 2007. Also, in 2008 € 22,410 thousand were allocated due to the exercise by the executive vice presidents of 5,317,978 Santander share options under the I06 incentive plan (see Note 47) and the delivery of Banesto shares under the incentive plan for executives approved by the shareholders at the general shareholders’ meeting of this entity held on February 28, 2006. No remuneration was paid in this connection in 2007.

F-73

Table of Contents

Following is a detail of the maximum number of options or rights that the Bank’s executive vice presidents (excluding executive directors) were entitled to receive at December 31, 2009, 2008 and 2007 under the various plans then in force.
Maximum number of options/rights 12/31/09 12/31/08 12/31/07
Plan I06 (*)
— 1,499,010 7,235,988
Plan I09
— 822,508 889,109
Plan I10
1,154,158 1,280,124 1,333,465
Plan I11
1,312,214 1,446,259 —
Plan I12
1,562,227 — —
(*)
The exercise period was from January 15, 2008 to January 15, 2009.
Additionally, with respect to the obligatory investment share plan, the annual investment made in February 2010, 2009 and 2008 by the executive vice presidents (excluding current executive directors) amounted to € 3.2 million (equal to 330,104 shares), € 2.9 million (equal to 508,764 shares) and € 3.4 million (equal to 261,681 shares), respectively.
The actuarial liability recognized in respect of post-employment benefits earned by the Bank’s senior managers totaled € 245 million at December 31, 2009 (December 31, 2008: € 240 million; December 31, 2007: € 202 million). The charge to the consolidated income statement in this connection amounted to € 40 million in 2009 (2008: € 41 million; 2007: € 24 million). Additionally, the total sum insured under life and accident insurance policies relating to this group amounted to € 63 million at December 31, 2009 (December 31, 2008: € 59 million; December 31, 2007: € 56 million).
g)
Post-employment benefits to former directors and former executive vice presidents
The post-employment benefits paid in 2009 to former directors of the Bank and former executive vice presidents amounted to € 7.9 million and € 40 million, respectively (2008: € 7.7 million and € 19.1 million, respectively; 2007: € 7.9 million and € 8.7 million, respectively).
The amounts recognized in the consolidated income statement for 2009 in connection with the Group’s pension and similar obligations to former directors of the Bank and former executive vice presidents were a release of € 1,258 thousand and a period provision of € 7,460 thousand, respectively (2008: period provision of € 1,064 thousand and € 570 thousand, respectively; 2007: period provision of € 308 million and 99 million, respectively).
Furthermore, Provisions — Provisions for pensions and similar obligations in the consolidated balance sheet at December 31, 2009 included € 84.9 million and € 146 million in respect of the post-employment benefit obligations to former directors of the Bank and former executive vice presidents, respectively (2008: € 88.8 million and € 132.2 million, respectively; 2007: € 89.2 million and € 142.9 million, respectively).
h)
Termination benefits
The Bank has signed contracts with all its executive directors.
The Bank’s executive directors have indefinite-term employment contracts. Executive directors whose contracts are terminated voluntarily or due to breach of duties are not entitled to receive any economic compensation. Under current conditions, if the contracts are terminated for reasons attributable to the Bank or due to objective circumstances (such as those affecting the executive directors’ functional and organic statute), the directors are entitled, at the date of termination of their employment relationship with the Bank, to the following:
•
In the cases of Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos and Mr. Alfredo Sáenz Abad, to retire and to receive the amounts relating to the accrued pensions in the form of capital ( € 24,642 thousand and € 85,740 thousand, respectively), without any additional amounts accruing in respect of pensions in the future in both cases, once the consolidation option referred to in Note 5.c has been exercised by both executive directors.

F-74

Table of Contents

Had Mr. Alfredo Sáenz Abad’s contract been terminated in 2009, he would have been able to choose between retiring or receiving severance pay equivalent to 40% of his fixed annual salary multiplied by the number of years’ service in banking, up to a maximum of 10 times his fixed annual salary. However, Mr. Alfredo Sáenz Abad has waived his right to receive this severance.
•
In the cases of Mr. Matías Rodríguez Inciarte and Mr. Francisco Luzón López, to take early retirement and to accrue pension supplements. At December 31, 2009, the annual pension supplements would amount to € 2,507 thousand for Mr. Matías Rodríguez Inciarte and € 2,701 thousand for Mr. Francisco Luzón López (2008: € 2,416 thousand and € 2,648 thousand, respectively; 2007: € 2,146 thousand and € 2,293 thousand, respectively).
•
In the case of Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, to receive a termination benefit amounting to five years’ annual fixed salary at the date of termination. At December 31, 2009, this benefit would amount to € 6,472 thousand (December 31, 2008: € 6,345 thousand; December 31, 2007: € 3,399 thousand). In the event of termination due to withdrawal at the will of the Bank, Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea may opt to take early retirement and accrue an annual emolument. At December 31, 2009, this emolument would amount to € 1,841 thousand per year. The two alternatives are mutually exclusive and, therefore, if Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea were to opt to receive the termination benefit she would not receive any emolument.
•
In the case of Mr. Juan Rodríguez Inciarte, to receive a termination benefit amounting to five years’ annual fixed salary at the date of termination. At December 31, 2009, this benefit would amount to € 4,936 thousand (December 31, 2008: € 4,792 thousand; December 31, 2007: € 4,652 thousand). In the event of termination due to withdrawal at the will of the Bank, Mr. Juan Rodríguez Inciarte may opt to take early retirement and accrue an annual emolument. At December 31, 2009, this emolument would amount to € 869 thousand per year (December 31, 2008: € 958 thousand per year; December 31, 2007: € 930 thousand per year). The two alternatives are mutually exclusive and, therefore, if Mr. Juan Rodríguez Inciarte were to opt to receive the termination benefit he would not receive any emolument.
If Mr. Matías Rodríguez Inciarte, Mr. Francisco Luzón López, Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea or Mr. Juan Rodríguez Inciarte retire or take early retirement, they have the right to opt to receive the pensions accrued -or similar amounts- in the form of income or capital -i.e. in a single payment- in full but not in part, without prejudice to the right to exercise their respective options, after reaching the age of 60 (see Note 5.c).
Additionally, other members of the Group’s senior management have contracts which entitle them to receive benefits in the event of termination for reasons other than voluntary redundancy, retirement, disability or serious breach of duties. These benefits are recognized as a provision for pensions and similar obligations and as a personnel expense only when the employment relationship between the Bank and its managers is terminated before the normal retirement date.

F-75

Table of Contents

i)
Detail of the directors’ investments in companies with similar business activities and performance by directors, as independent professionals or as employees, of similar activities
In accordance with the requirements of Article 127 ter.4 of the Spanish Public Limited Liability Companies Law ( Ley de Sociedades Anónimas ), in order to enhance the transparency of listed companies, following is a detail of the directors’ investments in the share capital of entities engaging in banking, financing or lending; and of the management or governing functions, if any, that the directors discharge thereat:
Corporate Number
Director name of shares Functions
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos
Bankinter, S.A. 3,295,300 —
Bank of America Corporation 560 —
Santander Investment, S.A. — Chairman (1)
Mr. Alfredo Sáenz Abad
Banco Bilbao Vizcaya Argentaria, S.A. 25,000 —
HSBC Holdings 13,074 —
Lloyds TSB 522 —
Banco Banif, S.A. — Chairman (1)
Santander Private Banking S.p.A. — Chairman (1)
Mr. Matías Rodríguez Inciarte
Banesto 27,575 Director (1)
Banco Santander Totta, S.A. — Deputy Chairman (1)
Mr. Manuel Soto Serrano
Intesa Sanpaolo 108,483 —
UniCredito Italiano S.p.A. 150,000 —
Istituto per le Opere di Religione (IOR) — Director (2)
Assicurazioni Generali S.p.A. (3)
Commerzbank, AG 66,531,286 —
Intesa Sanpaolo 617,113,776 —
Mediobanca — Banca di Credito Finanziario S.p.A. 16,381,963 —
Bank Leumi le-Israel B.M. 19,711,333 —
Erste Group Bank AG 3,796,516 —
UniCredito Italiano S.p.A. 117,276,064 —
Banca Monte dei Paschi di Siena S.p.A. 26,431,550 —
Crédit Agricole, S.A. 5,114,340 —
Société Générale 1,207,129 —
Banco Bilbao Vizcaya Argentaria, S.A. 6,805,838 —
Deustche Bank, A.G. 772,452 —
Banesto 753,429 —
Mr. Antonio Basagoiti García-Tuñón
Banco Popular Español, S.A. 510 —
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea
Banesto 560,214 Chairman
Santander Investment, S.A. — Director (1)
BSN - Banco Santander de Negocios Portugal, S.A. — Director (1)

F-76

Table of Contents

Corporate Number
Director name of shares Functions
Lord Burns (Terence)
Santander UK plc — Chairman (1)
Alliance & Leicester plc — Chairman (1)
Mr. Guillermo de la Dehesa Romero
Goldman Sachs & Co. 19,546 —
Banco Pastor, S.A. 11,088 —
Mr. Rodrigo Echenique Gordillo
JP Morgan Chase 3,000 —
Mitsubishi UFJ Financial Group, Inc. 6,000 —
Mizuho Financial Group, Inc. 5,000 —
HSBC 11,000 —
Banco Banif, S.A. — 2nd Deputy Chairman (1)
Santander Investment, S.A. — Director (1)
Allfunds Bank, S.A. — Deputy Chairman (1)
Banco Santander International — Director (1)
Mr. Antonio Escámez Torres
Attijariwafa Bank Societé Anonyme 10 Deputy Chairman (1)
Banco de Valencia, S.A. 349 —
Santander Consumer Finance, S.A. — Chairman (1)
Open Bank, S.A. — Chairman (1)
Mr. Francisco Luzón López
Banco Bilbao Vizcaya Argentaria, S.A. 24,658 —
UBS, AG 42,460 —
Bank of America 27,100 —
Goldman Sachs & Co. 460 —
Morgan Stanley 2,490 —
Citigroup Inc. 139,411 —
Wells Fargo 15,361 —
Barclays 185,441 —
HSBC 39,019 —
Lloyds Bank 3,307,838 —
Royal Bank of Scotland 2,626,919
Banco Santander (México), S.A., Institución de Banca Múltiple. Grupo Financiero Santander — Director (1)
Banco Santander International — Director (1)
Santander Consumo, S.A. de C.V., SOFOM, E.R. — Director (1)

F-77

Table of Contents

Corporate Number
Director name of shares Functions
Mr. Abel Matutes Juan
Intesa Sanpaolo 3,619,665 —
Banco Bilbao Vizcaya Argentaria, S.A. 563,708 —
Banesto 11,980 —
Mr. Juan Rodríguez Inciarte
Banco Bilbao Vizcaya Argentaria, S.A. 1,016 —
Wachovia 540 —
Santander UK plc — Deputy Chairman (1)
Alliance & Leicester plc — Director (1)
Banco Banif, S.A. — Director (1)
Santander Consumer Finance, S.A. — Director (1)
RFS Holding NV — Director
ABN AMRO Holding NV — Director (4)
ABN AMRO Bank NV — Director (4)
Ms. Isabel Tocino Biscarolasaga
Banco Bilbao Vizcaya Argentaria, S.A. 1,000 —
Citigroup Inc. 10,000 —
Mr. Antoine Bernheim (5)
Credit Suisse 40,900 —
BNP Paribas 16,179 —
UBS 82,863 —
Intesa Sanpaolo 398,533 Deputy Chairman (6)
Mediobanca — Banca di Credito Finanziario S.p.A. 63,000 Director (1)
UniCredito Italiano S.p.A. 149,519 —
Royal Bank of Scotland Group plc 12,298 —
Bank of New York Mellon 10,000 —
BSI SA — Director (1)
(1)
Non-executive.
(2)
Non-executive member of the control committee.
(3)
More detailed information on the ownership interests held by Assicurazioni Generali, S.p.A. can be consulted in the notes to the financial statements of this company or on its website (www.generali.com).
(4)
Non-executive member of the supervisory board.
(5)
Representative on the Bank’s board of directors of the non-executive proprietary director Assicurazioni Generali S.p.A.
(6)
(Non-executive) deputy chairman of the supervisory board.
(7)
Non-executive director of Shinsei Bank, Limited until June 23, 2009.
None of the members of the board of directors perform, as independent professionals or as employees, any activities of the kind indicated in the foregoing table.

F-78

Table of Contents

6.
Loans and advances to credit institutions
The detail, by classification, type and currency, of Loans and advances to credit institutions in the consolidated balance sheets is as follows:
Thousands of euros
2009 2008 2007
Classification:
Financial assets held for trading
5,952,956 5,149,584 12,294,559
Other financial assets at fair value through profit or loss
16,242,609 8,911,906 6,865,073
Loans and receivables
57,641,042 64,730,787 38,482,972
79,836,607 78,792,277 57,642,604
Type:
Reciprocal accounts
712,503 663,230 417,438
Term deposits
21,382,542 25,455,903 13,569,362
Reverse repurchase agreements
29,489,895 18,568,747 30,276,080
Other accounts
28,251,667 34,104,397 13,379,724
79,836,607 78,792,277 57,642,604
Currency:
Euro
50,346,410 44,157,708 32,327,552
Pound sterling
4,631,696 8,094,238 6,952,096
US dollar
11,209,610 13,079,671 13,007,374
Other currencies
13,674,427 13,714,227 5,374,069
Impairment losses
(25,536 ) (253,567 ) (18,487 )
Of which: Country risk
(8,460 ) (250,024 ) (16,748 )
79,836,607 78,792,277 57,642,604
The impairment losses on financial assets classified as loans and receivables are disclosed in Note 10.
Note 51 contains a detail of the residual maturity periods of loans and receivables and of the related average interest rates.
7.
Debt instruments
The detail, by classification, type and currency, of Debt instruments is as follows:
Thousands of euros
2009 2008 2007
Classification:
Financial assets held for trading
49,920,518 43,895,548 66,330,811
Other financial assets at fair value through profit or loss
7,365,213 5,154,732 7,072,423
Available-for-sale financial assets
79,289,337 42,547,677 34,187,077
Loans and receivables
14,959,331 17,652,560 1,668,339
151,534,399 109,250,517 109,258,650
Type:
Spanish government debt securities
Treasury bills
8,256,207 5,544,658 5,558,420
Government bonds
2,649,096 419,083 376,393
Other book-entry debt securities
27,407,375 14,535,752 9,440,746
Foreign government debt securities
44,006,698 23,132,075 21,617,457
Issued by financial institutions
39,853,240 39,096,714 43,443,566
Other fixed-income securities
29,528,505 26,703,413 28,913,821
Impairment losses
(166,722 ) (181,178 ) (91,753 )
151,534,399 109,250,517 109,258,650
Currency:
Euro
72,745,088 51,577,517 55,013,063
Pound sterling
11,882,570 16,345,483 16,164,296
US dollar
25,744,623 15,396,510 13,341,949
Other currencies
41,328,840 26,112,185 24,831,095
Impairment losses
(166,722 ) (181,178 ) (91,753 )
151,534,399 109,250,517 109,258,650

F-79

Table of Contents

At December 31, 2009, the nominal amount of Spanish government debt securities assigned to certain own or third-party commitments amounted to € 16,509 million (December 31, 2008: € 2,674 million; December 31, 2007: € 695 million).
Additionally, at December 31, 2009 other debt securities totaling € 23,152 million had been assigned to own obligations (December 31, 2008: 22,487 million; December 31, 2007: 16,171 million), mainly as security for credit facilities received by the Group.
The impairment losses on available-for-sale financial assets are disclosed in Note 8.
Note 51 contains a detail of the residual maturity periods of available-for-sale financial assets and of loans and receivables and of the related average interest rates.
8.
Other equity instruments
a)
Breakdown
The detail, by classification and type, of Other equity instruments is as follows:
Thousands of euros
2009 2008 2007
Classification:
Financial assets held for trading
9,248,022 6,272,403 9,744,466
Other financial assets at fair value through profit or loss
5,877,331 2,777,793 2,870,322
Available-for-sale financial assets
7,331,166 6,372,629 10,161,830
Of which:
Disregarding allowances for impairment losses
7,331,166 6,381,788 10,173,068
Allowances for impairment losses
— (9,159 ) (11,238 )
22,456,519 15,422,825 22,776,618
Type:
Shares of Spanish companies
4,981,812 3,219,901 6,375,891
Shares of foreign companies
7,526,087 5,897,681 9,787,139
Investment fund units and shares
4,254,774 3,614,329 4,068,215
Other securities
5,693,846 2,700,073 2,556,611
Of which: unit linked
5,693,846 2,700,073 2,556,611
Impairment losses
— (9,159 ) (11,238 )
22,456,519 15,422,825 22,776,618

F-80

Table of Contents

b)
Changes
The changes in Available-for-sale financial assets, disregarding the allowances for impairment losses, were as follows:
Millions of euros
2009 2008 2007
Balance at beginning of year
6,382 10,173 5,985
Changes in the scope of consolidation
467 366 —
Transfers (Note 13)
53 204 —
Net additions /disposals
(192 ) (454 ) 3,096
Of which:
Shinsei
— 322 —
Metrovacesa
938 — —
France Telecom
(378 ) — —
Attijariwafa Bank
(367 ) — —
Royal Bank of Scotland Group, plc
— — 1,368
Fortis SA/NV
— — 892
Iberdrola, S.A.
— (846 ) 1,503
BPI
— — (229 )
Intesa Sanpaolo
— — (1,206 )
Valuation adjustments (*)
621 (3,907 ) 1,092
Balance at end of year
7,331 6,382 10,173
(*)
The valuation adjustments in 2008 included the write-downs of the ownership interests held in that year in The Royal Bank of Scotland ( € 1,293 million) and Fortis Bank ( € 749 million).
The main acquisitions and disposals made in 2009, 2008 and 2007 were as follows:
i.
Metrovacesa, S.A. (Metrovacesa)
On February 20, 2009, certain credit institutions, including Banco Santander, S.A. and Banco Español de Crédito, S.A., entered into an agreement for the restructuring of the debt of the Sanahuja Group, whereby they received shares representing 54.75% of the share capital of Metrovacesa in payment of the Sanahuja Group’s debt.
The aforementioned agreement also envisages the acquisition by the creditor entities of an additional 10.77% of the share capital of Metrovacesa (shares on which the Sanahuja family was granted a call option for four years), which gave rise to an additional disbursement of € 214 million for the Group, and other conditions concerning the administration of this company.
Following the execution of the agreement, Santander Group had an ownership interest of 23.63% in Metrovacesa, S.A., and 5.38% of the share capital was subject to the aforementioned option.
At June 30, 2009, the Group’s investment in Metrovacesa totaled € 744 million, net of the impairment recognized under Impairment losses on financial assets amounting to € 195 million.
At 2009 year-end, the Group measured this investment at € 25 per share, which gave rise to additional write-downs and impairment losses of € 269 million net of tax (see Note 1.i).
ii.
France Telecom España, S.A. (France Telecom)
On April 29, 2009, the Group announced it had entered into an agreement with Atlas Services Nederland BV (a wholly-owned subsidiary of France Telecom) to sell the Group’s 5.01% ownership interest in France Telecom España, S.A. for € 378 million. This transaction generated a loss for the Group of € 14 million.

F-81

Table of Contents

iii.
Attijariwafa Bank (Attijari)
On December 28, 2009, the Group sold to the Moroccan company Société Nationale d’Investissement (SNI) 10% of the share capital of Attijariwafa Bank for MAD 4,149.4 million (approximately € 367 million at the closing exchange rate). This transaction gave rise to a gain of € 218 million for Santander Group (see Note 1.i), which was recognized under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations in the consolidated income statement (see Note 50). After the sale, Santander Group has a 4.55% ownership interest in Attijariwafa Bank.
iv.
Intesa Sanpaolo
In 2007 the Group sold its 1.79% ownership interest in the share capital of the Italian entity Intesa Sanpaolo, for a total amount of € 1,206 million. This transaction gave rise to a gain of € 566 million which was recognized under Gains on non-current assets held for sale not classified as discontinued operations (see Note 50).
v.
Banco BPI, S.A. (BPI)
Santander Group announced in January 2007 that it had entered into a definitive agreement with Banco Comercial Português (BCP) for the sale to this bank of 44.6 million shares of the Portuguese bank BPI, representing 5.87% of its share capital, at € 5.70 per share, equal to that offered by BCP in the takeover bid launched by it on BPI, or at the higher price resulting from any upward revision of the offer price. The transaction was conditional upon the relevant regulatory authorizations being obtained.
The takeover bid was closed in May 2007 and was unsuccessful since the minimum acceptance level upon which it was conditional was not reached. The Bank of Portugal had established certain limits on BCP’s ownership interest in BPI in the event that the takeover bid failed. Ultimately, in 2007 35.5 million shares of BPI were sold to BCP for a total of € 228 million, giving rise to a gain of € 107 million for the Group (see Note 44). The ownership interest in BPI at December 31, 2009 was 1.7%.
vi.
The Royal Bank of Scotland Group Plc (RBS)
In 2007 the Group acquired a 2.3% stake in the share capital of RBS. In 2008 this investment fell by 1.4% due basically to the dilutive effect of the capital contributions made by the UK Government. Following the disposals performed in the first quarter of 2009, this investment fell to 0.38%.
vii.
Other holdings
In 2007 the Group acquired ownership interests in Iberdrola, S.A. and Fortis, N.V. At December 31, 2007, it had stakes of 3.3% and 2.1%, respectively, in the share capital of these companies. In 2008 and 2009 the Group reduced its ownership interests in Iberdrola and Fortis to 1.3% and 0.6%, respectively, at December 31, 2009 (December 31, 2008: 1.3% and 1.9%, respectively).
c)
Notifications of acquisitions of investments
The notifications made by the Bank in 2009, in compliance with Article 86 of the Spanish Public Limited Liability Companies Law ( Ley de Sociedades Anónimas ) and Article 53 of Securities Market Law 24/1998 ( Ley del Mercado de Valores ), of the acquisitions and disposals of holdings in investees are listed in Appendix IV.

F-82

Table of Contents

d)
Allowances for impairment losses
Following is a summary of the changes in the impairment losses on these items and on debt instruments classified as Available-for-sale financial assets (see Note 7):
Thousands of euros
2009 2008 2007
Balance at beginning of year
190,337 102,991 104,181
Net impairment losses for the year
490,326 386,164 9,526
Of which:
Impairment losses charged to income
536,567 400,858 37,321
Impairment losses reversed with a credit to income
(46,241 ) (14,694 ) (27,795 )
Net changes in the scope of consolidation
— 19,654 (6,737 )
Write-off of assets due to impairment
(505,017 ) (370,498 ) (97 )
Exchange differences and other items
(8,924 ) 52,026 (3,882 )
Balance at end of year
166,722 190,337 102,991
Of which:
By geographical location of risk:
Spain
97,746 144,796 57,931
Rest of Europe
— 1,271 6,964
Latin America
68,976 44,270 38,096
By type of asset covered:
Debt instruments — Available-for-sale financial assets (Note 7)
166,722 181,178 91,753
Other equity instruments — Available-for-sale financial assets
— 9,159 11,238
9.
Trading derivatives (assets and liabilities) and Short positions
a)
Trading derivatives
The detail, by type of inherent risk, of the fair value of the trading derivatives arranged by the Group is as follows (see Note 36):
Thousands of euros
2009 2008 2007
Debit Credit Debit Credit Debit Credit
balance balance balance balance balance balance
Interest rate risk
43,413,018 43,135,683 68,145,560 67,005,552 33,298,794 35,195,843
Currency risk
11,364,400 9,892,032 19,001,043 14,381,752 4,369,032 6,809,887
Price risk
3,995,032 5,075,830 8,129,606 7,237,843 6,365,243 6,589,179
Other risks
1,083,963 609,079 539,100 542,286 2,699,474 852,624
59,856,413 58,712,624 95,815,309 89,167,433 46,732,543 49,447,533
b)
Short positions
Following is a breakdown of the short positions:
Thousands of euros
2009 2008 2007
Borrowed securities:
Debt instruments
1,536,689 1,054,527 2,424,447
Of which, Santander UK
896,439 775,094 1,783,832
Equity instruments
106,199 57,263 1,596,775
Of which, Santander UK
6,784 13,670 1,285,989
Short sales:
Debt instruments
3,496,842 1,912,854 1,582,052
Of which: the Bank
2,529,586 1,903,554 1,485,173
Equity instruments
— 10,587 9,960
5,139,730 3,035,231 5,613,234

F-83

Table of Contents

10.
Loans and advances to customers
a)
Breakdown
The detail, by classification, of Loans and advances to customers in the consolidated balance sheets is as follows:
Thousands of euros
2009 2008 2007
Financial assets held for trading
10,076,412 684,348 23,704,481
Other financial assets at fair value through profit or loss
8,328,516 8,972,707 8,021,623
Loans and receivables
664,145,998 617,231,380 539,372,409
Of which:
Disregarding impairment losses
682,019,094 629,697,436 548,067,613
Impairment losses
(17,873,096 ) (12,466,056 ) (8,695,204 )
Of which, Country risk
(37,234 ) (304,207 ) (51,522 )
682,550,926 626,888,435 571,098,513
Loans and advances to customers disregarding impairment losses
700,424,022 639,354,490 579,793,717
Note 51 contains a detail of the residual maturity periods of loans and receivables and of the related average interest rates.
There are no loans and advances to customers for material amounts without fixed maturity dates.

F-84

Table of Contents

b)
Breakdown
Following is a detail, by loan type and status, borrower sector, geographical area of residence and interest rate formula, of the loans and advances to customers, which reflect the Group’s exposure to credit risk in its core business, disregarding impairment losses:
Millions of euros
2009 2008 2007
By loan type and status:
Commercial credit
17,454 22,250 22,364
Secured loans
411,778 351,609 322,269
Reverse repurchase agreements
13,958 5,228 29,089
Other term loans
204,224 216,690 177,553
Finance leases
20,873 21,011 15,727
Receivable on demand
8,088 8,572 6,722
Impaired assets
24,049 13,994 6,070
700,424 639,354 579,794
By borrower sector:
Public sector — Spain
9,802 7,668 5,633
Public sector — Other countries
2,861 3,029 2,296
Individuals
379,297 347,201 316,129
Energy
11,521 10,476 7,820
Construction
22,696 24,341 21,137
Manufacturing
40,534 43,993 31,839
Services
134,638 123,895 98,548
Other sectors
99,074 78,751 96,392
700,424 639,354 579,794
Geographical area:
Spain
230,345 240,247 238,081
European Union (excluding Spain)
311,776 279,664 237,535
United States and Puerto Rico
49,501 15,096 32,071
Other OECD countries
5,256 8,104 6,633
Latin America
96,470 88,720 60,753
Rest of the world
7,075 7,523 4,721
700,424 639,354 579,794
By interest rate formula:
Fixed interest rate
286,445 256,506 228,434
Floating rate
413,979 382,848 351,360
700,424 639,354 579,794

F-85

Table of Contents

c)
Impairment losses
The changes in the allowances for the impairment losses on the assets included under Loans and receivables — Loans and advances to customers and Loans and receivables — Loans and advances to credit institutions (see Note 6) were as follows:
Thousands of euros
2009 2008 2007
Balance at beginning of year
12,719,623 8,796,371 8,288,128
Impairment losses charged to income for the year:
12,002,717 6,596,635 4,033,047
Of which:
Individually assessed
13,948,358 7,683,692 4,177,811
Collectively assessed
2,205,598 640,424 1,027,495
Impairment losses reversed with a credit to income
(4,151,239 ) (1,727,481 ) (1,172,259 )
Inclusion of entities in the Group in the year (Note 3)
1,426,104 2,310,095 7,356
Write-off of impaired balances against recorded impairment allowance
(9,794,628 ) (4,552,393 ) (3,320,162 )
Exchange differences and other changes
1,332,362 (532,847 ) (228,938 )
Transfers between allowances
212,453 101,762 16,940
Balance at end of year
17,898,632 12,719,623 8,796,371
Of which:
By method of assessment:
Individually
11,627,929 7,183,237 3,356,264
Of which: country risk (Note 2.g)
45,694 554,230 75,171
Collectively
6,270,703 5,536,386 5,440,107
By geographical location of risk:
Spain
6,992,818 5,948,950 4,512,000
Rest of Europe
4,435,269 3,307,313 2,250,127
Americas
6,470,545 3,463,360 2,034,244
Previously written-off assets recovered in 2009, 2008 and 2007 amounted to € 914,721 thousand, € 699,747 thousand and € 612,451 thousand, respectively. Taking into account these amounts and those recognized in Impairment losses charged to income for the year in the foregoing table, impairment losses on Loans and receivables amounted to € 11,087,996 thousand in 2009, € 5,896,888 thousand in 2008 and € 3,420,596 thousand in 2007.
The increase in the impairment losses charged to income in 2009 is due to various factors: the scope effect resulting from the new inclusions in the Group, the full consolidation of Banco Real for the whole year, the substantial deterioration of the macroeconomic situation and, to a lesser extent, the shift in preceding years in the mix of the Group’s portfolio towards more profitable products albeit with higher risk premiums.
d)
Impaired assets
The detail of the changes in the balance of the financial assets classified as Loans and receivables — loans and advances to customers and considered to be impaired due to credit risk is as follows:
Millions of euros
2009 2008 2007
Balance at beginning of year
13,994 6,070 4,613
Net additions
18,046 11,200 4,898
Written-off assets
(9,795 ) (4,552 ) (3,320 )
Increase in scope of consolidation
1,006 1,945 1
Exchange differences and other
798 (669 ) (122 )
Balance at end of year
24,049 13,994 6,070
This amount, after deducting the related allowances, represents the Group’s best estimate of the fair value of the impaired assets.

F-86

Table of Contents

Following is a detail of the financial assets classified as loans and receivables and considered to be impaired due to credit risk at December 31, 2009, classified by geographical location of risk and by age of the oldest past-due amount:
Millions of euros
With no
past-due
balances or
less than 3 With balances past due by
months 3 to 6 6 to 12 12 to 18 18 to 24 More than
past-due months months months months 24 months Total
Spain
2,171 1,431 2,311 2,831 1,164 292 10,201
European Union (excluding Spain)
276 3,343 1,666 751 231 436 6,703
United States and Puerto Rico
361 1,024 600 331 150 91 2,557
Other OECD countries
5 35 40 23 — — 102
Latin America
398 1,893 1,665 341 91 84 4,472
Rest of the world
— 4 5 2 — 2 13
3,212 7,730 6,287 4,279 1,636 905 24,049
The detail at December 31, 2008 is as follows:
Millions of euros
With no
past-due
balances or
less than 3 With balances past due by
months 3 to 6 6 to 12 12 to 18 18 to 24 More than
past-due months months months months 24 months Total
Spain
637 2,461 1,678 981 211 294 6,262
European Union (excluding Spain)
38 2,447 938 306 174 336 4,239
United States and Puerto Rico
102 261 106 55 10 20 554
Other OECD countries
28 284 5 3 1 — 321
Latin America
274 1,359 780 94 50 56 2,613
Rest of the world
2 1 1 — — 1 5
1,081 6,813 3,508 1,439 446 707 13,994
The detail at December 31, 2007 is as follows:
Millions of euros
With no
past-due
balances or
less than 3 With balances past due by
months 3 to 6 6 to 12 12 to 18 18 to 24 More than
past-due months months months months 24 months Total
Spain
209 708 524 206 71 64 1,782
European Union (excluding Spain)
121 1,422 530 172 115 244 2,604
United States and Puerto Rico
32 168 22 15 8 35 279
Other OECD countries
15 146 14 2 1 1 178
Latin America
53 350 348 42 17 409 1,219
Rest of the world
— 6 1 — — — 7
429 2,799 1,440 436 212 754 6,070

F-87

Table of Contents

e)
Securitization
Loans and advances to customers includes, inter alia, the securitized loans transferred to third parties on which the Group has retained risks, albeit partially, and which therefore, in accordance with the applicable accounting standards, cannot be derecognized. The breakdown of the securitized loans, by type of financial instrument, and of the securitized loans derecognized because the stipulated requirements were met (see Note 2.e) is shown below. Note 22 details the liabilities associated with these securitization transactions.
Millions of euros
2009 2008 2007
Derecognized
10,836 2,882 3,742
Of which
Mortgage assets (*)
10,232 2,088 2,479
Other securitized assets
604 794 1,263
Retained on the balance sheet
123,706 126,497 92,023
Of which
Securitized mortgage assets
90,182 90,264 60,056
Of which: the UK
64,592 66,615 40,216
Other securitized assets
33,524 36,233 31,967
Total
134,542 129,380 95,765
(*)
The amount relating to 2009 includes assets of Sovereign amounting to € 8,538 million that were sold, prior to this company’s inclusion in the Group, on the secondary market for multifamily loans, and over which control was transferred and substantially all the associated risks and rewards were not retained.
The growth in securitization in 2008 was the result of its use as a tool for the management of regulatory capital and as a means of diversifying the Group’s liquidity sources. In 2007, 2008 and 2009 the Group did not derecognize any of the securitizations performed, and the balance derecognized in those years relates to securitizations performed in prior years.
11.
Hedging derivatives
The detail, by type of risk hedged, of the fair value of the derivatives qualifying for hedge accounting is as follows (see Note 36):
Thousands of euros
2009 2008 2007
Assets Liabilities Assets Liabilities Assets Liabilities
Fair value hedges
7,585,383 4,296,012 8,553,353 5,213,389 2,662,762 3,862,500
Of which: Portfolio hedges
1,552,732 2,820,008 971,284 2,956,415 398,143 826,178
Cash flow hedges
201,626 719,726 879,230 694,328 101,629 238,277
Of which: Recognized in equity (Note 29)
— 363,600 — 436,772 — 62,073
Hedges of net investments in foreign operations
46,841 175,339 265,549 49,894 298,778 33,794
7,833,850 5,191,077 9,698,132 5,957,611 3,063,169 4,134,571
Note 36 contains a description of the Group’s main hedges.

F-88

Table of Contents

12.
Non-current assets held for sale
The detail of Non-current assets held for sale is as follows:
Thousands of euros
2009 2008 2007
Equity instruments
4,014 3,890,215 9,025,936
Of which:
Cepsa
— 2,846,300 —
Interbanca (Note 3-b)
— 1,000,000 —
Tangible assets
5,110,723 5,265,868 1,061,743
Of which:
Foreclosed assets
2,002,501 1,113,006 364,345
Other tangible assets held for sale (*)
3,108,222 4,152,862 697,398
Of which: Ciudad Financiera business campus
— — 625,124
Other assets
674,452 111,403 68,750
5,789,189 9,267,486 10,156,429
(*)
Includes land and buildings acquired from borrowers in payment of their debts in 2009 and 2008 amounting to € 2,936 million and € 3,768 million, respectively, net of impairment losses and costs to sell.
Impairment losses of € 2,090,126 thousand, € 178,495 thousand and € 112,030 thousand were deducted from the balance of this item at December 31, 2009, 2008 and 2007, respectively. The net charges recorded in those years amounted to € 1,350,592 thousand, € 70,027 thousand and € 27,223 thousand, respectively.
The most significant transactions relating to non-current assets held for sale were as follows:
Sale of Santander Business Campus
In the first half of 2008 Banco Santander entered into an agreement with the consortium led by Propinvest in relation to the sale of the Ciudad Financiera Santander business campus and the subsequent leaseback thereof for a term of 40 years, with the Bank reserving the right to a purchase option at market price at the end of the aforementioned term. This transaction, which was completed on September 12, 2008, was performed within the framework of the restricted private competition organized by Banco Santander for the sale and subsequent leaseback of a portfolio of properties owned by it in Spain, of which the business campus was the last part. The price agreed upon for the Santander Business Campus was € 1,900 million. The gains obtained by Banco Santander on this sale were recognized under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations in the consolidated income statement and amounted to € 586 million, net ( € 836 million, gross — see Note 50). Other relevant information on this transaction is provided in Note 16.
Cepsa
At December 31, 2008, the Bank’s directors classified the ownership interest held in Compañía Española de Petróleos, S.A. (Cepsa) as a non-current asset held for sale, since it intended to recover the value of the investment through the sale thereof in the short term. The Cepsa shares were previously recognized under Investments in the consolidated balance sheet, since the entity was deemed to be an associate, and the investment was accounted for using the equity method. The balance at which this asset was recognized related basically to the carrying amount of the ownership interest when the decision to sell it was taken; this amount was lower than the fair value of the ownership interest less costs to sell at 2008 year-end.
On March 31, 2009, Santander Group announced the agreement with the International Petroleum Investment Company of the Emirate of Abu Dhabi for the sale to it of the 32.5% ownership interest held by the Group in Cepsa for € 33 per share, which would be reduced by the amount of any dividends paid out of 2009 profit prior to completion of the transaction. This transaction was completed in 2009 and did not give rise to any gain or loss for the Group.
Foreclosed assets and assets acquired from borrowers in payment of their debts
In 2009 the Group recognized € 1,350 million under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations relating to impairment losses on foreclosed assets and acquired assets (see Note 50). At December 31, 2009, the allowance that covers the value of the foreclosed assets and acquired assets amounted to € 713 million and € 1,367 million, respectively, which represents a coverage ratio of 26.3% and 31.8% of the gross value of the portfolio.

F-89

Table of Contents

13.
Investments — Associates
a)
Breakdown
The detail, by company, of Investments — Associates (see Note 2.c) is as follows:
Thousands of euros
2009 2008 2007
Sovereign (Note 3)
— 1,103,623 1,026,826
RFS Holdings B.V. (Note 3)
— — 11,778,624
Cepsa (Note 12)
— — 2,548,035
Other companies
164,473 219,830 335,642
164,473 1,323,453 15,689,127
Of which:
Euros
72,755 130,079 14,431,945
Listed
— 1,103,623 3,763,010
At December 31, 2007, the unrealized gains on the Group’s portfolio of investments in associates amounted to € 3,771 million.
At December 31, 2009, the cost of the investments detailed in the foregoing table included € 9 million relating to goodwill (December 31, 2008: € 9 million; December 31, 2007: € 8,943 million). The most significant amount in 2007 related to Banco Real, which was transferred in 2008 to Goodwill (see Note 17), since this entity was fully consolidated.
b)
Changes
The changes in Investments — Associates were as follows:
Millions of euros
2009 2008 2007
Balance at beginning of year
1,323 15,689 5,006
Acquisitions and capital increases (Note 3)
13 754 11,774
Of which:
Sovereign
— 228 —
RFS Holdings B.V.
— 408 11,615
Disposals and capital reductions (Note 3)
(14 ) (41 ) (27 )
Of which:
RFS Holdings B.V.
— (36 ) —
Transfers
(53 ) (3,955 ) —
Of which:
Interbanca (Note 12)
— (800 ) —
Cepsa (Note 12)
— (2,736 ) —
Attijariwafa (Note 8)
— (204 ) —
Effect of equity accounting
— 792 441
Impairment losses
— (8 ) (1,053 )
Dividends paid
(5 ) (550 ) (148 )
Change in consolidation method (Note 3)
(1,346 ) (10,658 ) (13 )
Exchange differences and other changes (*)
246 (700 ) (291 )
Balance at end of year
164 1,323 15,689
(*)
In 2008 Exchange differences and other changes included € 723 million relating to the exchange losses incurred on RFS Holdings B.V.

F-90

Table of Contents

c)
Impairment losses
No significant impairment was disclosed with respect to investments in associates in 2009 and 2008. In 2007 the Group adjusted the value of its ownership interest in Sovereign by € 1,053 million. Of this amount, € 586 million relate to goodwill inherent in Sovereign and are recognized under Impairment losses on other assets (net) — Goodwill and other intangible assets, € 363 million are recognized under Impairment losses on other assets (net) — Other assets and € 104 million relate to exchange differences and are recognized under Exchange differences in the consolidated income statement.
d)
Other disclosures
Following is a summary of the financial information on the associates (obtained from the information available at the reporting date):
Millions of euros
2009 2008 2007
Total assets
2,604 59,915 168,320
Total liabilities
(2,160 ) (54,643 ) (151,891 )
Minority interests
— (196 ) (355 )
Net assets
444 5,076 16,074
Group’s share of the net assets of associates
155 1,314 6,746
Goodwill
9 9 8,943
Total Group share
164 1,323 15,689
Total income
311 21,849 16,058
Total profit
77 1,050 1,211
Group’s share of the profit of associates
— 792 438
14.
Insurance contracts linked to pensions
The detail of the balance of Insurance contracts linked to pensions (see Note 25.c) is as follows:
Thousands of euros
2009 2008 2007
Assets relating to insurance contracts covering post-employment benefit plan obligations:
Bank
2,094,039 2,159,707 2,220,638
Banesto
227,609 248,025 257,633
Other Spanish companies
31,159 32,035 33,286
Assets relating to insurance contracts covering other similar obligations:
Bank
1,791 4,794 10,663
Other Spanish companies
1,553 2,428 3,330
2,356,151 2,446,989 2,525,550

F-91

Table of Contents

15.
Liabilities under insurance contracts and Reinsurance assets
The detail of Liabilities under insurance contracts and Reinsurance assets in the consolidated balance sheets (see Note 2.j) is as follows:
Thousands of euros
2009 2008 2007
Direct Direct Direct
insurance and Total insurance and Total insurance and Total
reinsurance Reinsurance (balance reinsurance Reinsurance (balance reinsurance Reinsurance (balance
Technical Provisions for: assumed ceded payable) assumed ceded payable) assumed ceded payable)
Unearned premiums and unexpired risks
455,181 (195,688 ) 259,493 409,187 (194,646 ) 214,541 351,799 (128,663 ) 223,136
Life insurance:
Unearned premiums and risks
555,597 (55,891 ) 499,706 332,507 (25,401 ) 307,106 120,747 (23,580 ) 97,167
Mathematical provisions
4,189,032 — 4,189,032 3,798,070 (26,244 ) 3,771,826 2,885,581 (17,727 ) 2,867,854
Claims outstanding
483,234 (52,529 ) 430,705 407,121 (46,856 ) 360,265 364,878 (29,213 ) 335,665
Bonuses and rebates
18,605 — 18,605 17,440 (5,937 ) 11,503 15,957 (13,359 ) 2,598
Equalization
— — — — — — — — —
Life insurance policies where the investment risk is borne by the policyholders
10,939,477 (50 ) 10,939,427 11,713,993 (135,854 ) 11,578,139 9,097,620 (90,395 ) 9,007,225
Other technical provisions
275,320 (112,664 ) 162,656 171,193 (23,450 ) 147,743 197,035 (6,837 ) 190,198
16,916,446 (416,822 ) 16,499,624 16,849,511 (458,388 ) 16,391,123 13,033,617 (309,774 ) 12,723,843

F-92

Table of Contents

16.
Tangible assets
a)
Changes
The changes in Tangible assets in the consolidated balance sheets were as follows:
Thousands of euros
Property,
plant and Leased out
equipment under an Investment
for own use operating lease property Total
Cost:
Balances at January 1, 2007
9,841,308 6,618,326 400,994 16,860,629
Additions/Disposals (net) due to change in the scope of consolidation
(43,055 ) — — (43,055 )
Additions/Disposals (net)
(1,156,036 ) 545,769 77,285 (532,982 )
Transfers and other changes
(713,511 ) 86,768 9,680 (617,063 )
Exchange differences (net)
(97,641 ) (411,297 ) (511 ) (509,449 )
Balances at December 31, 2007
7,831,065 6,839,566 487,448 15,158,079
Additions/Disposals (net) due to change in the scope of consolidation (*)
1,569,298 (3,634,372 ) 190,232 (1,874,842 )
Additions/Disposals (net)
1,168,177 (38,474 ) 98,790 1,228,493
Transfers and other changes
(126,811 ) (140,635 ) 130,857 (136,589 )
Exchange differences (net)
(535,316 ) (551,757 ) 5 (1,087,068 )
Balances at December 31, 2008
9,906,413 2,474,328 907,332 13,288,073
Additions/Disposals (net) due to change in the scope of consolidation
463,730 62,695 (19 ) 526,406
Additions/Disposals (net)
263,707 (187,545 ) 38,474 114,635
Transfers and other changes
(188,297 ) 12,962 279,498 104,163
Exchange differences (net)
793,761 36,906 (2,086 ) 828,581
Balances at December 31, 2009
11,239,314 2,399,346 1,223,199 14,861,859
Accumulated depreciation:
Balances at January 1, 2007
(4,546,051 ) (2,094,670 ) (15,999 ) (6,656,720 )
Additions/Disposals (net) due to change in the scope of consolidation
21,681 — — 21,681
Disposals
1,440,435 202,503 14,363 1,657,301
Transfers and other changes
110,941 (304,805 ) (12,629 ) (206,493 )
Charge for the year
(589,153 ) (17,256 ) (3,561 ) (609,970 )
Exchange differences and other items
29,547 156,020 1,451 187,018
Balances at December 31, 2007
(3,532,600 ) (2,058,208 ) (16,375 ) (5,607,183 )
Additions/Disposals (net) due to change in the scope of consolidation (*)
(816,487 ) 1,529,887 (4,206 ) 709,194
Disposals
347,031 56,819 2,402 406,252
Transfers and other changes
99,030 (233,015 ) (3,220 ) (137,205 )
Charge for the year
(577,291 ) (3,091 ) (3,997 ) (584,379 )
Exchange differences and other items
250,977 199,599 (2 ) 450,573
Balances at December 31, 2008
(4,229,340 ) (508,009 ) (25,399 ) (4,762,748 )
Additions/Disposals (net) due to change in the scope of consolidation
(256,214 ) (14,794 ) (851 ) (271,860 )
Disposals
583,508 40,089 2,777 626,374
Transfers and other changes
8,883 (194,196 ) (5,111 ) (190,423 )
Charge for the year
(762,387 ) (276 ) (7,643 ) (770,306 )
Exchange differences and other items
(353,229 ) (9,760 ) 50 (362,939 )
Balances at December 31, 2009
(5,008,779 ) (686,946 ) (36,177 ) (5,731,902 )

F-93

Table of Contents

Thousands of euros
Property, Leased out
plant and under an
equipment operating Investment
for own use lease property Total
Impairment losses:
Balances at January 1, 2007
(11,080 ) (71,385 ) (10,448 ) (92,913 )
Impairment charge for the year
(1,060 ) — 8 (1,052 )
Additions/Disposals (net) due to change in the scope of consolidation
549 — — 549
Exchange differences
738 723 92 1,553
Balances at December 31, 2007
(10,853 ) (70,662 ) (10,348 ) (91,863 )
Impairment charge for the year
(16,699 ) — (1,801 ) (18,500 )
Additions/Disposals (net) due to change in the scope of consolidation (*)
(2,406 ) 54,404 — 51,998
Exchange differences and other
17,501 16,258 833 34,592
Balances at December 31, 2008
(12,457 ) — (11,316 ) (23,773 )
Impairment charge for the year
(29,683 ) (1,554 ) (84,856 ) (116,093 )
Additions/Disposals (net) due to change in the scope of consolidation
(22,597 ) — — (22,597 )
Exchange differences and other
36,364 (8,189 ) 66 28,241
Balances at December 31, 2009
(28,373 ) (9,743 ) (96,106 ) (134,222 )
Tangible assets, net:
Balances at December 31, 2007
4,287,612 4,710,696 460,725 9,459,033
Balances at December 31, 2008
5,664,616 1,966,319 870,617 8,501,552
Balances at December 31, 2009
6,202,162 1,702,657 1,090,916 8,995,735
(*)
The additions relate mainly to the acquisition of Banco Real and the reductions relate mainly to the disposal of Porterbrook.
b)
Property, plant and equipment for own use
The detail, by class of asset, of Property, plant and equipment — For own use in the consolidated balance sheets is as follows:
Millions of euros
Accumulated Impairment Carrying
Cost depreciation losses amount
Land and buildings
2,632 (682 ) (11 ) 1,939
IT equipment and fixtures
1,903 (1,303 ) — 601
Furniture and vehicles
3,019 (1,460 ) — 1,559
Construction in progress and other items
277 (88 ) — 189
Balances at December 31, 2007
7,831 (3,533 ) (11 ) 4,288
Land and buildings
3,767 (923 ) (12 ) 2,832
IT equipment and fixtures
2,093 (1,410 ) — 683
Furniture and vehicles
3,705 (1,814 ) — 1,891
Construction in progress and other items
341 (82 ) — 259
Balances at December 31, 2008
9,906 (4,229 ) (12 ) 5,665
Land and buildings
4,431 (1,116 ) (28 ) 3,287
IT equipment and fixtures
2,525 (1,754 ) — 772
Furniture and vehicles
4,118 (2,081 ) — 2,037
Construction in progress and other items
165 (58 ) — 106
Balances at December 31, 2009
11,239 (5,009 ) (28 ) 6,202

F-94

Table of Contents

The carrying amount at December 31, 2009 in the foregoing table includes the following approximate amounts:
•
€ 4,717 million relating to property, plant and equipment owned by Group entities and branches located abroad (December 31, 2008: € 4,063 million; December 31, 2007: € 5,335 million).
•
€ 196 million relating to property, plant and equipment being acquired under finance leases by the consolidated entities (December 31, 2008: € 118 million; December 31, 2007: € 394 million) (Note 2.l discloses additional information on these items).
c)
Investment property
The comparison of the fair value of the investment property at December 31, 2009 with the carrying amount at that date results in unrealized gains of € 9 million (December 31, 2008: € 18 million; December 31, 2007: € 127 million).
The rental income earned from investment property and the direct costs related both to investment properties that generated rental income in 2009, 2008 and 2007 and to investment properties that did not generate rental income in those years are not material in the context of the consolidated financial statements.
d)
Sale of properties
On November 14, 2007, the Group sold ten singular properties to two companies in the Pontegadea Group for € 458 million and recognized a net gain of € 216 million. At the same time, an operating lease agreement for the aforementioned properties (with maintenance, insurance and taxes payable by the Group) was entered into with these companies, with compulsory terms of between 12 and 15 years, during which the rent (currently set at € 1,722 thousand per month) will be reviewed annually on the date of completion of each year of the lease term, based on the percentage variation in the Spanish Consumer Price Index (CPI) in the preceding twelve months, except in the fifth year (effective from the sixth year), in which the rent for nine of the ten properties will be reviewed on the basis of the CPI plus three percentage points. In nine of the ten lease agreements, the agreement is renewable for five additional five-year periods and a last three-year renewal period, up to a total of 40 years. In one of the ten lease agreements, the agreement is renewable for five additional five-year periods up to a total of 40 years. Nine of the ten lease agreements provide for adjustment of the rent to market in each renewal period. One of the ten lease agreements provides for adjustment of the rent to market in 2017, with subsequent adjustments to market taking place every five years from 2017 onwards. Also, the lease agreements include a purchase option exercisable by the Group on final expiry of the agreements (2047), with the exception of one of the leases, which envisages the possibility of exercising the purchase option in March 2023, March 2028, March 2033, March 2038, March 2043 and March 2047. In all the lease agreements, the value of the properties in the event that the purchase option is exercised shall be the market value of the properties on the related dates; this market value will be determined, if appropriate, by independent experts.
Also, on November 23, 2007 the Group sold 1,152 of its branch offices to the Pearl Group for € 2,040 million and recognized a net gain of € 860 million. Simultaneously, an operating lease agreement for the aforementioned branch offices (with maintenance, insurance and taxes payable by the Group) was entered into with the Pearl Group, with compulsory terms of 24, 25 or 26 years (depending on the property), during which the rent (currently set at € 8,417 thousand per month, payable quarterly) will be reviewed annually on the date of completion of each year of the lease term: (i) during the first ten years of the agreement, based on the percentage variation in the Spanish CPI in the preceding twelve months, plus 215 basis points; and (ii) from the eleventh year onwards, based on variations in the CPI. The agreement is renewable for a maximum of three additional seven-year periods, up to a total of 45, 46 or 47 years (depending on the property), the rent being adjusted to market at the end of the compulsory term and of each renewal period, and includes an option, exercisable by the Group on final expiry of the lease (45, 46 or 47 years, depending on the property) to purchase the properties at their market value on the expiry date; this market value will be determined, if appropriate, by independent experts.

F-95

Table of Contents

Lastly, on September 12, 2008 the Group completed the sale of its head offices (the Santander Business Campus) to Marme Inversiones 2007, S.L. for € 1,904 million and recognized a net gain of € 586 million (not including any net gains relating to certain projects in progress that the Group undertook to complete, which were completed in 2009, as a result of which the Group recognized gains of € 73 million). Simultaneously, an operating lease agreement for the aforementioned offices (with maintenance, insurance and taxes payable by the Group) was entered into with Marme Inversiones 2007, S.L., with a compulsory term of 40 years, during which the rent (currently set at € 6,891 thousand per month, payable quarterly) will be reviewed annually based on the variation in the preceding twelve months in the Harmonized Consumer Price Index of the euro zone multiplied by 1.74, with a minimum of 2.20% during the first ten years and a maximum of 6% throughout the lease term. The agreement includes an option exercisable by the Group on final expiry of the lease to purchase the Business Campus at its market value on the expiry date -the market value will be determined, if appropriate, by independent experts-, and a right of first refusal if the lessor should wish to sell the Business Campus. In addition to the two aforementioned agreements, the Group entered into a third additional promotion agreement, whereby during the first 20 years of the lease term it can request Marme Inversiones 2007, S.L. to construct buildings additional to those already existing at the Business Campus or to acquire additional land (from the third year onwards) to be included in the Business Campus, all under certain terms and conditions and with a maximum total cost of approximately € 296 million, which would subsequently be included in the lease agreement.
The most noteworthy feature of the other agreed terms and conditions, all of which are customary market conditions for operating lease agreements, is that none of the aforementioned lease agreements provides for the transfer of ownership of the properties to the Group on expiry thereof, and the Group is entitled not to renew the rentals beyond the minimum compulsory term. Furthermore, the Group has not granted any guarantee to the buyers for any losses that might arise from the early termination of the agreements or for possible fluctuations in the residual value of the aforementioned properties.
The Group was advised in the above-mentioned transactions by independent advisors, who estimated the economic lives of the transferred properties at the transaction date, which in all cases were more than 60 years (more than 80 years in the case of the Business Campus). These advisors also analyzed both the selling prices of the properties and the agreed subsequent rental payments and, on the basis of this analysis, concluded that they had been set at fair market values at that date.
The rental expense recognized by the Group in 2009 in connection with these agreements amounted to € 208 million (December 31, 2008: € 144 million; December 31, 2007: € 10 million). At December 31, 2009, the present value of the minimum future payments that the Group will incur during the compulsory term (since it is considered that the agreements will not be renewed and the existing purchase options will not be exercised) amounted to € 189 million payable within one year (December 31, 2008: € 208 million; December 31, 2007: € 122 million), € 697 million payable at between one and five years (December 31, 2008: € 835 million; December 31, 2007: € 443 million) - € 183 million in the second year (December 31, 2008: € 208 million; December 31, 2007: € 117 million), € 177 million in the third year (December 31, 2008: € 209 million; December 31, 2007: € 113 million), € 172 million in the fourth year (December 31, 2008: € 180 million; December 31, 2007: € 109 million) and € 166 million in the fifth year (December 31, 2008: € 210 million; December 31, 2007: € 105 million)-, and € 1,764 million payable at more than five years (December 31, 2008: € 1,906 million; December 31, 2007: € 1,253 million).

F-96

Table of Contents

17.
Intangible assets — Goodwill
The detail of Goodwill, based on the companies giving rise thereto (see Note 3.c), is as follows:
Millions of euros
2009 2008 2007
Santander Brasil
7,706 6,850 501
Santander UK Group (formerly Abbey) (United Kingdom) (*)
7,996 6,921 8,168
Totta Group (Portugal)
1,641 1,641 1,641
Sovereign Bancorp (Note 3)
1,425 — —
Santander Consumer Bank AG (formerly CC-Holding) (Germany)
878 875 824
Banco Santander Chile
683 563 681
Drive Group
493 484 419
Grupo Financiero Santander Serfin (Mexico)
423 416 498
Banco Español de Crédito, S.A.
369 369 373
Santander Cards UK Limited (Note 3)
365 — —
Santander Consumer Bank, A.S. (Norway)
129 112 134
Interbanco, S.A.
122 122 163
Finconsumo Banca S.p.A. (Italy)
106 106 106
GE Money Bank, GmbH (Austria)
98 — —
Other companies
431 377 323
22,865 18,836 13,831
(*)
Including Abbey, Alliance & Leicester and Bradford & Bingley.
At least once per year (or whenever there is any indication of impairment), the Group reviews goodwill for impairment (i.e. a potential reduction in its recoverable value to below its carrying amount). For this purpose, it analyses the following: (i) certain macroeconomic variables that might affect its investments (population data, political situation, economic situation including bankarization, among others); (ii) various microeconomic variables comparing the investments of the Group with the financial services industry of the country in which the Group carries on most of its business activities (balance sheet composition, total funds under management, results, efficiency ratio, capital ratio, return on equity, among others); and (iii) the price earnings (P/E) ratio of the investments as compared with the P/E ratio of the stock market in the country in which the investments are located and that of comparable local financial institutions.
Based on the foregoing, and in accordance with the estimates, projections and measurements available to the Bank’s directors in 2009, the Group recognized impairment losses on goodwill totaling € 3 million (2008: € 73 million; 2007: € 15 million) under Impairment losses on other assets — Goodwill and other intangible assets.

F-97

Table of Contents

The changes in Goodwill were as follows:
Millions of euros
2009 2008 2007
Balance at beginning of year
18,836 13,831 14,513
Transfer of goodwill from Investments (Note 3)
— 8,000 —
Additions (Note 3)
2,300 941 252
Of which:
Sovereign Bancorp
1,601 — —
Santander UK Group (Bradford & Bingley)
— 202 —
Santander UK Group (Alliance & Leicester)
— 554 —
Santander Consumer USA Group (formerly Drive)
26 42 97
Santander Cards UK Limited
359 — —
Real Tokio Marine
152 — —
GE Money Bank GmbH (Austria)
98 — —
GE Money Oy (Finland)
42 — —
Banco Santander Consumer Portugal, S.A.
— — 74
CB Extrobank
— — 38
Adjustments to initial acquisition price allocation
628 (413 ) (50 )
Of which, transfer to other intangible assets
— (447 ) —
Impairment losses
(3 ) (73 ) (15 )
Disposals
(1,288 ) (3 ) (6 )
Of which:
Banco Santander Brasil, S.A. (Note 3)
(1,286 ) — —
Exchange differences and other items
2,392 (3,447 ) (863 )
Balance at end of year
22,865 18,836 13,831
The changes in goodwill in 2008 relate mostly to the goodwill that arose on the full consolidation of Banco Real (see Note 3.b), to the acquisition of Alliance & Leicester and to the exchange differences arising on the translation to euros, at the closing rates, of the amount of the goodwill expressed in foreign currency, mainly that resulting from the purchases of Abbey and Banco Real. In accordance with current regulations, these exchange differences were recognized with a charge to Valuation adjustments — Exchange differences in equity and a credit to Goodwill in assets. The change in the balance of this heading is disclosed in the consolidated statement of recognized income and expense.
Also, the changes in 2009 relate mainly to the acquisitions made in the year (Sovereign and GE units in Europe — see Note 3), the partial derecognizing of the goodwill of Banco Santander Brasil associated with the placement among minority shareholders of 14.47% of its share capital and the exchange differences arising on the translation to euros, at the closing rates, of the amount of the goodwill expressed in foreign currency, mainly that resulting from the purchases of Abbey and Banco Real, the trend in the balance reflecting the recovery of these currencies in 2009.

F-98

Table of Contents

18.
Intangible assets — Other intangible assets
The detail of Intangible assets — Other intangible assets and of the changes therein in 2009, 2008 and 2007 is as follows:
Net Application of
additions Change in Amortization amortization Exchange
Thousands Estimated December and scope of and and differences December 31,
of euros useful life 31, 2008 disposals consolidation impairment impairment and other 2009
With indefinite useful life:
Other brand names
41,011 1,388 — — — (1,525 ) 40,874
With finite useful life:
Credit cards (Abbey)
5 years 25,197 — — — — 1,827 27,024
IT developments
3 years 2,174,528 856,169 24,910 — (501,904 ) 388,168 2,941,871
Other
885,577 487,153 160,316 — (35,513 ) 199,284 1,696,817
Accumulated amortization
(1,332,187 ) — (40,774 ) (826,139 ) 515,036 (236,436 ) (1,920,500 )
Impairment losses
(7,058 ) — (28,618 ) 22,382 5,666 (7,728 )
1,787,068 1,344,711 144,452 (854,757 ) — 356,884 2,778,358
Net Application of
additions Change in Amortization amortization Exchange
Thousands Estimated December 31, and scope of and and differences December 31,
of euros useful life 2007 disposals consolidation impairment impairment and other 2008
With indefinite useful life:
Brand name (Abbey)
429,536 — — — (331,829 ) (97,707 ) —
Other brand names
16,639 — — — — 24,372 41,011
With finite useful life:
Customer deposits (Abbey)
10 years 1,175,428 — — — (903,867 ) (271,561 ) —
Credit cards (Abbey)
5 years 32,727 — — — — (7,530 ) 25,197
IT developments
3 years 1,574,969 726,322 209,873 — (159,527 ) (177,108 ) 2,174,528
Other
233,352 24,118 183,391 — (11,571 ) 456,287 885,577
Accumulated amortization
(1,234,838 ) — (171,372 ) (655,211 ) 482,266 246,968 (1,332,187 )
Impairment losses
(25,479 ) — — (911,203 ) 924,528 5,096 (7,058 )
2,202,334 750,440 221,892 (1,566,414 ) — 178,816 1,787,068
Net Application of
additions Change in Amortization amortization Exchange
Thousands Estimated December and scope of and and differences December
of euros useful life 31, 2006 disposals consolidation impairment impairment and other 31, 2007
With indefinite useful life:
Brand name (Abbey)
469,099 — — — — (39,563 ) 429,536
Other brand names
18,078 — — — — (1,439 ) 16,639
With finite useful life:
Customer deposits (Abbey)
10 years 1,283,693 — — — — (108,265 ) 1,175,428
Credit cards (Abbey)
5 years 35,741 — — — — (3,014 ) 32,727
IT developments
3 years 1,309,678 624,178 — — (470,219 ) 111,333 1,574,969
Other
323,026 449,418 — — (555,587 ) 16,495 233,352
Accumulated amortization
(980,530 ) — — (637,237 ) 470,219 (87,290 ) (1,234,838 )
Impairment losses
(14,679 ) — — (562,883 ) 555,587 (3,504 ) (25,479 )
Total
2,444,106 1,073,594 — (1,200,120 ) — (115,246 ) 2,202,334
At December 31, 2009, 2008 and 2007, the Group reviewed the useful lives of its intangible assets and adjusted the carrying amounts of these assets on the basis of the estimated economic benefits currently expected to be obtained therefrom. As a result of this review, in 2008 the Group recognized under Impairment losses on other assets — Goodwill and other intangible assets impairment losses amounting to € 911 million relating substantially in full to intangible assets arising from the acquisition of Abbey in 2004 (see Note 1-h).

F-99

Table of Contents

19.
Other assets
The detail of Other assets is as follows:
Thousands of euros
2009 2008 2007
Transactions in transit
439,739 204,780 147,392
Net pension plan assets (Note 25)
502,041 510,028 239,392
Prepayments and accrued income
2,259,262 1,952,843 1,749,193
Other
2,411,016 2,716,801 1,744,230
Inventories
518,833 620,774 231,734
6,130,891 6,005,226 4,111,941
20.
Deposits from central banks and Deposits from credit institutions
The detail, by classification, counterparty, type and currency, of Deposits from central banks and Deposits from credit institutions is as follows:
Thousands of euros
2009 2008 2007
Classification:
Financial liabilities held for trading
46,117,206 35,951,711 23,254,111
Of which:
Deposits from central banks
2,985,488 9,109,857 —
Deposits from credit institutions
43,131,718 26,841,854 23,254,111
Other financial liabilities at fair value through profit or loss
22,847,995 14,130,169 18,769,907
Of which:
Deposits from central banks
10,103,147 4,396,901 6,562,328
Deposits from credit institutions
12,744,848 9,733,268 12,207,579
Financial liabilities at amortized cost
73,126,386 79,795,490 70,873,290
Of which:
Deposits from central banks
22,345,110 9,211,957 22,185,751
Deposits from credit institutions
50,781,276 70,583,533 48,687,539
142,091,587 129,877,370 112,897,308
Type:
Reciprocal accounts
948,049 509,282 562,619
Term deposits
78,325,126 82,559,946 71,227,723
Other demand accounts
3,340,932 2,527,834 2,466,369
Repurchase agreements
56,818,092 41,651,446 36,615,910
Central bank credit account drawdowns
2,658,925 2,626,262 2,008,927
Hybrid financial liabilities
463 2,600 15,760
142,091,587 129,877,370 112,897,308
Currency:
Euro
58,457,951 59,833,384 58,327,694
Pound sterling
34,719,824 27,275,168 14,948,909
US dollar
37,066,057 33,490,478 28,930,017
Other currencies
11,847,756 9,278,340 10,690,688
142,091,587 129,877,370 112,897,308
Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates.

F-100

Table of Contents

21.
Customer deposits
The detail, by classification, geographical area and type, of Customer deposits is as follows:
Thousands of euros
2009 2008 2007
Classification:
Financial liabilities held for trading
4,658,372 4,896,065 27,992,480
Other financial liabilities at fair value through profit or loss
14,636,466 9,318,117 10,669,058
Financial liabilities at amortized cost
487,681,399 406,015,268 316,744,981
506,976,237 420,229,450 355,406,519
Geographical area:
Spain
170,760,231 142,376,596 131,833,844
European Union (excluding Spain)
199,169,106 170,778,310 134,505,644
United States and Puerto Rico
37,851,345 8,440,893 17,881,211
Other OECD countries
1,101,108 470,721 189,548
Latin America
96,804,592 96,103,045 69,360,898
Rest of the world
1,289,855 2,059,885 1,635,374
506,976,237 420,229,450 355,406,519
Type:
On demand-
Current accounts
135,895,002 94,773,159 87,136,743
Savings accounts
127,940,647 115,673,794 90,727,525
Other demand deposits
3,570,326 3,035,757 3,593,720
Term deposits-
Fixed-term deposits
192,244,789 143,130,514 92,375,364
Home-purchase savings accounts
315,867 295,458 296,768
Discount deposits
448,432 11,625,840 9,933,139
Hybrid financial liabilities
5,447,496 8,159,893 8,494,773
Other term deposits
212,113 290,055 113,562
Notice deposits
2,208,116 1,764,954 283,301
Repurchase agreements
38,693,449 41,480,026 62,451,624
506,976,237 420,229,450 355,406,519
Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates.
22.
Marketable debt securities
a)
Breakdown
The detail, by classification and type, of Marketable debt securities is as follows:
Thousands of euros
2009 2008 2007
Classification:
Financial liabilities held for trading
586,022 3,569,795 17,090,935
Other financial liabilities at fair value through profit or loss
4,886,840 5,191,073 10,279,037
Financial liabilities at amortized cost
206,490,311 227,642,422 205,916,716
211,963,173 236,403,290 233,286,688
Type:
Bonds and debentures outstanding
183,250,197 194,291,014 200,557,274
Notes and other securities
28,712,976 42,112,276 32,729,414
211,963,173 236,403,290 233,286,688

F-101

Table of Contents

At December 31, 2009, 2008 and 2007, none of these issues was convertible into Bank shares or granted privileges or rights which, in certain circumstances, make them convertible into shares (except for the Santander Securities ( Valores Santander )), which are described in Note 34.a.
At December 31, 2009, asset-backed securities amounted to € 37,945 million (December 31, 2008: € 50,153 million). In 2009 asset-backed securities amounting to € 1,220 million were issued, of which € 1,143 million were issued by Santander Consumer Bank AG and € 69 million by Brazil Foreign Diversified Payment Rights Finance Company.
Additionally, total mortgage-backed securities at December 31, 2009 amounted to € 53,994 million. In 2009 the Bank and Banesto issued mortgage-backed bonds ( cédulas hipotecarias ) amounting to € 1,500 million and € 2,807 million, respectively. The registered mortgage-backed bonds outstanding in connection with these issues totaled € 42,204 million at December 31, 2009 (December 31, 2008: € 37,726 million).
At December 31, 2008, asset-backed securities amounted to € 50,153 million (December 31, 2007: € 63,172 million). In 2008 asset-backed securities amounting to € 1,539 million were issued, of which € 677 million were issued by Santander Consumer Bank AG, € 507 million by the Alliance & Leicester Group and € 352 million by Brazil Foreign Diversified Payment Rights Finance Company.
Additionally, total mortgage-backed securities at December 31, 2008 amounted to € 47,758 million. In 2008 the Bank did not issue any mortgage-backed bonds and Banesto issued € 100 million in this connection. The mortgage-backed bonds outstanding in connection with these issues totaled € 37,726 million at December 31, 2008 (December 31, 2007: € 39,264 million).
Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates in each year.
b)
Bonds and debentures outstanding
The detail, by currency of issue, of Bonds and debentures outstanding is as follows:
December 31, 2009
Outstanding
issue amount in
foreign Annual
Millions of euros currency interest
Currency of issue 2009 2008 2007 (Millions) rate (%)
Euro
122,454 135,330 131,684 122,454 2.90 %
US dollar
36,535 27,459 38,864 52,632 2.15 %
Pound sterling
13,829 21,493 23,154 12,281 2.72 %
Chilean peso
3,180 2,380 2,239 2,323,523 3.99 %
Other currencies
7,252 7,629 4,616
Ending balance
183,250 194,291 200,557

F-102

Table of Contents

The changes in Bonds and debentures outstanding were as follows:
Millions of euros
2009 2008 2007
Balance at beginning of year
194,291 200,557 168,335
Net inclusion of entities in the Group
10,760 20,333 36
Of which, Alliance & Leicester Group
— 18,676 —
Sovereign Bancorp, Inc.
10,759 — —
Issues
60,999 76,786 122,530
Banco Santander, S.A.-
Mortgage-backed bonds — fixed rate
1,500 — 4,500
Banesto-
Mortgage-backed bonds — fixed rate
2,807 100 1,708
Bonds
4,556 3,818 5,006
Santander International Debt, S.A., Sole-Shareholder Company-
Bonds — floating rate
2,928 16,007 10,059
Santander UK (formerly Abbey)-
Holmes Master Issuer plc
— — 15,924
Bonds in pound sterling
4,945 21,667 26,613
Bonds in other currencies
33,257 29,599 41,122
Santander US Debt, S.A. Sole-Shareholder Company-
Debentures — floating rate
1,032 — 2,038
Santander Consumer Bank AG-
Asset-backed securities
— 677 2,585
Banco Santander Totta, S.A.-
Bonds
1,520 1,496 890
Mortgage debentures
1,000 1,000 —
Totta (Ireland) Plc — floating rate bonds
3,380 849 —
Banco Santander S.A. (Brasil)
Agricultural letters of credit
458 — —
Real estate letters of credit
2,311 663 —
Bonds
80 556
Banco Santander, S.A. (Chile)
Bonds
859 — —
Banco Santander, S.A. (Mexico)
Bonds
164 — —
Redemptions and repurchases
(75,614 ) (93,872 ) (85,674 )
Of which:
Banco Santander, S.A.
(1,545 ) (1,783 ) (3,987 )
Banesto
(4,971 ) (7,407 ) (2,358 )
Santander Consumer Bank S.p.A.
— (217 ) (26 )
Santander UK (formerly Abbey)-
(41,401 ) (65,039 ) (70,535 )
Banco Santander S.A. (formerly Banespa)
(2,278 ) (555 ) —
Santander Consumer Bank AG
(149 ) (203 ) —
Santander Central Hispano International Limited
(46 ) (979 ) —
Banco Santander Totta, S.A.
(1,430 ) (2,637 ) —
Totta (Ireland) Plc
(849 ) (1,189 ) —
Santander US Debt, S.A. Sole-Shareholder Company
(13,156 ) (4,178 ) (1,329 )
Santander International Debt, S.A. Sole-Shareholder Company
(2,672 ) (6,239 ) (3,037 )
Drive Group
(155 ) (960 ) —
Fondo de Titulización de Activos Santander Empresas 1
— (468 ) —
Fondo de Titulización de Activos Santander Empresas 2
— (691 ) —
Fondo de Titulización de Activos Santander Empresas 3
— (883 ) —
Exchange differences
1,459 (5,806 ) (2,864 )
Other changes
(8,645 ) (3,707 ) (1,806 )
Balance at end of year
183,250 194,291 200,557
c)
Notes and other securities
These notes were issued mainly by the following: Santander Commercial Paper, S.A. (Sole-Shareholder Company); Abbey National North America LLC; Abbey National Treasury Services plc; Abbey National plc., Santander Central Hispano Finance (Delaware) Inc.; Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander; Banco Santander Puerto Rico; Banesto and Santander S.A. Agente de Valores.

F-103

Table of Contents

d)
Guarantees
The detail of liabilities and contingent liabilities secured by financial assets is as follows:
Millions of euros
2009 2008 2007
Commercial paper (promissory notes)
— — 183
Asset-backed securities
37,945 50,153 63,172
Other mortgage securities
53,994 47,758 45,664
Of which: mortgage-backed bonds
42,204 37,726 39,264
91,939 97,911 109,019
The mortgage-backed securities and other mortgage securities are secured by mortgage loans with average maturities of more than ten years. The main terms and conditions of these loans are listed below:
1.
Transactions securing mortgage-backed securities:
•
First mortgage for acquisition and/or refurbishment of principal or second residence, which at the date of securitization must not have any amounts more than 30 days past due. For these purposes, financing granted to property developers is excluded.
•
Appraisal conducted by specialist valuer.
•
The amount of the loan must not exceed 80% of the appraised value, unless additional guarantees are provided (bank guarantee given by a credit institution other than the creditor bank or credit insurance on the terms established in Legislative Royal Decree 6/2004, of 29 October), in which case this limit may be extended up to a maximum of 95%.
•
Each of the mortgaged properties must have at least one liability insurance policy in force. The capital insured must not be lower than either the appraised value (excluding the land) or the amount of the loan.
2.
With respect to issues of mortgage-backed bonds ( cédulas hipotecarias ), in order to calculate the amount of the qualifying assets, the following transactions are excluded from the total base of the unsecuritized mortgage portfolio:
•
Transactions classified as non-performing, at pre-action stage and at procedural stage.
•
Transactions without appraisal by a specialist valuer.
•
Transactions exceeding 80% of the appraised value in residential financing and 60% in the case of other assets.
•
Second mortgages or mortgages with insufficient collateral.
•
Transactions without insurance or with insufficient insurance.
The other securitizations, including asset-backed securities and notes issued by special-purpose vehicles (SPVs), are secured by:
•
Mortgage loans to individuals to finance the acquisition and refurbishment of homes with an average maturity of over ten years.
•
Personal consumer finance loans with no specific guarantee and unsecured loans with an average maturity of five years.
•
Loans to SMEs (non-financial small and medium-sized enterprises) secured by State guarantees, and loans to companies (micro companies, SMEs, companies and large companies) secured by property mortgages, the borrower’s personal guarantee, guarantees and other collateral other than property mortgages, with an average maturity of seven years.

F-104

Table of Contents

•
Mortgage and non-mortgage loans to finance municipalities, autonomous communities and subsidiaries with an average maturity of over ten years.
•
Asset-backed securities issued by various European special-purpose vehicles backed by loans for the purchase of German and Italian vehicles and Italian personal loans with an average maturity of eight years.
•
Commercial credit of Banco Santander (ordinary invoice discounting, occasional discounting and advances to customers on legitimate receivables) with an average maturity of 45 days.
The fair value of the guarantees received by the Group (financial and non-financial assets) which the Group is authorized to sell or pledge even if the owner of the guarantee has not defaulted is scantly material taking into account the Group’s financial statements as a whole.
23.
Subordinated liabilities
a)
Breakdown
The detail, by currency of issue, of Subordinated liabilities is as follows:
Thousands of euros December 31, 2009
Outstanding
issue amount
in foreign Annual
currency interest rate
Currency of issue 2009 2008 2007 (Millions) (%)
Euro
16,598,441 19,660,053 19,224,529 16,598 4.22 %
US dollar
9,297,611 7,877,340 7,412,454 13,394 6.27 %
Pound sterling
6,440,827 7,952,179 7,387,191 5,720 7.14 %
Other currencies
4,467,722 3,383,678 2,168,563
Balance at end of year
36,804,601 38,873,250 36,192,737
Of which, preference shares
430,152 1,051,272 522,558
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.

F-105

Table of Contents

b)
Changes
The changes in Subordinated liabilities were as follows:
Millions of euros
2009 2008 2007
Balance at beginning of year
38,873 36,193 31,091
Net inclusion of entities in the Group
1,598 2,776 —
Of which:
Sovereign Bancorp, Inc.
1,598 — —
Alliance & Leicester Group
— 1,648 —
Banco Real S.A.
— 1,128 —
Issues
6,874 312 8,330
Of which:
Santander Finance Capital, S.A., Sole-Shareholder Company
2,463 — —
Santander Finance Preferred, S.A., Sole-Shareholder Company
1,576 — 1,072
Santander Issuances, S.A.
1,544 — —
Santander International Preferred, S.A., Sole-Shareholder Company
690 — —
Banesto
497 — —
Santander Central Hispano Issuances Limited
— — 5,908
Santander Perpetual, S.A., Sole-Shareholder Company
— — 1,019
Redemptions
(9,316 ) (1,315 ) (2,340 )
Of which:
Santander UK (formerly Abbey National plc)
(2,775 ) (409 ) (944 )
Santander Finance Capital, S.A., Sole-Shareholder Company
(2,280 ) — —
Santander Finance Preferred, S.A., Sole-Shareholder Company
(1,174 ) — —
Santander Central Hispano Issuances Limited
(1,027 ) (153 ) (1,188 )
Alliance & Leicester
(693 ) — —
Santander Perpetual, S.A., Sole-Shareholder Company
(588 ) — —
Santander Issuances, S.A.
(500 ) — —
Banesto
(131 ) (500 ) —
Exchange differences
708 (2,066 ) (1,353 )
Other changes
(1,932 ) 2,973 465
Balance at end of year
36,805 38,873 36,193
c)
Other disclosures
This item includes the preference shares ( participaciones preferentes ) securities and other financial instruments issued by the consolidated companies which, although equity for legal purposes, do not meet the requirements for classification as equity (preference shares).
The preference shares do not carry any voting rights and are non-cumulative. They were subscribed to by non-Group third parties and, except for the shares of Abbey referred to below, are redeemable at the discretion of the issuer, based on the terms and conditions of each issue.
For the purposes of payment priority, preference shares ( participaciones preferentes ) are junior to all general creditors and to subordinated deposits. The remuneration of these securities, which have no voting rights, is conditional upon the obtainment of sufficient distributable profit and upon the limits imposed by Spanish banking regulations on equity.
The other issues are subordinated and, therefore, rank junior to all general creditors of the issuers. The issues launched by Santander Central Hispano Issuances Limited, Santander Central Hispano Financial Services Limited, Santander Issuances, S.A. (Sole-Shareholder Company), Santander Perpetual, S.A. (Sole-Shareholder Company), Santander Finance Capital, S.A. (Sole-Shareholder Company), Santander International Preferred, S.A. (Sole-Shareholder Company) and Santander Finance Preferred S.A. (Sole-Shareholder Company) are guaranteed by the Bank or by restricted deposits arranged by the Bank for this purpose.
Except for those described in Note 34.a, at December 31, 2009 none of these issues was convertible into Bank shares or granted privileges or rights which, in certain circumstances, make it convertible into shares.

F-106

Table of Contents

Abbey has a GBP 200 million subordinated debt issue which is convertible, at Abbey’s option, into preference shares of Abbey, at a price of GBP 1 per share. Banco Santander (México), S.A. Institución de Banca Múltiple, Grupo Financiero Santander has two USD 150 million issues of unguaranteed subordinated preference debentures that are voluntarily convertible into ordinary shares of Banco Santander (México), S.A. Institución de Banca Múltiple, Grupo Financiero Santander.
The accrued interest on the subordinated liabilities amounted to € 2,354 million in 2009 (2008: € 2,415 million).
24.
Other financial liabilities
The detail of Other financial liabilities is as follows:
Thousands of euros
2009 2008 2007
Trade payables
1,902,249 2,282,759 3,350,422
Clearing houses
734,873 761,534 1,106,714
Tax collection accounts:
Tax payables
1,915,373 2,066,685 2,040,547
Factoring accounts payable
448,985 283,478 326,107
Unsettled financial transactions
2,753,781 3,628,473 2,994,299
Other financial liabilities
11,847,307 8,658,240 6,865,389
Of which: recognized in financial liabilities held for trading
302,520 — —
19,602,568 17,681,169 16,683,478
Note 51 contains a detail of the residual maturity periods of other financial assets and liabilities at each year-end.
25.
Provisions
a)
Breakdown
The detail of Provisions is as follows:
Thousands of euros
2009 2008 2007
Provisions for pensions and similar obligations
10,628,684 11,198,117 11,819,748
Provisions for taxes and other legal contingencies
3,283,339 2,363,706 1,715,967
Provisions for contingent liabilities and commitments (Note 2):
641,620 678,584 636,316
Of which: country risk
18,418 56,254 48,831
Other provisions
2,979,096 3,495,852 2,398,868
Provisions
17,532,739 17,736,259 16,570,899

F-107

Table of Contents

b)
Changes
The changes in Provisions were as follows:
Millions of euros
2009 2008 2007
Contingent Contingent Contingent
liabilities and Other liabilities and Other liabilities and Other
Pensions commitments provisions Total Pensions commitments provisions Total Pensions commitments provisions Total
Balances at beginning of year
11,198 679 5,860 17,737 11,820 636 4,115 16,571 14,014 599 4,614 19,227
Net inclusion of entities in the Group
44 125 (26 ) 143 175 73 2,816 3,064 (2 ) (35 ) (37 )
Additions charged to income:
Interest expense and similar charges (Note 39)
482 — — 482 454 — — 454 487 — — 487
Personnel expenses (Note 47)
176 — — 176 184 — — 184 209 — — 209
Period provisions
339 46 1,407 1,792 598 (3 ) 1,045 1,640 431 95 369 895
Other additions arising from insurance contracts linked to pensions
(30 ) — — (30 ) (17 ) — — (17 ) (17 ) — — (17 )
Payments to pensioners and early retirees with a charge to internal provisions
(1,191 ) — — (1,191 ) (1,086 ) — — (1,086 ) (1,109 ) — — (1,109 )
Insurance premiums paid
(1 ) — — (1 ) (8 ) — — (8 ) (6 ) — — (6 )
Payments to external funds
(594 ) — — (594 ) (563 ) — — (563 ) (2,168 ) — — (2,168 )
Amount used
— — (1,412 ) (1,412 ) — — (1,523 ) (1,523 ) — — (921 ) (921 )
Transfers, exchange differences and other changes
206 (208 ) 433 431 (359 ) (27 ) (594 ) (980 ) (19 ) (58 ) 88 11
Balances at end of year
10,629 642 6,262 17,533 11,198 679 5,860 17,736 11,820 636 4,115 16,571

F-108

Table of Contents

c)
Provisions for pensions and similar obligations
The detail of Provisions for pensions and similar obligations is as follows:
Millions of euros
2009 2008 2007
Provisions for post-employment plans — Spanish entities
5,443 5,596 5,723
Of which: defined benefit
5,439 5,593 5,626
Provisions for other similar obligations — Spanish entities
3,851 4,166 4,001
Of which: early retirements
3,842 4,158 3,950
Provisions for post-employment plans — Abbey
496 744 1,275
Provisions for post-employment plans and other similar obligations — Other foreign subsidiaries
839 692 821
Of which: defined benefit
829 688 821
Provisions for pensions and similar obligations
10,629 11,198 11,820
i.
Spanish entities — Post-employment plans and other similar obligations
At each year-end, the consolidated Spanish entities had post-employment benefit obligations under defined benefit plans. On July 25, 2006, the Bank entered into an agreement with the employee representatives to promote a defined contribution plan aimed at all current personnel. Subsequently, at its meeting on December 17, 2007, the Bank’s board of directors approved the implementation of a defined contribution retirement plan for executives of the Bank. In 2008, in accordance with the aforementioned plan, an extraordinary contribution totaling € 111 million was made for past service, together with a current contribution which amounted to € 19 million (2009: € 16.8 million). Lastly, in various years some of the consolidated entities offered certain of their employees the possibility of taking early retirement and, therefore, provisions were recognized in those years for the obligations to employees taking early retirement -in terms of salaries and other employee welfare costs- from the date of their early retirement to the date of effective retirement.
At each year-end, the Spanish entities had post-employment benefit obligations under defined contribution and defined benefit plans. The expenses incurred in respect of contributions to defined contribution plans amounted to € 44 million in 2009 (2008: € 40 million; 2007: € 14 million).
The amount of the defined benefit obligations was determined on the basis of the work performed by independent actuaries using the following actuarial techniques:
1.
Valuation method: projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.
2.
Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows:
Post-employment plans Other similar obligations
2009 2008 2007 2009 2008 2007
Annual discount rate
4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Mortality tables
GRM/F-95 (PERM/F-2000 in the case of Banesto) GRM/F-95 (PERM/F-2000 in the case of Banesto) GRM/F-95 (PERM/F-2000 in the case of Banesto) GRM/F-95 (PERM/F-2000 in the case of Banesto) GRM/F-95 (PERM/F-2000 in the case of Banesto) GRM/F-95 (PERM/F-2000 in the case of Banesto)
Cumulative annual CPI growth
1.5% 1.5% 1.5% 1.5% 1.5% 1.5%
Annual salary increase rate
2.50% (2.9% in the case of Banesto) 2.50% (2.9% in the case of Banesto) 2.50% (2.9% in the case of Banesto) n/a n/a n/a
Annual social security pension increase rate
1.5% 1.5% 1.5% n/a n/a n/a
Annual benefit increase rate
n/a n/a n/a 0% to 1.5% 0% to 1.5% 0% to 1.5%

F-109

Table of Contents

The discount rate used is that required by Spanish legislation for measuring similar obligations, which is published annually by the Directorate-General of Insurance (Resolution of January 21, 2009). The maximum rate to be used in 2009 was set at 4.32%. This figure relates to 100% of the average interest rates of Government bonds for the last quarter of the year prior to that in which the rate is applicable.
3.
The estimated retirement age of each employee is the first at which the employee is entitled to retire or the agreed-upon age, as appropriate.
The fair value of insurance contracts was determined as the present value of the related payment obligations, taking into account the following assumptions:
Post-employment plans Other similar obligations
2009 2008 2007 2009 2008 2007
Expected rate of return on plan assets
4.0 % 4.0 % 4.0 % — — —
Expected rate of return on reimbursement rights
4.0 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 %
The funding status of the defined benefit obligations in 2009 and the four preceding years is as follows:
Millions of euros
Post-employment plans Other similar obligations
2009 2008 2007 2006 2005 2009 2008 2007 2006 2005
Present value of the obligations:
To current employees
1,200 1,273 1,259 1,215 1,207 — — — — —
Vested obligations to retired employees
4,708 4,828 4,876 4,958 4,942 — — — — —
To early retirees
— — — — — 3,842 4,158 3,950 4,481 4,215
Long-service bonuses and other obligations
— — — — — 9 8 50 46 54
Other
183 181 174 164 225 — — 1 — —
6,091 6,282 6,309 6,337 6,374 3,851 4,166 4,001 4,527 4,269
Less-
Fair value of plan assets
184 193 192 203 211 — — — — —
Unrecognized actuarial (gains)/losses
462 489 487 482 506 — — — — —
Unrecognized past service cost
6 7 4 5 — — — — — —
Provisions — Provisions for pensions
5,439 5,593 5,626 5,647 5,657 3,851 4,166 4,001 4,527 4,269
Of which:
Internal provisions for pensions
3,086 3,153 3,114 3,065 3,015 3,848 4,159 3,987 4,504 4,235
Insurance contracts linked to pensions (Note 14)
2,353 2,440 2,512 2,582 2,642 3 7 14 23 34
The amounts recognized in the consolidated income statement in relation to the aforementioned defined benefit obligations are as follows:
Millions of euros
Post-employment plans Other similar obligations
2009 2008 2007 2009 2008 2007
Current service cost
55 56 56 1 5 5
Interest cost
226 240 242 153 145 166
Expected return on plan assets
(7 ) (8 ) (8 ) — — —
Expected return on insurance contracts linked to pensions
(95 ) (95 ) (102 ) — — (1 )
Extraordinary charges-
Actuarial (gains)/losses recognized in the year
10 6 6 38 4 13
Past service cost
29 63 58 — — —
Early retirement cost
(19 ) (23 ) 2 257 587 40
Other
(51 ) (20 ) (16 ) — (53 ) (22 )
Total
148 219 238 449 688 201

F-110

Table of Contents

The changes in the present value of the accrued defined benefit obligations were as follows:
Millions of euros
Post-employment plans Other similar obligations
2009 2008 2007 2009 2008 2007
Present value of the obligations at beginning of year
6,282 6,309 6,337 4,166 4,001 4,527
Net inclusion of entities in the Group
— — — — —
Current service cost
55 56 56 1 5 5
Interest cost
226 240 242 153 145 166
Early retirement cost
(19 ) (23 ) 2 257 587 39
Effect of curtailment/settlement
(51 ) (21 ) (16 ) — (54 ) (22 )
Benefits paid
(383 ) (334 ) (350 ) (765 ) (726 ) (729 )
Past service cost
29 66 58 — — 1
Actuarial (gains)/losses
(52 ) (11 ) (19 ) 38 4 13
Other
4 (1 ) 1 204 1
Present value of the obligations at end of year
6,091 6,282 6,309 3,851 4,166 4,001
The changes in the fair value of plan assets and of insurance contracts linked to pensions were as follows:
Plan assets
Millions of euros
Post-employment plans
2009 2008 2007
Fair value of plan assets at beginning of year
193 192 203
Expected return on plan assets
7 8 8
Actuarial gains/(losses)
(4 ) (2 ) (12 )
Contributions
(1 ) 8 6
Benefits paid
(11 ) (13 ) (13 )
Fair value of plan assets at end of year
184 193 192
Insurance contracts linked to pensions
Millions of euros
Post-employment plans Other similar obligations
2009 2008 2007 2009 2008 2007
Fair value of insurance contracts linked to pensions at beginning of year
2,440 2,512 2,582 7 14 23
Expected return on insurance contracts (Note 38)
95 95 102 — — 1
Actuarial gains/(losses)
(31 ) (17 ) (17 ) — — —
Premiums paid
7 11 12 — — —
Benefits paid
(158 ) (161 ) (165 ) (4 ) (7 ) (10 )
Exchange differences
— — (2 ) — — —
Fair value of insurance contracts linked to pensions at end of year
2,353 2,440 2,512 3 7 14
In 2010 the Group expects to make contributions in Spain to fund its defined benefit pension obligations for amounts similar to those made in 2009.
The plan assets and the insurance contracts linked to pensions are instrumented through insurance policies.

F-111

Table of Contents

The following table shows the estimated benefits payable at December 31, 2009 for the next ten years:
Millions
of euros
2010
1,091
2011
1,031
2012
958
2013
896
2014
824
2015 to 2019
2,775
7,575
ii.
United Kingdom
At the end of each of the last three years, the businesses in the UK (basically Abbey and Alliance & Leicester in 2008 and Abbey in 2007) had post-employment benefit obligations under defined contribution and defined benefit plans. The expenses incurred in respect of contributions to defined contribution plans amounted to € 22 million in 2009 (2008 and 2007: € 10 million).
The amount of the defined benefit obligations was determined on the basis of the work performed by independent actuaries using the following actuarial techniques:
1.
Valuation method: projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.
2.
Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows:
2009 2008 2007
Annual discount rate
5.75% 6.40% 5.30%
Mortality tables
PX92MC C2009 PX92MC C2008 PA92MC C2006
Cumulative annual CPI growth
3.4% 3.0% 3.0%
Annual salary increase rate
3.4% 3.5% 4.0%
Annual pension increase rate
3.3% 3.0% 3.0%
The funding status of the defined benefit obligations in 2009 and the four preceding years is as follows:
Millions of euros
2009 2008 2007 2006 2005
Present value of the obligations
7,116 5,445 6,248 6,350 6,337
Less-
Fair value of plan assets
5,910 4,591 4,913 4,810 4,326
Unrecognized actuarial (gains)/losses
787 202 60 (102 ) 223
Provisions — Provisions for pensions
419 652 1,275 1,642 1,788
Of which:
Internal provisions for pensions
496 744 1,275 1,642 1,788
Net assets for pensions
(77 ) (92 ) — — —

F-112

Table of Contents

The amounts recognized in the consolidated income statement in relation to the aforementioned defined benefit obligations are as follows:
Millions of euros
2009 2008 2007
Current service cost
72 69 97
Interest cost
367 331 322
Expected return on plan assets
(320 ) (298 ) (284 )
Extraordinary charges:
Actuarial gains/losses recognized in the year
— (1 ) (1 )
Past service cost
(1 ) — —
Total
118 101 134
The changes in the present value of the accrued defined benefit obligations were as follows:
Millions of euros
2009 2008 2007
Present value of the obligations at beginning of year
5,445 6,248 6,350
Net inclusion of entities in the Group
— 1,252 —
Current service cost
72 69 97
Interest cost
367 331 322
Past service cost
(1 ) — —
Benefits paid
(261 ) (199 ) (175 )
Actuarial (gains)/losses
1,050 (802 ) 200
Exchange differences and other items
444 (1,454 ) (546 )
Present value of the obligations at end of year
7,116 5,445 6,248
The net inclusion of entities in the Group in 2008 relates mainly to Alliance & Leicester.
The changes in the fair value of the plan assets were as follows:
Millions of euros
2009 2008 2007
Fair value of plan assets at beginning of year
4,591 4,913 4,810
Net inclusion of entities in the Group
— 1,335 —
Expected return on plan assets
320 298 284
Actuarial gains/losses
364 (954 ) 45
Contributions
564 413 387
Benefits paid
(261 ) (199 ) (175 )
Exchange differences
333 (1,215 ) (438 )
Fair value of plan assets at end of year
5,910 4,591 4,913
The net inclusion of entities in the Group in 2008 relates mainly to Alliance & Leicester.
In 2010 the Group expects to make contributions in Spain to fund these obligations for amounts similar to those made in 2009.
The main categories of plan assets as a percentage of total plan assets are as follows:
2009 2008 2007
Equity instruments
39 % 41 % 46 %
Debt instruments
54 % 56 % 52 %
Properties
1 % 2 % —
Other
6 % 1 % 2 %
The expected return on plan assets was determined on the basis of the market expectations for returns over the duration of the related obligations.

F-113

Table of Contents

The following table shows the estimated benefits payable at December 31, 2009 for the next ten years:
Millions
of euros
2010
279
2011
298
2012
318
2013
340
2014
363
2015 to 2019
2,234
3,832
iii.
Other foreign subsidiaries
Certain of the consolidated foreign entities have acquired obligations to their employees similar to post-employment benefits.
At December 31, 2009, 2008 and 2007, these entities had post-employment benefit obligations under defined contribution and defined benefit plans. The expenses incurred in respect of contributions to defined contribution plans amounted to € 48 million in 2009 (2008: € 28 million; 2007: € 23 million).
The actuarial assumptions used by these entities (discount rates, mortality tables and cumulative annual CPI growth) are consistent with the economic and social conditions prevailing in the countries in which they are located.
The funding status of the obligations similar to post-employment benefits and other long-term benefits in 2009 and the four preceding years is as follows:
Millions of euros
2009 2008 2007 2006 2005
Present value of the obligations
9,078 6,735 7,264 6,198 5,481
Less-
Fair value of plan assets
8,497 6,307 6,725 3,917 2,523
Unrecognized actuarial (gains)/losses
632 386 134 517 760
Unrecognized past service cost
3 — — — 2
Provisions — Provisions for pensions
(54 ) 42 405 1,764 2,196
Of which:
Internal provisions for pensions
829 688 821 2,198 2,459
Net assets for pensions
(425 ) (418 ) (239 ) (224 ) (55 )
Unrecognized net assets for pensions
(458 ) (228 ) (177 ) (210 ) (208 )
In January 2007 Banco do Estado de São Paulo, S.A.- Banespa (which merged with Banco Santander Banespa, S.A. on August 31, 2006) externalized a portion of the pension obligations to employees for which it still recognized an internal provision and for this purpose arranged an external plan or fund managed by Banesprev. As a result of this externalization, the related assets and liabilities were transferred to Banesprev, and Provisions — Provisions for pensions and similar obligations at December 31, 2007 included the present value of the aforementioned obligations, net of the fair value of the related plan assets and the net unrecognized cumulative actuarial gains and/or losses.

F-114

Table of Contents

The amounts recognized in the consolidated income statement in relation to these obligations are as follows:
Millions of euros
2009 2008 2007
Current service cost
49 54 50
Interest cost
736 670 607
Expected return on plan assets
(672 ) (627 ) (559 )
Extraordinary charges:
Actuarial gains/losses recognized in the year
73 31 22
Early retirement cost
9 5 16
Other
(10 ) (2 ) 216
Total
185 131 352
The changes in the present value of the accrued obligations were as follows:
Millions of euros
2009 2008 2007
Present value of the obligations at beginning of year
6,735 7,264 6,198
Net inclusion of entities in the Group
68 673 —
Current service cost
49 54 50
Interest cost
736 670 607
Early retirement cost
9 5 16
Effect of curtailment/settlement
(209 ) (2 ) (4 )
Benefits paid
(587 ) (535 ) (492 )
Past service cost
3 — —
Actuarial (gains)/losses
830 (10 ) 707
Exchange differences and other items
1,444 (1,384 ) 182
Present value of the obligations at end of year
9,078 6,735 7,264
The net inclusion of entities in the Group in 2008 relates mainly to Banco Real.
The changes in the fair value of the plan assets were as follows:
Millions of euros
2009 2008 2007
Fair value of plan assets at beginning of year
6,307 6,725 3,917
Net inclusion of entities in the Group
49 618 —
Expected return on plan assets
672 627 559
Actuarial gains/(losses)
449 (351 ) 586
Contributions
158 285 1,863
Benefits paid
(533 ) (495 ) (452 )
Exchange differences and other items
1,395 (1,102 ) 252
Fair value of plan assets at end of year
8,497 6,307 6,725
The net inclusion of entities in the Group in 2008 relates mainly to Banco Real.
In 2010 the Group expects to make contributions to fund these obligations for amounts similar to those made in 2009.

F-115

Table of Contents

The main categories of plan assets as a percentage of total plan assets are as follows:
2009 2008 2007
Equity instruments
12 % 12 % 27 %
Debt instruments
83 % 83 % 66 %
Properties
1 % 2 % 2 %
Other
4 % 3 % 5 %
The expected return on plan assets was determined on the basis of the market expectations for returns over the duration of the related obligations.
The following table shows the estimated benefits payable at December 31, 2009 for the next ten years:
Millions
of euros
2010
625
2011
644
2012
667
2013
689
2014
714
2015 to 2019
4,119
7,458
d)
Provisions for taxes and other legal contingencies and Other provisions
The balance of Provisions — Provisions for taxes and other legal contingencies and Provisions — Other provisions, which includes, inter alia, provisions for restructuring costs and tax and legal litigation, was estimated using prudent calculation procedures in keeping with the uncertainty inherent in the obligations covered. The definitive date of the outflow of resources embodying economic benefits for the Group depends on each obligation; in certain cases, these obligations have no fixed settlement period and, in other cases, are based on litigation in progress.
The detail of Provisions for taxes and other legal contingencies and Other provisions is as follows:
Millions of euros
2009 2008 2007
Recognized by Spanish companies
828 1,061 814
Recognized by other EU companies
537 721 886
Recognized by other companies
4,897 4,078 2,415
Of which:
Brazil
3,428 2,920 1,989
6,262 5,860 4,115

F-116

Table of Contents

e)
Litigation
i.
Tax litigation
At December 31, 2009, the main tax litigation concerning the Group was as follows:
•
The Mandados de Segurança filed by Banco Santander Brasil, S.A. and other Group companies in Brazil challenging the increase in the rate of Brazilian Social Contribution tax on net income from 9% to 15% stipulated by Interim Measure 413/2008, ratified by Law 11,727/2008.
•
The Mandados de Segurança filed by Group companies in Brazil claiming their right to pay the Brazilian Social Contribution tax on net income at a rate of 8%.
•
The Mandados de Segurança filed by Banco Santander, S.A. and other Group entities claiming their right to pay the Brazilian PIS and COFINS Social Contributions only on the income from the provision of services. In the case of Banco Santander, S.A., the “Mandado de Segurança” was declared unwarranted and an appeal was filed at the Federal Regional Court. On September 13, 2007, the Federal Regional Court found in favor of Banco Santander, S.A. The Brazilian authorities have filed an appeal against this judgment at a higher court. In the case of Banco ABN AMRO Real, S.A., on March 9, 2007 the court found in its favor although the Brazilian authorities have also filed an appeal against this judgment at a higher court. On September 29, 2009 a resolution was issued whereby it partially admitted the appeal.
•
Real Leasing S.A. Arrendamiento Mercantil and Banco ABN AMRO Real S.A. have filed various administrative and legal claims in connection with the deductibility of the provision for doubtful debts for 1995.
•
Banco Santander Brasil, S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against various municipalities that demand payment of the Service Tax on certain items of income from transactions not classified as provisions of services.
•
In November 2009 Banco Santander Brasil, S.A. and certain of its subsidiaries availed themselves of the program for the deferral and payment in cash of tax and Social Security debts established in Law 11,941/2009. The main processes included in this program, which were reported in prior years, refer to litigation related to (i) the right to consider the Social Contribution tax on net income as deductible in the calculation of Brazilian Legal Entities Income Tax, (ii) the right to pay the Brazilian Social Contribution tax on net income at a rate of 8%, and (iii) the deductibility for Income tax purposes of the depreciation and amortization expense in the same period as that in which lease Income is recognized in finance lease companies. The participation in this program entails payment of the disputed amounts and the discontinuance before the end of February 2010 of the related court proceedings.
•
A claim was filed against Abbey National Treasury Services plc by tax authorities abroad in relation to the refund of certain tax credits and other associated amounts. The legal advisers of Abbey National Treasury Services plc considered that the grounds to contest this claim were well-founded, proof of which is that a favorable judgment was handed down at first instance in September 2006, although the judgment was appealed against by the tax authorities in January 2007. However, in December 2006 an unfavorable judgment for another taxpayer was handed down on another proceeding which might affect this case.
•
Legal action filed by Sovereign Bancorp Inc. claiming entitlement to an international double taxation tax credit in connection with taxes paid outside of the United States in fiscal years 2003 to 2005 in relation to financial transactions carried out with an international bank.

F-117

Table of Contents

ii.
Non-tax-related proceedings
At December 31, 2009, the main non-tax-related proceedings concerning the Group were as follows:
•
Misselling: claims associated with the sale by Abbey of certain financial products to its customers.
The provisions recorded by Abbey in this respect were calculated on the basis of the best estimate of the number of claims that will be received, of the percentage of claims that will be upheld and of the related amounts.
•
LANETRO, S.A.: claim (Ordinary Lawsuit no. 558/2002) filed by LANETRO, S.A. against Banco Santander, S.A. at Madrid Court of First Instance no. 34, requesting that the Bank comply with the obligation to subscribe to €30.05 million of a capital increase at the complainant.
On December 16, 2003, a judgment was handed down dismissing the plaintiff’s request. The subsequent appeal filed by LANETRO was upheld by a decision of the Madrid Provincial Appellate Court on October 27, 2006. On March 30, 2010, the Spanish Supreme Court dismissed the extraordinary appeal on the grounds of procedural infringements, and partially admitted the appeal in cassation, which were both filed by the Bank against the decision of the Madrid Provincial Appellate Court.
•
Ordinary proceedings filed by Galesa de Promociones, S.A., against the Bank, at Elche Court of First Instance no. 5, Alicante (Ordinary Lawsuit no. 1946/2008). The claim sought damages amounting to €51,396,971.43 as a result of a judgment handed down by the Supreme Court on November 24, 2004 setting aside a summary mortgage proceeding filed by the Bank against the complainant company, which concluded in the foreclosure by the Bank of the mortgaged properties and their subsequent sale by the Bank to third-party buyers. The judgment of the Supreme Court ordered the reversal of the court foreclosure proceeding prior to the date on which the auctions were held, a circumstance impossible to comply with due to the sale by the Bank of the properties to the aforementioned third parties, which therefore prevented the reincorporation of the properties into the debtor company’s assets and their re-auction.
The damages claimed are broken down as follows: (i) €18,428,076.43 relating to the value of the property auctioned; (ii) €32,608,895 relating to the loss of profit on the properties lost by the complainant, which was prevented from continuing its business activity as a property developer; and (iii) €360,000 relating to rental income.
On October 31, 2008, a summons to respond to and oppose the claim was served on the Bank, which responded to the complainant’s requests on a timely basis and, at the same time, filed a counterclaim against Galesa de Promociones, S.A. for the amount owed to the Bank, basing its calculation on the difference between the value of the properties and the amount of the loan.
Galesa de Promociones, S.A. replied to the counterclaim on January 12, 2009 and the preliminary hearings took place on April 7, 2009 and September 30, 2009.
On March 2, 2010 the Court of First Instance handed down a judgment partially upholding both the claim and the counterclaim, ordering the Bank to pay the claimant an amount of €4,458,960.61, and Galesa Promociones, S.A. to pay the Bank an amount of €1,428,075.70, giving rise to a total loss of €3,030,874.91 for the Bank. Appeals have been prepared by Galesa and the Bank. The Bank filed its appeal on May 31, 2010.
•
Declaratory large claims action brought at Madrid Court of First Instance no. 19 (Ordinary Lawsuit no. 87/2001) in connection with a claim filed by Inversión Hogar, S.A. against the Bank. This claim sought the termination of a settlement agreement entered into between the Bank and the complainant on December 11, 1992.
On May 19, 2006, a judgment was handed down at first instance, whereby the agreement was declared to be terminated and the Bank was ordered to pay €1.8 million, plus the related legal interest since February 1997, to return a property that was given in payment under the aforementioned agreement, to pay an additional €72.9 million relating to the replacement value of the assets foreclosed, and subsequently sold, by the Bank, and to pay all the related court costs. The Bank and Inversión Hogar, S.A. filed appeals against the judgment.

F-118

Table of Contents

On July 30, 2007, the Madrid Provincial Appellate Court handed down a decision upholding in full the appeal filed by the Bank, reversing the judgment issued at first instance and dismissing the appeal filed by Inversión Hogar, S.A. On completion of the clarification procedure, as it had announced previously, Inversión Hogar, S.A. filed a cassation appeal against the aforementioned decision and an extraordinary appeal on the grounds of procedural infringements at the Civil Division of the Supreme Court, which issued an order on December 1, 2009, admitting for consideration the appeals filed by Inversión Hogar, S.A. and its subsidiaries, with a summons to the Bank to present the related notice of opposition to these appeals, which was carried out on January 21, 2010.
•
Claim in an ordinary proceeding filed by Inés Arias Domínguez and a further 17 persons against Santander Investment, S.A. at Madrid Court of First Instance no. 13 (Ordinary Lawsuit no. 928/2007), seeking damages of approximately €43 million, plus interest and costs. The complainants, who are former shareholders of Yesocentro, S.A. (Yesos y Prefabricados del Centro, S.A.), allege that Santander Investment, S.A. breached the advisory services agreement entered into on October 19, 1989 between the former Banco Santander de Negocios, S.A. and the complainants, the purpose of which was the sale of shares owned by the complainants to another company called Invercámara, S.A.
This claim was duly contested by Santander Investment, S.A. on November 5, 2007. The preliminary hearing was set for April 28, 2008 although it was subsequently postponed until the application for a resolution on a preliminary civil issue filed by the Bank was resolved.
In the order issued by Madrid Court of First Instance no. 13 on September 11, 2008 the proceedings were stayed due to a preliminary civil issue. The complainants appealed the decision and the Bank responded to and opposed the complainant’s appeal on December 16, 2008.
In a decision issued by the Madrid Provincial Appellate Court on March 24, 2010 the plaintiffs’ appeal was dismissed, maintaining the stay of proceedings on the basis of the civil preliminary ruling until a ruling is issued in the proceeding filed by other shareholders of Yesocentro (Mr. Siro Díaz Díaz and his wife), filed at the Madrid Court of First Instance nº 47 (Ordinary Lawsuit no. 1051/2004).
•
On February 6, 2008, Banco Santander, S.A. filed a request for arbitration with the Secretary of the Spanish Arbitration Court against Gaesco Bolsa, Sociedad de Valores, S.A., in respect of the claim for €66,418,077.27 that the latter owes Banco Santander, S.A. as a result of the early termination of the financial transaction framework agreement entered into with Banco Santander, S.A. and of the financial transactions performed under the agreement. In the same proceedings Gaesco filed a counterclaim against the Bank. On May 12, 2009, an arbitral award was issued upholding all the claims of Banco Santander, S.A. and dismissing the counterclaim filed by Gaesco. Gaesco has filed for the annulment of the arbitral award at the Madrid Provincial Appellate Court.
Additionally, Mobilaria Monesa, S.L. (parent of the former Gaesco) has filed a claim against Banco Santander, S.A. at Santander Court of First Instance no. 5, on the same grounds as previously mentioned, and which were resolved in arbitration, a circumstance that has been brought to the Court’s attention in the notice of opposition thereto prepared by the Bank.
•
Former Banco do Estado de São Paulo S.A. — Banespa — employees: a claim was filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s bylaws in the event that the entity obtained a profit and that the distribution of this profit, in the form of bonus, were approved by the board of directors. The bonus was not paid in 1994 and 1995 since the bank did not make a profit and partial payments were made from 1996 to 2000 in variable percentages as agreed by the board of directors, and the aforementioned clause was eliminated from the bylaws in 2001. After the Regional Labor Court ordered Banco Santander Banespa, S.A. (currently Banco Santander (Brasil), S.A.) to pay the half-yearly bonus in September 2005, the Bank filed an appeal at the High Labor Court which handed down a decision on June 25, 2008, ordering the Bank to pay the half-yearly bonus from 1996 onwards for a maximum amount equivalent to the share in the profits. Appeals against this decision were filed at the High Labor Court and at the Federal Supreme Court, and are currently in process.

F-119

Table of Contents

•
Padrão Comércio e Incorporacão de Imóveis Ltda: Claim for BRL 87 million against Banco Santander Brasil, S.A. for purported wrongful charges made by its predecessor, Banco do Estado de São Paulo, S.A. (Banespa), since the opening of a current account in the city of Recife in 1994 to 1996. In 2006, the Pernambuco Court of Justice handed down a decision at first instance against Banespa for not having submitted all the relevant documentation. Banespa then filed an appeal, dismissed in 2009, in which a new expert’s report was requested and additional documentation was provided which evidenced that at least a portion of the funds under dispute were used by the complainant. Banco Santander Brasil requested clarification of this decision and a decision has yet to be handed down. Subsequently, Banco Santander Brasil intends to appeal to the High Court.
•
The bankruptcy of various Lehman Group companies was made public on September 15, 2008. Various customers of Santander Group were affected by this situation since they had invested in securities issued by Lehman or in other products which had such assets as their underlying security.
On November 12, 2008, the Group announced the implementation of a solution (which was of a strictly commercial, exceptional nature and did not imply any admission of misselling) for holders of one of the products sold -Seguro Banif Estructurado- issued by the insurance company Axa Aurora Vida, which had as its underlying security a bond issued and guaranteed by Lehman. The solution involved replacing the Lehman issuer risk with the issuer risk of Grupo Santander subsidiaries. The exchange period ended on December 23, 2008. As a result of the exchange, at 2008 year-end a loss was recognized under Gains/losses on financial assets and liabilities (net) in the consolidated income statement for the difference of €46 million (€33 million after tax) between the fair value of the bonds received and the bonds delivered in the exchange.
In February 2009 the Group offered a similar solution to other customers affected by the Lehman bankruptcy. The cost of this transaction, before tax, was €143 million (€100 million after tax), which were recognized under Gains/losses on financial assets and liabilities (net) in the consolidated income statement for 2008.
At the date of preparation of these consolidated financial statements, it was known that certain claims had been filed in relation to this matter. The Bank’s directors and its legal advisers consider that the various Lehman products were sold in accordance with the applicable legal regulations in force at the time of each sale or subscription and that the fact that the Group acted as intermediary would not give rise to any liability in relation to the insolvency of Lehman. Accordingly, it has not been necessary to recognize any liability in this connection in the consolidated financial statements for 2009.
•
The investigation by the US Securities and Exchange Commission (“SEC”) into the alleged fraud of Bernard L. Madoff Investment Securities LLC (“Madoff Securities”) took place in December 2008. The exposure of customers of the Group through the subfund Optimal Strategic US Equity (“Optimal Strategic”) was €2,330 million, of which €2,010 million related to institutional investors and international private banking customers, and the remaining €320 million were in the investment portfolios of the Group’s private banking customers in Spain.
•
On January 27, 2009, the Group announced its decision to offer a solution to those of its private banking customers who had invested in Optimal Strategic and had been affected by the alleged fraud. This solution, which was applied to the principal amount invested, net of redemptions, totaled €1,380 million. It consisted of a replacement of assets whereby the private banking customers could exchange their investments in Optimal Strategic for preference shares ( participaciones preferentes ) to be issued by the Group for the aforementioned amount of €1,380 million, with an annual coupon of 2% and a call option that can be exercised by the issuer in year ten. At December 31, 2008, the Group determined that these events should be classified as “adjusting events after the reporting period”, as defined in IAS 10.3, since they provided evidence of conditions that existed at the end of the reporting period and, accordingly, in accordance with IAS 37.14, it recognized the pre-tax cost of this transaction for the Group (€500 million or €350 million after tax) under Gains/losses on financial assets and liabilities (net) in the consolidated income statement for 2008.
The Group believes it has at all times exercised due diligence in the management of its customers’ investments in the Optimal Strategic fund. These products have always been sold in a transparent way pursuant to applicable legislation and established Group procedures and, accordingly, the decision to offer a solution was taken in view of the exceptional circumstances attaching to this case and based on solely commercial reasons, due to the interest the Group has in maintaining its business relationship with these customers.

F-120

Table of Contents

At the time of the intervention, Madoff Securities was a broker-dealer authorized, registered and supervised by the SEC and was also authorized as an investment advisor by the US Financial Industry Regulatory Authority (FINRA).
At the date of these consolidated financial statements, it was known that certain claims have been filed in relation to this matter. Some of the claims have been submitted in several forums and jurisdictions. The claims have been initiated by investors with investments with exposure to Madoff Securities, including holders of shares in Optimal Strategic, holders of financial structured products whose value and profitability were linked to the evolution of some Optimal funds (among them, Optimal Strategic) and holders of life insurance products which had as its underlying security a bond whose value and profitability was linked to the evolution of Optimal funds (among them, Optimal Strategic). All these proceedings are ongoing.
On March 18, 2009, the Group issued the preference shares earmarked for the replacement of assets offered to the private banking customers affected by the intervention of Madoff Securities and those affected by the Lehman bankruptcy who were not able to participate in the exchange made on December 23, 2008 (referred to above). The preference shares have been listed on the London Stock Exchange since March 23, 2009. The level of acceptance of the exchange proposal is close to 97%.
On May 26, 2009, two funds managed by Optimal Investment Services, S.A., a subsidiary indirectly owned by Banco Santander, S.A., announced that they had entered into an agreement with Irving H. Picard, the court-appointed Trustee for the liquidation of Madoff Securities. Under the agreement, the Trustee will allow the funds’ claims in the liquidation proceeding and reduce his clawback demands on the funds by the amounts withdrawn by the latter from Madoff Securities, in the 90 days prior to bankruptcy, which American legislation allows him to claim, in exchange for the partial payment of those demands by the funds. The funds are Optimal Strategic U.S. Equity Limited and Optimal Arbitrage Limited. These are the only Optimal funds that had accounts at Madoff Securities.
Pursuant to the agreement, the funds’ claims against Madoff Securities were allowed in their full amounts, calculated on a cash-in, cash-out basis, of $1,540,141,277.60 and $9,807,768.40, respectively, and the funds were entitled to Securities Investor Protection Corporation advances of $500,000 each. The funds have paid 85% of the clawback claims asserted by the Trustee. The payments totaled $129,057,094.60 for Optimal Strategic and USD 106,323,953.40 for Arbitrage.
The funds agreed not to file any other claims against Madoff Securities’ estate. The agreement also contains an “equal treatment” provision, so that if the Trustee settled similar clawback claims for less than 85%, the funds would receive a rebate of a portion of their payments to equalize the percentages applied to the funds with respect to other comparable investors.
The agreement followed the Trustee’s investigation of Optimal companies and affiliates’ conduct in dealing with Madoff Securities, including a review of Optimal companies and affiliates’ documents relating to its due diligence, in which the Trustee concluded that their conduct does not provide grounds to assert any claim against the Optimal companies or any entity of Santander Group (other than the clawback claims described above, which did not arise from any inappropriate conduct by the funds).
The agreement contains releases of all clawback and other claims the Trustee may have against the funds for any matters arising out of the funds’ investments with Madoff Securities. The Trustee’s release applies to all potential claims against other Optimal companies, Santander Group companies and their investors, directors, officers and employees who agree to release the Trustee and the Madoff Securities estate, to the extent the claims arose out of the funds’ dealings with Madoff Securities. It also releases both funds from potential clawback liability for any other withdrawals made by them.
The agreement between the Trustee and the aforementioned Optimal funds was approved by the United States Bankruptcy Court of the Southern District of New York on June 16, 2009.
Madoff Securities is currently in liquidation in accordance with the Securities Investor Protection Act of 1970 in the United States Bankruptcy Court of the Southern District of New York. Bernard L. Madoff, the chief executive of Madoff Securities, has pleaded guilty to perpetrating what was probably the largest pyramid fraud in history and has been sentenced to 150 years imprisonment.

F-121

Table of Contents

Additionally, the development of the litigation in 2009 arising from the absorption of Banco Santander Noroeste S.A. — “Banco Noroeste” by Banco Santander Brasil, S.A. is detailed below:
•
Three claims filed by minority shareholders of Banco Noroeste requesting, in addition to compensation for damage and losses, the annulment of the general shareholders’ meeting that approved the merger between Banco Noroeste and Banco Santander Brasil, S.A. arguing that when the merger took place Banco Noroeste shareholders should have been offered a market value that would have enabled them to decide whether or not to sell their shares at that value.
In the three cases, judgments were handed down at first instance, one of which found in favor of Banco Santander (Brasil), S.A. and the other two against it. In the latter two cases the general shareholders’ meeting was not declared null and void but rather Banco Santander (Brasil), S.A. was ordered to pay compensation. Appeals were filed against these judgments by Banco Santander (Brasil), S.A.
The São Paulo Court of Justice recently handed down a joint judgment on the three appeals at second instance, finding that Banco Santander (Brasil), S.A. should have duly prepared a valuation report using the disposal value method, thereby concluding that the minority shareholders be indemnified.
In the case of the shareholders that sold their shares, the Court indicated that they should receive the difference between the value at which they sold their shares (equity value) and market value (calculated as the disposal value) at that time, plus interest. In the case of the shareholders that did not sell, the Court considered that they should receive the market value at that time plus interest, less the present value of their shares. Unlike the judgments handed down at first instance, lost profits and damages were excluded and the amount of lawyers’ fees was reduced. Banco Santander (Brasil), S.A. plans to file appeals against this judgment at higher courts.
In August 2009, an agreement was reached with the minority shareholders of the former Banco Noroeste by virtue of which Banco Santander (Brasil) S.A. made a payment of BRL 106 million as compensation for damages related to the absorption of Banco Noroeste by Banco Santander (Brasil) S.A. Such compensation included the repurchase from the shareholders of the shares of Banco Santander (Brasil) S.A. that they held and payment of all other expenses. Based on the agreement, the minority shareholders accepted the annulment of all actions against Banco Santander (Brasil) S.A. and agreed not to file any further claims for the same reasons.
The total amount of payments made by the Group arising from litigation in 2009, 2008 and 2007 is not material with respect to these consolidated financial statements.
**********************
At 2009, 2008 and 2007 year-end the Group had recognized provisions that reasonably cover any contingencies that might arise from these tax-related and non-tax-related proceedings.
26.
Other liabilities
The detail of Other Liabilities is as follows:
Thousands of euros
2009 2008 2007
Transactions in transit
325,987 401,977 150,609
Accrued expenses and deferred income
5,438,831 4,593,557 3,907,719
Other
1,859,341 2,565,461 2,328,848
7,624,159 7,560,995 6,387,176
27.
Tax matters
a)
Consolidated tax group
Pursuant to current legislation, the Consolidated Tax Group includes Banco Santander, S.A. (as the Parent) and the Spanish subsidiaries that meet the requirements provided for in Spanish legislation regulating the taxation of the consolidated profits of corporate groups (as the controlled entities).
The other Group companies file income tax returns in accordance with the tax regulations applicable to them.

F-122

Table of Contents

b)
Years open for review by the tax authorities
At December 31, 2009, the Consolidated Tax Group had the years from 2003 to 2009 open for review in relation to the main taxes applicable to it.
The other entities have the corresponding years open for review, pursuant to their respective tax regulations.
The tax audit of 2001 and 2002 for the main taxes applicable to the Consolidated Tax Group was completed in March 2007. Most of the tax assessments issued were signed on a contested basis.
In 2009 there were no significant developments in connection with the tax disputes at the different instances, which were pending resolution at December 31, 2008.
Because of the possible different interpretations which can be made of the tax regulations, the outcome of the tax audits of the years reviewed and of the open years might give rise to contingent tax liabilities which cannot be objectively quantified. However, the Group’s tax advisers consider that it is unlikely that such contingent liabilities will become actual liabilities, and that in any event the tax charge which might arise therefrom would not materially affect the consolidated financial statements of the Group.
c)
Reconciliation
The reconciliation of the income tax expense calculated at the standard tax rate to the income tax expense and the detail of the effective tax rate are as follows:
Millions of euros
2009 2008 2007
Consolidated Operating profit before tax:
From ordinary activities
10,588 10,849 10,970
From discontinued operations
46 372 1,178
10,634 11,221 12,148
Income tax at 30% (*)
3,190 3,366 3,948
Decreases due to permanent differences
(1,460 ) (1,419 ) (1,062 )
Of which:
Due to effect of different tax rates
(1,180 ) (1,039 ) (851 )
Income tax of Group companies, per local books
1,730 1,947 2,886
Net increases (decreases) due to other permanent differences
(556 ) (346 ) (577 )
Other, net
48 287 204
Current income tax
1,222 1,888 2,513
Effective tax rate
11.49 % 16.83 % 20.69 %
Of which:
Ordinary activities
1,207 1,836 2,322
Discontinued operations
15 52 191
Of which:
Current tax
2,082 2,689 2,805
Deferred taxes
(860 ) (801 ) (292 )
Taxes paid in the year
1,527 1,445 3,181
(*)
32.5% for 2007.

F-123

Table of Contents

d)
Tax recognized in equity
In addition to the income tax recognized in the consolidated income statement, the Group recognized the following amounts in consolidated equity:
Millions of euros
2009 2008 2007
Tax charged to equity:
Measurement of non-current assets held for sale
— (16 ) —
Measurement of available-for-sale fixed-income securities
(373 ) — (104 )
Measurement of available-for-sale equity securities
— — (393 )
(373 ) (16 ) (497 )
Tax credited to equity:
Measurement of available-for-sale fixed-income securities
— 30 —
Measurement of available-for-sale equity securities
35 247 —
Measurement of cash flow hedges
106 163 20
141 440 20
Total
(232 ) 424 (477 )
e)
Deferred taxes
Tax assets in the consolidated balance sheets includes debit balances with the Spanish Public Treasury relating to deferred tax assets. Tax liabilities includes the liability for the Group’s various deferred tax liabilities.
The detail of Tax assets — Deferred and Tax liabilities — Deferred is as follows:
Millions of euros
2009 2008 2007
Tax assets:
Of which:
Banco Santander (Brasil) S.A.
3,410 1,775 1,905
Banco ABN AMRO Real S.A. (*)
— 2,191 —
Sovereign Bancorp
1,925 — —
Grupo Santander UK (**)
909 1,303 1,257
Early retirements
989 1,242 1,167
Other pensions
910 1,084 1,167
Prepaid taxes- Investments
— 965 965
15,827 14,644 10,853
Tax liabilities:
Of which:
Banco Santander (Brasil) S.A.
553 472 253
Banco ABN AMRO Real S.A. (*).
— 376 —
Sovereign Bancorp
107 — —
Grupo Santander UK (**)
405 418 741
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander
65 113 101
Santander Consumer Bank AG
92 89 104
Valuation adjustments
744 341 534
3,667 3,464 3,744
(*)
Merged into Banco Santander (Brazil), S.A. in 2009.
(**)
Including Alliance & Leicester in 2009 and 2008.

F-124

Table of Contents

The detail of the deferred tax assets and liabilities at December 31, 2009, on the basis of their expected recovery/payment, is as follows:
Millions
of euros
Deferred tax assets
15,827
That do not depend on the Group’s ability to generate future profit
11,624
That depend on the Group’s ability to generate future profit
4,203
Deferred tax liabilities
(3,667 )
Net
536
The changes in Tax Assets — Deferred and Tax Liabilities — Deferred in the last three years were as follows:
Millions of euros
(Charge)/
Foreign currency credit to
balance asset and
Balances at (Charge)/ translation liability Acquisitions Balances at
December 31, credit to differences and revaluation Prepaid for the December 31,
2008 income other items reserve taxes year (net) 2009
Deferred tax assets
14,644 895 (1,736 ) (165 ) — 2,189 15,827
Deferred tax liabilities
(3,464 ) (35 ) 246 (307 ) — (107 ) (3,667 )
Total
11,180 860 (1,490 ) (472 ) — 2,082 12,160
Millions of euros
Foreign
currency (Charge)/
balance credit to
translation asset and
Balances at (Charge)/ differences liability Acquisitions for Balances at
December 31, credit to and other revaluation Prepaid the December 31,
2007 income items reserve taxes year (net) 2008
Deferred tax assets
10,853 837 (374 ) 696 — 2,632 14,644
Deferred tax liabilities
(3,744 ) (36 ) 461 107 — (252 ) (3,464 )
Total
7,109 801 87 803 — 2,380 11,180
Millions of euros
Foreign
currency (Charge)/
balance credit to
translation asset and
Balances at (Charge)/ differences liability Acquisitions for Balances at
December 31, credit to and other revaluation Prepaid the December 31,
2006 income items reserve taxes year (net) 2007
Deferred tax assets
9,156 419 230 110 965 (27 ) 10,853
Deferred tax liabilities
(3,778 ) (127 ) 252 (128 ) — 37 (3,744 )
Total
5,378 292 482 (18 ) 965 10 7,109

F-125

Table of Contents

f)
Other disclosures
In conformity with the Listing Rules Instrument 2005 published by the UK Financial Services Authority, it is hereby stated that shareholders of the Bank resident in the United Kingdom will be entitled to a tax credit in respect of the withholdings the Bank is required to make from the dividends to be paid to them. The shareholders of the Bank resident in the United Kingdom who hold their ownership interest in the Bank through Grupo Santander Nominee Service and Santander UK Nominee will be informed directly of the amount thus withheld and of any other data they may require to complete their tax returns in the United Kingdom. The other shareholders of the Bank resident in the United Kingdom should contact their bank or securities broker.
28.
Minority interests
Minority interests include the net amount of the equity of subsidiaries attributable to equity instruments that do not belong, directly or indirectly, to the Bank, including the portion attributed to them of profit for the year.
a)
Breakdown
The detail, by Group company, of Equity — Minority interests is as follows:
Thousands of euros
2009 2008 2007
Grupo Financiero Santander, S.A. de C.V.
787,351 707,603 649,291
Banesto
555,368 495,021 476,152
Banco Santander Chile
383,191 245,229 241,726
Santander Brasil
2,571,235 122,067 56,062
Santander BanCorp
35,340 34,751 30,701
Other companies
402,051 353,935 328,445
4,734,536 1,958,606 1,782,377
Profit for the year attributable to minority interests
469,522 456,000 575,892
Of which:
Banesto Group
26,773 75,294 81,467
Grupo Financiero Santander, S.A. de C.V.
160,478 182,927 281,186
Banco Santander Chile
134,913 129,758 138,781
Santander Brasil
114,151 22,042 7,005
Santander BanCorp
3,178 2,434 1,626
5,204,058 2,414,606 2,358,269

F-126

Table of Contents

b)
Changes
The changes in Minority interests are summarized as follows:
Millions of euros
2009 2008 2007
Balance at beginning of year
2,415 2,358 2,221
Change in consolidation method
— 105 —
(Net) inclusion of companies in the Group and changes in scope of consolidation
(12 ) 13 (9 )
Change in proportion of ownership interest
(2 ) (41 ) (117 )
Valuation adjustments
75 (26 ) (57 )
Dividends paid to minority interests
(233 ) (241 ) (360 )
Changes in share capital (*)
2,187 74 220
Exchange differences and other items
305 (283 ) (116 )
Profit for the year attributable to minority interests
469 456 576
Balance at end of year
5,204 2,415 2,358
(*)
In 2009 including mainly the minority interests arising from the initial public offering of Santander Brasil launched by the Group amounting to €2,360 million at the closing exchange rate (see Note 3). This change is also shown as a capital increase in the consolidated statement of changes in total equity for 2009.
29.
Valuation adjustments
The balances of Valuation adjustments include the amounts, net of the related tax effect, of the adjustments to assets and liabilities recognized temporarily in equity through the statement of changes in equity (recognized income and expense) until they are extinguished or realized, when they are recognized definitively as shareholders’ equity through the consolidated income statement. The amounts arising from subsidiaries and jointly controlled entities are presented, on a line by line basis, in the appropriate items according to their nature.
It should be noted that the consolidated statement of recognized income and expense includes the changes to “Valuation adjustments” as follows:
•
Revaluation gains (losses): includes the amount of the income, net of the expenses incurred in the year, recognized directly in equity. The amounts recognized in equity in the year remain under this item, even if in the same year they are transferred to the income statement or to the initial carrying amount of the assets or liabilities or are reclassified to another line item.
•
Amounts transferred to income statement: includes the amount of the revaluation gains and losses previously recognized in equity, even in the same year, which are recognized in the income statement.
•
Amounts transferred to initial carrying amount of hedged items: includes the amount of the revaluation gains and losses previously recognized in equity, even in the same year, which are recognized in the initial carrying amount of assets or liabilities as a result of cash flow hedges.
•
Other reclassifications: includes the amount of the transfers made in the year between the various valuation adjustment items.
The amounts of these items are recognized gross, including the amount of the valuation adjustments relating to minority interests, and the corresponding tax effect is presented under a separate item, except in the case of entities accounted for using the equity method, the amounts for which are presented net of the tax effect.
a)
Available-for-sale financial assets
“Valuation adjustments — Available-for-sale financial assets” includes the net amount of unrealized changes in the fair value of assets classified as available-for-sale financial assets.
At December 31, 2008, the consolidated statement of recognized income and expense included €2,042 million, the result of the negative balance of revaluation gains/losses and the positive balance of amounts transferred to the income statement, relating to the write-down recognized in income of the ownership interests in Royal Bank of Scotland and Fortis (see Notes 1.i and 50).

F-127

Table of Contents

The remaining changes in the balance at December 31, 2008 with respect to the previous year related mainly to the reduction arising from the loss of unrealized gains that were recognized in equity at 2007 year-end.
The changes in 2009 reflect the recovery in the equities markets and the positive effect that falls in interest rates had on debt securities.
b)
Cash flow hedges
Valuation adjustments — Cash flow hedges includes the gains or losses attributable to hedging instruments that qualify as effective hedges. These amounts will remain under this heading until they are recognized in the consolidated income statement in the periods in which the hedged items affect it (see Note 11).
Accordingly, amounts representing valuation losses will be offset in the future by gains generated by the hedged instruments.
c)
Hedges of net investments in foreign operations and Exchange differences
Valuation adjustments — Hedges of net investments in foreign operations includes the net amount of changes in the value of hedging instruments in hedges of net investments in foreign operations, for the portion of these changes considered as effective hedges (see Note 11).
Valuation adjustments — Exchange differences includes the net amount of exchange differences arising on non-monetary items whose fair value is adjusted against equity and the differences arising on the translation to euros of the balances of the consolidated entities whose functional currency is not the euro (see Note 2.a).
The net changes in these two headings in the consolidated statement of recognized income and expense include the valuation gain or loss relating to the exchange difference arising from the goodwill held by the Group in foreign currency. At December 31, 2008, the balance recognized in the consolidated statement of recognized income and expense in this connection represented a loss of approximately €3,500 million. This change was offset by a negative change in the balance of goodwill at the corresponding date and, accordingly, it did not affect the Group’s equity (see Note 17).
The changes in 2009 reflect the positive effect of the fluctuations in exchange rates, mainly the pound sterling and the Brazilian real, giving rise to a gain of approximately €2,390 million with regard to the measurement of goodwill.
The detail, by country, of Valuation adjustments — Hedges of net investments in foreign operations and Valuation adjustments — Exchange differences is as follows:
Thousands of euros
2009 2008 2007
Net balance at end of year
(3,555,140 ) (7,957,582 ) (638,275 )
Of which:
Arising on consolidation:
Subsidiaries:
(3,558,042 ) (7,949,868 ) (663,779 )
Brazil Group
1,124,699 (2,819,871 ) 696,462
Chile Group
(89,222 ) (475,525 ) (130,186 )
Mexico Group
(1,010,852 ) (977,254 ) (508,264 )
Abbey Group
(2,964,878 ) (3,280,445 ) (562,990 )
Other
(617,789 ) (396,773 ) (158,801 )
Associates
2,902 (7,714 ) 25,504

F-128

Table of Contents

d)
Entities accounted for using the equity method
Valuation adjustments — Entities accounted for using the equity method includes the amounts of valuation adjustments recognized in equity arising from associates.
The net changes in Valuation adjustments — Entities accounted for using the equity method were as follows:
Thousands of euros
2009 2008 2007
Balance at beginning of year
(148,402 ) (1,840 ) 57,437
Revaluation gains (losses)
— (149,073 ) (59,277 )
Amounts transferred to income
— 43,728 —
Transfers
148,402 (41,217 ) —
Balance at end of year
— (148,402 ) (1,840 )
Of which:
Sovereign
— (148,402 ) (27,068 )
Cepsa
— — 25,213
30.
Shareholders’ equity
Shareholders’ equity includes the amounts of equity contributions from shareholders, accumulated profit or loss recognized through the consolidated income statement, and components of compound financial instruments having the substance of permanent equity. Amounts arising from subsidiaries and jointly controlled entities are presented in the appropriate items based on their nature.
The changes in Shareholders’ equity are presented in the consolidated statement of changes in total equity. Significant information on certain items of Shareholders’ equity and the changes therein in 2009 is set forth below.
31.
Issued capital
a)
Changes
At December 31, 2008, the share capital consisted of 7,994,059,403 shares with a total par value of €3,997,029,701.50.
On January 28, 2009 the shareholders at the general shareholders’ meeting of Sovereign approved its acquisition by the Bank and on January 30, 2009 the Bank increased capital through the issue of 161,546,320 ordinary shares for an effective amount (par value plus premium) of €1,302,063,339.
Additionally, after completion on October 5, 2009 of the period for the voluntary conversion of Valores Santander into shares, and in accordance with the terms established in the related prospectus, on October 13, 2009, 257,647 new shares were issued to cater for this exchange.
Lastly, on November 2, 2009 the bonus issue through which the Santander Dividendo Elección program (see Note 4) is instrumented took place, whereby 72,962,765 shares (0.89% of the share capital) relating to bonus share rights were issued in the proportion of one new share for 91 existing shares, for an amount of €36,481,382.5.
Following these transactions, at December 31, 2009 the Bank’s share capital consisted of 8,228,826,135 shares with a par value of €4,114,413,067.5.
The Bank’s shares are listed on the computerized trading system of the Spanish Stock Exchanges and on the New York, London, Milan, Lisbon, Buenos Aires and Mexico Stock Exchanges, and all of them have the same features and rights. At December 31, 2009, the only shareholders with an ownership interest in the Bank’s share capital of over 3% were Chase Nominees Ltd. (with a 12.51% holding), State Street Bank & Trust (with a 9.06% holding), EC Nominees Ltd. (with a 6.91% holding), Bank of New York Mellon (with a 5.57% holding), Société Generale (with a 3.59% holding) and Caceis Bank (with a 3.42% holding). These ownership interests are held on behalf of customers, and the Bank is not aware of any of these shareholders individually holding a stake of 3% or more.

F-129

Table of Contents

b)
Other considerations
The additional share capital authorized by the shareholders at the annual general meeting of June 19, 2009 was €2,038,901,430.50. The Bank’s directors have until June 19, 2012 to carry out capital increases up to this limit. The resolution empowers the board to fully or partially disapply the pre-emption right in accordance with the terms of Article 159.2 of the Spanish Public Limited Liability Companies Law ( Ley de Sociedades Anónimas ). At December 31, 2009, this power had not been exercised.
The shareholders at the annual general meeting of 2009 resolved to increase the Bank’s capital by a par value of €500 million and granted the board the broadest powers to set the date and establish the terms and conditions of this capital increase within one year from the date of the aforementioned general shareholders’ meeting. If the board does not exercise the powers delegated to it within the period established by the general shareholders’ meeting, these powers will be rendered null and void.
In addition, the aforementioned general shareholders’ meeting authorized the board to issue fixed-income securities, convertible into or exchangeable for shares of the Bank, for up to a total of €7,000 million or the equivalent amount in another currency. The Bank’s directors have until June 19, 2014 to execute this resolution.
At December 31, 2009, the shares of the following companies were listed on official stock markets: Banco Santander Río S.A.; Banco Universal; Banco Santander Colombia, S.A.; Santander BanCorp (Puerto Rico); Grupo Financiero Santander, S.A. de C.V.; Banco Santander Chile; Cartera Mobiliaria, S.A., S.I.C.A.V.; Santander Chile Holding, S.A.; Banco Santander (Brazil), S.A. and Banco Español de Crédito.
At December 31, 2009, the number of Bank shares owned by third parties and managed by Group management companies (mainly portfolio, collective investment undertaking and pension fund managers) was 21,770,053, which represented 0.26% of the Bank’s share capital. In addition, the number of Bank shares owned by third parties and received as security was 42.5 million (equal to 0.52% of the Bank’s share capital).
At December 31, 2009, the capital increases in progress at Group companies and the additional capital authorized by their shareholders at the respective general shareholders’ meetings were not material at Group level.
32.
Share premium
Share premium includes the amount paid up by the Bank’s shareholders in capital issues in excess of the par value.
The Consolidated Spanish Public Limited Liability Companies Law (Ley de Sociedades Anónimas) expressly permits the use of the Share premium account balance to increase capital at the entities at which it is recognized and does not establish any specific restrictions as to its use.
The increase in the balance of the Share premium in 2009 relates to the capital increases detailed in Note 31.a. Also in 2009, an amount of €23 million was transferred from the Share premium account to the Legal reserve (see Note 33.b.i).
33.
Reserves
a)
Definitions
Shareholders’ equity — Reserves — Accumulated reserves includes the net amount of the accumulated profit or loss recognized in previous years through the consolidated income statement that, in the distribution of profit, was appropriated to equity, and the own equity instrument issuance expenses and the differences between the selling price of treasury shares and the cost of acquisition thereof.

F-130

Table of Contents

Shareholders’ equity — Reserves of entities accounted for using the equity method includes the net amount of the accumulated profit or loss generated in previous years by entities accounted for using the equity method, recognized through the consolidated income statement.
b)
Breakdown
The detail of Accumulated reserves and Reserves of entities accounted for using the equity method is as follows:
Thousands of euros
2009 2008 2007
Accumulated reserves:
Restricted reserves-
Legal reserve
822,883 799,406 625,430
Reserve for treasury shares
531,695 871,994 218,603
Revaluation reserve Royal Decree-Law 7/1996
42,666 42,666 42,666
Reserve for retired capital
10,610 10,610 10,610
Voluntary reserves (*)
2,282,098 2,479,352 3,668,316
Consolidation reserves attributed to the Bank
6,752,138 5,591,045 3,131,239
Reserves at subsidiaries
14,097,534 11,363,796 7,779,129
24,539,624 21,158,869 15,475,993
Reserves of entities accounted for using the equity method:
Associates
67,663 (290,463 ) 895,437
Of which:
Sovereign
— (352,986 ) 3,357
Cepsa
— — 734,719
Attijariwafa Bank
— — 126,626
24,607,298 20,868,406 16,371,430
(*)
Include the reserves stipulated by Article 81 of the Consolidated Spanish Public Limited Liability Companies Law (Ley de Sociedades Anónimas ) for an amount equal to the loans granted by Group companies to third parties for the acquisition of treasury shares.
i.
Legal reserve
Pursuant to the Consolidated Spanish Public Limited Liability Companies Law ( Ley de Sociedades Anónimas ), 10% of net profit for each year must be transferred to the legal reserve until the balance of this reserve reaches 20% of the share capital. The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount.
In 2009 the Bank transferred €23 million from the share Premium account to the Legal reserve so that, once again, after the capital increases described in Note 31 had been carried out, the balance of the Legal reserve reached 20% of the share capital, and at December 31, 2009 the Legal reserve was at the stipulated level.
ii.
Reserve for treasury shares
Pursuant to the Consolidated Spanish Public Limited Liability Companies Law ( Ley de Sociedades Anónimas), a restricted reserve has been recognized for an amount equal to the carrying amount of the Bank shares owned by subsidiaries. The balance of this reserve will become unrestricted when the circumstances that made it necessary to recognize it cease to exist. Additionally, this reserve covers the outstanding balance of the loans granted by the Group secured by Bank shares.
iii.
Revaluation reserve Royal Decree Law 7/1996, of 7 June:
The balance of Revaluation reserve Royal Decree-Law 7/1996 can be used, free of tax, to increase share capital. From January 1, 2007, the balance of this account can be taken to unrestricted reserves, provided that the monetary surplus has been realized. The surplus will be deemed to have been realized in respect of the portion on which depreciation has been taken for accounting purposes or when the revalued assets have been transferred or derecognized.

F-131

Table of Contents

If the balance of this reserve were used in a manner other than that provided for in Royal Decree-Law 7/1996, of 7 June, it would be subject to taxation.
iv.
Reserves at subsidiaries and jointly controlled entities
The detail, by company, of Reserves at subsidiaries and jointly controlled entities, based on the companies’ contribution to the Group (considering the effect of consolidation adjustments) is as follows:
Millions of euros
2009 2008 2007
Banco Español de Crédito, S.A. (Banesto) (Consolidated Group)
4,031 3,703 3,319
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander (Consolidated Group)
1,623 1,630 1,819
Abbey Group
2,689 2,040 1,419
Banco Santander, S.A. (Banespa) (Consolidated Group)
1,940 1,596 1,036
Banco Santander Totta, S.A. (Consolidated Group)
1,589 1,273 939
Banco Santander Chile (Consolidated Group)
1,598 1,031 589
Banco de Venezuela, S.A., Banco Universal (Consolidated Group)
— 663 502
Grupo Santander Consumer Finance, S.A.
723 559 323
Cartera Mobiliaria, S.A., S.I.C.A.V.
315 324 298
Santander Investment, S.A.
230 207 181
Banco Santander International (United States)
241 203 178
Banco Banif, S.A.
210 188 133
Banco Santander (Suisse) SA
151 175 139
Santander Seguros y Reaseguros, Compañía Aseguradora, S.A.
237 149 72
BSN — Banco Santander de Negocios Portugal, S.A.
94 116 78
Banco Santander Río, S.A.
(412 ) (449 ) (525 )
Exchange differences, consolidation adjustments and other companies (*)
(1,161 ) (2,044 ) (2,721 )
Total
14,098 11,364 7,779
Of which: restricted
1,271 1,466 925
(*)
Includes the charge relating to cumulative exchange differences in the transition to International Financial Reporting Standards.
34.
Other equity instruments and Treasury shares
a)
Other equity instruments
Other equity instruments includes the equity component of compound financial instruments, the increase in equity due to personnel remuneration, and other items not recognized in other Shareholders’ equity items.
Valores Santander
In 2007, in order to partially finance the takeover bid launched on ABN AMRO, Santander Emisora 150, S.A.U. issued securities mandatorily convertible into newly-issued ordinary shares of the Bank ( Valores Santander ) amounting to €7 billion. These securities can be voluntarily exchanged for Bank shares on October 4, 2010 and 2011, and must be mandatorily exchanged on October 4, 2012.
The reference price of the Bank’s share for conversion purposes was set at €16.04 per share, and the conversion ratio of the bonds -i.e. the number of Bank shares corresponding to each Valor Santander for conversion purposes- is 311.76 shares for each Valor Santander . The nominal interest rate on these securities was 7.30% until October 4, 2008 and Euribor plus 2.75% thereafter until the securities are exchanged for shares.

F-132

Table of Contents

Subsequent to issue, Banco Santander resolved in several occasions, in accordance with the prospectus, to change the conversion ratio of these securities. The latest revision was carried out in view of the bonus share issue performed by Banco Santander, through which the Santander Dividendo Elección program was put into effect, and the new reference price of the shares of Banco Santander for conversion purposes was set at €14.48 per share. Consequently, the new conversion ratio applicable to the Valores Santander is 345.30 shares of Banco Santander for each Valor Santander , the result of dividing the face value of each Valor Santander (€5,000) by the aforementioned reference price (€14.48).
b)
Treasury shares
Shareholders’ equity — Treasury shares includes the amount of own equity instruments held by all the Group entities.
Transactions involving own equity instruments, including their issuance and cancellation, are recognized directly in equity, and no profit or loss may be recognized on these transactions. The costs of any transaction involving own equity instruments are deducted directly from equity, net of any related tax effect.
The shareholders at the Bank’s annual general meeting on June 21, 2008 set the maximum number of Bank shares that the Bank and/or any Group subsidiary are authorized to acquire at a number equivalent to 5% of the fully paid share capital amount, at a minimum share price not lower than par value and a maximum share price of up to 3% higher than the latest quoted price with respect to which the Bank did not trade for its own account in the Spanish Stock Market Interconnection System (including the block market) on the acquisition date concerned.
The Bank’s shares owned by the consolidated companies accounted for 0.031% of issued share capital at December 31, 2009 (December 31, 2008: 0.81%; December 31, 2007: less than 0.01%).
The average purchase price of the Bank’s shares in 2009 was €7.5 per share and the average selling price was €7.79 per share.
The effect on equity arising from transactions involving Bank shares (gains of €321 million in 2009, gains of €12 million in 2008 and gains of €5 million in 2007) was recognized in equity.
35.
Memorandum items
Memorandum items relates to balances representing rights, obligations and other legal situations that in the future may have an impact on net assets, as well as any other balances needed to reflect all transactions performed by the consolidated entities although they may not impinge on their net assets.

F-133

Table of Contents

a)
Contingent liabilities
Contingent liabilities includes all transactions under which an entity guarantees the obligations of a third party and which result from financial guarantees granted by the entity or from other types of contract. The detail is as follows:
Thousands of euros
2009 2008 2007
Financial guarantees
20,974,258 15,614,342 17,172,878
Financial bank guarantees
19,725,382 14,514,126 16,386,413
Doubtful guarantees
489,367 196,862 77,815
Credit derivatives sold
759,224 903,067 708,250
Other financial guarantees
285 287 400
Irrevocable documentary credits
2,636,618 3,590,454 5,803,088
Other bank guarantees and indemnities provided
35,192,187 45,613,498 52,632,118
Other guarantees
28,025,392 38,905,912 34,657,158
Undertakings to provide bank guarantees
7,166,795 6,707,586 17,974,960
Other contingent liabilities
453,013 504,900 608,501
Assets earmarked for third-party obligations
3 4 3
Other doubtful contingent liabilities
6 — 112
Other contingent liabilities
453,004 504,896 608,386
59,256,076 65,323,194 76,216,585
A significant portion of these guarantees will expire without any payment obligation materializing for the consolidated entities and, therefore, the aggregate balance of these commitments cannot be considered as an actual future need for financing or liquidity to be provided by the Group to third parties.
Income from guarantee instruments is recognized under Fee and commission income in the consolidated income statements and is calculated by applying the rate established in the related contract to the nominal amount of the guarantee.
At December 31, 2009, the Group had recognized provisions of €641,620 thousand to cover contingent liabilities (December 31, 2008: €678,584 thousand; December 31, 2007: €636,316 thousand) (see Note 25).
i.
Financial guarantees
Financial guarantees includes, inter alia, financial guarantee contracts such as financial bank guarantees, credit derivatives sold, and risks arising from derivatives arranged for the account of third parties.
ii.
Other bank guarantees and indemnities provided
Other bank guarantees and indemnities provided includes guarantees other than those classified as financial, such as technical guarantees, guarantees covering the import and export of goods and services, irrevocable formal undertakings to provide bank guarantees, legally enforceable letters of guarantee and other guarantees of any kind.
iii.
Other contingent liabilities
Other contingent liabilities includes the amount of any contingent liability not included in other items.

F-134

Table of Contents

b)
Contingent commitments
“Contingent commitments” includes those irrevocable commitments that could give rise to the recognition of financial assets.
The detail is as follows:
Thousands of euros
2009 2008 2007
Drawable by third parties
150,562,786 123,329,168 102,215,927
Financial asset forward purchase commitments
3,302,484 856,212 1,439,956
Regular way financial asset purchase contracts
3,446,834 1,626,097 4,181,396
Securities subscribed but not paid
29,141 42,467 107,244
Securities placement and underwriting commitments
11 50,006 33,032
Documents delivered to clearing houses
4,764,584 5,348,689 5,987,879
Other contingent commitments
1,424,916 472,367 711,129
163,530,756 131,725,006 114,676,563
36.
Other disclosures
a)
Notional amounts and market values of trading and hedging derivatives
The detail of the notional and/or contractual amounts and the market values of the trading and hedging derivatives held by the Group is as follows:
Millions of euros
2009 2008 2007
Notional Market Notional Market Notional Market
amount value amount value amount value
Trading derivatives:
Interest rate risk-
Forward rate agreements
150,906 (1,177 ) 328,743 (31 ) 330,315 (995 )
Interest rate swaps
1,693,804 918 1,742,448 2,424 1,923,372 (455 )
Options and futures
1,001,660 537 848,479 (1,252 ) 953,315 (463 )
Foreign currency risk-
Foreign currency purchases and sales
108,031 (525 ) 110,049 (1,261 ) 117,868 (505 )
Foreign currency options
45,983 (81 ) 71,114 9 62,723 (566 )
Currency swaps
112,361 2,079 82,080 5,871 75,090 (1,020 )
Securities and commodities derivatives
160,867 (606 ) 156,094 889 157,807 1,288
3,273,612 1,144 3,339,007 6,648 3,620,490 (2,716 )
Hedging derivatives:
Interest rate risk-
Forward rate agreements
— — 653 1 — —
Interest rate swaps
218,539 1,751 164,800 2,205 120,822 (1,159 )
Options and futures
21,144 (26 ) 27,140 33 10,660 (112 )
Foreign currency risk-
Foreign currency purchases and sales
1,714 (14 ) 8,329 (69 ) 29 6
Foreign currency options
21,784 (128 ) 4,209 246 16,630 292
Currency swaps
14,715 1,091 12,889 1,595 16,372 (99 )
Securities and commodities derivatives
1,007 (32 ) 3,593 (270 ) 155 1
278,903 2,643 221,613 3,741 164,667 (1,071 )
Total
3,552,515 3,787 3,560,620 10,389 3,785,156 (3,788 )

F-135

Table of Contents

The notional and/or contractual amounts of the contracts entered into do not reflect the actual risk assumed by the Group, since the net position in these financial instruments is the result of offsetting and/or combining them. This net position is used by the Group basically to hedge the interest rate, underlying asset price or foreign currency risk; the results on these financial instruments are recognized under Gains/losses on financial assets and liabilities (net) in the consolidated income statements and increase or offset, as appropriate, the gains or losses on the investments hedged (see Note 11).
Additionally, in order to interpret correctly the results on the Securities and commodities derivatives shown in the foregoing table, it should be considered that these items relate mostly to securities options for which a premium has been received which offsets their negative market value. Also, this market value is offset by positive market values generated by symmetrical positions in the Group’s held-for-trading portfolio.
The Group manages the credit risk exposure of these contracts through netting arrangements with its main counterparties and by receiving assets as collateral for its risk positions.
The detail of the cumulative credit risk exposure, by financial derivative, is as follows:
Millions of euros
2009 2008 2007
Credit derivatives
1,942 3,186 1,008
Securities derivatives
2,763 4,322 3,227
Fixed-income derivatives
343 345 405
Currency derivatives
21,568 15,277 7,990
Interest rate derivatives
23,438 25,117 17,507
Commodities derivatives
138 138 23
Collateral received
(7,430 ) (9,366 ) (3,084 )
Total
42,761 39,019 27,076
The notional amounts and fair values of the hedging derivatives, by type of hedge, is as follows:
Millions of euros
2009 2008 2007
Notional Fair Notional Fair Notional Fair
amount value amount value amount value
Fair value hedges
203,975 3,289 169,623 3,340 126,388 (1,199 )
Cash flow hedges
66,194 (518 ) 45,162 185 10,696 (137 )
Hedges of net investments in foreign operations
8,735 (128 ) 6,828 216 27,583 265
278,904 2,643 221,613 3,741 164,667 (1,071 )
Following is the description of the main hedges (including the results of the hedging instrument and the hedged item attributable to the hedged risk):
i.
Fair value and cash flow hedges
Micro-hedges
The Group hedges the interest rate risk of the issues guaranteed by the Parent Bank. At 2009 year-end, the Group held derivative contracts to hedge the interest rate risk of issues, with an equivalent euro nominal value of €50,477 million, of which €41,590 million were denominated in euros, €4,159 million in US dollars and €3,659 million in pounds sterling. The fair value of these transactions at that date represented a gain of €1,958.5 million, which was offset by the loss on the hedged items, giving rise to a net loss of €23.1 million. In addition, there was an unrealized loss of €15.6 million relating to cash flow hedges.
At 2008 year-end, the Group held derivative contracts to hedge the interest rate risk of issues, with an equivalent euro nominal value of €52,369 million, of which €41,180 million were denominated in euros, €5,263 million in US dollars and €4,263 million in pounds sterling. The fair value of these transactions at that date represented a gain of €2,305.5 million, which was offset by the loss on the hedged items, giving rise to a net loss of €150.9 million. In addition, there was an unrealized gain of €4.2 million relating to a cash flow hedge on a floating rate issue.

F-136

Table of Contents

Interest rate risk hedges of portfolios of financial instruments
The main hedges of portfolios of financial instruments in the Group are described below:
•
Hedges for the purpose of eliminating exposure to the interest rate risk of mortgage loan portfolios
•
Hedges for the purpose of covering the interest rate risk of issued liabilities -issues of subordinated debt and mortgage-backed bonds ( cédulas hipotecarias )
•
Hedges for the purpose of covering the interest rate risk of fixed-rate consumer loans
These hedges are mainly recognized in the financial statements of Abbey, Alliance & Leicester, Banesto and the Santander Consumer Finance Group.
In the case of fair value hedges of interest rate risk on financial instrument portfolios, the gain or loss on the hedged items is recognized in assets or liabilities under Changes in the fair value of hedged items in portfolio hedges of interest rate risk. At December 31, 2009, there were gains of €1,420 million and losses of €806 million, associated with assets and liabilities thus hedged, respectively (December 31, 2008: gains of €2,403 million and losses of €440 million, respectively).
In 2009 a revenue of €8 million and an expense of €146 million, attributable to the hedged risk, were recognized in profit or loss (see Note 44) on the hedging instruments and on the hedged items, respectively (2008: a revenue of €4,685 million and an expense of €4,776 million, respectively).
The fair value of the cash flow hedges, net of the related tax effect, is recognized against the Group’s equity under Valuation adjustments — Cash flow hedges. The detail of the terms, from December 31, 2009, within which it is expected that the amounts recognized in consolidated equity under Valuation adjustments — Cash flow hedges at that date will be recognized in future consolidated income statements is as follows:
Millions of euros
Less than 1 to 5 More than
2009 1 Year Years 5 years Total
Debit balances (loss)
(197 ) (238 ) (83 ) (518 )
ii.
Foreign currency hedges (net investments in foreign operations)
As part of its financial strategy, the Group hedges the foreign currency risk arising from its investments in non-euro-zone countries. To this end, it arranges foreign currency derivatives in order to take a long position in euros vis-à-vis the local currency of the investment. At 2009 year-end, the Group held foreign currency options in this connection with an equivalent euro nominal value of €9,404 million, of which €7,461 million were denominated in Brazilian reais and €1,943 million in Mexican pesos. In 2009 losses amounting to €292 million arising from the settlement of options that were exercised in the year were taken to reserves. At 2009 year-end, the market value of the options not yet exercised represented an unrealized loss of €153 million. In addition to these options, the Group arranged other derivatives hedging the exposure to Chilean pesos with an equivalent euro value of €1,478 million, which gave rise to a loss of €107 million in 2009. The hedge, through short currency positions, of the underlying carrying amount in pounds sterling, for a notional amount of GBP 4,485 million, recorded a loss of €339 million in 2009. The overall losses incurred by the hedging derivatives are offset from an equity position by the appreciation in euros of the value of the Group’s investments in the related entities.
At 2008 year-end, the Group held foreign currency options in this connection with an equivalent euro nominal value of €3,438 million, of which €1,151 million were denominated in Brazilian reais, €1,520 million in Mexican pesos and €767 million in Chilean pesos. In addition to these options, the underlying carrying amount in pounds sterling was hedged through short positions for a notional amount of GBP 4,832 million. In 2008 gains amounting to €499.8 million arising from the settlement of options that were exercised in the year were taken to reserves. At December 31, 2008, the market value of the options not yet exercised represented an unrealized gain of €379 million, which was supplemented by the gain of €306 million on the sterling hedge.

F-137

Table of Contents

At 2007 year-end, the Group held foreign currency options in this connection with an equivalent euro nominal value of €12,878 million, of which €5,046 million were denominated in pounds sterling, €3,592 million in Brazilian reais, €2,560 million in Mexican pesos and €1,320 million in Chilean pesos. In 2007 gains amounting to €37.6 million arising from the settlement of options that matured in the year were taken to reserves. At 2007 year-end, the unrealized gain on the options not yet exercised amounted to €256 million.
b)
Off-balance-sheet funds under management
The detail of off-balance-sheet funds managed by the Group is as follows:
Millions of euros
2009 2008 2007
Investment funds
105,216 90,305 119,211
Pension funds
11,310 11,128 11,952
Assets under management
18,364 17,289 19,814
134,890 118,722 150,977
c)
Third-party securities held in custody
At December 31, 2009, the Group held in custody debt securities and equity instruments totaling €935,343 million entrusted to it by third parties.
37.
Discontinued operations
a)
Description of divestments (see Note 3)
i.
Banco de Venezuela
On July 6, 2009, Banco Santander announced that it had closed the sale of the stake in Banco de Venezuela to Banco de Desarrollo Económico y Social de Venezuela, a public institution of the Bolivarian Republic of Venezuela, for USD 1,050 million, of which USD 630 million were received in cash on that date and the remainder was received before year-end. This sale did not have a material impact on the Group’s consolidated income statement.
ii.
Pension fund managers (AFPs)
The agreement to sell the obligatory pension fund managers in Latin America (AFPs) to ING Groep NV for €906 million was executed in December 2007. The agreement covered the AFPs in Chile (AFP Bansander, S.A.), Colombia (AFP Cesantías Santander), Mexico (Afore Santander, S.A. de C.V.) and Uruguay (Afinidad AFAP, S.A.). These disposals gave rise to gross gains totaling €747 million.
Also, an agreement was entered into for the sale of the Argentine companies Orígenes AFJP, S.A. and Orígenes Seguro de Retiro, S.A. to ING Groep NV. The agreement was executed in December 2007 for €112 million, giving rise to a pre-tax gain of €84 million.
No significant operations were discontinued in 2008.

F-138

Table of Contents

b)
Profit and net cash flows from discontinued operations
The detail of the profit from discontinued operations is set forth below.
The comparative figures for 2008 and 2007 were restated in order to include the operations classified as discontinued in 2009.
Millions of euros
2009 2008 2007
Interest income / (Charges)
248 645 516
Income from equity instruments
— — 3
Income from entities accounted for using the equity method
1 6 3
Net fee and commission income
48 184 350
Gains/losses on financial assets and liabilities
10 63 43
Exchange differences
(1 ) (1 ) 2
Other operating income (net)
(8 ) (52 ) 19
Total income
298 845 936
Personnel expenses
(59 ) (162 ) (191 )
Other general administrative expenses
(61 ) (170 ) (170 )
Depreciation and amortization charge
(11 ) (33 ) (25 )
Provisions
(19 ) (62 ) (136 )
Impairment losses on financial assets
(104 ) (63 ) (72 )
Profit from operations
44 355 342
Gains (losses) on disposal of assets not classified as non-current assets held for sale
2 17 5
Operating Profit / (Loss) before tax
46 372 347
Income tax
(15 ) (53 ) (43 )
Gains on divestments (Note 1.i)
— — 831
Income tax on gains on divestments
— — (147 )
Profit from discontinued operations
31 319 988
Additionally, following is a detail of the net cash flows attributable to the operating, investing and financing activities of discontinued operations.
The comparative figures for 2008 and 2007 were restated in order to include the operations classified as discontinued in 2009.
Millions of euros
2009 2008 2007
Cash and cash equivalents at beginning of year
2,623 1,807 1,322
Cash flows from operating activities
(2,043 ) 751 523
Cash flows from investing activities
143 (30 ) (25 )
Cash flows from financing activities
(723 ) 94 (12 )
Cash and cash equivalents at end of year
— 2,623 1,807

F-139

Table of Contents

c)
Consideration received
The detail of the assets and liabilities associated with the operations discontinued in 2009 and 2007 is as follows:
Millions of euros
2009 2007
ASSETS:
8,839 1,081
Cash and balances with central banks
2,832 —
Financial assets held for trading
7 426
Other financial assets at fair value through profit or loss
— 110
Available-for-sale financial assets
544 43
Loans and receivables
5,125 422
Investments
7 —
Tangible assets and intangible assets
132 18
Tax assets
128 —
Other assets
63 62
LIABILITIES:
(8,089 ) (880 )
Financial liabilities at amortized cost
(7,619 ) (68 )
Liabilities under insurance contracts
— (640 )
Provisions
(309 ) (55 )
Tax liabilities
(12 ) —
Other liabilities
(149 ) (117 )
Carrying amount
750 201
Goodwill
2 5
Minority interests
(12 ) (19 )
Net amount
740 187
Gains on divestments
— 831
Consideration received
740 1,018
Of which: in cash
740 1,018
d)
Earnings per share relating to discontinued operations
The earnings per share relating to discontinued operations were as follows:
2009 2008 2007
Basic earnings per share (euros)
0.0032 0.0427 0.1318
Diluted earnings per share (euros)
0.0032 0.0425 0.1305
38.
Interest and similar income
Interest and similar income in the consolidated income statement comprises the interest accruing in the year on all financial assets with an implicit or explicit return, calculated by applying the effective interest method, irrespective of measurement at fair value; and the rectifications of income as a result of hedge accounting. Interest is recognized gross, without deducting any tax withheld at source.

F-140

Table of Contents

The detail of the main interest and similar income items earned in 2009, 2008 and 2007 is as follows:
Thousands of euros
2009 2008 2007
Balances with the Bank of Spain and other central banks
357,017 759,952 541,813
Loans and advances to credit institutions
2,520,858 3,819,453 2,836,935
Debt instruments
5,586,577 4,506,874 4,006,805
Loans and advances to customers
42,081,922 41,366,071 34,581,518
Insurance contracts linked to pensions (Note 25)
94,626 95,319 102,604
Other interest
2,532,004 4,495,877 3,442,583
Total
53,173,004 55,043,546 45,512,258
39.
Interest expense and similar charges
Interest expense and similar charges in the consolidated income statement includes the interest accruing in the year on all financial liabilities with an implicit or explicit return, including remuneration in kind, calculated by applying the effective interest method, irrespective of measurement at fair value; the rectifications of cost as a result of hedge accounting; and the interest cost attributable to pension funds.
The detail of the main items of interest expense and similar charges accrued in 2009, 2008 and 2007 is as follows:
Thousands of euros
2009 2008 2007
Deposits from the Bank of Spain and other central banks
296,449 422,265 279,624
Deposits from credit institutions
2,988,915 3,266,323 3,574,818
Customer deposits
11,810,713 15,000,393 12,072,200
Marketable debt securities and subordinated liabilities
8,590,796 13,232,690 11,451,605
Marketable debt securities
6,236,747 10,817,648 9,351,606
Subordinated liabilities (Note 23)
2,354,049 2,415,042 2,099,999
Provisions for pensions (Note 25)
481,771 453,852 487,165
Other interest
2,705,818 5,129,561 3,204,074
Total
26,874,462 37,505,084 31,069,486
40.
Income from equity instruments
Income from equity instruments includes the dividends and payments on equity instruments out of profits generated by investees after the acquisition of the equity interest.
The detail of Income from equity instruments is as follows:
Thousands of euros
2009 2008 2007
Equity instruments classified as:
Financial assets held for trading
238,209 222,795 210,562
Available-for-sale financial assets
198,265 329,962 209,435
Of which:
San Paolo IMI, S.p.A.
— — 80,500
Royal Bank of Scotland
— 74,575 —
436,474 552,757 419,997

F-141

Table of Contents

41.
Income from entities accounted for using the equity method — Associates
Share of results of entities accounted for using the equity method — Associates comprises the amount of profit or loss attributable to the Group generated during the year by associates.
The detail of this item is as follows:
Thousands of euros
2009 2008 2007
Cepsa (Note 12)
— 130,932 206,706
Attijariwafa (Note 8)
— 27,560 25,700
Sovereign Bancorp (**)
(15,691 ) (110,251 ) 43,355
RFS Holdings B.V. (*)
— 711,146 141,348
Other companies
15,171 32,367 20,940
(520 ) 791,754 438,049
(*)
Of the 2008 result of entities accounted for using the equity method relating to RFS Holdings B.V., €675 million correspond to Banco Real, an entity which was accounted for using the equity method in the first three quarters of 2008 and was fully consolidated in the last quarter of that year (see Note 3).
(**)
Fully consolidated from February 2009.
42.
Fee and commission income
Fee and commission income comprises the amount of all fees and commissions accruing in favor of the Group in the year, except those that form an integral part of the effective interest rate on financial instruments.
The detail of Fee and commission income is as follows:
Thousands of euros
2009 2008 2007
Collection and payment services:
Bills
326,974 313,312 238,460
Demand accounts
858,696 570,404 555,826
Cards
1,761,868 1,566,972 1,428,820
Cheques and other
279,882 347,879 403,204
Orders
309,582 247,502 231,596
3,537,002 3,046,069 2,857,906
Marketing of non-banking financial products:
Investment funds
1,070,672 1,458,148 1,812,975
Pension funds
148,986 160,331 171,935
Insurance
1,963,847 1,864,109 1,459,122
3,183,505 3,482,588 3,444,032
Securities services:
Securities underwriting and placement
254,298 102,199 260,641
Securities trading
324,672 353,603 434,182
Administration and custody
242,665 247,612 266,084
Asset management
67,490 79,100 87,152
889,125 782,514 1,048,059
Other:
Foreign exchange
154,847 96,187 56,594
Financial guarantees
485,149 391,280 352,971
Commitment fees
199,563 265,807 166,374
Other fees and commissions
2,277,177 1,676,955 1,364,107
3,116,736 2,430,229 1,940,046
10,726,368 9,741,400 9,290,043

F-142

Table of Contents

43.
Fee and commission expense
Fee and commission expense shows the amount of all fees and commissions paid or payable by the Group in the year, except those that form an integral part of the effective interest rate on financial instruments.
The detail of Fee and commission expense is as follows:
Thousands of euros
2009 2008 2007
Fees and commissions assigned to third parties
1,050,665 936,713 906,831
Of which: Cards
728,485 710,330 653,686
Brokerage fees on lending and deposit transactions
29,591 26,925 21,882
Other fees and commissions
565,978 511,467 492,825
1,646,234 1,475,105 1,421,538
44.
Gains/losses on financial assets and liabilities
Gains/losses on financial assets and liabilities includes the amount of the valuation adjustments of financial instruments, except those attributable to interest accrued as a result of application of the effective interest method and to allowances, and the gains or losses obtained from the sale and purchase thereof.
a)
Breakdown
The detail, by origin, of Gains/losses on financial assets and liabilities is as follows:
Thousands of euros
2009 2008 2007
Other financial instruments at fair value through profit or loss (*)
197,993 607,309 125,774
Financial instruments not measured at fair value through profit or loss
1,630,858 1,722,651 873,018
Of which: Available-for-sale financial assets
861,901 767,131 1,015,013
Of which:
Debt instruments
439,633 397,213 311,761
Equity instruments
422,268 369,918 703,252
Bolsas y Mercados Españoles
— — 110,587
BPI (Note 1.i)
— — 107,000
Telefónica, S.A.
— — 138,410
Of which: Other
768,957 955,520 (141,995 )
Of which:
Due to exchange of shares (Note 1.i)
723,917 — —
Due to repurchase of securitizations
97,459 — —
Disposal of ABN liabilities (Note 1.i)
— 741,100 —
Hedging derivatives and other
(125,655 ) (4,539 ) (100,346 )
Losses on assets to be delivered to Madoff/Lehman victims (Note 25)
— (643,000 ) —
Other financial assets and liabilities held for trading (*)
2,098,449 1,209,828 1,407,938
3,801,645 2,892,249 2,306,384
(*)
Includes the net gain or loss arising from transactions involving debt securities, equity instruments and derivatives included in this portfolio, since the Group manages its risk in these instruments on a global basis.

F-143

Table of Contents

Gains/losses due to exchange of shares and repurchase of securitizations
In July 2009 the Group offered the holders of certain securities issued by various Group companies (with a total nominal amount of approximately €9,100 million) the possibility of exchanging these securities for newly-issued Group securities plus a cash premium. Holders of securities with a cumulative nominal amount of €4,527 million subscribed to this exchange. Since the characteristics of the securities received and delivered in the exchange differ substantially, the Group wrote down the original financial liability and recognized a new financial liability for the securities delivered, and recognized with a credit to income an amount of €724 million relating to the difference between the carrying amount of the financial liability written down and the value of the consideration delivered.
Additionally, in August 2009 the Group invited the holders of securitization bonds to submit offers for the sale of their securities. The end nominal amount of bonds repurchased by the Group amounted to €609 million, and the Group recognized with a credit to income an amount of €97 million relating to the difference between the carrying amount of the financial liability written down and the value of the consideration delivered in cash.
b)
Financial assets and liabilities at fair value through profit or loss
The detail of the amount of the asset balances is as follows:
Millions of euros
2009 2008 2007
Loans and advances to credit institutions
22,196 14,061 19,160
Loans and advances to customers
18,405 9,657 31,726
Debt instruments
57,286 49,050 73,403
Other equity instruments
15,125 9,051 12,614
Derivatives
59,856 95,815 46,733
172,868 177,634 183,636
The foregoing table shows the maximum credit risk exposure of these assets. The Group mitigates and reduces this exposure as explained below.
With respect to derivatives, the Group has entered into framework agreements with a large number of credit institutions and customers for the netting-off of asset positions and the provision of collateral for non-payment. For derivatives arranged with customers, the Group applies a risk premium accrual policy. At December 31, 2009, the actual credit risk exposure of the derivatives was €42,761 million (December 31, 2008: €39,019 million) (see Note 36).
Loans and advances to credit institutions and Loans and advances to customers included repos amounting to €28,298 million at December 31, 2009 (December 31, 2008: €9,028 million). Also, mortgage-backed assets totaled €6,828 million (December 31, 2008: €7,020 million).
Debt instruments included €27,909 million of Spanish and foreign government debt securities at December 31, 2009 (December 31, 2008: €17,049 million).
At December 31, 2009 and 2008, the amount of the change in the year in the fair value of financial assets at fair value through profit or loss attributable to variations in their credit risk (spread) was not material, taking into account the Group’s management of these risks by purchasing protection through credit derivatives.

F-144

Table of Contents

The detail of the amount of the liability balances is as follows:
Millions of euros
2009 2008 2007
Derivatives
(58,713 ) (89,167 ) (49,448 )
Other liabilities
(99,175 ) (76,093 ) (113,668 )
(157,888 ) (165,260 ) (163,116 )
The difference between the amount recognized as liabilities at fair value and the amount which the Group would contractually be required to pay to the holders of the related obligations at maturity, in other than derivative transactions, was €352 million at December 31, 2009 (December 31, 2008: €605 million).
45.
Exchange differences
Exchange differences shows basically the gains or losses on currency dealings, the differences that arise on translations of monetary items in foreign currencies to the functional currency, and those disclosed on non-monetary assets in foreign currency at the time of their disposal.
46.
Other operating income and Other operating expenses
Other operating income and Other operating expenses in the consolidated income statement include:
Thousands of euros
2009 2008 2007
Insurance activity income
338,860 251,589 229,933
Income from insurance and reinsurance contracts issued
7,112,856 8,385,788 5,529,987
Of which:
Insurance and reinsurance premium income
6,950,140 8,150,685 5,377,949
Reinsurance income
162,716 235,103 152,038
Expenses of insurance and reinsurance contracts
(6,773,996 ) (8,134,199 ) (5,300,054 )
Of which:
Claims paid and other insurance-related expenses
(3,015,508 ) (3,480,255 ) (2,862,786 )
Net provisions for insurance contract liabilities
(3,540,038 ) (4,381,487 ) (2,239,778 )
Reinsurance premiums paid
(218,450 ) (272,457 ) (197,490 )
Non-financial services
140,404 117,718 152,072
Sales and income from the provision of non-financial services
377,800 586,872 771,027
Cost of sales
(237,396 ) (469,154 ) (618,955 )
Other operating income and expenses
(335,347 ) (97,486 ) (91,455 )
Other operating income
437,882 463,648 438,656
Of which, fees and commissions offsetting direct costs
116,851 155,785 195,272
Other operating expenses
(773,229 ) (561,134 ) (530,111 )
Of which, Deposit Guarantee Fund
(317,708 ) (179,023 ) (144,988 )
143,917 271,821 290,550
Most of the Bank’s insurance activity is carried on in life insurance.

F-145

Table of Contents

47.
Personnel expenses
a)
Breakdown
The detail of Personnel expenses is as follows:
Thousands of euros
2009 2008 2007
Wages and salaries
6,060,541 4,941,871 4,762,049
Social security costs
1,054,906 815,864 724,882
Additions to provisions for defined benefit pension plans (Note 25)
175,810 184,072 208,648
Contributions to defined contribution pension funds (Note 25)
114,080 77,703 47,485
Share-based payment costs
147,805 107,644 48,546
Of which:
Payments granted to the Bank’s directors
5,724 3,560 1,424
Other personnel expenses
897,141 686,197 642,733
8,450,283 6,813,351 6,434,343
b)
Headcount
The average number of employees in the Group, by professional category, was as follows:
Average number of employees (**)
2009 2008 2007
The Bank:
Senior management (*)
87 90 93
Other line personnel
16,292 16,364 16,153
Clerical staff
3,625 3,816 4,147
General services personnel
33 36 42
20,037 20,306 20,435
Banesto
9,678 10,330 10,524
Rest of Spain
5,970 5,940 5,582
Santander UK
20,809 15,593 15,771
Other companies (**)
113,582 82,168 71,751
170,076 134,337 124,063
(*)
Categories of deputy assistant executive vice presidents and above, including senior management.
(**)
Excluding personnel assigned to discontinued operations.
The functional breakdown, by gender, at December 31, 2009 is as follows:
Functional breakdown by gender
Managers Other line personnel Clerical staff
Men Women Men Women Men Women
Continental Europe
2,659 651 18,413 13,735 6,920 5,784
United Kingdom
369 108 4,058 4,234 4,881 11,135
Latin America
1,926 667 16,343 13,329 24,180 40,068
Total
4,954 1,426 38,814 31,298 35,981 56,987
The same information, expressed in percentage terms at December 31, 2009, is as follows:
Functional breakdown by gender
Managers Other line personnel Clerical staff
Men Women Men Women Men Women
Continental Europe
80 % 20 % 57 % 43 % 54 % 46 %
United Kingdom
77 % 23 % 49 % 51 % 30 % 70 %
Latin America
74 % 26 % 55 % 45 % 38 % 62 %
Total
78 % 22 % 55 % 45 % 39 % 61 %

F-146

Table of Contents

The labor relations between employees and the various Group companies are governed by the related collective labor agreements or similar regulations.
c)
Share-based payments
i.
The Bank
In recent years, as part of the deferred variable remuneration, the Group has set up remuneration systems tied to the performance of the stock market price of the shares of the Bank, based on the achievement of certain targets indicated below:
Date of Date of
Euros commencement expiry of
Number Exercise Year Employee Number of exercise exercise
of shares price granted group of persons period period
Plans outstanding at 01/01/07
96,251,390
Rights granted (Plan I09)
10,448,480 — 2007 Managers 5,476 06/23/07 07/31/09
Rights granted (Plan I10)
15,690,283 — 2007 Managers 5,506 06/23/07 07/31/10
Options cancelled, net (Plan I06)
(1,195,371 ) 9.09 Managers (45 ) 01/15/08 01/15/09
Plans outstanding at 12/31/07
121,194,782
Options exercised (Plan I06)
(65,983,402 ) 9.09 — Managers (1,555 ) 01/15/08 01/15/09
Rights granted (Plan I10)
46,560 — 2008 Managers 1 06/23/07 07/31/10
Rights granted (Plan I11)
17,122,650 — 2008 Managers 5,771 06/21/08 07/31/11
Plans outstanding at 12/31/08
72,380,590
Shares delivered (Plan I09)
(8,978,865 ) — 2007 Managers (5,066 ) 06/23/07 07/31/09
Options cancelled, net (Plan I06)
(29,072,617 ) 9.09 — Managers (957 ) 01/15/08 01/15/09
Rights cancelled, net (Plan I09)
(1,469,615 ) — 2007 Managers (410 ) 06/23/07 07/31/09
Rights granted (Plan I12)
18,866,927 — 2009 Managers 6,510 06/19/09 07/31/12
Plans outstanding at 12/31/09
51,726,420
Of which:
Plan I10
15,736,843 — 2007 Managers 5,507 06/23/07 07/31/10
Plan I11
17,122,650 — 2008 Managers 5,771 06/21/08 07/31/11
Plan I12
18,866,927 — 2009 Managers 6,510 06/19/09 07/31/12
Plan I06
In 2004 a long-term incentive plan (I06) was designed which, consisting of options on shares of the Bank, was tied to the achievement of two targets: appreciation of the Bank’s share price and growth in earnings per share, in both cases above a sample of comparable banks. These targets were achieved. The exercise period was from January 15, 2008 to January 15, 2009. This Plan was approved by the shareholders at the general shareholders’ meeting on June 18, 2005 and was cancelled at December 31, 2009.
The fair value of the equity instruments granted (€57.5 million) was charged to income (see Note 47.a), with a credit to equity, in the specific period in which the beneficiaries provided their services to the Group.
The executive directors were beneficiaries under this plan; the number of Bank share options held by them is indicated in Note 5.d.
Long-term incentive policy
At the board meeting on March 26, 2007, following the report of the appointments and remuneration committee, the Bank’s directors approved a long-term incentive policy aimed at the Bank’s executive directors and certain executive personnel of the Bank and of other Santander Group companies. This policy, through which the deferred share-based variable remuneration is paid, includes Bank share-based payments, and its implementation requires, in conformity with the law and the Bank’s Bylaws, specific resolutions to be adopted by the general shareholders’ meeting.

F-147

Table of Contents

Were it necessary or advisable for legal, regulatory or other similar reasons, the delivery mechanisms described below may be adapted in specific cases without altering the maximum number of shares linked to the plan or the essential conditions to which the delivery thereof is subject. These adaptations may involve replacing the delivery of shares with the delivery of cash amounts of an equal value.
The plans shaping the aforementioned incentive policy are as follows: (i) performance share plan; (ii) obligatory investment share plan; (iii) selective delivery share plan; and (iv) minimum investment program. The characteristics of the plans are set forth below:
(i)
Performance share plan
The deferred share-based variable remuneration is instrumented through a multiannual incentive plan, which is payable in shares of the Bank. The beneficiaries of the plan are the executive directors and other members of senior management, together with any other Group executives determined by the board of directors or, when delegated by it, the executive committee.
This plan involves successive three-year cycles of share deliveries to the beneficiaries, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end. The aim is to establish an adequate sequence between the end of the incentive program linked to the previous Plan I06 and the successive cycles of this plan. Thus, the first two cycles commenced in July 2007, the first cycle having a duration of two years (PI09) and the second cycle having a standard three-year term (PI10). The first cycle (PI09) was cancelled on July 31, 2009. In June 2008 and June 2009 the third and fourth cycles of the performance share plan (PI11 and PI12, respectively), both of which were to run for three years, were approved.
For each cycle a maximum number of shares is established for each beneficiary who remains in the Group’s employ for the duration of the plan. The targets, which, if met, will determine the number of shares to be delivered with respect to the cycles approved until June 2008, were defined by comparing the Group’s performance with that of a benchmark group of financial institutions and were linked to two parameters, namely Total Shareholder Return (TSR) and growth in Earnings per Share (EPS). The targets, which, if met, will determine the number of shares to be delivered under Plan PI12, are defined by comparing the Group’s performance with that of a benchmark group of financial institutions and are linked to only one parameter, namely Total Shareholder Return (TSR).
The ultimate number of shares to be delivered will be determined in each of the cycles by the degree of achievement of the targets on the third anniversary of commencement of each cycle (with the exception of the first cycle, for which the second anniversary was considered), and the shares will be delivered within a maximum period of seven months from the end of the cycle.
At the end of the cycles of Plan PI10 and Plan PI11, the TSR and the EPS growth will be calculated for Santander and each of the benchmark entities and the results will be ranked from first to last. Each of the two criteria (TSR and EPS growth) will be weighted at 50% in the calculation of the percentage of shares to be delivered, based on the following scale and in accordance with Santander’s relative position among the group of benchmark financial institutions:
Percentage of Santander’s place Percentage of
Santander’s place maximum shares in the EPS maximum shares
in the TSR ranking to be delivered growth ranking to be delivered
1 st to 6 th
50 % 1 st to 6 th 50 %
7 th
43 % 7 th 43 %
8 th
36 % 8 th 36 %
9 th
29 % 9 th 29 %
10 th
22 % 10 th 22 %
11 th
15 % 11 th 15 %
12th and below
0 % 12th and below 0 %

F-148

Table of Contents

In the case of Plan PI12 the TSR criterion will determine the percentage of shares to be delivered, based on the following scale and in accordance with Santander’s relative position among the group of benchmark financial institutions:
Percentage of
Santander’s place maximum shares
in the TSR ranking to be delivered
1 st to 5 th
100.0 %
6 th
82.5 %
7 th
65.0 %
8 th
47.5 %
9 th
30.0 %
10th and below
0 %
Any benchmark group entity that is acquired by another company, whose shares cease trading or that ceases to exist will be excluded from the benchmark group. In an event of this or any similar nature, the comparison with the benchmark group will be performed in such a way that, for each of the measures considered (TSR and EPS growth, as appropriate), the maximum percentage of shares will be delivered if Santander ranks within the first quartile (including the 25th percentile) of the benchmark group; no shares will be delivered if Santander ranks below the median (50th percentile); 30% of the maximum amount of shares will be delivered if Santander is placed at the median (50th percentile). The linear interpolation method will be used for calculating the corresponding percentage for positions between the median and the first quartile (25th percentile) (neither included).
The fair value of the equity instruments granted under these plans is €268 million (of which €85 million correspond to PI12), and this amount is being charged to Personnel expenses, with a credit to equity, over the specific period in which the beneficiaries provide their services to the Group.
Plan I09 matured in 2009. As established in the aforementioned plan, the number of shares received by each beneficiary was determined by the degree of achievement of the targets to which Plan I09 was tied and, since it fell short of the maximum number established, the unearned options were cancelled.
(ii)
Obligatory investment share plan
The deferred share-based variable remuneration is instrumented through this multiannual incentive plan, which is payable in shares of the Bank and is conditional upon compliance with certain investment and continued service requirements.
The current beneficiaries of the plan are the Group’s top 32 executives, who include the executive directors, non-director members of senior management and other executives (see Note 5).
This plan is structured in three-year cycles which start each year. The beneficiaries of the plan must use 10% of their gross annual variable cash-based remuneration (or bonus) to acquire shares of the Bank in the market (the Obligatory Investment). As resolved by the shareholders at the relevant general shareholders’ meeting, the Obligatory Investments were made before February 29, 2008, February 28, 2009 and February 28, 2010, respectively.
Participants who hold the shares acquired through the Obligatory Investment and remain in the Group’s employ for three years from the date on which the Obligatory Investment is made will be entitled to receive the same number of Bank shares as that composing their initial Obligatory Investment.
The shares will be delivered within a maximum period of one month from the third anniversary of the date on which the Obligatory Investment was made.
The shareholders at the general shareholders’ meeting of June 19, 2009 introduced, for the third cycle, a requirement additional to that of remaining in the Group’s employ, which is that in the three-year period from the investment in the shares, none of the following circumstances should concur: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, that relating to risks that is applicable to the executive in question; or (iii) a material restatement of the Bank’s financial statements, except when it is required pursuant to a change in accounting standards.

F-149

Table of Contents

(iii)
Selective delivery share plan
This plan envisages the selective delivery of shares in special circumstances relating to the hiring or retention of executives or employees of the Bank or other Group entities, except for executive directors. The board of directors, or by delegation thereof, the executive committee, shall decide when this instrument is to be used.
Each participant must have completed a minimum of three to four years of service at the Group. Each participant will be entitled to receive the shares upon completion of the minimum period of service.
The authorization may be used to assume share delivery obligations in the twelve months following the date it was granted. At the general shareholders’ meeting on June 19, 2009, the shareholders approved the delivery of shares of the Bank up to a maximum of 2,478,000 shares to be used selectively.
(iv)
Minimum investment program
This program consists of the obligation of the Group’s top 32 executives (including executive directors) to hold Bank shares equal to one year’s fixed remuneration. This amount must be reached within a maximum period of five years from March 26, 2007.
ii.
Abbey
The long-term incentive plans on shares of the Bank originally granted by management of Abbey to its employees (on Abbey shares) are as follows:
Pounds Date of Date of
sterling (*) commencement expiry of
Number Exercise Employee Number of exercise exercise
of shares price Year granted group of persons period period
Plans outstanding at 01/01/07
10,354,232 4.32
Options exercised
(1,535,325 ) 3.81
Of which:
Executive Options
(33,904 ) 3.96
Sharesave
(1,501,421 ) 3.81
Options cancelled (net) or not exercised
(770,595 ) —
Plans outstanding at 12/31/07
8,048,312 5.34
Options granted (Sharesave)
5,196,807 7.69 2008 Employees 6,556 (**) 11/01/08 11/01/11
11/01/08 11/01/13
Options exercised
(6,829,255 ) 4.91
Of which:
Executive Options
(132,107 ) 4.11
Sharesave
(4,506,307 ) 3.07
MTIP
(2,190,841 ) 8.73
Options cancelled (net) or not exercised
(262,868 ) 4.87
Of which:
Sharesave
(233,859 ) 4.13
MTIP
(29,009 ) 10.88
Plans outstanding at 12/31/08
6,152,996 7.00
Options granted (Sharesave)
4,527,576 7.26 2009 Employees 7,066 (**) 11/01/09 11/01/12
11/01/09 11/01/14
Options exercised
(678,453 )
Of which:
Sharesave
(678,453 ) 3.85
Options cancelled (net) or not exercised
(1,277,590 )
Of which:
Sharesave
(1,277,590 ) 7.48
Plans outstanding at 12/31/09
8,724,529 7.24
Of which:
Executive Options
12,015 4.54 2003-2004 Managers 2 03/26/06 03/24/13
Sharesave
8,712,514 7.24 2004-2008-2009 Employees 11,919 (**) 04/01/06 11/01/14
(*)
At December 31, 2009, 2008 and 2007 the euro/pound sterling exchange rate was €1.12600/GBP 1, €1.04987/GBP 1 and €1.36360/GBP 1, respectively.
(**)
Number of accounts/contracts. A single employee may have more than one account/contract. On September 30, 2008, 4,493 contracts were delivered with an execution date three years thereafter and 2,063 contracts with an execution date five years thereafter. The date of commencement of all these contracts is November 1, 2008.

F-150

Table of Contents

In 2005 the Group designed a Medium-Term Incentive Plan (MTIP) involving the delivery of Bank shares to Abbey executives. Under the plan, effective allocation of the shares in 2008 was tied to the achievement of business targets by Abbey (in terms of net profit and income). This plan was approved by the shareholders at the general shareholders’ meeting on June 17, 2006. Subsequently, it was considered necessary to amend the conditions of the plan in order to reflect the impact of the sale of Abbey’s life insurance business to Resolution on the income targets of Abbey for 2007. The board of directors, after obtaining a favorable report from the appointments and remuneration committee, submitted this amendment for ratification by the shareholders at the general shareholders’ meeting held on June 23, 2007. The amendment was approved thereat. In the first half of 2008, all the shares under this plan were delivered, and the plan was cancelled on June 30, 2008.
In 2008 the Group launched a voluntary savings scheme for Abbey employees (Sharesave Scheme) whereby employees who join the scheme will have between GBP 5 and GBP 250 deducted from their net monthly pay over a period of three or five years. When this period has ended, the employees may use the amount saved to exercise options on shares of the Bank at an exercise price calculated by reducing by up to 20% the average purchase and sale prices of the Bank shares in the first three trading days of September 2008. This scheme, which commenced in September 2009, was approved by the shareholders at the general shareholders’ meeting held on June 21, 2008 and is authorized by the UK tax authorities (HMRC). At the general shareholders’ meeting on June 19, 2009, the shareholders approved a new plan with similar features to the plan approved in 2008.
iii.
Fair value
The fair value of each option granted by the Group is calculated at the grant date. In order to value Plan I06 two valuation reports were performed by two multinational investment banks. These experts used the Black-Scholes equity option pricing model considering the following parameters: the expected life of the options, interest rates, volatility, exercise price, market price and dividends of the Bank shares and the shares of comparable banks. The fair value of the options granted was calculated by the Group on the basis of the two valuations.
With the exception of the share option plans which include terms relating to market conditions, the transfer terms included in the vesting conditions are not taken into account to estimate fair value. The transfer terms that are not based on market conditions are taken into account by adjusting the number of shares or share options included in the measurement of the service cost of the employee so that, ultimately, the amount recognized in the consolidated income statement is based on the number of shares or share options transferred. When the transfer terms are related to market conditions, the charge for the services received is recognized regardless of whether the market conditions for the transfer are met, although the non-market transfer terms must be satisfied. The share price volatility is based on the implicit volatility scale for the Bank’s shares at the exercise prices and the duration corresponding to most of the sensitivities.
The fair value of the performance share plans was calculated as follows:
•
It was assumed that the beneficiaries will not leave the Group’s employ during the term of each plan.
•
The fair value of the 50% linked to the Bank’s relative TSR position (100% in the case of PI12) was calculated, on the grant date, on the basis of the report of an independent expert whose assessment was carried out using a Monte Carlo valuation model, performing 10,000 simulations to determine the TSR of each of the companies in the benchmark group, taking into account the variables set forth below. The results (each of which represents the delivery of a number of shares) are classified in decreasing order by calculating the weighted average and discounting the amount at the risk-free interest rate.

F-151

Table of Contents

PI09 PI10 PI11 PI12
Expected volatility (*)
16.25 % 15.67 % 19.31 % 42.36 %
Annual dividend yield based on last few years
3.23 % 3.24 % 3.47 % 4.88 %
Risk-free interest rate (Treasury Bond yield — zero coupon) over the period of the plan
4.473 % 4.497 % 4.835 % 2.040 %
(*)
Calculated on the basis of historical volatility over the corresponding period (two or three years).
The application of the simulation model results in percentage values of 42.7% for the I-09 plan, 42.3% for the I-10 plan and 44.9% for the I-11 plan, which are applied to 50% of the value of the options granted in order to determine the cost per books of the TSR-based portion of the incentive, and a percentage value of 55.42% for the I-12 plan. Since this valuation refers to a market condition, it cannot be adjusted after the grant date.
•
In view of the high correlation between TSR and EPS, it was considered feasible to extrapolate that, in a high percentage of cases, the TSR value is also valid for EPS. Therefore, it was initially determined that the fair value of the portion of the plans linked to the Bank’s relative EPS position, i.e. of the remaining 50% of the options granted, was the same as that of the 50% corresponding to the TSR. Since this valuation refers to a non-market condition, it is reviewed and adjusted on a yearly basis.
The fair value of each option granted by Abbey was estimated at the grant date using a European/American Partial Differential Equation model with the following assumptions:
2009 2008 2007
Risk-free interest rate
2.5%-3.5% 2.9%-6.5% 5.0%-5.8%
Dividend increase, based solely on the average increase since 1989
10% 10% 10%
Volatility of underlying shares based on historical volatility over 5 years
29.0%-34.4% 20.2%-29.6% 19.8%-26.9%
Expected life of options granted under:
Employee Sharesave Plan
3, 5 and 7 years 3, 5 and 7 years 3, 5 and 7 years
Executive Share Option Plan
10 years 10 years 10 years
Medium-Term Incentive Plan
— — 3 years
48.
Other general administrative expenses
a)
Breakdown
The detail of Other general administrative expenses is as follows:
Thousands of euros
2009 2008 2007
Property, fixtures and supplies
1,613,675 1,206,895 965,937
Other administrative expenses
1,435,743 1,048,392 897,877
Technology and systems
785,504 504,196 468,273
Advertising
594,432 534,876 553,967
Communications
631,806 452,900 401,057
Technical reports
359,753 298,037 294,058
Per diems and travel expenses
262,097 257,079 271,842
Taxes other than income tax
312,994 279,250 265,542
Surveillance and cash courier services
331,220 235,207 188,717
Insurance premiums
47,098 35,674 35,057
6,374,322 4,852,506 4,342,327

F-152

Table of Contents

b)
Other information
Technical reports includes the fees paid by the various Group companies (detailed in the accompanying Appendices) to their respective auditors, the detail being as follows:
Millions of euros
2009 2008 2007
Audit of the annual financial statements of the companies audited by Deloitte (constant scope of consolidation)
14.6 18.3 15.9
Of which:
Abbey
2.7 3.3 4.1
Santander Brasil
1.5 2.4 0.8
Audit of the Bank’s separate and consolidated financial statements
1.0 1.0 1.0
Audit of the annual financial statements of the companies included in the Group in 2009
5.0
Of which:
Sovereign
2.3
Alliance & Leicester, Bradford & Bingley
1.0
In recent years, in addition to the audits of financial statements, the internal control audit (Sarbanes-Oxley) and the regulatory capital audit (BIS) were performed (for €4.7 million in 2009, €5.9 million in 2008 and €6.2 million in 2007) and other reports were prepared in accordance with the requirements of the legal and tax regulations issued by the national supervisory authorities of the countries in which the Group operates, totaling €3.6 million, €4.5 million and €3.7 million in 2009, 2008 and 2007, respectively (€2.7 million relate to companies included in the Group in 2009).
The detail of the other services provided to the various Group companies is as follows:
1.
Due diligence review and other corporate transaction services: €3.7 million (2008: €3.8 million; 2007: €3.7 million). Additionally, the Group’s auditors provided other non-attest services to various Group companies for €4.7 million in 2009, €5.3 million in 2008 and €5.3 million in 2007.
The services commissioned from the Group’s auditors meet the independence requirements stipulated by Law 44/2002, of 22 November, on Financial System Reform Measures and by the Sarbanes-Oxley Act of 2002, and they did not involve the performance of any work that is incompatible with the audit function.
2.
Services provided by audit firms other than Deloitte: €14.0 million (2008: €13.9 million; 2007: €12.5 million).

F-153

Table of Contents

49.
Gains/(losses) on disposal of assets not classified as non-current assets held for sale
The detail of Gains/(losses) on disposal of assets not classified as non-current assets held for sale is as follows:
Millions of euros
2009 2008 2007
Gains
On disposal of tangible assets
51 115 1,849
Of which:
Disposal of properties (Note 16)
— — 1,620
On disposal of investments
1,531 53 17
Of which:
Banco Santander Brasil (Note 3)
1,499 — —
Disposal of Porterbrook (Note 3)
— 50 —
1,582 168 1,866
Losses
On disposal of tangible assets
(14 ) (64 ) (55 )
On disposal of investments
(4 ) (3 ) (1 )
(18 ) (67 ) (56 )
1,565 101 1,810
50.
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations
The detail of Gains/(losses) on non-current assets held for sale not classified as discontinued operations is as follows:
Millions of euros
Net Balance
2009 2008 2007
Tangible assets
(1,362 ) 799 (23 )
Impairment (Note 12) (*)
(1,350 ) (70 ) (27 )
Gain on disposals
(12 ) 868 5
Of which, on disposal of the Ciudad Financiera business campus (Note 1.i)
— 836 —
Other gains
243 3,046 666
Of which:
Antonveneta (Note 1.i)
— 3,046 —
Intesa San Paolo (Note 1.i)
— — 566
Attijariwafa Bank (Note 1.i)
218 — —
Other losses
(106 ) (2,113 ) —
Of which, write-down of ownership interests in Royal Bank of Scotland and Fortis (Note 1.i)
— (2,043 ) —
Total
(1,225 ) 1,731 643
(*)
Including in 2009 the write-downs performed at year-end of €814 million (€554 million net of tax) (see Note 1.i).

F-154

Table of Contents

51.
Other disclosures
a)
Residual maturity periods and average interest rates
The detail, by maturity, of the balances of certain items in the consolidated balance sheets is as follows:
December 31, 2009
Millions of euros Average
On Less than 1 to 3 3 to 12 1 to 3 3 to 5 More than Interest
Demand 1 Month Months Months Years Years 5 Years Total Rate
Assets:
Cash and balances with central banks
19,998 10,585 521 3,310 475 — — 34,889 4.07 %
Available-for-sale financial assets:
Debt instruments
67 5,180 1,082 4,163 10,224 28,967 29,606 79,289 5.01 %
Loans and receivables:
Loans and advances to credit institutions
9,834 22,660 5,893 6,893 1,692 2,190 8,479 57,641 3.15 %
Loans and advances to customers
12,401 35,749 33,408 69,955 82,397 82,769 347,467 664,146 6.08 %
Debt instruments
70 321 506 1,738 2,387 4,297 5,640 14,959 4.57 %
42,370 74,495 41,410 86,059 97,175 118,223 391,192 850,924 5.67 %
Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks
383 7,359 258 14,109 6 227 3 22,345 1.69 %
Deposits from credit institutions
7,978 13,161 2,611 15,253 5,238 4,962 1,578 50,781 2.68 %
Customer deposits
235,974 69,839 47,546 64,755 34,148 30,571 4,848 487,681 2.70 %
Marketable debt securities (*)
1,079 16,545 12,709 37,033 50,302 31,498 57,324 206,490 2.38 %
Subordinated liabilities
3,412 752 34 1,841 1,714 3,097 25,955 36,805 5.69 %
Other financial liabilities
6,765 5,992 1,680 2,072 1,675 646 470 19,300 N/A
255,591 113,648 64,838 135,063 93,083 71,001 90,178 823,402 2.73 %
Difference (assets less liabilities)
(213,221 ) (39,153 ) (23,428 ) (49,004 ) 4,092 47,222 301,014 27,522
(*)
Includes promissory notes, certificates of deposit and other short-term debt issues.
December 31, 2008
Millions of euros Average
On Less than 1 to 3 3 to 12 1 to 3 3 to 5 More than interest
demand 1 month months months years years 5 years Total rate
Assets:
Cash and balances with central banks
20,920 22,121 846 621 — — 1,272 45,781 4.51 %
Available-for-sale financial assets:
Debt instruments
21 4,630 385 5,123 9,534 6,522 16,333 42,548 5.13 %
Loans and receivables:
Loans and advances to credit institutions
16,111 15,394 6,448 20,947 367 2,598 2,865 64,731 4.98 %
Loans and advances to customers
35,010 29,706 51,500 64,061 103,164 72,172 261,619 617,231 7.56 %
Debt instruments
38 — 600 6,071 30 173 10,741 17,652 3.15 %
72,100 71,851 59,779 96,824 113,096 81,464 292,829 787,944 6.94 %
Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks
1,681 366 2,427 4,720 — 14 4 9,212 4.38 %
Deposits from credit institutions
10,411 16,243 24,200 10,550 4,006 3,740 1,432 70,584 3.20 %
Customer deposits
182,475 64,213 70,655 49,707 20,349 9,602 9,014 406,015 5.08 %
Marketable debt securities (*)
7,250 22,168 26,241 25,125 42,132 23,509 81,218 227,642 4.21 %
Subordinated liabilities
190 571 41 1,103 3,506 1,283 32,179 38,873 5.69 %
Other financial liabilities
9,453 2,646 1,760 1,209 461 1,873 278 17,681
211,461 106,208 125,324 92,415 70,453 40,022 124,124 770,008 4.66 %
Difference (assets less liabilities)
(139,361 ) (34,356 ) (65,545 ) 4,409 42,642 41,442 168,705 17,936
(*)
Includes promissory notes, certificates of deposit and other short-term debt issues.

F-155

Table of Contents

December 31, 2007
Millions of euros Average
On Less than 1 to 3 3 to 12 1 to 3 3 to 5 More than interest
demand 1 month months months years years 5 years Total rate
Assets:
Cash and balances with central banks
14,102 10,278 5 10 1,265 4,295 1,108 31,063 5.93 %
Available-for-sale financial assets:
Debt instruments
31 953 1,070 2,060 5,837 6,450 17,786 34,187 5.11 %
Loans and receivables:
Loans and advances to credit institutions
8,227 13,147 6,333 4,113 884 759 5,021 38,483 4.53 %
Loans and advances to customers
9,848 29,446 34,228 65,696 58,124 62,048 279,982 539,372 6.75 %
Debt instruments
1 4 — 5 634 65 959 1,668 4.55 %
32,209 53,828 41,636 71,884 66,744 73,617 304,856 644,773 6.51 %
Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks
2,727 16,387 2,917 155 — — — 22,186 4.45 %
Deposits from credit institutions
5,706 22,412 6,504 6,197 3,002 3,111 1,756 48,688 4.55 %
Customer deposits
178,240 55,381 27,839 28,959 13,141 11,145 2,040 316,745 4.12 %
Marketable debt securities
520 13,310 17,600 24,198 35,294 26,745 88,250 205,917 4.61 %
Subordinated liabilities
88 8 61 569 4,065 2,357 29,045 36,193 5.69 %
Other financial liabilities
11,393 931 1,343 1,034 79 1,780 123 16,683 —
198,674 108,429 56,264 61,112 55,581 45,138 121,214 646,412 4.41 %
Difference (assets less liabilities)
(166,466 ) (54,602 ) (14,628 ) 10,772 11,163 28,479 183,642 (1,639 )
b)
Equivalent euro value of assets and liabilities
The detail of the main foreign currency balances in the consolidated balance sheet, based on the nature of the related items, is as follows:
Equivalent value in millions of euros
2009 2008 2007
Assets Liabilities Assets Liabilities Assets Liabilities
Cash and balances with central banks
28,198 — 26,685 — 16,155 —
Financial assets/liabilities held for trading
94,069 87,066 104,429 96,666 124,409 100,719
Other financial instruments at fair value
18,407 27,195 14,478 22,025 15,815 28,553
Available-for-sale financial assets
43,048 — 25,338 — 15,395 —
Loans and receivables
408,161 — 351,302 — 260,435 —
Investments
92 — 1,169 — 13,036 —
Tangible assets
3,918 — 3,286 — 4,665 —
Intangible assets
21,659 — 16,940 — 12,557 —
Financial liabilities at amortized cost
— 456,697 — 406,270 — 308,166
Liabilities under insurance contracts
— 6,675 — 2,985 — 2,139
Other
20,864 32,207 18,945 25,230 8,388 19,120
638,416 609,840 562,572 553,176 470,855 458,697

F-156

Table of Contents

c)
Fair value of financial assets and liabilities not measured at fair value
The financial assets owned by the Group are measured at fair value in the accompanying consolidated balance sheet, except for loans and receivables, equity instruments whose market value cannot be estimated reliably and derivatives that have these instruments as their underlyings and are settled by delivery thereof.
Similarly, the Group’s financial liabilities -except for financial liabilities held for trading, those measured at fair value and derivatives other than those having as their underlyings equity instruments whose market value cannot be estimated reliably- are measured at amortized cost in the accompanying consolidated balance sheet.
i)
Financial assets measured at other than fair value
Following is a comparison of the carrying amounts of the Group’s financial assets measured at other than fair value and their respective fair values at year-end:
Millions of euros
2009 2008 2007
Carrying Fair Carrying Fair Carrying Fair
Assets amount value amount value amount value
Loans and receivables:
Loans and advances to credit institutions
57,641 58,121 64,731 65,059 38,483 38,482
Loans and advances to customers
664,146 676,218 617,231 627,006 539,372 541,129
Debt instruments
14,959 13,718 17,653 17,645 1,668 1,668
736,746 748,057 699,615 709,710 579,524 581,280
ii)
Financial liabilities measured at other than fair value
Following is a comparison of the carrying amounts of the Group’s financial liabilities measured at other than fair value and their respective fair values at year-end:
Millions of euros
2009 2008 2007
Carrying Fair Carrying Fair Carrying Fair
Liabilities amount value amount value amount value
Financial liabilities at amortized cost:
Deposits from central banks
22,345 22,349 9,212 9,212 22,186 22,186
Deposits from credit institutions
50,781 50,905 70,583 70,740 48,687 48,728
Customer deposits
487,681 488,675 406,015 407,537 316,745 316,886
Marketable debt securities
206,490 206,765 227,642 227,413 205,917 206,132
Subordinated liabilities
36,805 37,685 38,873 36,705 36,193 36,808
Other financial liabilities
19,300 19,636 17,681 17,677 16,683 16,681
823,403 826,015 770,007 769,285 646,411 647,422

F-157

Table of Contents

52.
Geographical and business segment reporting
a)
Geographical segments
This first level of segmentation, which is based on the Group’s management structure, comprises five segments: four operating areas plus the Financial Management and Holdings Unit. The operating areas, which include all the business activities carried on therein by the Group, are Continental Europe, the United Kingdom (Santander UK), Latin America and Sovereign, based on the location of the Group’s assets.
The Continental Europe area encompasses all the Commercial Banking (including the Private Banking entity Banif), Wholesale Banking and Asset Management and Insurance business activities carried on in Europe with the exception of the United Kingdom. Latin America includes all the financial activities carried on by the Group through its banks and subsidiaries, as well as the specialized units of Santander Private Banking, which is treated as a globally managed independent unit, and the New York business. Sovereign includes the businesses of the Sovereign unit that was acquired in 2009.
The Financial Management and Holdings segment includes the centralized management business relating to financial and industrial investments, the financial management of the Parent’s structural currency position and its structural interest rate risk position and the management of liquidity and equity through issues and securitizations. As the Group’s holding unit, this segment handles the total capital and reserves, capital allocations and liquidity with the other businesses.
The financial statements of each operating segment are prepared by aggregating the figures for the Group’s various business units. The basic information used for segment reporting comprises the accounting data of the legal units composing each segment and the data available from the management information systems. All segment financial statements have been prepared on a basis consistent with the accounting policies used by the Group.
Consequently, the sum of the figures in the income statements of the various segments is equal to those in the consolidated income statement. With regard to the balance sheet, due to the required segregation of the various business units (included in a single consolidated balance sheet), the amounts lent and borrowed between the units are shown as increases in the assets and liabilities of each business. These amounts relating to intra-Group liquidity are eliminated and are shown in the Intra-Group eliminations column in the table below in order to reconcile the amounts contributed by each business unit to the consolidated Group’s balance sheet.
There are no customers located in areas other than those in which the Group’s assets are located that generate income exceeding 10% of total income.

F-158

Table of Contents

The condensed balance sheets and income statements of the various geographical segments are as follows:
Millions of euros
2009
Financial
Continental management and Intra-Group
(Condensed) Balance sheet Europe United Kingdom Latin America Sovereign holdings eliminations Total
Loans and advances to customers
322,026 277,713 97,901 34,605 306 — 682,551
Financial assets held for trading (excluding loans and advances)
50,764 41,245 22,521 163 4,331 — 119,024
Available-for-sale financial assets
20,132 897 29,154 9,568 26,870 — 86,621
Loans and advances to credit institutions
88,508 28,745 22,146 496 43,550 (103,608 ) 79,837
Non-current assets
5,054 1,424 3,926 391 979 — 11,774
Other asset accounts
21,955 24,522 38,105 3,568 144,697 (102,125 ) 130,722
Total assets/liabilities
508,439 324,546 213,753 48,791 220,733 (205,733 ) 1,110,529
Customer deposits
198,144 166,607 108,122 30,888 3,216 — 506,977
Marketable debt securities
50,610 58,611 8,411 11,236 83,094 — 211,962
Subordinated liabilities
2,079 8,577 4,888 2,129 19,131 — 36,804
Liabilities under insurance contracts
10,287 3 6,627 — — — 16,917
Deposits from central banks and credit institutions
115,487 57,879 32,765 736 38,832 (103,608 ) 142,091
Other liability accounts
105,366 26,946 34,994 1,689 11,274 (49,677 ) 130,592
Equity (share capital + reserves)
26,466 5,923 17,946 2,113 65,186 (52,448 ) 65,186
Other customer funds under management
70,289 10,937 62,759 327 — — 144,312
Investment funds
44,598 10,937 49,681 — — — 105,216
Pension funds
11,310 — — — — — 11,310
Assets under management
5,499 — 12,538 327 — — 18,364
Savings insurance
8,882 — 540 — — — 9,422
Customer funds under management
321,122 244,732 184,180 44,580 105,441 — 900,055

F-159

Table of Contents

Millions of euros
2008
Financial
Continental management and Intra-Group
(Condensed) Balance sheet Europe United Kingdom Latin America Sovereign holdings eliminations Total
Loans and advances to customers
325,378 202,622 96,054 — 2,836 — 626,890
Financial assets held for trading (excluding loans and advances)
72,303 50,029 20,965 — 2,686 — 145,983
Available-for-sale financial assets
12,806 2,785 19,208 — 14,122 — 48,921
Loans and advances to credit institutions
63,296 31,518 19,946 — 48,222 (84,189 ) 78,793
Non-current assets
4,612 1,210 3,272 — 1,195 — 10,289
Other asset accounts
17,644 30,626 30,496 — 178,563 (118,573 ) 138,756
Total assets/liabilities
496,039 318,790 189,941 — 247,624 (202,762 ) 1,049,632
Customer deposits
165,762 143,200 108,257 — 3,010 — 420,229
Marketable debt securities
52,077 67,996 8,674 — 107,657 — 236,404
Subordinated liabilities
1,752 9,890 3,847 — 23,384 — 38,873
Liabilities under insurance contracts
13,889 3 2,958 — — — 16,850
Deposits from central banks and credit institutions
85,232 60,063 29,331 — 39,434 (84,183 ) 129,877
Other liability accounts
153,674 32,306 24,291 — 14,435 (77,011 ) 147,695
Equity (share capital + reserves)
23,653 5,332 12,583 — 59,704 (41,568 ) 59,704
Other customer funds under management
75,473 7,180 48,408 — — — 131,061
Investment funds
47,725 7,180 35,400 — — — 90,305
Pension funds
11,128 — — — — — 11,128
Assets under management
4,479 — 12,810 — — — 17,289
Savings insurance
12,141 — 198 — — — 12,339
Customer funds under management
295,064 228,266 169,186 — 134,051 — 826,567

F-160

Table of Contents

Millions of euros
2007
Financial
Continental management and Intra-Group
(Condensed) Balance sheet Europe United Kingdom Latin America Sovereign holdings eliminations Total
Loans and advances to customers
314,715 184,080 70,228 — 2,076 — 571,099
Financial assets held for trading (excluding loans and advances)
44,847 53,787 22,846 — 1,328 — 122,808
Available-for-sale financial assets
10,149 44 12,628 — 21,528 — 44,349
Loans and advances to credit institutions
54,798 22,166 12,847 — 26,502 (58,670 ) 57,643
Non-current assets
5,373 4,685 1,805 — (202 ) — 11,661
Other asset accounts
20,185 7,103 21,631 — 168,924 (112,488 ) 103,355
Total assets/liabilities
450,067 271,865 141,985 — 220,156 (171,158 ) 912,915
Customer deposits
149,061 122,500 82,046 — 1,800 — 355,407
Marketable debt securities
70,004 76,056 5,031 — 82,196 — 233,287
Subordinated liabilities
2,433 8,345 2,540 — 22,875 — 36,193
Liabilities under insurance contracts
10,907 6 2,121 — — — 13,034
Deposits from central banks and credit institutions
66,027 38,687 19,064 — 47,789 (58,670 ) 112,897
Other liability accounts
131,362 23,094 22,595 — 18,541 (80,450 ) 115,142
Equity (share capital + reserves)
20,273 3,177 8,588 — 46,955 (32,038 ) 46,955
Other customer funds under management
101,713 10,225 48,048 — — — 159,986
Investment funds
72,945 10,225 36,041 — — — 119,211
Pension funds
11,952 — — — — — 11,952
Assets under management
7,865 — 11,949 — — — 19,814
Savings insurance
8,951 — 58 — — — 9,009
Customer funds under management
323,211 217,126 137,665 — 106,871 — 784,873

F-161

Table of Contents

Millions of euros
2009
Financial
Continental management and
(Condensed) Income statement Europe United Kingdom Latin America Sovereign holdings Total
INTEREST INCOME / (CHARGES)
11,456 3,934 11,959 1,160 (2,210 ) 26,299
Income from equity instruments
218 — 96 1 121 436
Income from companiess accounted for using the equity method
7 — 10 (3 ) (15 ) (1 )
Net fee and commission income
3,787 993 3,925 380 (5 ) 9,080
Gains/losses on financial assets and liabilities
687 506 1,663 14 1,376 4,246
Other operating income/(expenses)
139 27 15 (89 ) 52 144
TOTAL INCOME
16,294 5,460 17,668 1,463 (681 ) 40,204
Personnel expenses
(3,306 ) (1,170 ) (3,210 ) (457 ) (307 ) (8,450 )
Other administrative expenses
(2,028 ) (827 ) (2,822 ) (309 ) (388 ) (6,374 )
Depreciation and amortization of tangible and intangible assets
(570 ) (231 ) (566 ) (115 ) (114 ) (1,596 )
Net impairment losses on financial assets
(3,286 ) (881 ) (4,979 ) (571 ) (1,861 ) (11,578 )
Provisions (net)
(311 ) 16 (681 ) (55 ) (762 ) (1,793 )
Net impairment losses on non-financial assets
(41 ) — (22 ) (1 ) (100 ) (164 )
Other non-financial gains/(losses)
(81 ) — 40 (2 ) 382 339
OPERATING PROFIT (LOSS) BEFORE TAX
6,671 2,367 5,428 (47 ) (3,831 ) 10,588
Income tax
(1,768 ) (641 ) (1,257 ) 22 2,437 (1,207 )
PROFIT (LOSS) FROM CONTINUING OPERATIONS
4,903 1,726 4,171 (25 ) (1,394 ) 9,381
Profit (loss) from discontinued operations
(45 ) — 91 — (15 ) 31
CONSOLIDATED PROFIT (LOSS) FOR THE YEAR
4,858 1,726 4,262 (25 ) (1,409 ) 9,412
Attributable to minority interests
65 — 428 — (24 ) 469
PROFIT ATTRIBUTABLE TO THE PARENT
4,793 1,726 3,834 (25 ) (1,385 ) 8,943

F-162

Table of Contents

Millions of euros
2008 2007
Financial Financial
Continental United management and Continental United management and
(Condensed) Income statement Europe Kingdom Latin America Sovereign holdings Total Europe Kingdom Latin America Sovereign holdings Total
INTEREST INCOME / (CHARGES)
9,259 2,411 8,025 — (2,157 ) 17,538 7,742 2,334 6,144 — (1,777 ) 14,443
Income from equity instruments
266 — 58 — 229 553 202 1 34 — 183 420
Income from companies accounted for using the equity method
15 1 680 — 96 792 9 2 — — 427 438
Net fee and commission income
4,074 926 3,208 — 59 8,267 4,137 1,007 2,694 — 30 7,868
Gains/losses on financial assets and liabilities
764 500 857 — 1,353 3,474 732 436 674 — 1,113 2,955
Other operating income/(expenses)
181 49 10 — 32 272 133 65 49 — 43 290
TOTAL INCOME
14,559 3,887 12,838 — (388 ) 30,896 12,955 3,845 9,595 — 19 26,414
Personnel expenses
(3,123 ) (986 ) (2,504 ) — (200 ) (6,813 ) (3,037 ) (1,045 ) (2,105 ) — (247 ) (6,434 )
Other administrative expenses
(1,833 ) (617 ) (2,147 ) — (255 ) (4,852 ) (1,527 ) (784 ) (1,742 ) — (289 ) (4,342 )
Depreciation and amortization of tangible and intangible assets
(500 ) (158 ) (404 ) — (177 ) (1,239 ) (559 ) (101 ) (328 ) — (259 ) (1,247 )
Net impairment losses on financial assets
(2,476 ) (457 ) (3,020 ) — (331 ) (6,284 ) (1,557 ) (312 ) (1,546 ) — (14 ) (3,429 )
Provisions (net)
(89 ) (29 ) (533 ) — (989 ) (1,640 ) 45 5 (437 ) — (509 ) (896 )
Net impairment losses on non-financial assets
(16 ) — (6 ) — (1,027 ) (1,049 ) (8 ) (1 ) (30 ) — (1,510 ) (1,549 )
Other non-financial gains/(losses)
(38 ) 32 54 — 1,783 1,831 11 15 169 — 2,259 2,454
OPERATING PROFIT(LOSS) BEFORE TAX
6,484 1,672 4,278 — (1,584 ) 10,850 6,323 1,622 3,576 — (550 ) 10,971
Income tax
(1,686 ) (425 ) (663 ) — 938 (1,836 ) (1,777 ) (421 ) (809 ) — 684 (2,323 )
PROFIT (LOSS) FROM CONTINUING OPERATIONS
4,798 1,247 3,615 — (646 ) 9,014 4,546 1,201 2,767 — 134 8,648
Profit (loss) from discontinued operations
(21 ) — 340 — — 319 — — 303 — 685 988
CONSOLIDATED PROFIT (LOSS) FOR THE YEAR
4,777 1,247 3,955 — (646 ) 9,333 4,546 1,201 3,070 — 819 9,636
Attributable to minority interests
109 — 346 — 1 456 107 — 404 — 65 576
PROFIT ATTRIBUTABLE TO THE PARENT
4,668 1,247 3,609 — (647 ) 8,877 4,439 1,201 2,666 — 754 9,060
(*)
Presented for comparison purposes only.

F-163

Table of Contents

Following is the detail of revenue by the geographical segments used by the Group. For the purposes of the table below, revenue is deemed to be that recognized under Interest and similar income, Income from equity instruments, Fee and commission income, Gains/losses on financial assets and liabilities (net) and Other operating income in the accompanying consolidated income statements for 2009, 2008 and 2007.
Revenue (Millions of euros)
Revenue from external
customers Inter-segment revenue Total revenue
Segment 2009 2008 2007 2009 2008 2007 2009 2008 2007
Continental Europe
31,968 40,396 33,364 1,297 1,108 1,245 33,265 41,504 34,609
United Kingdom
10,595 13,621 12,602 1,287 2,099 389 11,882 15,721 12,991
Latin America
30,101 23,184 18,194 480 1,169 1,375 30,581 24,353 19,570
Sovereign
2,496 — — (19 ) — — 2,477 — —
Financial management and holdings
906 464 107 5,206 9,378 5,988 6,112 9,843 6,095
Inter-segment revenue adjustments and eliminations
— — — (8,251 ) (13,755 ) (8,998 ) (8,251 ) (13,755 ) (8,998 )
TOTAL
76,066 77,666 64,268 — — — 76,066 77,666 64,268
b)
Business segments
At this second level of segment reporting, the Group is structured into commercial banking, asset management and insurance and global wholesale banking; the sum of these three segments is equal to that of the primary operating geographical segments. Total figures for the Group are obtained by adding to the business segments the data for the financial management and holdings segment.
The commercial banking segment encompasses the entire commercial banking business (except for the corporate banking business managed globally using the global relationship model). The asset management and insurance segment includes the contribution to the Group arising from the design and management of the investment fund, pension and insurance businesses of the various units. The global wholesale banking segment reflects the returns on the global corporate banking business, those on investment banking and markets worldwide, including all the globally managed treasury departments and the equities business.

F-164

Table of Contents

The condensed income statements and other significant data are as follows:
Millions of euros
2009 2008 2007
Global Asset Financial Global Asset Financial Global Asset Financial
Commercial wholesale management management Commercial wholesale management management Commercial wholesale management management
(Condensed) Income statement banking banking and insurance and holdings Total banking banking and insurance and holdings Total banking banking and insurance and holdings Total
INTEREST INCOME / (CHARGES)
25,942 2,366 201 (2,210 ) 26,299 17,613 1,892 190 (2,157 ) 17,538 14,771 1,303 146 (1,777 ) 14,443
Income from equity instruments
127 188 — 121 436 154 164 6 229 553 77 148 12 183 420
Income from companies accounted for using the equity method
12 2 — (15 ) (1 ) 556 87 53 96 792 9 2 — 427 438
Net fee and commission income
7,523 1,131 431 (5 ) 9,080 6,861 883 464 59 8,267 6,432 911 495 30 7,868
Gains/losses on financial assets and liabilities
1,454 1,382 34 1,376 4,246 1,100 995 26 1,353 3,474 957 855 30 1,113 2,955
Other operating income/(expenses)
(230 ) (16 ) 338 52 144 31 (45 ) 254 32 272 47 (29 ) 229 43 290
TOTAL INCOME
34,828 5,053 1,004 (681 ) 40,204 26,315 3,976 993 (388 ) 30,896 22,293 3,190 912 19 26,414
Personnel expenses
(7,280 ) (725 ) (138 ) (307 ) (8,450 ) (5,806 ) (672 ) (135 ) (200 ) (6,813 ) (5,430 ) (625 ) (132 ) (247 ) (6,434 )
Other administrative expenses
(5,454 ) (392 ) (140 ) (388 ) (6,374 ) (4,051 ) (388 ) (158 ) (255 ) (4,852 ) (3,512 ) (387 ) (154 ) (289 ) (4,342 )
Depreciation and amortization of tangible and intangible assets
(1,367 ) (86 ) (29 ) (114 ) (1,596 ) (946 ) (98 ) (18 ) (177 ) (1,239 ) (878 ) (90 ) (20 ) (259 ) (1,247 )
Net impairment losses on financial assets
(9,744 ) 37 (10 ) (1,861 ) (11,578 ) (5,672 ) (281 ) — (331 ) (6,284 ) (3,357 ) (58 ) — (14 ) (3,429 )
Provisions (net)
(1,001 ) 6 (36 ) (762 ) (1,793 ) (607 ) (26 ) (18 ) (989 ) (1,640 ) (423 ) 58 (22 ) (509 ) (896 )
Net impairment losses on non-financial assets
(61 ) (3 ) — (100 ) (164 ) (24 ) — 2 (1,027 ) (1,049 ) (38 ) — (1 ) (1,510 ) (1,549 )
Other non-financial gains/(losses)
(43 ) — — 382 339 43 4 1 1,783 1,831 289 (94 ) — 2,259 2,454
OPERATING PROFIT (LOSS) BEFORE TAX
9,878 3,890 651 (3,831 ) 10,588 9,252 2,515 667 (1,584 ) 10,850 8,944 1,994 583 (550 ) 10,971
Income tax
(2,300 ) (1,125 ) (219 ) 2,437 (1,207 ) (1,825 ) (775 ) (174 ) 938 (1,836 ) (2,347 ) (486 ) (174 ) 684 (2,323 )
PROFIT (LOSS) FROM CONTINUING OPERATIONS
7,578 2,765 432 (1,394 ) 9,381 7,427 1,740 493 (646 ) 9,014 6,597 1,508 409 134 8,648
Profit (loss) from discontinued operations
46 — — (15 ) 31 319 — — — 319 151 40 112 685 988
CONSOLIDATED PROFIT (LOSS) FOR THE YEAR
7,624 2,765 432 (1,409 ) 9,412 7,746 1,740 493 (646 ) 9,333 6,748 1,548 521 819 9,636
Attributable to minority interests
465 — 28 (24 ) 469 434 (1 ) 22 1 456 457 9 45 65 576
PROFIT ATTRIBUTABLE TO THE PARENT
7,159 2,765 404 (1,385 ) 8,943 7,312 1,741 471 (647 ) 8,877 6,291 1,539 476 754 9,060

F-165

Table of Contents

53.
Related parties
The parties related to the Group are deemed to include, in addition to its subsidiaries, associates and jointly controlled entities, the Bank’s key management personnel (the members of its board of directors and the executive vice presidents, together with their close family members) and the entities over which the key management personnel may exercise significant influence or control.
Following is a detail of the ordinary business transactions performed by the Group with its related parties, distinguishing between associates and jointly controlled entities, members of the Bank’s board of directors, the Bank’s executive vice presidents, and other related parties. Related-party transactions were made on terms equivalent to those prevailing in arm’s-length transactions or, when this was not the case, the related compensation in kind was recognized.

F-166

Table of Contents

Millions of euros
2009 2008 2007
Associates Associates Associates
and jointly Members of Executive Other and jointly Members of Executive and jointly Members of Executive Other
controlled the board of vice related controlled the board of vice Other related controlled the board of vice related
entities directors presidents parties entities directors presidents parties entities directors presidents parties
Assets:
Loans and advances to credit institutions
3,990 — — — 4,019 — — — 3,169 — — 136
Loans and advances to customers
149 7 24 1,664 221 4 21 1,728 262 1 14 2,040
Debt instruments
609 — — 117 510 — — 464 — — — 293
Liabilities:
Deposits from credit institutions
(204 ) — — — (136 ) — — — (284 ) — — —
Customer deposits
(217 ) (8 ) (41 ) (551 ) (143 ) (11 ) (22 ) (405 ) (4 ) (7 ) (18 ) (265 )
Income statement:
Interest and similar income
96 — 1 111 203 — 1 83 110 — — 117
Interest expense and similar charges
(9 ) — (1 ) (31 ) (25 ) — (1 ) (10 ) (11 ) — — (6 )
Gains/losses on financial assets and liabilities
57 — — 8 3 — 1 32 6 — — 21
Fee and commission income
22 — — 10 28 — — 25 48 — — 15
Fee and commission expense
(11 ) — — — (23 ) — — — (16 ) — — —
Other:
Contingent liabilities
— — — 491 293 — — 479 365 — 2 968
Contingent commitments
137 1 3 3 164 1 7 13 358 1 1 280
Derivative financial instruments
6,868 — — 3,153 7,074 — — 1,314 7,823 — 4 831
In addition to the detail provided above, there were insurance contracts linked to pensions amounting to € 2,356 million at December 31, 2009 (December 31, 2008: € 2,447 million) and marketable debt securities held by Other related parties for € 1,007 million at December 31, 2009.

F-167

Table of Contents

54.
Risk management
Risk management at Santander is based on the following principles:
•
Involvement of senior management. Banco Santander’s risk committee and the Group units’ senior management committees are structured so as to involve senior management in the overall risk oversight process.
•
Independence of the risk function with respect to the business. The head of the Group’s risk division, Mr. Matías Rodríguez Inciarte, as third deputy chairman and in his capacity as chairman of the risk committee, reports directly to the board of directors. The segregation of functions between the business areas (which assume risk) and the risk areas entrusted with risk measurement, analysis, control and reporting provides sufficient independence and autonomy for proper risk control.
•
Decisions by consensus (even at branch level), which ensure that different opinions are taken into account and avoid individual decision making.
•
Decisions on credit transactions taken jointly by the risk and commercial areas.
•
Definition of powers. The type of activities to be performed, segments, risks to be assumed and risk decisions to be made are clearly defined for each risk taking unit and, if appropriate, for each risk management unit, based on their delegated powers. How transactions should be arranged and managed and where they should be accounted for is also defined.
•
Risk measurement. Risk measurement takes into account all risk exposures assumed across the business spectrum and uses measures based on risk components and dimensions, over the entire risk cycle, for the management of risk at any given time.
•
From a qualitative standpoint, this integrated vision translates into the use of certain integrating measures, which are mainly the risk capital requirement and return on risk-adjusted capital (RORAC).
•
Limitation of risk. The limitation of risk is intended to limit, in an efficient and comprehensive manner, the maximum levels of risk for the various risk measures, based on a knowledge of the risks incurred and supported by the necessary infrastructure for risk management, control and reporting, and to ensure that no undesired risks are assumed and that the risk-based-capital charge, risk exposures and losses do not exceed, in any case, the approved maximum levels.
•
Establishment of risk policies and procedures. The risk policies and procedures represent the basic regulatory framework, consisting of circulars, frameworks and operating rules, through which risk activities and processes are regulated.
•
Definition and assessment of risk methodologies. Risk methodologies provide the definitions of the internal risk models applicable by the Group and, therefore, stipulate the risk measures, product valuation methods, yield curve and market data series building methods, calculation of risk-based capital requirements and other risk analysis methods, and the respective calibration and testing processes.
The risk management and control process at Santander Group is structured into the following phases:
•
Establishment of risk management frameworks and policies that reflect the principles and standards governing the general modus operandi of Santander Group’s risk activities, based on a corporate risk management framework, which comprises the organizational model and the management model, and on a series of more specific corporate frameworks of the functions reporting to the risk unit. Local risk units transpose corporate risk regulations into their internal policies and develop the procedures required to implement them.
•
Identification of risks, through the constant review and monitoring of exposures, the assessment of new products and businesses and the specific analysis of singular transactions.

F-168

Table of Contents

•
Measurement of risks using methodologies and models implemented subject to a validation and approval process.
•
Definition of the Group’s risk appetite by setting overall and specific limits for the various types of risks, products, customers, groups, sectors and geographical locations.
•
Preparation and distribution of a complete set of reports that are reviewed daily by the heads at all levels of Santander management.
•
Implementation of a risk control system which checks, on a daily basis, the degree to which Santander’s risk profile matches the risk policies approved and the risk limits set.
For many years Santander Group has managed risk using a number of techniques and tools which are described in detail in various sections of this note. The most noteworthy of these techniques and tools, due to the foresight with which Santander implemented them at the time and their current significance in light of the new Basel Capital Accord (BIS II), are as follows:
•
Internal ratings- and scorings-based models which, by assessing the various qualitative and quantitative risk components by customer and transaction, make it possible to estimate, firstly, the probability of default and, subsequently, the expected loss, based on LGD estimates.
•
Economic capital, as a homogeneous measure of the risk assumed and a basis for the measurement of the management performed.
•
RORAC, which is used both as a transaction pricing tool (bottom-up approach) and in the analysis of portfolios and units (top-down approach).
•
VaR, which is used for controlling market risk and setting the market risk limits for the various trading portfolios.
•
Scenario analysis and stress testing to supplement market and credit risk analyses in order to assess the impact of alternative scenarios, even on provisions and capital.
Consequently, Santander’s risk management fully identifies with BIS II principles, insofar as it recognizes and supports the leading-edge industry practices that the Group has implemented in advance.
Santander Group calculates the minimum regulatory capital in conformity with Bank of Spain Circular 3/2008 on the determination and control of minimum capital requirements for credit institutions. This Circular completed the transposition into Spanish banking legislation of Directives 2006/48/EC and 2006/49/EC that incorporate the new Basel Capital Accord (BIS II) into EU regulations.
1. CORPORATE GOVERNANCE OF THE RISK FUNCTION
The risk committee is responsible for proposing the Group’s risk policy for approval by the board within its governing and supervisory powers. Furthermore, the committee ensures that the Group’s activities are consistent with its risk tolerance level and, in this regard, it sets global limits for the main risk exposures, which it reviews systematically, and decides upon any transactions that exceed the powers delegated to lower-ranking bodies.
The risk committee, an executive body that adopts decisions within the scope of the powers delegated by the board, is presided over by the third deputy chairman of Santander Group and also comprises a further four members of the Bank’s board of directors.
In 2009 the risk committee held 99 meetings, evidencing the importance that Santander Group attaches to the proper management of its risks.

F-169

Table of Contents

The responsibilities assigned to the risk committee are essentially as follows:
•
To propose to the board the Group’s risk policy, which will identify, in particular:
•
The various types of risk (financial, operational, technological, legal and reputational, inter alia) facing the Group;
•
The information and internal control systems to be used to control and manage these risks;
•
The level of risk deemed acceptable by the Group;
•
The measures envisaged to mitigate the impact of the identified risks in the event that they materialize.
•
To conduct systematic reviews of the Group’s exposure to its main customers, economic activity sectors, geographical areas and types of risk.
•
To authorize the management tools and risk models and ascertain the result of their internal validation.
•
To ensure that the Group’s actions are consistent with the level of risk tolerance previously defined.
•
To be informed of, assess and follow any remarks and recommendations that may be periodically made by the supervisory authorities in discharging their function.
•
To resolve transactions outside the powers delegated to lower-ranking bodies and the overall limits for pre-classified risk categories for economic groups or in relation to exposure by type of risk.
The risk committee has delegated certain of its powers to risk subcommittees which are structured by geographical area, business line and type of risk, all of which are defined in the corporate governance model.
The risk function at Santander Group is performed through two risk units, which are independent from the business areas from both a hierarchical and a functional standpoint. The two risk units are directly linked to the board of directors through the risk committee and the third deputy chairman of the Group, who is the person ultimately responsible for the Group’s risk management.
In order to meet the requirements of Basel II and to enhance the Group’s capacity to cater for its business growth, the organizational and functional structure of the two risk units was defined as follows:
•
The integrated risk control and internal risk validation unit, with global-reaching corporate responsibilities, which provide support to the Group’s governing bodies, namely:
•
Validation of the internal risk models in order to assess the appropriateness and adequacy of the rating systems, internal processes and data processing systems, in conformity with Basel II.
•
Integrated risk control in order to ensure that the risk management and control systems are consistent with the Bank’s global risk profile.
•
The risk unit, whose functions are divided into two blocks:
•
A corporate structure , with global-reaching responsibilities (all risks, all geographical areas), which establishes the risk policies, methodologies and control systems: solvency, market and methodology.
•
A business structure , centred on the performance and management integration of the risk function in the Group’s commercial, global and local businesses. Within this structure, the Brazil corporate risk area was created in 2009 as part of the Group’s risk division. The objectives of this area include enhancing the relationship and cooperation between the global risk areas and the local unit in Brazil; boosting the globalization of the risk models; and obtaining and systematizing risk management information.
2. INTEGRATED RISK CONTROL
In 2008 Santander Group launched the integrated risk control function, which meant the early adoption of the new regulatory requirements then under discussion by the main bodies and forums (Basel Committee, CEBS, FSF, etc.) and of the recommendations on best risk management practices made by various public and private organizations.
In July 2009 the Basel Committee required credit institutions to implement this function immediately.

F-170

Table of Contents

Organization, mission and features of the function
The integrated risk control function is located in the integrated risk control and internal risk validation unit. This function provides risk control and management support to the Group’s governing bodies.
A special focus is placed on credit risk (including concentration and counterparty risks); market risk (including liquidity and structural interest rate and foreign currency risks); operational and technology risk; and compliance and reputational risk.
The integrated control mission is based on three modules:
Module 1) To guarantee that the management and control systems for the various risks inherent in Santander Group’s activities comply with the most stringent criteria and the best practices observed in the industry and/or established by regulators;
Module 2) To ensure that senior management has an all-embracing view of the profiles of the various risks assumed at any time and that these profiles are consistent with the pre-determined risk appetite; and
Module 3) To supervise adequate compliance, in due time and form, with any recommendations on risk management and control made as a result of inspections conducted by internal audit and by the competent supervisory authorities.
The integrated risk control function supports the risk committee by providing it with the best risk management practices.
The main features of the function are as follows:
•
Global and corporate approach: all risks, all businesses, all geographical areas.
•
It is a third layer of control, which follows the control performed in the first instance by the officer responsible for managing and controlling each risk at each business or functional unit (first layer of control) and by the officer responsible for the control of each risk at corporate level (second layer of control). This system ensures a vision and, therefore, the integrated control of all the risks incurred as a result of Santander Group’s business activities.
•
Special attention is paid to the development of best practices in the financial services industry, so that the Group is in a position to promptly incorporate any relevant advance.
•
The available information and the resources assigned by Santander Group to the control of the various risks are optimized in order to avoid overlaps.
Methodology and tools
Santander Group has developed internally, tailored to its specific needs, a methodology to systematize this function, together with the related proprietary supporting tools to formalize implementation of the methodology, making it traceable and objectifiable. The methodology and tools are articulated through the three modules described above for all the addressed risks:
Module 1) Testing or review guidelines have been defined for each risk. These guidelines consist of over 650 tests, considering all the risks referred to above, and are divided in control areas (e.g. corporate governance, organizational structure, management systems, management integration, technology environment, contingency plans and business continuity, etc.).
The Group performs the tests and gathers the relevant evidence assessed in the process —which enables it to standardize the control parameters of the various risks— on a half-yearly basis, with the inclusion of new tests if required. The supporting tool is the risk control monitor , serving as a repository for the findings of each test and of the related working papers.
Module 2 ) A combined balanced scorecard is being designed, together with the related tool, so as to make it easier for senior management to monitor, with an integrated approach, the various risks assumed and their consistency with the previously-established risk appetite.
Module 3) In order to follow up the recommendations on risk management and control made by internal audit and by the supervisory authorities, the Group uses SEGRE, a tool which also enables it to include the recommendations made by the integrated risk control function itself. The use of this tool is coordinated with the risk control areas involved so as to optimize the follow-up process.
The Bank of Spain can access these tools if it deems it appropriate.

F-171

Table of Contents

Main achievements in 2009
The main milestones achieved in 2009 were as follows:
(a) The first review cycle of the various risks was completed in close cooperation with the corporate risk control areas, testing and assessing the management and control systems in place for these risks. Areas for improvement were identified, giving rise to recommendations, with the related implementation schedule agreed upon with the areas involved, which will facilitate the subsequent follow-up of any progress made in this connection;
(b) The corporate integrated risk control model was submitted, together with the first diagnostic report, to the audit and compliance committee, to the risk committee and to the board of directors, which approved the model;
(c) The process of reporting to the board of directors with an integrated view of all risks was initiated; and
(d) The first steps were taken to extend the integrated risk control model to the Group’s main units.
Following is an analysis of the Group’s main types of risk: credit, market, operational and reputational risks.
3. CREDIT RISK
3.1 Introduction to the treatment of credit risk
Credit risk is the possibility of loss stemming from the total or partial failure of our customers or counterparties to meet their financial obligations to the Group.
The specialization of Santander Group’s risk function is based on the type of customer and, accordingly, a distinction is made between individualized customers and standardized customers in the risk management process:
•
Individualized customers are defined as those to which a risk analyst has been assigned, basically because of the risk assumed. This category includes wholesale banking customers, financial institutions and certain enterprises belonging to retail banking. Risk management is performed through expert analysis supplemented by decision-making support tools based on internal risk assessment models.
•
Standardized customers are those which have not been expressly assigned a risk analyst. This category generally includes individuals, individual entrepreneurs, and retail banking enterprises not classified as individualized customers. Management of these risks is based on internal risk assessment and automatic decision-making models, supplemented subsidiarily, when the model is not comprehensive enough or is not sufficiently accurate, by teams of analysts specializing in this type of risk.
3.2 Main aggregates and variations
The profile of the credit risk assumed by the Group is characterized by a diversified geographical distribution and the prevalence of retail banking operations.
A. Global map of credit risk — 2009
The following table shows the global map of the credit risk, expressed in nominal amounts (with the exception of exposure in derivatives and repos, which is expressed in credit risk equivalent), to which the Group was exposed at December 31, 2009.

F-172

Table of Contents

Data in millions of euros
SANTANDER GROUP — GROSS CREDIT RISK EXPOSURE
Sovereign Private
Customer Drawable Fixed- Fixed- Credit Drawable by Derivatives
Draw- by Income Income Institution Credit and Repos Change/
Downs Customers (Excl. Trad.) (Excl. Trad.) Drawdowns Institutions (CRE) Total % Dec-08
SPAIN
281,621 57,179 29,602 11,835 28,440 1,113 27,911 437,700 39.6 % -7.1 %
Parent bank
170,692 39,716 20,769 8,049 19,038 736 19,053 278,053 25.2 % -8.6 %
Banesto
80,109 11,167 6,204 2,003 6,696 225 8,701 115,104 10.4 % 3.2 %
Other
30,819 6,296 2,629 1,784 2,706 152 157 44,543 4.0 % -19.4 %
OTHER EUROPEAN COUNTRIES
305,831 36,827 3,844 16,025 9,025 155 18,877 390,583 35.3 % 10.8 %
Germany
22,256 9 0 159 432 0 5 22,861 2.1 % -5.0 %
Portugal
22,143 8,276 2,734 1,410 2,425 0 1,519 38,507 3.5 % 6.9 %
United Kingdom
228,044 26,484 464 14,136 5,172 155 17,132 291,587 26.4 % 12.9 %
Other
33,387 2,058 646 320 996 0 220 37,627 3.4 % 10.6 %
LATIN AMERICA
104,965 45,537 24,280 1,821 20,684 19 10,648 207,953 18.8 % 15.4 %
Brazil
62,952 30,996 16,719 1,212 14,535 0 5,564 131,978 11.9 % 38.3 %
Chile
20,200 6,300 2,220 502 1,812 19 3,209 34,261 3.1 % 22.0 %
Mexico
11,611 6,724 4,252 0 2,220 0 1,573 26,379 2.4 % -7.3 %
Other
10,202 1,516 1,089 108 2,118 0 303 15,335 1.4 % -45.6 %
UNITED STATES
43,814 9,395 1,742 9,157 2,970 77 105 67,260 6.1 %
REST OF THE WORLD
1,017 262 80 1 167 0 0 1,526 0.1 %
TOTAL GROUP
737,246 149,200 59,547 38,839 61,287 1,363 57,540 1,105,022 100 % 8.8 %
% /Total
66.7 % 13.5 % 5.4 % 3.5 % 5.5 % 0.1 % 5.2 % 100.0 %
% Change/Dec-08
6.5 % 27.2 % 68.5 % 45.3 % -30.8 % -77.3 % 16.9 % 8.8 %
Data at 31/12/09, prepared on the basis of legal-entity criteria.
CRE (Credit Risk Equivalent: net replacement value plus maximum potential value. Includes credit risk mitigants).
Derivatives and repos do not include Sovereign or Alliance & Leicester.
Balances drawn down by customers exclude repos (EUR 13,439 million) and Other financial assets — Customer loans (EUR 7,661 million).
Balances with credit institutions (excluding repos and trading portfolio) include EUR 29,718 million of deposits at central banks.
2009 was characterized by moderate lending growth, reflecting the lower demand for credit (a very significant portion of the growth observed was due to the change in the scope of consolidation as a result of the inclusion of Sovereign Bank). The credit risk exposure increased by 8.8% year-on-year, owing particularly to the balances drawn down and drawable by customers. Annual growth excluding Sovereign Bank was 3.3%.
Spain continues to be the most significant unit as regards credit risk exposure, albeit with a decline of 7% on December 2008. Other European countries represent more than one third of credit risk exposure. Particularly noteworthy in this respect is the presence in the United Kingdom. Taken as a whole, Europe represents 75% of credit risk exposure.
In Latin America, 96% of credit risk exposure is rated investment-grade.
With the inclusion of Sovereign Bank, the United States accounted for 6% of credit risk exposure at December 2009.
B. Variations in main aggregates in 2009
The changes in non-performing loans and the cost of credit reflect the impact of the deterioration of the economic environment, mitigated by prudent risk management, which generally enabled the Group to hold these data at levels lower than those of its competitors. As a result, the Group has a significant NPL coverage ratio.
The non-performing loans ratio stood at 3.24% in December 2009, an increase of 120 b.p. in the year. The NPL coverage ratio was 75.3%, as compared with a coverage ratio of 90.6% at 2008 year-end.
Specific credit loss provisions, net of recoveries of written-off assets, amounted to € 11,760 million, i.e. 1.57% of average credit risk exposure to customers (average lending plus off-balance-sheet exposures for the year), as compared with 1.16% in 2008.

F-173

Table of Contents

Credit Risk Exposure to Non-Performing Loans Specific Credit Loss
Customers * Ratio Coverage Ratio Provisions, Net of RAWO ** Cost of Credit (1)
(Millions of Euros) (%) (%) (Millions of Euros) (% of Risk)
2009 2008 2009 2008 2009 2008 2009 2008 2009 2008
Continental Europe
366,970 368,512 3.64 2.31 76.6 90.0 5,084 3,201 1.39 0.89
Santander Network
129,099 135,508 4.38 2.58 64.9 74.9 1,851 1,204 1.41 0.91
Banesto
86,681 87,925 2.97 1.64 64.1 106.5 737 450 0.89 0.53
Santander Consumer Finance
60,245 56,245 5.39 4.18 96.8 85.5 2,005 1,402 3.38 2.71
Portugal
34,501 34,760 2.27 1.72 64.6 77.2 95 6 0.27 0.02
United Kingdom
238,215 217,063 1.71 1.04 43.8 68.5 1,018 442 0.43 0.23
Latin America
117,146 112,040 4.25 2.95 105.2 108.3 5,053 3,965 4.44 3.44
Brazil
65,611 53,764 5.27 3.58 99.2 102.4 3,537 2,493 5.88 4.30
Mexico
12,676 13,482 1.84 2.41 264.4 132.1 824 879 6.13 5.44
Chile
21,384 18,848 3.20 2.64 89.0 102.4 402 350 1.98 1.73
Puerto Rico
4,132 4,810 9.60 6.92 53.3 61.0 89 138 1.99 2.84
Colombia
1,719 1,464 1.83 1.79 187.5 204.1 31 44 1.94 2.83
Argentina
2,936 3,271 2.60 1.83 141.0 178.6 91 49 2.99 1.54
Sovereign
38,770 5.35 62.5 578
Total Group
758,347 697,200 3.24 2.04 75.3 90.6 11,760 7,659 1.57 1.16
Memorandum item:
Spain
284,307 300,524 3.41 1.95 73.4 98.5 3,497 2,150 1.20 0.71
Data prepared on the basis of management criteria. Memorandum item Spain, on the basis of controller’s unit accounting criteria.
Data for 2008 have been restated including the full consolidation of Banco Real throughout the year.
*
Includes gross loans and advances to customers, guarantees and documentary credits.
**
RAWO = Recoveries of Assets Written Off.
(1)
Excludes Sovereign
C. Distribution of credit risk
Santander Group has a mainly retail profile (commercial banking represents 86.3%) and its main portfolios consist of products secured with collateral (mortgages).
3.3 Measures and measurement tools
A. Rating tools
Since 1993 the Group has used proprietary internal rating models to measure the credit quality of a given customer or transaction. Each rating relates to a certain probability of default or non-payment, determined on the basis of the Entity’s historical experience, with the exception of certain portfolios classified as low default portfolios. More than 200 internal rating models are used in the Group’s loan approval and risk monitoring process.
Global rating tools are applied to the sovereign risk, financial institution and global wholesale banking segments. Management of these segments is centralized at Group level, for both rating calculation and risk monitoring purposes. These tools assign a rating to each customer, which is obtained from a quantitative or automatic module, based on balance sheet ratios or macroeconomic variables, supplemented by the analyst’s expert judgement.
For individualized corporates and institutions, the parent of Santander Group has defined a single methodology for the construction of a rating in each country, based on an automatic module which includes an initial participation of the analyst that can be supplemented subsequently if required. The automatic module determines the rating in two phases, a quantitative phase and a qualitative phase. The latter is based on a corrective questionnaire which enables the analyst to modify the automatic score by up to ±2 rating points. The quantitative rating is determined by analyzing the credit performance of a sample of customers and the correlation with their financial statements. The corrective questionnaire consists of 24 questions divided into 6 assessment areas. The automatic rating (quantitative + corrective questionnaire) may in turn be modified by the analyst by overwriting it or using a manual scoring module.
Ratings assigned to customers are reviewed periodically to include any new financial information available and the experience in the banking relationship. The frequency of the reviews is increased in the case of customers that reach certain levels in the automatic warning systems and of customers classified as requiring special monitoring. The rating tools themselves are also reviewed in order to progressively fine-tune the ratings they provide.

F-174

Table of Contents

For standardized customers, both legal entities and individuals, the Group has scoring tools that automatically assign a score to the proposed transactions.
These loan approval systems are supplemented by performance rating models. These tools provide enhanced predictability of the risk assumed and are used for preventive and marketing activities.
B. Credit risk parameters
The assessment of customers or transactions using rating or scoring systems constitutes a judgement of their credit quality, which is quantified through the probability of default (PD), in accordance with Basel II terminology.
In addition to customer assessment, the quantification of credit risk requires the estimation of other parameters, such as exposure at default (EAD) and the percentage of EAD that will not be recovered (loss given default or LGD). Therefore, other relevant factors are taken into account in estimating the risk involved in transactions, such as the quantification of off-balance-sheet exposures, which depends on the type of product, or the analysis of expected recoveries, which is related to existing guarantees.
These factors are the main credit risk parameters. Their combination facilitates calculation of the probable loss or expected loss (EL). This loss is considered to be an additional cost of the activity which is reflected in the risk premium and must be charged in the transaction price.
These risk parameters also make it possible to calculate the regulatory capital in accordance with the regulations deriving from the new Basel Capital Accord (BIS II). Regulatory capital is determined as the difference between unexpected loss and expected loss.
Unexpected loss is the basis for the capital calculation and refers to a very high, albeit scantly probable, level of loss, which is not deemed to be recurring and must be catered for using capital.
The estimates of the risk parameters (PD, LGD and EAD) should be based on internal experience, i.e. on default observations and on the experience in defaulted loan recoveries.
For portfolios with scant internal default experience, such as banks, sovereign risk or global wholesale banking, parameter estimates are based on alternative sources: market prices or studies conducted by external agencies gathering the shared experience of a sufficient number of entities. These portfolios are known as low default portfolios.
For all other portfolios, parameter estimates are based on the entity’s internal experience. The PD is calculated by observing the cases of new arrears in relation to the final rating assigned to customers or to the scoring assigned to the related transactions.
LGD calculation is based on the observation of the recoveries of defaulted loans, taking into account not only the income and expenses associated with the recovery process, but also the timing thereof and the indirect costs arising from the recovery process.
EAD is estimated by comparing the use of committed facilities at the time of default and their use under normal (performing) circumstances, so as to identify the actual use of the facilities at the time of default .
The parameters estimated for global portfolios are the same for all the Group’s units. Therefore, a financial institution with an 8.5 rating will have the same PD, regardless of the Group unit in which its exposure is accounted for. By contrast, the retail portfolios have specific scoring systems in each of the Group’s units, which require separate estimates and specific assignment of parameters in each case.
The parameters are then assigned to the units’ on-balance-sheet transactions in order to calculate the expected losses and the capital requirements associated with their exposure.

F-175

Table of Contents

C. Global rating scales
The models committee approved the following relationship between internal ratings and PDs for the global banks and global wholesale banking portfolios.
Wholesale Banking
Internal Rating PD
9.3
0.018 %
9.2
0.020 %
9.0
0.024 %
8.5
0.037 %
8.0
0.060 %
7.5
0.095 %
7.0
0.151 %
6.5
0.240 %
6.0
0.382 %
5.5
0.607 %
5.0
0.965 %
4.5
1.535 %
4.0
2.442 %
3.5
3.884 %
3.0
6.178 %
2.5
9.826 %
2.0
15.627 %
1.5
24.855 %
1.0
39.532 %
Banks
Internal Rating PD
9.3
0.013 %
9.2
0.014 %
9.0
0.018 %
8.5
0.029 %
8.0
0.049 %
7.5
0.083 %
7.0
0.139 %
6.5
0.232 %
6.0
0.390 %
5.5
0.653 %
5.0
1.095 %
4.5
1.835 %
4.0
3.076 %
3.5
5.157 %
3.0
8.645 %
2.5
14.492 %
2.0
24.294 %
1.5
40.725 %
1.0
68.268 %
These PDs are applied consistently across the Group in keeping with the global management of these portfolios. As can be seen, although the PD assigned to the internal rating is not exactly the same for the same rating in both portfolios, it is very similar in the tranches where most exposure is concentrated, i.e. in the rating tranches above 6.
D. Distribution of EAD and associated EL
The table below details the distribution, by segment, of the outstanding credit risk exposure in terms of EAD, PD, LGD and EL. Approximately 83% of total risk exposure to customers (excluding sovereign and counterparty risks and other assets) relates to the corporate, SME and individuals segments, which reflects the commercial orientation of Santander Group’s business and risks. The expected loss arising from customer exposure is 1.09%, as compared with 0.90% for the Group’s total credit risk exposure, and, accordingly, the profile of the credit risk assumed can be classified as medium-low.

F-176

Table of Contents

Segmentation of Credit Risk Exposure
Average Average
EAD (1) % PD LGD EL
Sovereign debt
104,457 11.0 % 0.23 % 14.54 % 0.03 %
Counterparty
76,888 8.1 % 0.29 % 70.34 % 0.21 %
Public sector
3,129 0.3 % 0.70 % 21.32 % 0.15 %
Corporate
131,703 13.8 % 0.51 % 39.68 % 0.20 %
SMEs
186,321 19.5 % 4.65 % 28.11 % 1.31 %
Mortgage loans to individuals
302,395 31.7 % 3.30 % 7.04 % 0.23 %
Consumer loans to individuals
111,452 11.7 % 6.51 % 52.42 % 3.41 %
Credit cards — individuals
24,297 2.5 % 6.73 % 64.94 % 4.37 %
Other assets
13,066 1.4 % 2.47 % 29.73 % 0.74 %
Memorandum item — customers (2)
759,296 79.6 % 3.72 % 29.32 % 1.09 %
Total
953,707 100.00 % 3.04 % 29.52 % 0.90 %
Data at December 2009
(1)
Excluding doubtful assets
(2)
Excluding sovereign, counterparty and other assets
3.4 Observed loss: measures of cost of credit
To supplement the use of the advanced models described above, other habitual measures are used to facilitate prudent and effective management of credit risk based on observed loss.
The cost of credit risk at Santander Group is measured using different approaches: variation in non-performing loans in the recovery process (ending doubtful assets — beginning doubtful assets + assets written off — recovery of assets written off), net credit loss provisions (provisions to specific allowances — recovery of assets written off); and net assets written off (assets written off — recovery of assets written off).
3.5 Credit risk cycle
The risk management process consists of identifying, measuring, analyzing, controlling, negotiating and deciding on, as appropriate, the risks incurred in the Group’s operations. The parties involved in this process are the risk taking areas, senior management and the risk units.
The process begins at senior management level, through the board of directors, the executive committee and the risk committee, which establishes the risk policies and procedures, and the limits and delegations of powers, and approves and supervises the scope of action of the risk function.
The risk cycle comprises three different phases: pre-sale, sale and post-sale:
•
Pre-sale: this phase includes the risk planning and target setting processes, determination of the Group’s risk appetite, approval of new products, risk analysis and credit rating process, and limit setting.
•
Sale: this is the decision-making phase for both pre-classified and specific transactions.
•
Post-sale: this phase comprises the risk monitoring, measurement and control processes and the recovery process.
A. Risk limit planning and setting
Risk limit setting is a dynamic process that identifies the Group’s risk appetite through the discussion of business proposals and the attitude to risk.
This process is defined in the global risk limit plan, an agreed-upon comprehensive document for the integrated management of the balance sheet and the inherent risks, which establishes risk appetite on the basis of the various factors involved.

F-177

Table of Contents

The risk limits are founded on two basic structures: customers/segments and products.
For individualized risks, customers represent the most basic level, and individual limits are established (pre-classification) when certain features, generally materiality, concur.
For large corporate groups a pre-classification model, based on an economic capital measurement and monitoring system, is used. As regards the corporate segment, a simplified pre-classification model is applied for customers meeting certain requirements (thorough knowledge, rating , etc.).
In the case of standardized risks, the risk limits are planned and set using the credit management programs (PGC, using the Spanish acronym), a document agreed upon by the business areas and the risk units and approved by the risk committee or its delegated committees, which contains the expected results of transactions in terms of risk and return, as well as the limits applicable to the activity and the related risk management.
B. Risk analysis and credit rating process
Risk analysis is a pre-requisite for the approval of loans to customers by the Group.
This analysis consists of examining the customer’s ability to meet its contractual obligations to the Bank, which involves analyzing the customer’s credit quality, its risk transactions, its solvency and the return to be obtained in view of the risk assumed.
The risk analysis is conducted every time a new customer or transaction arises or with a pre-established frequency, depending on the segment involved. Additionally, the credit rating is examined and reviewed whenever a warning system is triggered or an event affecting the customer/transaction occurs.
C. Transaction decision-making
The purpose of the transaction decision-making process is to analyze transactions and adopt resolutions thereon, taking into account the risk appetite and any transaction elements that are important in achieving a balance between risk and return.
Since 1993 the Group has been using, among others, the RORAC (return on risk-adjusted capital) methodology for risk analysis and pricing in the decision-making process on transactions and deals.
D. Risk monitoring and control
In order to ensure adequate credit quality control in addition to the tasks performed by the internal audit division, the risk unit has a specific risk monitoring function, consisting of local and global teams, to which specific resources and persons in charge have been assigned.
This monitoring function is based on an ongoing process of permanent observation to enable early detection of any incidents that might arise in the evolution of the risk, the transactions, the customers and their environment, with a view to adopt mitigating actions. The risk monitoring function is specialized by customer segment.
For this purpose a system called “companies under special surveillance” (FEVE, using the Spanish acronym) has been designed that distinguishes four categories based on the degree of concern raised by the circumstances observed (extinguish, secure, reduce and monitor). The inclusion of a company in the FEVE system does not mean that there has been a default, but rather that it is deemed advisable to adopt a specific policy for this company, to place a person in charge and to set the policy implementation period. Customers classified as FEVE are reviewed at least every six months, or every three months for those classified in the most severe categories. A company can be classified as FEVE as a result of the monitoring process itself, a review performed by internal audit, a decision made by the sales manager responsible for that company or the triggering of the automatic warning system.
Assigned ratings are reviewed at least annually, but should any weakness be detected, or depending on the rating itself, more frequent reviews are performed.

F-178

Table of Contents

For exposures to standardized customers, the key indicators are monitored in order to detect any variance in the performance of the loan portfolio with respect to the forecasts contained in the credit management programs.
Loan portfolio — Spain
Portfolio overview
The total credit risk exposure of the loan portfolio in Spain amounted to € 284,307 million at 2009 year-end, 37.49% of the Group’s total credit risk.
This exposure in Spain shows a high degree of diversification, both at product and at customer segment levels. The risk exposure of the aggregate commercial networks of Santander and Banesto is distributed as follows: 48% to individualized companies, 32% to residential mortgage loans, and 6% to public institutions, as the most significant portfolios.
In accordance with Bank of Spain regulations, the Group considers as doubtful the total contractual debt more than 90 days past due and also includes the total amount of customer’s debt when the unpaid portion represents more than 25% of the customer’s debt or when preliminary legal proceedings have been initiated. All customer loans which, although performing, present reasonable doubts as to their total repayment, are also treated as doubtful.
Based on this definition, the NPL ratio of the loan portfolio in Spain was 3.41% at 2009 year-end, much lower than the aggregate total for banks (per data published by the Bank of Spain) and showing a more moderate growth trend.
The total allowances available for the possible losses arising from these loans represent a coverage ratio of 73.4%.
Additionally, in accordance with Bank of Spain regulations and instructions, the Group classifies as substandard any performing loans for which there is no reason to classify them as doubtful, but which exhibit a weakness which might give rise to defaults and losses in the future, because the customers concerned are the weakest of a certain group or sector that has been affected by extraordinary higher-risk circumstances. The loans classified in this category total € 6,724 million.
Analysis of the mortgage loans to individuals
As regards standardized risks, the mortgage loans to individuals are particularly noteworthy due to their importance with respect to the Group’s total loans and receivables in Spain .
The performance of this portfolio was affected by the situation of the real economy and its progressive deterioration during the year, which gave rise to a contraction in the demand for credit in the system in 2008, which continued in 2009. However, the number of applications for mortgage loans showed signs of a slight recovery in the last quarter of 2009.
The NPL ratio of the residential mortgage loan portfolio of the Group in Spain was 2.46% at 2009 year-end, which was lower than the average ratios of the financial system.
In view of the impaired scenario and taking into account the medium-low risk profile of this portfolio, the estimated impact at Group level is limited and the estimated final loss is low, due to the outstanding collateral for the loans. The mortgage portfolio and, therefore, its risk profile, is characterized by the prevalence of principal residence loans, an average LTV ratio of 52% (with values updated on the basis of the house price index published by the Ministry of Housing) and an effort ratio of 31% in loan approval.
Residential mortgage loans account for 31.8% of total credit risk of Santander and Banesto commercial banking, with 85% of the residential mortgage portfolio having an LTV ratio lower than 80%.
Loans to the construction and real estate sectors in Spain
These two sectors are among the industries most affected by the deterioration of the business cycle.

F-179

Table of Contents

Aggregate lending to the construction and real estate sectors in Spain (Banco Santander and Banesto) amounted to € 42,256 million. This portfolio includes financing for a wide array of activities such as the tourism industry, lease-back transactions, developments of subsidiaries of local and autonomous community governments, insurance companies, etc.
The NPL ratio for this portfolio, using the aforementioned criteria, stood at 6.2% at 2009 year-end, which is above the average for the Group, and specific provisions cover 45% thereof.
In addition, in accordance with Bank of Spain guidelines, risks amounting to € 4,332 million were classified as substandard.
A product of special relevance in the real estate portfolio is the housing developer mortgage loan totaling € 12,207 million at 2009 year-end, approximately 1.6% of Santander Group’s total lending.
At year-end, this portfolio had a high level of customer granularity, low concentration and an adequate level of collateral and provisions.
The analysis of the portfolio distribution, by stage of the work in progress of the financed developments, is as follows:
•
Developments with completed work / certificate of final completion obtained: 66.7% of outstanding risk.
•
Developments with a percentage of completion of more than 80%: 14.5% of outstanding risk.
•
Developments with a percentage of completion of between 50% and 80%: 8.9% of outstanding risk.
•
Percentage of completion of less than 50%: only 9.8%.
The percentages of completion detailed above show that the stage of completion of the developments included in this portfolio is high, with 81.2% of transactions outstanding having overcome, or almost overcome, the construction risk.
In addition to the permanent control performed by its risk monitoring teams, the Group has a specialist technical unit that monitors and controls this portfolio with regard to the stage of completion of construction work, planning compliance and sales control, and validates and controls progress billing payments.
The Group conducted its ordinary stress-testing exercises on this portfolio of loans to the construction and property development sectors.
Purchase of real estate assets (Spain)
The measures adopted in Spain to achieve more efficient risk management included the purchase of real estate assets. In 2009 the volume of such purchases fell significantly and the net balance of properties acquired amounted to € 2,935 million at 2009 year-end. In 2009 the beginning balance was € 3,768 million, purchases amounted to € 908 million (substantially all of them were made in the first half of the year) and provisions and write-downs totaled € 947 million.
The Group still considers the reasons for giving priority to this option over the legal proceedings route to be as follows:
•
Longer duration of legal proceedings as compared with the immediate availability of the assets.
•
Cost saving.
•
Enhanced viability of companies as a result of the injection of liquidity for their business activity
•
Reduction of potential loss in value of the loans to these customers.
•
Reduced exposure and expected loss.
Additionally, in line with habitual banking practice in risk management, the Group in Spain foreclosed properties amounting to € 1,357 million (gross) in 2009. The net balance of foreclosed assets is € 1,595 million.

F-180

Table of Contents

At 2009 year-end, the gross amount of properties acquired and foreclosed was € 4,304 million and € 2,217 million, respectively.
It should be noted that this process was implemented by applying a provisioning policy which was in keeping with the Group’s habitual principles of prudence, with the assets being reassessed regularly in order to ensure an adequate level of provisions. At 2009 year-end, the coverage of all these assets was 31%.
In addition to the habitual structure already in place for managing these assets, there are companies specialized in property management and disposals in order to provide a more efficient treatment of the properties acquired or foreclosed.
Analysis of potentially problematic exposure
Given the current economic circumstances of these sectors and the need for adjustments therein, on the basis of the figures shown in the above sections, the potentially problematic exposure -the sum of doubtful and substandard assets plus total acquired and foreclosed assets plus written-off assets- in the construction and property development sectors would amount to € 13,961 million.
Specific allowances were recognized for this portfolio amounting to € 4,024 million, which represents coverage of 29%. If the allowances determined collectively for Spain were included together with these specific allowances, the coverage would be 50%.
Refinancing
Refinancing is one of the management tools established to adapt the maturity structure of loan principal and interest to the new customer payment capacity.
At Santander Group, refinancing is confined, with stringent and selective criteria, to:
•
Viable transactions,
•
In which customers have a willingness to pay,
•
That improve the Bank’s position in terms of expected loss, and
•
In which refinancing does not discourage an additional effort by customers.
The Group’s corporate refinancing policy ensures uniform and strict application of these criteria across the various units:
•
The overall customer risk is assessed, regardless of the situation of each individual contract, and the highest possible level of guarantees is assigned to all customer risks.
•
As a general rule, the customer exposure is not increased.
•
All the alternatives to refinancing and their impacts are assessed, making sure that the results of this solution exceed those which would foreseeable be obtained if no refinancing were performed.
•
Special attention is paid to the guarantees and the possible future changes in their value.
•
Its use is restricted, and priority is given to the restructuring of loans that requires an additional effort from customers, and actions that only postpone the problem are avoided.
•
Refinanced transactions are subject to special monitoring.
Refinancing is used mainly to address situations having a low impact on customer payment capacity and which are expected to last for a medium/long period of time. With greater restrictions, it can also be used for more serious cases in which the payment difficulty is estimated to be of short duration. No refinancing is applied to the most severe cases, in which other solutions are sought to recover the amount owed.
In addition to the close monitoring of these portfolios by the Group’s risk management teams, the competent supervisory authorities and the Group’s internal audit pay special attention to the control and appropriate assessment of refinanced portfolios.

F-181

Table of Contents

Refinancing does not entail the release of provisions or the classification of the related transactions as performing, unless:
•
The criteria established in the regulations based on Bank of Spain circulars are met (i.e. collection of ordinary interest outstanding and new efficient guarantees or reasonable assurance of payment capacity);
•
The precautionary provisions included, using the principle of prudence, in the Group’s corporate policy (sustained payment for a period of between three and twelve months, depending on the transaction features and the type of guarantee) are met.
In the case of Spain (commercial networks of Santander plus Banesto), at 2009 year-end the balance of transactions refinancing exposures previously recognized as doubtful assets amounted to € 1,449 million, of which € 950 million related to corporate transactions and € 499 million to individuals.
Of the total refinanced amount, € 1,028 million met the requirements defined by the Bank of Spain to be reclassified as performing at the date of arrangement. At 2009 year-end, the NPL ratio of these transactions was 8.2%.
The remaining € 421 million related to refinancing transactions which, in conformity with the conditions established by the Bank of Spain, were maintained as non-performing at the date of arrangement.
Stress-testing exercises
Santander Group periodically performs stress-testing exercises on its main loan portfolios. These are theoretical exercises, required by the regulatory authorities, in which the effect on the Bank’s loan portfolios of different scenarios of a country’s main economic and financial variables is simulated. In the case of Spain, the exercise covered all the loan portfolios.
Analysis of the mortgage portfolio in the United Kingdom
With regard to standardized exposures, in addition to the loan portfolio in Spain, the mortgage loan portfolio in the United Kingdom is particularly noteworthy because of its significance with respect to Santander Group’s total loans and receivables.
This mortgage portfolio is focused on principal residence mortgages, showing a high risk quality in terms of the LTV ratio, which stands at 56% on average. The mortgage loans with the highest risk profile ( buy-to-let ) represent a scant percentage (barely 1%) of the total portfolio amount.
E. Risk control function
Supplementing the management process, the risk control function obtains a global view of the Group’s loan portfolio, through the various phases of the risk cycle, with a sufficient level of detail to permit the assessment of the current risk position and any changes therein.
Any changes in the Group’s risk position are controlled on an ongoing and systematic basis against budgets, limits and benchmarks, and the impacts of these changes in future situations, both of an exogenous nature and those arising from strategic decisions, are assessed in order to establish measures that place the profile and amount of the loan portfolio within the parameters set by the Group.
The risk control function is performed by assessing risks from various complementary perspectives, the main pillar being control by geographical location, business area, management model, product and process, thus facilitating the detection of specific areas of action requiring decision-making.
In 2009 one of the focus points of the risk control function was to ensure compliance with the corporate criteria for the classification of refinanced portfolios and to monitor production volumes and their performance.
In 2006, within the corporate framework established in the Group for compliance with the Sarbanes-Oxley Act, a corporate tool was made available on the Group’s intranet for the documentation and certification of all the subprocesses, operational risks and related mitigating controls. The risk division assesses annually the efficiency of the internal control of its activities.

F-182

Table of Contents

Scenario analysis
As part of the ongoing risk monitoring and control management process, the Group performs simulations of the portfolio performance in different adverse and stress scenarios (stress testing) which enable it to assess the Group’s capital adequacy in certain future situations. These simulations cover the Group’s main portfolios and are conducted systematically using a corporate methodology with the following features:
•
It determines the sensitivity of risk factors (PD, LGD) to certain macroeconomic variables.
•
It characterizes benchmark scenarios (globally and for each Group unit).
•
It identifies “break-off scenarios” (the levels above which the sensitivity of the risk factors to macroeconomic variables is more accentuated) and the distance of these break-off scenarios from the current situation and the benchmark scenarios.
•
It estimates the expected loss associated with each scenario and the changes in the risk profile of each portfolio arising from variations in certain macroeconomic variables.
The simulation models used by the Group use data of a full business cycle to calibrate the performance of risk factors given certain movements in macroeconomic variables.
In the wholesale banking area, since low-default portfolios are involved, there is not sufficient historical default data available to perform the calibration and, therefore, expert judgment is used.
Scenarios are constructed including the view of each unit and the global view. The main macroeconomic variables contained in these scenarios are as follows:
•
Unemployment rate
•
Housing price
•
GDP
•
Interest rate
•
Inflation
The scenario analysis enables senior management to better understand the foreseeable performance of the portfolio given certain changing market conditions and situations, and is an essential tool to assess the sufficiency of the provisions held in the event of stress scenarios.
The analyses performed, both in base and in acid scenarios, for the Group as a whole and for each unit, with a time horizon of five years, show the strength of the balance sheet against the various market and macroeconomic situations simulated.
F. Recovery process
Recovery management at Santander is defined as a strategic, integrated business activity.
Santander has a global model which is applied and implemented locally, considering the specific features of the business in each area of activity.
The specific objectives of the recovery process are as follows:
•
To achieve collection or regularization of unpaid balances, so that accounts can return to the performing status; if this is not possible, the aim is to fully or partially recover debts, regardless of their status for accounting or management purposes.
•
To maintain and strengthen the relationship with customers, paying attention to customer payment behavior.
The recovery process is part of the business and is based on the customer relationship and on the contribution to profit. Therefore, Santander has developed a proprietary management model which links and capitalizes on management capabilities and commercial and risk expertise to improve results and maintain the Group’s traditional culture with respect to quality and risk sensitiveness.

F-183

Table of Contents

This model is employed in all phases of management, both prior to default, through a preventive management that assists the customer or detects possible difficulties in advance, and in the subsequent phases of the recovery process (management of impaired loans, defaults and written-off assets.
3.6 Credit risk from other standpoints
Certain areas and/or specific views of credit risk deserve specialist attention, complementary to global risk management.
A. Concentration risk
Concentration risk control is key to the risk management process. The Group continuously monitors the degree of credit risk concentration, by geographical area/country, economic sector, product and customer group.
The risk committee establishes the risk policies and reviews the exposure limits required to ensure adequate management of credit risk concentration.
The Group is subject to Bank of Spain regulations on large exposures. In accordance with Bank of Spain Circular 3/2008, no exposure to a single individual or economic group, including all types of credit and equity risks, should exceed 25% of the Group’s capital. Also, the total amount of large exposures (defined as those exceeding 10% of eligible capital) may not exceed eight times the Group’s capital. Exposures to governments and central banks belonging to the OECD are excluded from this treatment.
At December 31, 2009, there was only one economic group —a UK financial group with an internal rating equal to “A”—, the exposure to which should be classified as a large exposure since it represented 11.15% of capital. Following the application of risk mitigation techniques and the regulations applicable to large exposures, the percentage stood at 1.67% of eligible capital (use of 6.7% of the 25% limit established by Bank of Spain regulations).
At December 31, 2009, the Group’s credit exposure to the top 20 borrower financial groups, excluding AAA rated governments and sovereign bonds denominated in local currency, accounted for 6.7% of the credit risk exposure to customers (lending plus off-balance-sheet exposures).
From the sectorial standpoint, the distribution of the corporate portfolio is adequately diversified.
The Group’s risk division works closely with the finance division in the active management of credit portfolios, which includes reducing the concentration of exposures through several techniques, such as the arrangement of credit derivatives for hedging purposes or the performance of securitization transactions, in order to optimize the risk/return ratio of the total portfolio.
B. Credit risk from financial market operations
This concept includes the credit risk arising in treasury operations with customers, mainly credit institutions. These operations are performed both via money market financing products with different financial institutions and via derivative instruments arranged for the purpose of serving our customers.
Risk control is performed using an integrated, real-time system that enables the Group to know at any time the unused exposure limit with respect to any counterparty, any product and maturity and at any Group unit.
Credit risk is measured at its current market value and its potential value (exposure value considering the future variation in the underlying market factors). Therefore, the credit risk equivalent (CRE) is defined as the sum of net replacement value plus the maximum potential value of the contracts in the future. The capital at risk or unexpected loss, i.e. the loss that, after deducting the expected loss, constitutes the economic capital, net of guarantees and recoveries, is also calculated.
The total credit risk exposure to credit institutions from financial market operations stands at 70.1%. By type of product, 48.6% relates to derivative transactions, mainly products without optionality, and the remaining 51.4% to liquidity and traditional financing products.

F-184

Table of Contents

Derivative transactions are concentrated on counterparties with high credit ratings and, therefore, 68.4% of the risk exposure is to counterparties with a credit rating of A- or above. In 2009 the total exposure arising from these transactions in terms of credit risk equivalent was € 38,704 million.
Distribution of OTC-derivative credit risk exposure by counterparty rating
RATING %
AAA
4.6 %
AA
12.6 %
A
51.2 %
BBB
21.3 %
BB
5.3 %
B
2.2 %
Other
2.8 %
The distribution of the credit risk exposure arising from derivatives, by counterparty, is as follows: 52% to banks, 37% to large corporations and 5% to SMEs.
With respect to the geographical distribution of the risk exposure, 15% is to Spanish counterparties, 21% to UK counterparties (operations performed mainly by Abbey) and 28% to other European countries, 10% to the United States and 20% to Latin America.
Credit derivative transactions
Santander Group uses credit derivatives to hedge credit transactions, to conduct customer business in financial markets and, to a lesser extent, as part of its trading operations. Credit derivatives represent a small portion of the Group’s operations as compared with other similar banks and are subject to strict internal controls and to sound operational risk minimization policies.
The risk inherent in these transactions is controlled using a broad set of limits such as VaR, nominal value per rating, sensitivity to spread by rating and name, sensitivity to recovery rate and sensitivity to correlation. Jump-to-default limits are also set by individual name, geographical area, sector and liquidity.
At December 31, 2009, for the Group’s trading operations, the sensitivity of credit transactions to increases of 1 basis point in spreads was € 1.9 million and the average annual VaR amounted to € 12.3 million.
In notional terms, the position in CDSs includes protection purchased for € 83,791 million and protection sold for € 73,684 million.
C. Country risk
Country risk is a credit risk component inherent in all cross-border credit transactions due to circumstances other than ordinary commercial risk. Its main elements are sovereign risk, transfer risk and other risks that can affect cross-border financial operations (war, natural disasters, balance of payments crises, etc.).
At December 31, 2009, the country risk exposure for which allowances must be recorded amounted to € 444 million, € 37 million of which related to intra-Group transactions. At 2008 year-end, the total regulatory country risk exposure amounted to € 5,422 million. The allowance recognized in this connection at 2009 year-end amounted to € 65 million, as compared with € 612 million at 2008 year-end.
This decrease arose basically from the fact that transactions with Brazil are no longer considered to give rise to country risk for which provisions must be recognized. This circumstance did not entail significant changes in the level of the Group’s credit risk exposure to Brazil.

F-185

Table of Contents

D. Sovereign risk
As a general rule, sovereign risk is the risk assumed in transactions with the central bank (including the regulatory cash reserve requirement), the issuer risk of the Treasury or Republic (government debt securities) and the risk arising from transactions with public entities with the following features: their funds are obtained only from fiscal income; they are legally recognized as entities directly included in the government sector; and their activities are of a non-commercial nature.
At December 31, 2009, the sovereign risk was distributed among Europe (58.5%), Latin America (36.9%), United States (4.1%) and other regions (0.5%). Noteworthy were the contributions from Spain (31.4%) and the United Kingdom (21.2%) in Europe and of Brazil (23.3%) and Mexico (7.0%) in Latin America. The rise in this risk with respect to the figure at 2008 year-end reflected mainly the increase in the risk exposures in the United Kingdom, Brazil, Spain, Chile and Miami and the inclusion of the risk exposures of Sovereign in the scope of consolidation, which was partially offset by the reduction arising from the exclusion of Venezuela from consolidation.
As regards Latin America as a whole, the sovereign risk exposure arose mainly from the subsidiary banks’ obligations to make certain deposits at the related central banks and from the fixed-income portfolios held as part of the structural interest rate risk management strategy. These exposures are taken in local currency and are financed out of local customer deposits, also denominated in local currency. The exposures to the sovereign risk of Latin American issuers denominated in currencies other than the official currency of the issuer country totaled € 2,595 million, which accounts for 5.5% of the total sovereign risk exposure to Latin American issuers.
E. Environmental risk
The environmental risk analysis of credit transactions is one of the main features of the strategic corporate social responsibility plan. The analysis is founded on two major cornerstones:
•
The Equator Principles: an initiative of the International Finance Corporation of the World Bank. These principles constitute an international standard for the analysis of the social and environmental implications of project finance transactions. The adoption of these principles involves the commitment to assess the social and environmental risks of projects financed in developing countries, using a sequential methodology. For this purpose, a questionnaire must be completed for all project finance transactions. This questionnaire has been designed to determine the sensitivity of the related transactions to social and environmental issues and their degree of compliance with the principles.
•
The VIDA tool: implemented since 2004, the main aim of this tool is to assess the environmental risk of both current and potential customer companies, using a system that classifies each of the companies into one of seven categories, depending on the degree of environmental risk incurred. In 2009, 38,510 companies in Spain were assessed using this tool.
4.
MARKET RISK
4.1
Activities subject to market risk
The measurement, control and monitoring of the market risk area comprises all operations in which net worth risk is assumed. This risk arises from changes in the risk factors 1 —interest rate, exchange rate, equities, credit spread, commodity prices and the volatility thereof— and from the liquidity risk of the various products and markets in which the Group operates.
1
Unlike in 2008, in 2009 two new factors are treated separately: the credit spread (previously included partially in interest rate) and commodity prices (previously included in equities, with a very low weight with respect to other factors).

F-186

Table of Contents

The activities are segmented by risk type as follows:
a)
Trading : this item includes financial services for customers, trading operations and positioning mainly in fixed-income, equity and foreign currency products.
b)
Balance sheet management : interest rate risk and liquidity risk arising as a result of the maturity and repricing gaps of all assets and liabilities. This item also includes the active management of the credit risk inherent in the Group’s balance sheet.
c)
Structural risks:
•
Structural foreign currency risk/hedges of results : foreign currency risk arising from the currency in which investments in consolidable and non-consolidable companies are made ( structural exchange rate ). This item also includes the positions taken to hedge the foreign currency risk on future results generated in currencies other than the euro ( hedges of results ).
•
Structural equities risk : this item includes equity investments in non-consolidated financial and non-financial companies that give rise to equities risk.
The treasury area is responsible for managing the positions taken in the trading activity.
The financial management area is responsible for managing the balance sheet management risk and structural risks centrally through the application of uniform methodologies adapted to the situation of each market in which the Group operates. Thus, in the convertible currencies area, financial management directly manages the parent’s risks and coordinates the management of the other units operating in these currencies. Decisions affecting the management of these risks are taken through the ALCO committees in the respective countries and, ultimately, by the parent’s markets committee.
The aim pursued by financial management is to ensure the stability and recurring nature of both the net interest margin of the commercial activity and the Group’s economic value, whilst maintaining adequate liquidity and solvency levels.
Each of these activities is measured and analyzed using different tools in order to reflect their risk profiles as accurately as possible.
4.2
Methodologies
Trading
The standard methodology applied to trading activities by Santander Group in 2009 was value at risk (VaR), which measures the maximum expected loss with a given confidence level and time horizon. This methodology was based on a standard historical simulation with a 99% confidence level and a one-day time horizon. Statistical adjustments were made to enable the swift and efficient incorporation of the most recent events that condition the level of risk assumed. Specifically, the Group uses a time window of two years or 520 daily data obtained retrospectively from the reference date of the VaR calculation. Two figures are calculated each day, one by applying an exponential decline factor which gives a lesser weighting to more distant observations in time, and another with uniform weightings for all observations. The VaR reported is the higher of these two figures.
VaR is not the only measure. It is used because it is easy to calculate and because it provides a good reference of the level of risk incurred by the Group. However, other measures are simultaneously being taken to enable the Group to exercise greater risk control in all the markets in which it operates.
One of these measures is scenario analysis , which consists of defining behavior scenarios for various financial variables and determining the impact on results of applying them to the Group’s activities. These scenarios can replicate past events (such as crises) or, conversely, determine plausible scenarios that are unrelated to past events. A minimum of three types of scenarios are defined ( plausible, severe and extreme ) which, together with VaR, make it possible to obtain a much more complete spectrum of the risk profile.

F-187

Table of Contents

Also, the market risk area, in accordance with the principle of independence of the business units, monitors daily the positions of each unit and the global positions, through an exhaustive control of changes in the portfolios, the aim being to detect possible incidents and correct them immediately. The daily preparation of an income statement is an excellent risk indicator, insofar as it allows us to identify the impact of changes in financial variables on the portfolios.
Lastly, due to their atypical nature, derivatives and credit management activities are controlled daily using specific measures. In the case of derivatives, a control is conducted of sensitivities to fluctuations in the price of the underlying (delta and gamma), in volatility (vega) and in time (theta). For credit management activities, measures such as sensitivity to spread, jump-to-default and risk concentrations by rating level are reviewed systematically.
With respect to the credit risk inherent in the trading portfolios, and in keeping with the recommendations made by the Basel Committee on Banking Supervision and with current regulations, an additional measure is calculated, the incremental default risk (IDR), in order to cover the default risk which is not properly captured in the VaR, through the variation of the related credit spreads. The instruments subject to control are basically fixed-income government and corporate bonds, derivatives on bonds (forwards, options, etc.) and credit derivatives (credit default swaps, asset-backed securities, etc.). The method used to calculate the IDR, which in essence is similar to that applied to the credit risk on non-trading positions, is based on direct measurements on the loss distribution tails at the appropriate percentile (99.9%). The Monte Carlo methodology is used and one million simulations are applied.
Balance-sheet management
Interest rate risk
The Group analyses the sensitivity of the net interest margin and market value of equity to changes in interest rates. This sensitivity arises from maturity and interest rate repricing gaps in the various balance sheet items.
On the basis of the balance-sheet interest rate position, and considering the market situation and outlook, the necessary financial measures are adopted to align this position with that desired by the Bank. These measures can range from the taking of positions on markets to the definition of the interest rate features of commercial products.
The measures used by the Group to control interest rate risk in these activities are the interest rate gap , the sensitivity of net interest margin and market value of equity to changes in interest rates, the duration of capital, value at risk (VaR) and scenario analysis.
a)
Interest rate gap of assets and liabilities
The interest rate gap analysis focuses on the mismatches between the interest reset periods of on-balance-sheet assets and liabilities and of off-balance-sheet items. This analysis facilitates a basic snapshot of the balance sheet structure and enables concentrations of interest rate risk in the various maturity buckets to be detected. Additionally, it is a useful tool for estimating the possible impact of potential changes in interest rates on the entity’s net interest margin and market value of equity.
The flows of all the on- and off-balance-sheet aggregates must be broken down and placed at the point of repricing or maturity. The duration and sensitivity of aggregates that do not have a contractual maturity date are analyzed and estimated using an internal model.
b)
Net interest margin (NIM) sensitivity
The sensitivity of the net interest margin measures the change in the expected interest income for a specific period (twelve months) given a shift in the yield curve.
The sensitivity of the net interest margin is calculated by simulating the margin both for a scenario of changes in the yield curve and for the current scenario, the sensitivity being the difference between the two margins so calculated.

F-188

Table of Contents

c)
Market value of equity (MVE) sensitivity
The sensitivity of the market value of equity is a complementary measure to the sensitivity of the net interest margin.
This sensitivity measures the interest rate risk implicit in the market value of equity based on the effect of changes in interest rates on the present values of financial assets and liabilities.
d)
Value at risk (VaR)
The value at risk for balance sheet aggregates and investment portfolios is calculated by applying the same standard as that used for trading: historical simulation with a confidence level of 99% and a one-day time horizon. Statistical adjustments were made to enable the swift and efficient incorporation of the most recent events that condition the level of risk assumed.
e)
Scenario analysis
Two interest rate performance scenarios are established: maximum volatility and sudden crisis. These scenarios are applied to the activities under analysis, thus obtaining the impact on the market value of equity and the net interest margin projections for the year.
Liquidity risk
Liquidity risk is associated with the Group’s ability to fund its commitments at reasonable market prices and to carry out its business plans with stable sources of funding. The Group permanently monitors maximum gap profiles.
The measures used to control liquidity risk in balance sheet management are the liquidity gap, liquidity ratios, stress scenarios and contingency plans.
a)
Liquidity gap
The liquidity gap provides information on contractual and expected cash inflows and outflows for a given period for each currency in which the Group operates. The gap measures net cash requirements or surpluses at a given date and reflects the liquidity level maintained under normal market conditions.
The Group conducts two types of liquidity gap analyses, depending on the balance sheet item in question:
1.- Contractual liquidity gap : all cash-flow generating on- and off-balance-sheet items are analyzed and placed at the point of contractual maturity. For assets and liabilities without contractual maturities, an internal analysis model is used based on a statistical study of the time series of the products, and the so-called stable or instable balance for liquidity purposes is determined.
2.- Operational liquidity gap : this is a scenario for normal liquidity profile conditions, since the cash flows of the on-balance-sheet items are placed at the point of probable liquidity rather than at the point of contractual maturity. In this analysis, the definition of the behavior scenario (renewal of liabilities, discounts in portfolio disposals, renewal of assets, etc.) is the fundamental point.
b)
Liquidity ratios
The liquidity ratio compares liquid assets available for sale or transfer (after the relevant discounts and adjustments have been applied) with the total amount of liabilities (including contingencies). This ratio shows, by non-consolidable currency, the Entity’s capacity to immediately respond to its commitments.
Cumulative net liquidity is defined as the 30-day cumulative gap obtained from the modified liquidity gap. The modified contractual liquidity gap is calculated on the basis of the contractual liquidity gap, and places liquid assets at the point of settlement or transfer rather than at the point of maturity.

F-189

Table of Contents

Additionally, other ratios or measures relating to the structural liquidity position are used:
•
Loans to net assets
•
Customer deposits, insurance and medium/long-term financing to loans
•
Customer deposits, insurance and medium/long-term financing, equity and other liabilities to total loans and fixed assets
•
Short-term funding to net liabilities
c)
Scenario analysis/Contingency plan
Santander Group’s liquidity management focuses on adopting all the measures required to prevent a crisis. It is not always possible to predict the causes of a liquidity crisis and, therefore, contingency plans focus on the modeling of potential crises by analyzing various scenarios, the identification of crisis types, internal and external communications, and individual responsibilities.
The contingency plan spans management activity from local unit to head office level. At the first sign of a crisis, it specifies clear lines of communication and suggests a wide range of responses to different levels of crisis.
Since a crisis can occur locally or globally, each local unit must prepare a contingency funding plan. Each local unit must inform headquarters of its contingency plan at least every six months so that it can be reviewed and updated. However, these plans must be updated more frequently if market conditions make this advisable.
Lastly, Santander Group is actively involved in the process initiated by the Basel Committee to strengthen the liquidity of financial institutions 2 , through two channels: on the one hand, by participating in the impact analysis of the regulatory changes proposed — basically the introduction of two new ratios: liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) — and, on the other, by being present at the various forums created to discuss and make suggestions on the issue (European Banking Federation, etc.), in both cases in close cooperation with the Bank of Spain.
Structural foreign currency risk / Hedges of results / Structural equities risk
These activities are monitored by measuring positions, VaR and results.
Complementary measures
Calibration and test measures
Back-testing consists of performing a comparative analysis between VaR estimates and daily clean results (i.e. profit or loss on the portfolios at the end of the preceding day valued at following-day prices). The aim of these tests is to verify and provide a measure of the accuracy of the models used to calculate VaR.
Back-testing analyses performed at Santander Group comply, at the very least, with the BIS recommendations regarding the verification of the internal systems used to measure and manage financial risks. Additionally, Santander Group also conducts hypothesis tests: excess tests, normality tests, Spearman’s rank correlation, average excess measures, etc.
The assessment models are regularly calibrated and tested by a specialized unit.
Coordination with other areas
Joint efforts are made daily with other areas to mitigate operational risk. This coordination work comprises mainly the reconciliation of positions, risks and results.
2
International framework for liquidity risk measurement, standards and monitoring (Basel Committee on Banking Supervision, Consultative Document, December 2009)

F-190

Table of Contents

4.3.
Control system
A.
Limit setting
The limit setting process is performed together with the budgeting activity and is the tool used to establish the assets and liabilities of each business activity. Limit setting is a dynamic process that responds to the level of risk appetite considered acceptable by senior management.
Objectives of the limits structure
The limits structure requires a process to be performed that pursues, inter alia, the following objectives:
•
To identify and delimit, in an efficient and comprehensive manner, the main types of financial risk incurred, so that they are consistent with business management and the defined strategy.
•
To quantify and communicate to the business areas the risk levels and profile deemed acceptable by senior management so as to avoid undesired risks.
•
To give flexibility to the business areas for the efficient and timely assumption of financial risks, depending on market changes, and for the implementation of the business strategies, provided that the acceptable levels of risk are not exceeded.
•
To allow business makers to assume risks which, although prudent, are sufficient to obtain the budgeted results.
•
To delimit the range of products and underlyings with which each treasury unit can operate, taking into account features such as assessment model and systems, liquidity of the instruments involved, etc.
4.4.
Risks and results in 2009
A.
Trading
Changes in VaR in 2009
The average VaR of the Group’s market trading operations in 2009, at € 30.2 million, was lower than that for 2008, reflecting the rise in global financial market volatility as a result of the collapse of Lehman Brothers, rather than an increase in the level of risk assumed. Also, in comparison with other similar financial groups, the Group’s trading risk profile can be classified as low. The dynamic management of this profile enables the Group to change its strategy in order to capitalize on the opportunities offered by an environment of uncertainty.
B.
Balance sheet management 3
B1. Interest rate risk
Convertible currencies
At 2009 year-end, the sensitivity of the net interest margin at one year to parallel increases of 100 basis points was concentrated on the euro yield curve ( € 209.7 million), the Parent bank being the main contributor, and on the sterling yield curve (negative by GBP 34.1 million). The sensitivity of the margin for other convertible currencies is scantly material.
Also at 2009 year-end, the equity value sensitivity to parallel increases of 100 basis points in the euro yield curve was € 743.4 million and was mostly concentrated on the Parent bank. With respect to the sterling curve, the sensitivity was GBP 11.2 million.
The inclusion of Sovereign in the scope of consolidation in 2009 had no significant impact on the sensitivities of the dollar yield curve.
In the current environment of low interest rates, the Bank’s sensitivity to rate increases, in terms of net interest margin and equity value, is slightly positive.
3
Includes the total balance sheet, except for financial assets and liabilities held for trading.

F-191

Table of Contents

Latin America
Quantitative risk analysis
The interest rate risk in balance sheet management portfolios in Latin America, measured in terms of sensitivity of the net interest margin (NIM) at one year to a parallel increase of 100 b.p. in the yield curve, remained at low levels throughout 2009, fluctuating within a narrow band and reaching a high of € 96 million in September. Measured in terms of equity value sensitivity, it fluctuated within a wider range, between € 250 million and € 750 million, showing an increase in the second half of the year, mainly as a result of the portfolio purchases in Brazil to hedge the on-balance sheet interest rate risk.
At 2009 year-end, the risk consumption for the region, measured in terms of 100 b.p. sensitivity of the MVE, stood at € 704 million (December 2008: € 430 million), while the net interest margin risk at one year, measured in terms of 100 b.p. sensitivity of this margin, was € 64 million (December 2008: € 27 million).
Geographical distribution
Net interest margin sensitivity
For Latin America taken as a whole, the consumption at December 2009 was € 64 million (sensitivity of the net interest margin at one year to increases of 100 basis points). Over 80% of the risk is concentrated in three countries: Brazil, Chile and Mexico.
Market value of equity sensitivity
For Latin America taken as a whole, the consumption at December 2009 was € 704 million (sensitivity of the market value of equity to a parallel increase of 100 basis points in interest rates). Over 90% of the market value of equity risk is concentrated in three countries: Brazil, Chile and Mexico.
B2. Structural credit risk management
The aim of structural credit risk management is to reduce, through the sale of assets, the concentrations that arise naturally as a result of commercial activity. These sales are offset by the acquisition of other assets which permit diversification of the loan portfolio as a whole. The financial management area analyses these strategies and submits management proposals to the ALCO with a view to optimizing credit risk exposure and contributing to the creation of value.
In 2009:
•
Assets amounting to € 16 billion were securitized. In view of the difficulties experienced by the securitization market since August 2007, all the issues were retained by the Group’s various units. These securitization transactions increase the Group’s liquidity position since they can be discounted at central banks.
•
AAA asset-backed bonds issued by Group companies were repurchased in the secondary market ( € 2 billion).

F-192

Table of Contents

B3. Funding and liquidity risk management
The Group’s liquidity management framework and the liquidity position at 2009 year-end are described below.
1. Liquidity management framework
Liquidity management is based on three basic pillars:
A) Organizational governance and board model — a sound governance model that ensures the participation of senior management and of the board in the decision-making process, thus facilitating integration with the Group’s global strategy.
B) Management — adapted to the liquidity needs of each business, in accordance with the decentralized organizational model.
C) Balance sheet analysis and liquidity risk measurement — thorough analysis of the balance sheet and of the changes therein in order to support decision-making.
A.
Organizational and governance model
Decisions relating to all structural risks are made through local ALCO committees, in coordination with the markets committee, which is the senior decision-making body responsible for coordinating all the global decisions affecting liquidity risk measurement, management and control.
The markets committee is presided over by the Entity’s chairman and consists of the second deputy chairman and managing director, the third deputy chairman (who, in turn is ultimately responsible for the Group’s risk management), the finance executive vice president and risk executive vice president and the heads of the business and analysis units.
The management and control functions for structural risks, including liquidity risk, are performed by the financial management and global market risk areas, respectively, which provide support to the ALCOs by submitting management analyses and proposals and controlling compliance with the limits set.
In keeping with best governance practices, the Group establishes a clear division between the implementation of the financial management strategy (for which the financial management area is responsible) and its monitoring and control (which is the responsibility of the market risk area).
B.
Management
Structural liquidity management seeks to finance the Group’s recurring business with optimal maturity and cost conditions, avoiding the need to assume undesired liquidity risks.
Funding and liquidity management is based on the following principles:
• Broad base of highly stable customer deposits: more than 90% are retail customer deposits captured by the various commercial units in the Group’s main markets.
• Financing of stable on-balance-sheet liquidity needs (commercial gap or difference between lending and deposits) through medium- and long-term issues, establishing a surplus of structural financing in order to cope with possible adverse situations.
• Diversification of funding sources to reduce concentration risk with respect to:
• Instruments/investors
• Markets/currencies
• Terms
• Strict control of short-term funding needs, in keeping with the Group’s policy of minimizing the raising of short-term financing.

F-193

Table of Contents

• Autonomy and responsibility of subsidiaries in the management of liquidity, with no structural support from the parent.
In practice, based on the aforementioned principles, the liquidity management performed by the Group consists of the following:
• Preparation of a liquidity plan each year on the basis of the funding needs arising from the budgets of each business and the methodology described in section B. Based on these liquidity requirements and taking into account certain prudential limits on the raising of short-term market financing, financial management establishes an issue and securitization plan for the year.
• Year-round monitoring of the actual changes in the balance sheet and in the financing requirements, which results in the relevant updates of the plan.
• Maintaining an active presence in a broad and diversified set of funding markets. In particular, the Group has 8 major independent issuer units which avoid any dependence on a specific market and endow it with significant issuance capabilities in the various markets.
• Supported by the foregoing, the Group has an adequate structure of medium- and long-term issues, well diversified by product (senior, subordinate, preference, mortgage-backed bonds, securitizations), with a conservative average term (4.5 years at 2009 year-end).
• All this translates into a moderate need for short-term wholesale financing at Group level which represented only 5% of net liabilities in 2009, as compared with 7% in 2008.
Subsidiaries have a high degree of autonomy in their liquidity management, in keeping with Santander Group’s decentralized funding model. Specifically, each subsidiary must budget its liquidity requirements and assess its own ability to raise funding in the wholesale markets so that it can establish the issue and securitization plan in cooperation with the parent.
Only in the case of Santander Consumer Finance, the parent (Banco Santander S.A.) provides the required liquidity, always at market prices considering the financing term and the rating of the liquidity taker.
C.
Balance sheet analysis and liquidity risk measurement
Funding and liquidity decision-making is based on a thorough understanding of the Group’s current situation (environment, strategy, balance sheet and liquidity position), of the future liquidity needs of the businesses (liquidity projection) and of the accessibility and situation of the funding sources in wholesale markets.
Its aim is to ensure that the Group maintains optimum liquidity levels to cover its short- and long-term funding requirements, optimizing the impact of the funding cost on the income statement.
This requires the monitoring of the balance sheet structure, the preparation of short- and medium-term liquidity projections and the establishment of basic measures, consistent with those described in the following section.
Simultaneously, various scenario analyses are conducted considering the additional liquidity needs that could arise if certain extreme but plausible events occur. These events might have a varying effect on the various balance sheet items and/or funding sources (extent of roll-over of wholesale financing, run-off of deposits, impairment of liquid assets,...), due either to the global market conditions or to the Group’s specific situation.
All this enables the Group to respond to a broad-range of potential adverse situations and to implement early, if necessary, the related contingency plans.
2. Current liquidity position
The Group maintains an excellent structural liquidity position and has the ability to cope with further stress market conditions, as reflected by the following factors:
A) Robust balance sheet
B) Funding dynamics

F-194

Table of Contents

A.
Robust balance sheet
The balance sheet at 2009 year-end had a sound structure consistent with the Group’s commercial nature. The loan portfolio, which accounted for 79% of net assets, was fully funded by customer deposits and medium- and long-term financing. Similarly, structural liquidity needs, i.e. loans and fixed assets, were also fully funded by structural funds (deposits, medium- and long-term financing and equity).
As regards wholesale market funding, the Group’s structure is based mainly on medium- and long-term instruments, which in aggregate account for 81% of total wholesale market funding.
Short-term funding is a residual portion of the structure (5% of total liabilities) and is amply covered by liquid assets. Noteworthy in this connection is the fact that the parent bank, the unit with the highest liquidity requirements, comfortably meets the liquidity horizon recommendations made by the CEBS (Committee of European Banking Supervisors).
Finally, it should be noted that the Bank has ample capacity to call on central banks to obtain immediate liquidity. At 2009 year-end, total eligible assets available for discounting at the various central banks to which the Group has access through its subsidiaries amounted to more than € 100 billion.
B.
Funding dynamics
Developments in 2009 enabled Santander to continue to improve its structural liquidity position based on two management levers, which proved highly effective in the current environment of economic downturn.
As a first lever, the Group was able to significantly increase its customer deposit base: by more than € 170 billion from the beginning of the crisis in June 2007 (+52%).
This increase was driven by two factors. On the one hand, the effort made to capture new deposits through the commercial networks, which was fostered by the customers’ confidence in the Group’s liquidity and capital adequacy. On the other, growth was also fuelled by the acquisitions made in recent years, specifically the assets from ABN Amro (basically Banco Real in Brazil and Uruguay), Alliance & Leicester, the deposits of Bradford & Bingley and Sovereign. Overall, these additions significantly increased the Group’s stable deposit base and improved its funding ratios.
The second lever is the high capacity to access wholesale funding markets, as was clearly demonstrated in the worst times of the financial crisis, when Santander took a leading role in the “opening” of certain markets to other domestic issuers.
C.
Structural foreign currency risk/hedges of results
Structural foreign currency risk arises from the Group’s operations in foreign currencies, and relates mainly to long-term investments, and the results and hedges of those investments.
Foreign currency risk is managed dynamically in order to limit the impact on capital of currency depreciations and optimize the financial cost of hedges.
The Group’s general policy for managing the foreign currency risk on long-term investments is to finance these investments in the currency in which they are denominated, provided that the market is sufficiently deep and the cost is justified by the expected currency depreciation. Also, hedges are arranged on an as-needed basis when it is considered that a local currency may weaken against the euro considerably faster than it is being discounted in the market.
At 2009 year-end, the largest long-term exposures (with their potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso and the Chilean peso. The Group hedges a portion of these long-term exposures through foreign exchange derivatives.
Additionally, the financial management division at consolidated level is responsible for managing the foreign currency risk inherent in the expected results and dividends of the Group at the units whose base currency is not the euro.

F-195

Table of Contents

D.
Structured financing operations
Santander Group’s ordinary operations are subject to low exposure and are diversified by product type, sector and number of transactions. The committed exposure at 2009 year-end amounted to € 13,983 million relating to 422 transactions. The breakdown is as follows: € 8,138 million (296 transactions) in project finance operations; € 3,712 million (39 transactions) in acquisition finance operations; and the remainder in LBOs and other modalities (87 transactions). No writedowns of the investment portfolio, in addition to the credit loss allowances amounting to € 79 million, are considered necessary. No significant leveraged buy-outs (LBOs) were carried out in 2009. Overall, the Group’s exposure in structured financing operations, resulting from its ordinary business transactions, decreased by 28.7% with respect to 2008 year-end.
A structured operations portfolio is also held as a result of the integration of the UK Alliance & Leicester group in 2008. This is a diversified portfolio consisting entirely of specialized lending transactions. The committed exposure at 2009 year-end amounted to GBP 5,872 million ( € 6,621 million) relating to 258 transactions. This exposure was reduced by 20.1% with respect to 2008 year-end.
Additionally, it should be noted that a partial securitization of the Group’s project finance portfolio amounting to € 308 million, extendable to € 850 million within two years, was formally executed in December 2009. This transaction releases regulatory capital as a result of the reduction in the related risk assets.
E.
Exposures related to complex structured assets
Santander Group continued to have highly limited exposure to complex structured instruments or vehicles, reflecting a management culture in which prudent risk management is one of the main identifying features. Specifically, at 2009 year-end, the Group had:
•
CDOs/CLOs: exposure amounting to € 637 million, mainly as a result of the integration of the Alliance & Leicester portfolio in 2008. 56% of this portfolio was rated AAA and 85% had a rating of A or above.
•
Non-Agency CMOs and pass-throughs with alt-A 4 mortgage underlying: exposure of € 730 million at 2009 year-end.
•
Hedge funds: the total exposure was not material ( € 549 million at 2009 year-end) and consisted largely of the financing provided to these funds ( € 342 million), the remainder being direct portfolio investment. This exposure involved low levels of loan-to-value risk -around 50% (collateral of € 1,095 million at year-end). The risk exposure to this type of counterparty is analyzed on a case-by-case basis, and the percentages of collateral are established according to the features and assets of each fund. Exposure decreased significantly -by 52%-with respect to the previous year.
•
Conduits: the only exposure resulted from the acquisition of Alliance&Leicester, which gave rise to the integration of a conduit, with assets amounting to € 657 million at 2009 year-end, of which 42% had an AAA rating and 83% a rating of A or above.
•
Monolines: Santander’s exposure to monoline insurers amounted to € 396 million in December 2009 5 , and related mainly to indirect exposure, totaling € 191 million, by virtue of the guarantee provided by entities of this kind for various traditional financing or securitization transactions. The exposure was to double-default risk in this case. The primary underlyings had high credit ratings, mostly “AA”. The small remainder was direct exposure (e.g. through the purchase of a credit default swap to protect it against the risk of default of these insurance companies).
Overall, it can be asserted that the exposure to these instruments arising from the Group’s ordinary operations has decreased. The only increases are due to the integration of exposures at entities acquired by the Group, such as Alliance&Leicester or Sovereign (in 2008 and 2009, respectively). All these exposures were known at the time of the purchase and adequate provisions were recognized.
4
Alternative A-paper: mortgages arising in the US market which, for various reasons, are deemed to have an intermediate level of risk, between prime and subprime mortgages (not all the required information is available, loan-to-value levels above standard levels, etc.).
5
The guarantees provided by monoline insurers in US Municipal Bonds are not treated as exposure. As a result of the purchase of Sovereign Bank, the Group included a portfolio of US municipal bonds amounting to € 1,260 million.

F-196

Table of Contents

Santander’s policy for the approval of new transactions in these products continues to be very prudent and conservative, and is subject to strict supervision by the Group’s senior management. Before approval is given for a new transaction, product or underlying, the risk division checks:
•
whether there is an adequate valuation model (mark-to-market, mark-to-model or mark-to-liquidity) to monitor the value of each exposure.
•
whether the inputs enabling application of this valuation model are observable in the market.
Provided the two aforementioned conditions are met, the risk division ascertains:
•
the availability of adequate systems duly adapted for the calculation and daily monitoring of the results, positions and risks of the new transactions envisaged.
•
the degree of liquidity of the product or underlying, with a view to arranging the related hedge on a timely basis.
4.5.
Internal model
The Bank of Spain approved the use of the internal market risk model for the calculation of regulatory capital at 2008 year-end. Although this approval was initially effective for the parent’s trading activities, the Group intends to progressively extend the approval to its other units.
Following this approval, the regulatory capital of the trading activities for the above-mentioned scope has since been calculated using advanced approaches, applying as a fundamental measure the VaR calculated by the market risk area and, additionally, capturing an incremental charge for default risk (incremental default risk).
The Group cooperates closely with the Bank of Spain to make further progress in the scope of application of the internal model (at geographical and operational levels) and in the impact analysis of possible future changes, in line with the consultative documents issued by the Basel Committee in December 2009 to strengthen the capital of financial institutions 6 .
5.
OPERATIONAL RISK
Definition and objectives
Santander Group defines operational risk as “the risk of loss resulting from inadequate or failed internal processes, human resources or systems or from external events”. Unlike other risks, this is a risk that is not associated with products or businesses, which is found in processes and/or assets and is generated internally (people, systems, processes) or as a result of external risks, such as natural disasters.
The basic aim pursued by the Group in operational risk control and management is to identify, measure/assess, control/mitigate and inform about this risk.
The Group’s priority, therefore, is to identify and eliminate any clusters of operational risk, irrespective of whether losses have been incurred. Measurement of this risk also contributes to the establishment of priorities in operational risk management.
For the purpose of calculating regulatory capital for operational risk, Santander Group decided to opt initially for the standardized approach provided for under Basel II standards. The Group is assessing the most appropriate time to shift to advanced measurement approaches (AMA) taking into account, however, that: a) the short-term priority in operational risk management is focused on mitigation; and b) most of the regulatory requirements established for use of the AMA must be incorporated in the standardized approach and, at the present time, these requirements have already been included in the operational risk management approach used by Santander Group.
6
Strengthening the resilience of the banking sector and International framework for liquidity risk measurement, standards and monitoring

F-197

Table of Contents

Management model
The organizational model for risk management and control is the result of the adaptation to the new Basel II environment implemented by the Group, which establishes three levels of control:
•
First level: control functions performed by the Group’s units
•
Second level: functions performed by the corporate areas
•
Third level: integrated control functions performed by the risk division — integrated risk control and internal risk validation area (CIVIR, using the Spanish acronym).
Operational risk management and control are conducted by the technology and operations division. Within this division, the corporate technology and operational risk area, created in 2008, is responsible for the definition of policies and methodology and for the management and control of technology and operational risks. The implementation, integration and local adaptation of the policies and guidelines established by the area are entrusted to the local operational risk officers identified in each unit.
This operational risk management structure is based on the knowledge and experience of the executives and professionals of the various Group units, with particular importance being attached to the role of the local operational risk officers.
The technology and operational risk management model includes the following phases:
•
Identification of the operational risk inherent in all the Bank’s activities, products, processes and systems.
•
Objective and continued measurement and assessment of operational risk, consistent with the industry and regulatory standards (Basel II, Bank of Spain,...), and setting of risk appetite limits.
•
Continuous monitoring of operational risk exposures in order to detect unassumed levels of risk, implement control procedures, improve internal awareness and mitigate losses.
•
Establishment of mitigation measures to eliminate or minimize operational risk.
•
Generation of periodic reports on the exposure to operational risk and the level of control for senior management and the Group’s areas/units, and reporting to the market and the regulatory authorities.
•
Definition and implementation of systems enabling the Group to monitor and control operational risk exposures. These systems are integrated into the Group’s daily management, using the current technology and maximizing the automation of applications.
•
Definition and documentation of operational risk management policies and implementation of the related methodologies consistent with current regulations and best practices.
The benefits of Santander Group’s operational risk management model are as follows:
•
Integrated and effective management of operational risk (identification, measurement / assessment, control / mitigation and information).
•
Improved knowledge of actual and potential operational risks and better assignment to business and support lines.
•
The information on operational risk helps improve processes and controls and reduce losses and income volatility.
Model implementation: global initiatives and results
The corporate function for operational risk management and control was created in 2001 and has been operating since then. The main duties and activities performed and global initiatives adopted by this function are summarized as follows:
•
Designation of head coordinators and creation of operational risk departments.
•
Training and experience sharing: communication of best practices within the Group.
•
Fostering of mitigation plans: control of both the implementation of corrective measures and projects under development.
Since 2008 the corporate function has strengthened technology risk management and fostered the following aspects, inter alia:
•
Security of information systems.
•
Promotion of contingency and business continuity plans.
•
Management of technology risk (risk associated with the use of technology -development and maintenance of applications, design, implementation and maintenance of technology platforms, production of computer processes, etc.).

F-198

Table of Contents

Analysis and monitoring of controls in market operations
In view of the specific features and complexity of financial markets, the Group considers it necessary to steadily strengthen the operational control of its financial market activities, thus bolstering the highly stringent and conservative risk and operational principles already applied on a regular basis by Santander Group.
In addition to monitoring all operational control-related matters, in all its units the Group placed greater emphasis on a number of aspects, the reviews conducted being validated on a monthly basis by the management committee of each unit. The most noteworthy of these aspects are as follows:
•
Review of the valuation models and, in general, of the values of the portfolios.
•
Processes for the capture and independent validation of prices.
•
Adequate confirmation of transactions with counterparties.
•
Review of transaction cancellations/modifications.
•
Review and monitoring of the effectiveness of guarantees, collateral and risk mitigators.
The role of insurance in operational risk management
Santander Group considers insurance as a key factor in operational risk management. Since 2004 the operational risk area has worked closely with the insurance area in Santander Group in all activities leading to improvements in the two areas. Some notable examples are as follows:
•
Cooperation in the presentation of Santander Group’s operational risk management and control model to insurers and reinsurers.
•
Analysis and follow-up of the recommendations and suggestions for improving operational risks made by insurance companies, through previous audits performed by specialized companies, and of the subsequent implementation thereof.
•
Sharing of the information generated in the two areas in order to strengthen the quality of error bases and the cover of insurance policies for the various operational risks.
•
Close cooperation between local operational risk officers and local insurance coordinators in order to enhance operational risk mitigation.
•
Regular meetings to report on specific activities, statements of position and projects in the two areas.
•
Active participation of the two areas in the global insurance sourcing desk, the highest technical body in the Group responsible for the definition of insurance coverage and arrangement strategies.
6.
REPUTATIONAL RISK
Santander Group defines reputational risk as the risk associated with the perception of the Bank held by the various internal and external stakeholders with which it is related as a result of its business activities, which may have an adverse impact on results, capital or business expectations. This risk includes legal, economic, financial, ethical, social and environmental aspects.
As part of its supervisory function, the board is responsible for defining the Group’s risk policy and the assessment of reputational risk is entrusted to the risk committee, in its capacity as the body responsible for global risk management at the Group.
Various Group governance structures are involved in the management of reputational risk, depending on the sources thereof. Thus, the audit and compliance committee provides support to the board in this connection and supervises compliance with the Group’s code of conduct in securities markets, the manuals and procedures for the prevention of money laundering and, in general, the Bank’s governance and compliance rules, and makes any required proposals for improvement.
This section addresses the reputational risk that may arise from an inadequate sale of products or an improper provision of services by the Group.

F-199

Table of Contents

Corporate project for the marketing of products and services
As part of the new corporate framework of the compliance function, a corporate marketing project was launched in 2009 which will further reinforce (i) marketing policies, (ii) procedures for product authorization and monitoring, and (iii) systems and processes, all with special emphasis on the customer view.
i) Marketing policies
The product and service marketing policies encompass all the marketing phases at corporate level (approval, pre-sale, sale and post-sale).
ii) Governing bodies
The global new products committee (CGNP, using the Spanish acronym) -whose activities in 2009 are summarized below— was reinforced and its name was changed to the corporate marketing committee (CCC, using the Spanish acronym). This committee has the powers to approve and monitor products, once they have been marketed.
A global consultative committee (CGC, using the Spanish acronym) was created, consisting of area representatives who provide an insight to risks, regulations and markets. The CGC may recommend the review of products affected by market changes, impaired creditworthiness (country, sectors or companies) or changes in the Group’s market perception at medium and long term.
In 2009 the reputational risk management office became operational. The purpose of this office is to provide the relevant governing bodies with the appropriate information enabling them: (i) to conduct an appropriate analysis of risk in the approval phase, with a twofold focus: impact on the Bank and impact on customers; and (ii) to monitor products over their life cycle.
In the first three months of operations, the reputational risk management office monitored certain types of product, such as derivatives, investment insurance or funds with a certain level of risk or complexity.
iii) Systems and processes
The improvement of systems and processes will facilitate the adaptation of certain marketing processes to the new commercial policies and will also enable automated, remote compliance monitoring.
The global new products committee and the procedures manual for the sale of financial products in 2009
Global new products committee (CGNP)
In 2009 the committee held 15 meetings, at which a total of 170 products or product families were analyzed.
In 2009 the areas that were represented on the CGNP, chaired by the general secretary, were as follows: tax advisory, legal advisory, customer care, internal audit, commercial banking, global corporate banking, CIVIR/integrated risk control, compliance, the controller’s unit, global business technology and operations, ECB technology and operations, global wholesale banking risks management, corporate risks and IFIs, credit risk, market risks, risks — systems, solvency risk, corporate technology and operational risk, Santander private banking, technology, global treasury, universities and, lastly, the unit proposing the new product or a representative of the local new products committee.
Before a new product or service is launched, the areas represented on the CGNP, together, if required, with other independent experts, conduct an exhaustive analysis of all the matters involved and express their opinion as to whether the product or service should be marketed.
On the basis of the documentation received, the CGNP, after checking that all requirements for the approval of the new product or service have been met and considering the risk guidelines established by the risk committee, either approves, rejects or sets conditions for the proposed new product or service.

F-200

Table of Contents

The CGNP pays particular attention to the suitability of the new product or service for the environment in which it is to be marketed, placing particular emphasis on ensuring that:
•
Each product or service is sold by people who know how to sell it.
•
Customers know what they are investing in and are aware of the risk involved in the particular product or service, and this can be evidenced by supporting documentation.
•
The product or service fits the customer’s risk profile.
•
Each product or service is sold where its sale is possible, not only from a legal or tax standpoint (i.e. it complies with the legal or tax regime of the country in question), but also with regard to the local financial culture.
•
When a given product or service is approved, maximum placement limits are set.
Procedures manual for the sale of financial products
This manual, which has been used at Banco Santander since 2004 in the retail sale of financial products in Spain, is applied to investment services for financial products, including: fixed-income or equity securities or other financial instruments, money market instruments, shares or units in collective investment undertakings, traded and OTC derivatives and atypical financial contracts. Nevertheless, the CGNP may opt to include other financial products within the scope of the procedures manual, as was the case with structured deposits, savings and investment insurance, and pension plans.
In 2009, 115 products subject to this manual were submitted for approval. Of these products, 38 were new products submitted to the CGNP and 77 were existing products submitted to the office for the manual (a specific body which was created to oversee implementation of the manual and forms part of the corporate compliance area).
7.
COMPLIANCE WITH THE NEW REGULATORY FRAMEWORK
Santander Group has assumed from the outset a firm commitment to the principles underlying the Basel II regulations. The Basel II framework allows entities to make internal estimates of the regulatory capital required to ensure their capital adequacy when faced by events caused by various types of risk. As a result of this commitment, Santander Group has devoted all the human and material resources required for the successful performance of the Basel II implementation plan. For this purpose, a Basel II team was created in the past, consisting of qualified professionals from the Group’s different areas: the controller’s unit, risks, technology and operations, financial management and internal audit. Santander Group senior management participates actively in monitoring progress in the implementation of Basel II at corporate level and fosters the measures required to extend the new culture and its implications across the organization. In the case of credit and market risks, the implementation of Basel II entails the recognition, for regulatory capital purposes, of the internal models that have been used for management purposes.
Santander Group intends to adopt, over the next few years, the advanced internal ratings-based (AIRB) approach under Basel II for substantially all its banks, until the percentage of net exposure of the loan portfolio covered by this approach is close to 100%. Accordingly, Santander Group continued in 2009 with the project for the progressive implementation of the technology platforms and methodological developments required for the roll-out of the AIRB approaches for regulatory capital calculation purposes at the remaining Group units.
Santander Group has obtained authorization from the supervisory authorities to use advanced approaches for the calculation of regulatory capital requirements for credit risk for the parent and the main subsidiaries in Spain, the United Kingdom and Portugal, which represents almost two thirds of its total exposure at 2009 year-end. From now on, the Group’s Basel II implementation strategy will focus on the main entities in the Americas and on consumer banking in Europe.
Given the medium-low risk profile characterizing Santander’s business activities, strongly focused on commercial banking (corporations, SMEs and individuals), the authorization granted by the Bank of Spain enabled the Group, based on its actual risk profile, to optimize the capital requirements under the so-called Pillar 1. Similarly, the significant diversification of the Group’s risk and business profiles enabled it to offset the additional capital requirements arising from the Internal Capital Adequacy Assessment Process (treated under Pillar 2), which takes into account the impact of risks not addressed under Pillar 1 and the benefits arising from the diversification among risks, businesses and geographical locations.

F-201

Table of Contents

As regards the other risks explicitly addressed under Pillar 1 of Basel II, Santander Group was authorized to use its internal model for market risk with respect to the treasury area’s trading activities in Madrid and, as for credit risk, it has submitted a roll-out plan for the other units to the Bank of Spain.
As far as operational risk is concerned, the Group has decided, for the time being, to use the standardized approach for regulatory capital calculation purposes and is considering the possibility of adopting AMA approaches in the medium term.
Pillar 2 is another significant line of action under the Basel II corporate framework. In 2009 Santander Group worked on the implementation in the corporate economic capital model of the improvements proposed as a result of reviews conducted on the corporate economic capital model by an international team of CEBS supervisors at the end of 2008 and by the internal audit and internal validation teams.
Additionally, the methodology of the economic capital model was consolidated and utilization of the technology platform supporting Pillar 1 was completed. This will enable the Group to use an integrated and robust information system for the units with internal models authorized under Pillar 1, which will cover regulatory capital and economic capital requirements.
Internal validation of risk models
Internal validation is a pre-requisite for the supervisory validation process. A fully-independent specialized unit of the Entity obtains a technical opinion on the adequacy of the internal models for the intended internal or regulatory purposes, and concludes on their usefulness and effectiveness.
In addition to complying with the regulatory requirement, the internal validation function provides essential support to the risk committee and the local risk committees in the performance of their duties to authorize the use of the models (for management and regulatory purposes) and to review them regularly.
Internal model validation at Santander Group encompasses credit risk models, market risk models, financial asset pricing models and the economic capital model. The scope of the validation includes not only the more theoretical or methodological aspects, but also the technology systems and the quality of the data the models provide, on which their effective operation relies, and, in general, all the relevant aspects of risk management (controls, reporting , uses, involvement of senior management, etc.).
The internal validation function is located, at corporate level, within the integrated risk control and internal risk validation area (CIVIR) and reports directly to the third deputy chairman of the Group and to the chairman of the risk committee. This function is performed at a global and corporate level in order to ensure uniformity of application, and is implemented through three regional centres located in Madrid, London and Sao Paulo. From a functional and hierarchical standpoint, these centres are fully accountable to the corporate centre, thus ensuring consistency in the performance of their activities. This system facilitates the application of a corporate methodology that is supported by a set of tools developed internally by Santander Group which provide a robust corporate framework for application at all the Group’s units and which automate certain verifications to ensure efficient reviews.
It should be noted that Santander Group’s corporate internal validation framework is fully consistent with the internal validation standards for advanced approaches issued by the Bank of Spain. Accordingly, the Group maintains the segregation of functions between internal validation and internal audit, which, in its role as the last layer of control at the Group, is responsible for reviewing the methodology, tools and work performed by internal validation and for giving its opinion on the degree of effective independence.

F-202

Table of Contents

8.
ECONOMIC CAPITAL
The concept of economic capital has traditionally been contrasted with that of regulatory capital, the latter being the capital required by capital adequacy regulations. The new Basel II capital framework has without doubt brought the two concepts closer together. While Pillar 1 determines the minimum regulatory capital requirements, Pillar 2 quantifies, through economic capital, the Group’s overall capital adequacy.
The Group’s economic capital model enables it to quantify the consolidated risk profile taking into account all the significant risks of the business, as well as the diversification effect inherent in a multi-national, multi-business group such as Santander. The Group used this model to prepare its internal capital adequacy assessment report in accordance with Bank of Spain regulations within the framework of Pillar 2 of Basel II.
The concept of diversification is fundamental to the proper measurement of the risk profile of a group with global operations. Although it is an intuitive concept that has been a part of risk management since the very beginnings of the banking business, diversification can also be explained in terms of the imperfect correlation between the various risks, which means that the largest loss events do not occur simultaneously in all portfolios or for all types of risk. Consequently, the sum of the economic capital of the various portfolios and types of risk, taken separately, is higher than the Group’s total economic capital. In other words, the risk borne by the Group as a whole is less than the risk arising from the sum of its various components considered separately.
Additionally, the economic capital measurement and aggregation model also considers the concentration risk for wholesale portfolios (large corporations, banks and sovereigns), in terms of both the size of their exposure and their sectoral or geographical concentration. Any geographical or product concentration in retail portfolios is captured through the application of an appropriate correlation model.
Analysis of the global risk profile
The distribution of the economic capital among the main business areas reflects the diversified nature of the Group’s activity and risk. This diversification increased in 2009 following the acquisition of Sovereign in the US, which accounts for 5% of the Group’s capital.
Continental Europe and Latin America each account for approximately one third of total risk, and the United Kingdom 8%, while the corporate financial management and holdings area, which assumes the risk stemming from exposure to structural foreign currency risk (risk arising from holding investments in foreign subsidiaries denominated in currencies other than the euro) and most of the equity investments, represents 19%.
At December 31, 2009, the Group’s total economic capital, including the portion relating to minority interests, amounted to € 43,045 million.
The Group’s geographical diversification, understood as the difference between the sum of the capital of each individual business unit and the Group’s total diversified capital, stood at 21.6%.
Additionally, the main purpose of the Group’s capital planning is to obtain future economic and regulatory capital projections so as to assess the adequacy of capital in various scenarios. For each scenario, capital planning incorporates the Entity’s profit forecasts, in keeping with its strategic targets (organic and inorganic growth, pay-out ratio, etc.) and with economic developments, and simulating stress situations, and identifies possible capital management strategies enabling the Group to optimize the Bank’s capital adequacy and the return on capital.

F-203

Table of Contents

RORAC and value creation
Santander Group has used RORAC methodology in its credit risk management since 1993, with the following objectives:
•
Calculation of economic capital requirement and of the return thereon for the Group’s business units and for business segments, portfolios or customers, in order to facilitate an optimal allocation of economic capital.
•
Budgeting of capital requirement and RORAC of the Group’s business units and inclusion thereof in their compensation plans.
•
Analysis and setting of prices in the decision-making process for transactions (loan approval) and customers (monitoring).
The RORAC methodology facilitates the comparison, on a consistent basis, of the performance of transactions, customers, portfolios and businesses, and identifies those which achieve a risk-adjusted return higher than the Group’s cost of capital, thus aligning risk management and business management with the aim of maximizing value creation, which is the ultimate objective of Group senior management.
The Group periodically assesses the level and evolution of the value creation (VC) and return on risk-adjusted capital (RORAC) of its main business units. The VC is the profit generated over and above the cost of the economic capital (EC) used, and is calculated using the following formula:
VC = Profit – (average EC x cost of capital)
The profit used is obtained by making the required adjustments to accounting profit in order to reflect only each unit’s recurring profit or loss from its business activity.
The minimum rate of return on capital that a transaction should achieve is determined by the cost of capital, which is the minimum remuneration required by shareholders. In order to objectively calculate this rate, the premium that shareholders demand for investing in the Group is added to the risk-free return. This premium depends essentially on the degree of volatility of the market price of the Santander share in relation to the market trend. The cost of capital for 2009 applied to the various Group units was 12.03%.
If a transaction or portfolio yields a positive return, it will be contributing to the Group’s profit, although it will not actually create shareholder value unless this return exceeds the cost of capital.
The Group’s return on risk-adjusted capital (RORAC) amply exceeded the estimated cost of capital for 2009, standing at 21.6%. Value creation, i.e. economic profit less the cost of capital used to obtain it, amounted to € 4,180 million.

F-204

Table of Contents

55.
Other Disclosures
This Note includes relevant information about additional disclosure requirements.
55.1
Consolidated financial statements
Following are the consolidated balance sheets and consolidated statements of income of the Group under the IFRS reformatted to conform to the presentation guidelines for bank holding companies set forth in Regulation S-X of the Securities and Exchange Commission of the United States of America.
The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts and allocations of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

F-205

Table of Contents

CONSOLIDATED BALANCE SHEET
Thousands of Euros
2009 2008 2007
Assets
Cash and due from banks
28,231,681 41,131,292 25,341,083
Interest earning deposits in other banks
29,288,269 43,553,958 16,766,716
Securities purchased under agreements to resell
21,288,275 19,391,367 26,147,541
Trading account assets
172,867,988 177,451,940 183,629,876
Banks
22,714,580 13,998,287 19,159,632
Loans
17,885,911 9,537,868 31,726,104
Derivatives
59,856,413 95,815,309 46,726,118
Debt securities
57,285,731 49,050,280 73,403,234
Equity securities
15,125,353 9,050,196 12,614,788
Investment securities
101,579,834 66,572,866 46,017,246
Available-for-sale
101,579,834 66,572,866 46,017,246
Net Loans and leases
653,348,725 607,424,343 528,318,209
Loans and leases, net of unearned income
671,184,116 619,890,400 537,013,413
Less-Allowance for loan losses
(17,835,391 ) (12,466,057 ) (8,695,204 )
Premises and equipment, net
11,499,449 11,953,856 9,272,962
Investment in affiliated companies
164,473 1,323,452 15,689,127
Other assets
89,904,613 78,381,486 59,206,661
Intangible Assets
2,778,358 1,787,068 2,202,334
Goodwill in consolidation
22,865,056 18,836,199 13,830,708
Accrual Accounts
2,259,262 1,952,843 1,749,193
Hedge derivatives
7,833,850 9,698,132 3,063,169
Others
54,168,087 46,107,244 38,361,257
Total assets
1,108,173,307 1,047,184,560 910,389,421
Liabilities
Deposits
554,133,789 468,641,990 371,573,338
Non interest deposits
5,393,916 4,608,242 4,507,057
Interest bearing
548,739,873 464,033,748 367,066,281
Demand deposits
142,483,882 99,670,268 91,576,243
Savings deposits
127,940,647 115,673,794 90,727,525
Time deposits
278,315,344 248,689,686 184,762,513
Certificates of deposit
— — —
Short-term debt
124,189,724 125,291,176 131,774,426
Long-term debt
220,089,591 233,516,879 237,120,341
Other liabilities
135,889,561 159,733,023 112,363,165
Taxes Payable
7,003,945 5,768,665 6,156,365
Accounts Payable
7,859,466 8,738,047 7,656,262
Accrual Accounts
5,502,958 4,669,160 4,050,992
Pension Allowance
8,272,533 8,751,128 9,294,198
Stock borrowing liabilities
— — —
Derivatives
63,903,701 95,125,044 52,937,798
Liabilities under insurance contracts
16,916,446 16,849,511 13,033,617
Other Provisions
6,904,055 6,538,142 4,751,151
Short securities positions
5,139,730 3,035,231 5,613,234
Others
14,386,727 10,258,095 8,869,548
Total liabilities
1,034,302,665 987,183,068 852,831,270
Minority interest
5,204,058 2,414,606 2,358,269
Stockholders’ equity
Capital stock
4,114,413 3,997,030 3,127,148
Additional paid-in-capital
29,305,257 28,103,802 20,370,128
Other additional capital
(2,326,272 ) (3,114,636 ) (1,537,999 )
Current year earnings
8,942,538 8,876,414 9,060,258
Other reserves
28,630,648 19,724,276 24,180,347
Total stockholders’ equity
68,666,584 57,586,886 55,199,882
Total liabilities and Stockholders’ equity
1,108,173,307 1,047,184,560 910,389,421
The Group has issued Mortgage backed securities, called Cédulas Hipotecarias . These securities issued pursuant the Mortgage Market law amount as a maximum 90% of the amount of the mortgage loans assigned as guarantee of them. As of December 31, 2009, 2008 and 2007, the amount of Mortgage backed securities was € 55,032 million, € 48,682 million and € 48,017 million, respectively.
Additionally, as of December 31, 2009, 2008 and 2007, the investment debt securities assigned to certain Group or third-party commitments amounted to € 39,661 million, € 25,161 million and € 16,866 million, respectively.

F-206

Table of Contents

CONSOLIDATED STATEMENTS OF INCOME
Thousands of Euros
2009 2008 2007
Interest income:
Interest and fees on loans and leases
42,707,534 42,574,139 35,615,053
Interest on deposits in other banks
3,362,476 5,561,810 3,336,520
Interest on securities purchased under agreements to resell
1,155,892 1,788,147 1,952,621
Interest on investment securities
6,285,097 5,567,274 5,004,275
Dividends
5,350 92,017 145,323
Total interest income
53,516,349 55,583,387 46,053,792
Interest expenses:
Interest on deposits
(15,852,047 ) (18,814,100 ) (14,356,301 )
Interest on short-term borrowings
(2,929,118 ) (5,437,822 ) (4,924,638 )
Interest on long-term debt
(6,561,801 ) (12,174,778 ) (10,864,167 )
Total interest expense
(25,342,966 ) (36,426,700 ) (30,145,106 )
Interest income / (Charges)
28,173,383 19,156,687 15,908,686
Provision for credit losses
(11,010,021 ) (5,909,252 ) (3,426,746 )
Interest income / (Charges) after provision for credit losses
17,163,362 13,247,435 12,481,940
Non interest income:
Commissions and fees from fiduciary activities
1,219,658 1,618,479 1,984,910
Commissions and fees from securities activities, net
774,296 704,525 970,639
Fees and commissions from insurance activities
8,858,253 9,977,441 6,791,619
Other Fees and commissions, net
5,122,333 4,079,182 3,453,834
Gains (losses) from:
Affiliated companies’ securities
1,521,863 3,791,479 307,789
Investment securities
4,551,719 (6,767,774 ) 792,727
Foreign exchange, derivatives and other, net
(811,761 ) 7,757,144 1,168,599
Sale of premises
37,279 887,931 1,798,669
Income from non financial entities
381,653 591,177 775,644
Gains on sale of non-current assets / liabilities held for sale not classified as discontinued operations
414,802 36,419 —
Other income
485,908 558,812 1,769,689
Total non interest income
22,556,003 23,234,815 19,814,119
Non interest expense:
Salaries and employee benefits
(9,176,648 ) (7,774,565 ) (7,261,755 )
Occupancy expense of premises, depreciation and maintenance, net
(2,254,891 ) (1,665,057 ) (1,462,414 )
General and administrative expenses
(4,889,737 ) (3,771,527 ) (3,489,649 )
Impairment of goodwill
(2,631 ) (72,726 ) (599,989 )
Impairment / amortization of intangible assets
(854,757 ) (1,566,414 ) (1,200,173 )
Impairment of tangible assets
(1,503,048 ) (111,114 ) (74,522 )
Provisions for specific allowances
(1,444,074 ) (1,034,102 ) (458,649 )
Payments to Deposit Guarantee Fund
(317,708 ) (179,023 ) (144,988 )
Insurance claims
(7,604,807 ) (8,472,523 ) (5,601,487 )
Expenses of non financial entities
(244,083 ) (489,283 ) (622,280 )
Losses on sale of non-current assets / liabilities held for sale not classified as discontinued operations
(289,617 ) (75,184 ) —
Other expenses
(549,564 ) (421,407 ) (409,659 )
Total non interest expense
(29,131,565 ) (25,632,925 ) (21,325,565 )
Income before income taxes
10,587,800 10,849,325 10,970,494
Income tax expense
(1,206,610 ) (1,836,052 ) (2,322,107 )
Net consolidated income for the year
9,381,190 9,013,273 8,648,387
Net income attributed to minority interest
466,083 447,662 484,351
Income from discontinued operation, net of taxes
27,431 310,803 896,222
NET INCOME ATTRIBUTED TO THE GROUP
8,942,538 8,876,414 9,060,258

F-207

Table of Contents

Following are the summarized balance sheets of Banco Santander, S.A. as of December 31, 2009, 2008 and 2007.
CONDENSED BALANCE SHEETS (Parent company only) 2009 2008 2007
(Thousands of Euros)
Assets
Cash and due from banks
70,922,607 78,827,627 52,548,200
Trading account assets
57,262,358 79,641,722 51,349,204
Investment securities
34,033,734 16,061,930 17,074,175
Net Loans and leases
174,645,173 183,754,083 163,903,007
Investment in affiliated companies
67,430,284 62,232,929 59,256,377
Premises and equipment, net
1,338,600 728,588 714,212
Other assets
10,436,136 13,943,826 18,543,369
Total assets
416,068,892 435,190,705 363,388,544
Liabilities
Deposits
236,833,251 213,464,786 173,660,916
Short-term debt
13,597,783 34,337,021 35,077,018
Long-term debt
59,884,683 57,769,675 57,005,977
Other liabilities
59,571,695 84,257,494 59,762,058
Total liabilities
369,887,412 389,828,976 325,505,969
Stockholders’ equity
Capital stock
4,114,413 3,997,030 3,127,148
Retained earnings and other reserves
42,067,067 41,364,699 34,755,427
Total stockholders’ equity
46,181,480 45,361,729 37,882,575
Total liabilities and Stockholders’ equity
416,068,892 435,190,705 363,388,544
Following are the summarized statements of income of Banco Santander, S.A. for the years ended December 31, 2009, 2008 and 2007.
CONDENSED STATEMENTS OF INCOME (Parent company only) 2009 2008 2007
(Thousands of Euros)
Interest income
Interest from earning assets
11,410,345 15,233,869 11,766,647
Dividends from affiliated companies
2,456,785 4,541,565 2,863,829
13,867,130 19,775,434 14,630,476
Interest expense
(7,117,004 ) (13,318,953 ) (10,028,500 )
Interest income / (Charges)
6,750,126 6,456,481 4,601,976
Provision for credit losses
(331,241 ) (1,387,505 ) (288,386 )
Interest income / (Charges) after provision for credit losses
6,418,885 5,068,976 4,313,590
Non interest income:
1,483,843 4,369,576 2,996,666
Non interest expense:
(3,688,492 ) (4,555,202 ) (3,231,707 )
Income before income taxes
4,214,236 4,883,350 4,078,549
Income tax expense
(63,423 ) (57,132 ) (8,302 )
Net income
4,150,813 4,826,218 4,070,247

F-208

Table of Contents

Following are the summarized cash flow statements of Banco Santander, S.A. for the years ended December 31, 2009, 2008 and 2007.
CONDENSED CASH FLOW STATEMENTS (Parent company only) 2009 2008 2007
(Thousands of Euros)
1. Cash flows from operating activities
Consolidated profit
4,150,813 4,826,218 4,070,247
Adjustments to profit
1,305,971 2,895,285 164,914
Net increase/decrease in operating assets
(12,900,811 ) 63,231,280 49,949,432
Net increase/decrease in operating liabilities
(26,129,154 ) 61,252,781 56,657,110
Reimbusements/payments of income tax
254,105 57,132 8,302
Total net cash flows from operating activities (1)
(7,517,454 ) 5,800,136 10,951,141
2. Cash flows from investing activities
Investments (-)
(3,641,824 ) (3,686,280 ) (22,068,312 )
Divestments (+)
2,026,980 524,116 3,438,200
Total net cash flows from investment activities (2)
(1,614,844 ) (3,162,164 ) (18,630,112 )
3. Cash flows from financing activities
Disposal of own equity instruments
32,345 — 21,640
Acquisition of own equity instruments
(61,059 ) (61,471 ) —
Issuance of debt securities
1,945,877 200,039 13,132,494
Dividends paid
(4,386,550 ) (4,243,021 ) (3,456,731 )
Issuance/Redemption of equity instruments
— 7,020,677 —
Other collections/payments related to financing activities
(438,283 ) 1,162,017 7,560,549
Total net cash flows from financing activities (3)
(2,907,670 ) 4,078,241 17,257,952
4. Effect of exchange rate changes on cash and cash equivalents (4)
112,740 (468,668 ) 445,697
5. Net increase/decrease in cash and cash equivalents (1+2+3+4)
(11,927,228 ) 6,247,545 10,024,676
Cash and cash equivalents at beginning of period
18,554,099 12,306,554 2,281,878
Cash and cash equivalents at end of period
6,626,871 18,554,099 12,306,554

F-209

Table of Contents

55.2
Preference Shares and Preferred Securities
The following table shows the balance of the preference shares and preferred securities as of December 31, 2009, 2008 and 2007:
2009 2008 2007
(Thousands of Euros)
Preference shares
430,152 1,051,272 522,558
Preferred securities
7,315,291 7,621,575 7,261,382
Total at year-end
7,745,443 8,672,847 7,783,940
Both Preference Shares and Preferred Securities are recorded under the “Financial liabilities at amortized cost – Subordinated Liabilities” caption in the consolidated balance sheet as of December 31, 2009, 2008 and 2007.
Preference Shares include the financial instruments issued by the consolidated companies which, although equity for legal purposes, do not meet the requirements for classification as equity in the financial statements. These shares do not carry any voting rights and are non-cumulative. They were subscribed to by non-Group third parties except for the shares of Abbey amounting to GBP 160.6 million, are redeemable at the discretion of the issuer, based on the conditions of the issuer. None of these issues are convertible into Bank shares or granted privileges or right which, in certain circumstances, make them convertibles into shares.
This category includes non-cumulative preferred non-voting shares issued by Banesto Holdings, Abbey National plc, Alliance & Leicester plc and Santander Holding USA, Inc.
For the purposes of payment priority, Preferred Securities are junior to all general creditors and to subordinated deposits. The payment of dividends on these securities, which have no voting rights, is conditional upon the obtainment of sufficient distributable profit and upon the limits imposed by Spanish banking regulations on equity.
This category includes non-cumulative preferred non-voting securities issued by Santander Finance Capital, S.A. (Unipersonal), Santander Finance Preferred, S.A. (Unipersonal), and Santander International Preferred, S.A. (Sociedad Unipersonal), guaranteed by the Bank. It also includes non-cumulative preferred non-voting securities issued by Banesto Preferentes, S.A, Banco Español de Crédito, S.A., Santander PR Capital Trust and Abbey Group.
Except the issues of Santander PR Capital Trust I, which redeems in 2036, all preference shares and preferred securities are perpetual securities and there is no obligation that requires the Group to redeem them. All securities have been fully subscribed by third parties outside the Group. In the consolidated balance sheets, these securities are shown net of any temporary operations relating to liquidity guarantees (see Note 23 and Exhibit III), and are described in the table below:

F-210

Table of Contents

Outstanding at December 31, 2009
Amount in
Preference Shares currency
Issuer/Date of issue Currency (million) Interest rate Redemption Option (1)
Banesto Holding, Ltd, December 1992
US Dollar 77.3 10.500 % June 30, 2012
Abbey National plc, October 1995
Pounds Sterling 80.3 10.375 % No option
Abbey National plc, February 1996
Pounds Sterling 80.3 10.375 % No option
Alliance & Leicester plc, March 2004
Pounds Sterling 21.1 5.827 % March 22, 2016
Alliance & Leicester plc, May 2006
Pounds Sterling 21.1 6.222 %(2) May 24, 2019
Santander Holding USA, Inc, August 2000
US Dollar 147.9 12.000 % May 16, 2020
Santander Holding USA, Inc, May 2006
US Dollar 73.7 7.300 % May 15, 2011
Outstanding at December 31, 2009
Amount in
Preferred Securities currency
Issuer/Date of issue Currency (million) Interest rate Maturity date
Banesto Group
Banco Español de Crédito, October 2004
Euro 110.8 € CMS 10 + 0.125% Perpetuity
Banco Español de Crédito (1), November 2004
Euro 161.3 5.5% Perpetuity
Banco Español de Crédito, June 2009
Euro 497.5 6.0% Perpetuity
Santander Finance Capital, S.A. (Unipersonal)
April 2005
Euro 1,000 Euribor (3M) + 0.1% Perpetuity
March 2009
US Dollar 18.2 2.0% Perpetuity
March 2009
US Dollar 25.0 2.0% Perpetuity
March 2009
Euro 313.8 2.0% Perpetuity
March 2009
Euro 153.7 2.0% Perpetuity
June 2009
Euro 1,965.6 Euribor (3M) + 2.2% Perpetuity
Santander Finance Preferred, S.A. (Unipersonal)
March 2004
US Dollar 89.3 6.41% Perpetuity
September 2004
Euro 174.38 € CMS 10 +0.05% subject to a maximum distribution of 8% per annum Perpetuity
October 2004
Euro 165.1 5.75% Perpetuity
November 2006
US Dollar 161.8 6.80% Perpetuity
January 2007
US Dollar 109.5 6.50% Perpetuity
March 2007
US Dollar 210.4 US3M + 0.52% Perpetuity
July 2007
Pounds Sterling 9.0 7.01% Perpetuity
July 2009
Pounds Sterling 679.4 Libor (3M) + 7.66% Perpetuity
July 2009
Euro 125.7 Euribor (3M) + 7.66% Perpetuity
September 2009
US Dollar 161.6 USD Libor (3M) + 7.67% Perpetuity
September 2009
US Dollar 825.1 10.50% Perpetuity
Santander International Preferred S.A. (Sociedad Unipersonal)
March 2009
US Dollar 981.0 2.00% Perpetuity
March 2009
Euro 8.6 2.00% Perpetuity
Abbey Group
Abbey National Capital Trust I, February 2000
US Dollar 621.2 Fixed to 8.963% until June 30, 2030, and from this date, 2.825% + Libor USD (3M) Perpetuity
Abbey National Plc, February 2001(3)
Pounds Sterling 104.8 7.037% Perpetuity
Abbey National Plc, August 2002
Pounds Sterling 15.9 Fixed to 6.984% until February 9, 2018, and thereafter, at a rate reset semi-annually of 1.86% per annum + Libor GBP (6M) Perpetuity
Santander PR Capital Trust I
February 2006
US Dollar 125 6.750% July 2036

F-211

Table of Contents

(1)
From these date the issuer can redeem the shares, subject to prior authorization by the national supervisor.
(2)
That issuance is a Fixed/Floating Rate Non-Cumulative Callable Preference Shares. Dividends will accrue on a principal amount equal to £1,000 per Preference Share at a rate of 6.222 per cent. per annum in respect of the period from (and including) May 24, 2006 (the Issue Date) to (but excluding) May 24, 2019 (the First Call Date) and thereafter at a rate reset quarterly equal to 1.13 per cent. per annum above the London interbank offered rate for three-month sterling deposits. From (and including) the Issue Date to (but excluding) the First Call Date, dividends, if declared, will be paid annually in arrear on May 24, in each year. Subject as provided herein, the first such dividend payment date will be May 24, 2007 and the last such dividend payment date will be the First Call Date. From (and including) the First Call Date, dividends, if declared, will be paid quarterly in arrear on May 24, August 24, November 24 and February 24, in each year. Subject as provided herein, the first such dividend payment date will be August 24, 2019.
(3)
From February 14, 2026, this issue will bear interest at a rate, reset every five years, of 3.75% per annum above the gross redemption yield on a five-year specified United Kingdom government security.
In accordance with Reg. S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered, Santander Finance Capital, S.A. (Unipersonal), Santander Finance Preferred, S.A. (Unipersonal) and Santander International Preferred, S.A. (Unipersonal) - issuers of registered preferred securities guaranteed by Banco Santander, S.A. — do not file the financial statements required for a registrant by Regulation S-X as:
•
Santander Finance Preferred, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. who fully and unconditionally guarantees the preferred securities (Series 1, 4, 5, 6, 10 and 11 are listed in the United States). No other subsidiary of the Bank guarantees such securities.
•
Santander Finance Capital, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. that fully and unconditionally guarantees the preferred securities (not listed in United States). No other subsidiary of the Bank guarantees such securities.
•
Santander International Preferred, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. that fully and unconditionally guarantees the preferred securities (not listed in United States). No other subsidiary of the Bank guarantees such securities.
The condensed financial statements of Santander Finance Capital, S.A. (Unipersonal), Santander Finance Preferred, S.A. (Unipersonal) and Santander International Preferred, S.A. (Sociedad Unipersonal) for the years ended December 31, 2009 and 2008 are the following:
SANTANDER FINANCE CAPITAL, S.A. (UNIPERSONAL)
Santander Finance Capital, S.A. (Unipersonal) was established in Spain on July 8, 2003.
The common stock of the company is wholly owned by Banco Santander, S.A.
Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander Finance Capital, S.A. (Unipersonal), prepared in conformity with IFRS.
Balance sheets
Thousands of Euros
SANTANDER FINANCE CAPITAL, S.A. (UNIPERSONAL) 2009 2008
Assets:
Cash
22,965 56,490
Deposits with Parent Bank
3,442,226 3,214,769
Accrual accounts
11,201 27,756
Other assets
—
Total Assets
3,476,392 3,299,015
Liabilities and stockholders’ equity:
LIABILITIES:
Public entities
4,409 1,567
Accrual accounts
10,043 26,153
Non-commercial debts
— —
Commercial debts
74 40
Debts with Group companies
69 18
Provisions for taxes
— —
Preferred securities
3,461,648 3,270,842
Total Liabilities
3,476,243 3,298,620
STOCKHOLDERS’ EQUITY:
Capital stock
151 151
Retained earnings
243 123
Net income
(245 ) 121
Total Stockholders’ Equity
149 395
Total Liabilities and Stockholders’ Equity
3,476,392 3,299,015

F-212

Table of Contents

Statement of income
Thousands of Euros
SANTANDER FINANCE CAPITAL, S.A. (UNIPERSONAL) 2009 2008
Interest income
118,253 175,020
Interest expenses
(118,236 ) (174,770 )
Non interest expenses
(262 ) (77 )
Corporate income tax
— (52 )
Net income / (loss)
(245 ) 121
Statement of changes in stockholders’ equity
Total
Retained Stockholders’
Capital stock Earnings Net income Equity
Changes in Stockholders’ Common
Equity Shares Thousands of Euros
Balance at January 1, 2008
1,505 151 70 53 274
2007 Income allocation
— — 53
Net income 2008
— — — 121 121
Balance at December 31, 2008
1,505 151 123 121 395
2008 Income allocation
— — 120 (121 ) (1 )
Net income 2009
— — — (245 ) (245 )
Balance at December 31, 2009
1,505 151 243 (245 ) 149
In October 2005, the board of directors authorized a capital increase of 903 shares of common stock with a € 100 par value. This capital increase was fully subscribed and paid by Banco Santander, S.A.
After this capital increase, the capital stock of Santander Finance Capital S.A. (Unipersonal), as of December 31, 2005, amounted to 1,505 shares of common stock with a € 100 par value, fully subscribed and paid by Banco Santander, S.A. (wholly owner of this company).
Preferred Securities
Thousands of
Issuances Issue Date Euros at 12/31/09
Series V
04/12/2005 1,000,000
Series VI
03/18/2009 12,622
Series VII
03/18/2009 17,336
Series VIII
03/18/2009 313,745
Series IX
03/18/2009 153,700
Series X
06/30/2009 1,965,616
Total
3,463,019
Issuances expenses
Series V
(1,100 )
Series VI
(4 )
Series VII
(27 )
Series VIII
(103 )
Series IX
(50 )
Series X
(87 )
Total
(1,371 )
Total
3,461,648

F-213

Table of Contents

•
Series I: on October 3, 2003, Santander Finance Capital, S.A. (Unipersonal) issued 18,000,000 preference securities, at € 25 par value. On April 7, 2009 the company redeemed the whole series.
•
Series II: on February 18, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 16,000,000 preference securities, at € 25 par value. On March 31, 2009 the company redeemed the whole series.
•
Series III: on July 30, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 30,000,000 preference securities, at € 25 par value. On August 17, 2009 the company redeemed the whole series.
•
Series IV: on September 30, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 27,200,000 preference securities, at € 25 par value. On August 17, 2009 the company redeemed the whole series.
•
Series V: on April 12, 2005, Santander Finance Capital, S.A. (Unipersonal) issued 40,000,000 preference securities, at € 25 par value.
•
Series VI: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 12,122 preference securities, at € 1,500 par value.
•
Series VII: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 333 preference securities, at € 75,000 par value.
•
Series VIII: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 313,745 preference securities, at € 1,000 par value.
•
Series IX: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 3,074 preference securities, at € 50,000 par value.
•
Series X: on June 30, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 78,624,629 preference securities, at € 25 par value.
•
These issues are perpetual and can be redeemable at the option of the issuer, subject to the consent of the Bank of Spain, in whole or in part, at any time after five years from the issue date.
•
All the issues of Santander Finance Capital, S.A. (Unipersonal) are guaranteed by Banco Santander, S.A.
SANTANDER FINANCE PREFERRED, S.A. (UNIPERSONAL)
Santander Finance Preferred, S.A. (Unipersonal) was established in Spain on February 27, 2004.
The common stock of the company is wholly owned by Banco Santander, S.A.
Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander Finance Preferred, S.A. (Unipersonal), prepared in conformity with IFRS.
Balance sheets
Thousands of Euros
SANTANDER FINANCE PREFERRED, S.A. (UNIPERSONAL) 2009 2008
Assets:
Cash
24,917 16,086
Deposits with Parent Bank
3,626,360 1,912,206
Accrual accounts
69,304 26,735
Total Assets
3,720,581 1,955,027
Liabilities and stockholders’ equity:
LIABILITIES:
Public entities
254 153
Accrual accounts
69,017 23,485
Commercial debts
25 36
Non-commercial debts
— —
Deferred income
— 863
Debts with group companies
928,206 9
Provisions for taxes
— —
Preferred securities
2,720,256 1,928,990
Total Liabilities
3,717,758 1,953,536
STOCKHOLDERS’ EQUITY:
Capital stock
151 151
Retained earnings
1,340 2,084
Net income
1,332 (744 )
Total Stockholders’ Equity
2,823 1,491
Total Liabilities and Stockholders’ Equity
3,720,581 1,955,027

F-214

Table of Contents

Statement of income
Thousands of Euros
SANTANDER FINANCE PREFERRED, S.A. (UNIPERSONAL) 2009 2008
Interest income
182,125 123,313
Interest expenses
(179,748 ) (122,172 )
Non interest income
— —
Non interest expensive
(1,042 ) (1,885 )
Corporate income tax
(3 ) —
Net income / (loss)
1,332 (744 )
Statement of changes in stockholders’ equity
Total
Retained Stockholders’
Capital stock Earnings Net income Equity
Changes in Stockholders’ Common
Equity Shares Thousands of Euros
Balance at January 1, 2008
1,505 151 421 1,663 2,235
2007 Income allocation
— — 1,663 (1,663 ) —
Net income 2008
— — — (744 ) (744 )
Balance at December 31, 2008
1,505 151 2,084 (744 ) 1,491
2008 Income allocation
— — (744 ) 744 —
Net income 2009
— — — 1,332 1,332
Balance at December 31, 2009
1,505 151 1,340 1,332 2,823

F-215

Table of Contents

In October 2005, the board of directors authorized a capital increase of 903 shares of common stock with a € 100 par value. This capital increase was fully subscribed and paid by Banco Santander, S.A.
After this capital increase, the capital stock of Santander Finance Preferred, S.A. (Unipersonal), as of December 31, 2005, amounted to 1,505 shares of common stock with a € 100 par value, fully subscribed and paid by Banco Santander, S.A. (wholly owner of this company).
Preferred Securities
Thousands of
Issue Date Euros at 12/31/09
Issuances
Series 1- $190,000
03/11/2004 131,889
Series 2- € 300,000
09/30/2004 300,000
Series 3- € 200,000
10/08/2004 200,000
Series 4- $500,000
11/21/2006 347,078
Series 5- $600,000
31/01/2007 416,493
Series 6- $350,000
05/03/2007 242,954
Series 7- £250,000
07/10/2007 281,500
Series 8- £679,400
07/27/2009 765,004
Series 9- € 125,700
07/27/2009 125,700
Series 10- $825,110
09/29/2009 572,754
Series 11- $161,587
09/29/2009 112,166
3,495,538
Issuances expenses
Series 1
— —
Series 2
— —
Series 3
— —
Series 4
— (2.988 )
Series 5
— (3.792 )
Series 6
— (109 )
Series 7
— (45 )
Series 8
— (114 )
Series 9
— (114 )
Series 10
— (119 )
Series 11
— (119 )
(7,400 )
Total
3,488,138
•
Series 1: on March 11, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 7,600,000 preferred securities, at $25 par value.
•
Series 2: on September 30, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 300,000 preferred securities, at € 1,000 par value.
•
Series 3: on October 8, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 200,000 preferred securities, at € 1,000 par value.
•
Series 4: on November 21, 2006 Santander Finance Preferred, S.A. (Unipersonal) issued 20,000,000 preferred securities, at € 25 par value.
•
Series 5: on January 31, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 24,000,000 preferred securities, at $25 par value.
•
Series 6: on March 5, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 14,000,000 preferred securities, at $25 par value.
•
Series 7: on July 10, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 5,000 preferred securities, at £50,000 par value.
•
Series 8: on July 27, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 13,588 preferred securities, at £50,000 par value.
•
Series 9: on July 27, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 2,514 preferred securities, at € 50,000 par value.
•
Series 10: on September 29, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 33,004,383 preferred securities, at $25 par value.
•
Series 11: on September 29, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 161,587 preferred securities, at $1,000 par value.
•
These issues are perpetual and can be redeemable at the option of the issuer, subject to the consent of the Bank of Spain, in whole or in part, at any time after five years from the issue date.
•
All the issues of Santander Finance Preferred, S.A. (Unipersonal) are guaranteed by Banco Santander, S.A.
•
On July 9, 2009, we published on the international markets offers to exchange issues of securities eligible to be included in capital issued by Santander and its subsidiaries. The exchange envisaged the delivery of new securities that meet the current market standards and regulatory requirements to be classified as equity at the consolidated Group level. For this purpose Santander Finance Preferred, S.A. (Unipersonal) issued Series 8, 9, 10 and 11 above.

F-216

Table of Contents

SANTANDER INTERNATIONAL PREFERRED, S.A. (SOCIEDAD UNIPERSONAL)
Santander International Preferred, S.A. (Sociedad Unipersonal) was established in Spain on February 17, 2009.
The common stock of the company is wholly owned by Banco Santander, S.A.
Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander International Preferred, S.A. (Sociedad Unipersonal), prepared in conformity with IFRS.
Balance sheets
Thousands of Euros
SANTANDER INTERNATIONAL PREFERRED, S.A. (SOCIEDAD UNIPERSONAL) 2009
Assets:
Cash
225
Deposits with Parent Bank
689,271
Accrual accounts
10,904
Other current assets
4
Total Assets
700,404
Liabilities and stockholders’ equity:
LIABILITIES:
Public entities
7
Commercial debts
71
Accrual accounts
10,882
Preferred securities
689,401
Total Liabilities
700,361
STOCKHOLDERS’ EQUITY:
Capital stock
60
Net income
(17 )
Total Stockholders’ Equity
43
Total Liabilities and Stockholders’ Equity
700,404
Statement of income
Thousands of Euros
SANTANDER INTERNATIONAL PREFERRED, S.A. (SOCIEDAD UNIPERSONAL) 2009
Interest income
11,078
Interest expenses
(11,066 )
Non interest income
2
Non interest expensive
(31 )
Corporate income tax
—
Net income / (loss)
(17 )
Statement of changes in stockholders’ equity
Total
Retained Stockholders’
Capital stock Earnings Net income Equity
Changes in Stockholders’ Common
Equity Shares Thousands of Euros
Balance at February 17, 2009
— — — — —
Capital increase
— 60 — — 60
Net income 2009
— — — (17 ) (17 )
Balance at December 31, 2009
602 60 — (17 ) 43

F-217

Table of Contents

At December 31, 2009, the capital stock of Santander International Preferred, S.A. (Sociedad Unipersonal) amounted to 602 shares of common stock with a € 100 par value, fully subscribed and paid by Banco Santander, S.A. (wholly owner of this company).
Preferred Securities
Thousands of
Issue Date Euros at 12/31/09
Issuances
Series 1 ($)
03/19/2009 680,961
Series 2 ( € )
03/19/2009 8,582
689,543
Issuances expenses
(142 )
Total
689,401
•
Series 1: on March 19, 2009, Santander International Preferred, S.A. (Sociedad Unipersonal) issued 653,995 preferred securities, at $1,500 par value.
•
Series 2: on March 19, 2009, Santander International Preferred, S.A. (Sociedad Unipersonal) issued 8,582 preferred securities, at € 1,000 par value.
•
These issues are perpetual and can be redeemable at the option of the issuer, subject to the consent of the Bank of Spain, in whole or in part, at any time after ten years from the issue date.
•
All the issues of Santander Finance Preferred, S.A. (Sociedad Unipersonal) are guaranteed by Banco Santander, S.A.
55.3
Acquisition of Sovereign Bancorp, Inc (“Sovereign”).
On May 31, 2006, Santander acquired shares of common stock of Sovereign equal to 19.8% of Sovereign’s outstanding shares after giving effect to such purchase. The purchase price was $27 per share ($25.65 post-stock dividend), for an aggregate purchase price of $2.4 billion and generated goodwill of $760 million.
On October 13, 2008, Banco Santander, S.A. (Santander) and Sovereign Bancorp Inc., the parent of Sovereign Bank, announced that Santander would acquire Sovereign through a share exchange. At the date of the announcement Santander held 24.35% of the outstanding ordinary shares of Sovereign.
Under the terms of the definitive transaction agreement, which was unanimously approved by the non-Santander directors of Sovereign and by the Executive Committee of Santander, Sovereign shareholders will receive 0.2924 Banco Santander American Depository Shares (ADSs) for every 1 ordinary Sovereign share they own (or 1 Banco Santander ADS for every 3.42 Sovereign shares). Based on the closing price of Santander ADSs on Friday, October 10, 2008, the transaction had an aggregate value of approximately USD 1,900 million ( € 1,400 million), or USD 3.81 per share, and met Santander’s criteria for acquisitions, both strategically, by significantly enhancing the geographical diversification of the Group, and financially, with a projected net profit for Sovereign of USD 750 million in 2011.
On January 26, 2009, Banco Santander held an Extraordinary General Meeting at which the shareholders approved the capital increase to cater for the acquisition of 75.65% of the US entity Sovereign Bancorp Inc., which was agreed upon in October 2008. The resolution was adopted with the vote of 96.9% of the capital present in person or by proxy.
On January 28, 2009, the shareholders at the General Meeting of Sovereign approved the acquisition.
On January 30, 2009, the acquisition of Sovereign was completed and Sovereign became a wholly-owned subsidiary of the Santander Group. The transaction involved the issue of 0.3206 ordinary shares of Banco Santander for each ordinary share of Sovereign (equivalent to the approved exchange of 0.2924 ADSs adjusted for the dilution arising from the capital increase carried out in December 2008). To this end, 161,546,320 ordinary shares were issued for a cash amount (par value plus share premium) of € 1,302,063,339.20.
Under SEC Regulation S-X, Sovereign was an equity method investee significant to the Group in 2008 and thus we present below its summarized balance sheets as of December 31, 2008 and 2007 and income statements for the fiscal years ended December 31, 2008 and 2007. At December 31, 2009 Sovereign was fully consolidated in Santander Group.
On February 1, 2010 Sovereign Bancorp changed its name to Santander Holdings USA, Inc.
The financial information for 2008 and 2007 disclosed below, differs for those years from that included in our 2008 Form 20F due to reclassifications for comparative purposes reported in Sovereign’s form 10-K as of December 31, 2009. Such reclassifications bear no impact on our financial statements for any of the years 2007 and 2008.

F-218

Table of Contents

CONSOLIDATED BALANCE SHEET — SOVEREIGN BANCORP, INC. 2008 2007
(Thousands of euros)
Assets
Cash and amounts due from depository institutions
2,697,796 2,126,737
Investment securities available for sale
6,683,437 9,470,720
Investment securities held to maturity
— —
Other investments
516,470 815,532
Net loans held for investment
39,117,012 38,536,772
Loans held for sale
235,203 372,094
Premises and equipment
395,308 381,993
Accrued interest receivable
180,795 238,118
Goodwill
2,465,676 2,327,455
Core deposits and other intangibles
192,909 252,779
Bank owned life insurance
1,327,648 1,218,734
Other assets
1,583,067 1,827,435
Total assets
55,395,321 57,568,369
Liabilities
Deposits and other customer accounts
34,805,327 33,907,958
Borrowings and other debt obligations
15,063,724 17,846,961
Advance payments by borrowers for taxes and insurance
66,986 56,444
Other liabilities
1,437,789 1,007,108
Total liabilities
51,373,826 52,818,471
Minority interest-preferred securities of subsidiaries
— —
Stockholders’ Equity
Preferred stock
140,436 132,766
Common stock
5,546,289 4,276,593
Warrants and employee stock options issued
251,902 236,645
Unallocated common stock held by Employee Stock Ownership Plan
— —
Treasury stock
(6,739 ) (13,486 )
Accumulated other comprehensive loss
(564,642 ) (221,543 )
Retained earnings
(1,345,751 ) 338,923
Total Stockholders’ Equity
4,021,495 4,749,898
Total Liabilities and Stockholders’ Equity
55,395,321 57,568,369
CONSOLIDATED INCOME STATEMENT — SOVEREIGN BANCORP, INC. 2008 2007
(Thousands of euros)
Interest income
2,679,882 3,402,988
Interest expense
(1,394,001 ) (2,055,868 )
Provision for credit losses
(622,297 ) (297,958 )
Interest income / (Charges) after provision for credit losses
663,584 1,049,161
Fees and other income
434,746 387,895
Net (loss)/gain on investment securities
(994,022 ) (128,888 )
Non-interest income
(559,277 ) 259,008
General and administrative expenses
(1,013,917 ) (977,037 )
Other expenses
(206,312 ) (1,361,408 )
Income before income taxes
(1,115,922 ) (1,030,277 )
Income tax benefit/(provision)
(494,269 ) 44,179
Net income
(1,610,191 ) (986,098 )

F-219

Table of Contents

Exhibit I
Subsidiaries of Banco Santander, S.A. (1)
Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
2 & 3 Triton Limited (m)
United Kingdom 0.00 % 100.00 % 100.00 % PROPERTY 125 7 12
A & L CF (Guernsey) Limited (n)
Guernsey 0.00 % 100.00 % 100.00 % LEASING 0 0 0
A & L CF (Jersey) Limited (n)
Jersey 0.00 % 100.00 % 100.00 % LEASING 88 1 85
A & L CF (Jersey) No.2 Limited (n)
Jersey 0.00 % 100.00 % 100.00 % LEASING 93 11 89
A & L CF December (1) Limited
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 13 0 0
A & L CF December (10) Limited
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 35 0 32
A & L CF December (11) Limited
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 12 0 10
A & L CF December (2) Limited
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 1 (2 ) 0
A & L CF June (1) Limited (e)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 3 0 1
A & L CF June (2) Limited (e)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 1 0 0
A & L CF June (3) Limited (e)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING (1 ) 0 0
A & L CF June (4) Limited (j) (e)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
A & L CF June (5) Limited (e)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
A & L CF June (6) Limited (e)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
A & L CF June (7) Limited (e)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
A & L CF June (8) Limited (e)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
A & L CF March (1) Limited (d)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING (1 ) 1 0
A & L CF March (3) Limited (d)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
A & L CF March (4) Limited (j) (d)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 5 0 3
A & L CF March (5) Limited (d)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
A & L CF March (6) Limited (d)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
A & L CF March (7) Limited (d)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
A & L CF March (8) Limited (d)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
A & L CF March (9) Limited (d)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
A & L CF September (1) Limited (f)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 3 0 0
A & L CF September (2) Limited (f)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
A & L CF September (3) Limited (f)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
A & L CF September (4) Limited (f)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING (3 ) 0 0
A & L CF September (5) Limited (f)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 2 0 0
A & L Direct Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
A & L Insurance Services plc (j)
United Kingdom 0.00 % 100.00 % 100.00 % INSURANCE 0 0 0
A & L Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
A N (123) plc
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 960 16 964
Abbey Business Services (India) Private Limited (d)
India 0.00 % 100.00 % 100.00 % HOLDING COMPANY 1 0 0
Abbey Covered Bonds (Holdings) Limited
United Kingdom — (b ) — SECURITIZATION 0 0 0
Abbey Covered Bonds (LM) Limited
United Kingdom — (b ) — SECURITIZATION 0 0 0
Abbey Covered Bonds LLP
United Kingdom — (b ) — SECURITIZATION (548 ) (33 ) 0
Abbey National (America) Holdings Inc.
United States 0.00 % 100.00 % 100.00 % HOLDING COMPANY 31 0 31
Abbey National (America) Holdings Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 31 0 26
Abbey National (CF Trustee) Limited (d)
United Kingdom 0.00 % 100.00 % 100.00 % ASSET MANAGEMENT COMPANY 0 0 0
Abbey National (Gibraltar) Limited
Gibraltar 0.00 % 100.00 % 100.00 % BROKER-DEALER 6 0 5
Abbey National (Holdings) Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 21 0 18
Abbey National 1986 Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 7 0 5

F-220

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Abbey National Alpha Investments (d)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 2 0 1
Abbey National American Investments Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 291 2 285
Abbey National Baker Street Investments
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 4 0 4
Abbey National Beta Investments Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 130 (1 ) 96
Abbey National Business Cashflow Finance Limited
United Kingdom 0.00 % 100.00 % 100.00 % FACTORING 6 0 5
Abbey National Business Equipment Leasing Limited
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 1 0 6
Abbey National Business Office Equipment Leasing Limited
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 5 0 0
Abbey National Capital LP I
United States — (b ) — FINANCE 0 0 0
Abbey National Charitable Trust Limited
United Kingdom — (b ) — SECURITIZATION 10 1 0
Abbey National Financial Investments 3 B.V.
Netherlands 0.00 % 100.00 % 100.00 % FINANCE 5 (1 ) 1
Abbey National Financial Investments 4 B.V.
Netherlands 0.00 % 100.00 % 100.00 % FINANCE 298 3 282
Abbey National General Insurance Services Limited
United Kingdom 0.00 % 100.00 % 100.00 % ADVISORY SERVICES (43 ) 0 0
Abbey National GP (Jersey) Limited
Jersey 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Abbey National Group Pension Schemes Trustees Limited (d)
United Kingdom 0.00 % 100.00 % 100.00 % ASSET MANAGEMENT COMPANY 0 0 0
Abbey National Guarantee Company
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 4 0 3
Abbey National Homes Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE (43 ) 0 0
Abbey National International Limited
Jersey 0.00 % 100.00 % 100.00 % BANKING 293 23 168
Abbey National Investments
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 144 1 120
Abbey National Legacy Holdings Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 152 (6 ) 0
Abbey National Legacy Leasing Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 85 0 0
Abbey National Legacy Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 310 2 0
Abbey National Nominees Limited
United Kingdom 0.00 % 100.00 % 100.00 % BROKER-DEALER 0 0 0
Abbey National North America Holdings Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 0 0 0
Abbey National North America LLC
United States 0.00 % 100.00 % 100.00 % FINANCE 1 (1 ) 0
Abbey National Pension (Escrow Services) Limited
United Kingdom 0.00 % 100.00 % 100.00 % PENSION FUND MANAGEMENT COMPANY 7 11 0
Abbey National PEP & ISA Managers Limited
United Kingdom 0.00 % 100.00 % 100.00 % FUND AND PORTFOLIO MANAGER 45 2 12
Abbey National Personal Pensions Trustee Limited
United Kingdom 0.00 % 100.00 % 100.00 % ASSET MANAGEMENT COMPANY 0 0 0
Abbey National plc
United Kingdom 100.00 % 0.00 % 100.00 % BANKING 6,642 818 14,968
Abbey National PLP (UK) Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Abbey National Property Investments
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 368 14 156
Abbey National Property Services Limited
United Kingdom 0.00 % 100.00 % 100.00 % PROPERTY (15 ) 0 0
Abbey National Secretariat Services Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FUND AND PORTFOLIO MANAGER 0 0 0
Abbey National Securities Inc.
United States 0.00 % 100.00 % 100.00 % BROKER-DEALER 40 0 31
Abbey National September Leasing (3) Limited (f)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING (9 ) 0 0
Abbey National Shelf Co. (4) Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % INACTIVE 0 0 0
Abbey National Sterling Capital plc
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 3 0 0
Abbey National Treasury International (IOM) Limited (j)
Isle of Man 0.00 % 100.00 % 100.00 % BANKING 4 0 0
Abbey National Treasury Investments
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 307 2 207
Abbey National Treasury Services (Transport Holdings) Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 0 0 0
Abbey National Treasury Services Investments Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 951 3 845
Abbey National Treasury Services Overseas Holdings
United Kingdom 0.00 % 99.99 % 99.99 % HOLDING COMPANY 1,389 252 1,148
Abbey National Treasury Services plc
United Kingdom 0.00 % 100.00 % 100.00 % BANKING 3,272 621 3,208
Abbey National UK Investments
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 811 15 683
Abbey Stockbrokers (Nominees) Limited
United Kingdom 0.00 % 100.00 % 100.00 % BROKER-DEALER 0 0 0
Abbey Stockbrokers Limited
United Kingdom 0.00 % 100.00 % 100.00 % BROKER-DEALER 6 0 7
ABN AMRO Administradora de Cartões de Crédito Ltda. (l)
Brazil 0.00 % 0.00 % 0.00 % CARDS — — —

F-221

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
ABN AMRO Brasil dois Participações S.A. (l)
Brazil 0.00 % 0.00 % 0.00 % HOLDING COMPANY — — —
ABN AMRO Brasil Partipações e Investimentos S.A. (l)
Brazil 0.00 % 0.00 % 0.00 % HOLDING COMPANY — — —
ABN AMRO Real Corretora de Câmbio e Valores Mobiliários S.A.
Brazil 0.00 % 83.55 % 100.00 % BROKER-DEALER 15 1 14
ABN AMRO Securities (Brasil) Corretora de Valores Mobiliários S.A.
Brazil 0.00 % 83.55 % 100.00 % BROKER-DEALER 25 2 21
Administración de Bancos Latinoamericanos Santander, S.L.
Spain 24.11 % 75.89 % 100.00 % HOLDING COMPANY 541 10 156
AEH Purchasing, Ltd.
Ireland — (b ) — SECURITIZATION 0 0 0
Afisa S.A.
Chile 0.00 % 100.00 % 100.00 % FUND MANAGEMENT COMPANY 7 1 3
Agencia de Seguros Santander, Ltda.
Colombia 0.00 % 100.00 % 100.00 % INSURANCE 1 0 2
Agrícola Tabaibal, S.A.
Spain 0.00 % 66.56 % 100.00 % AGRICULTURE AND LIVESTOCK 0 0 0
Agropecuaria Tapirapé S.A.
Brazil 0.00 % 82.77 % 99.07 % AGRICULTURE AND LIVESTOCK 3 0 0
Aguas Araucanía S.A.
Chile 0.00 % 100.00 % 100.00 % WATER TREATMENT AND DISTRIBUTION 54 7 32
Aguas del Altiplano S.A.
Chile 0.00 % 100.00 % 100.00 % WATER TREATMENT AND DISTRIBUTION 37 11 38
Aguas Magallanes S.A.
Chile 0.00 % 100.00 % 100.00 % WATER TREATMENT AND DISTRIBUTION 17 6 18
Aguas Nuevas S.A.
Chile 0.00 % 100.00 % 100.00 % HOLDING COMPANY 75 23 302
AKB Marketing Services Sp. Z.o.o.
Poland 0.00 % 100.00 % 100.00 % MARKETING 6 0 0
Aktúa Soluciones Financieras, S.A.
Spain 0.00 % 89.72 % 100.00 % FINANCIAL SERVICES 1 6 0
Alcaidesa Golf, S.L.
Spain 0.00 % 44.87 % 50.01 % SPORTS OPERATIONS 5 (1 ) 3
Alcaidesa Holding, S.A. (consolidated)
Spain 0.00 % 44.87 % 50.01 % PROPERTY 71 (4 ) 28
Alcaidesa Inmobiliaria, S.A.
Spain 0.00 % 44.87 % 50.01 % PROPERTY 64 (2 ) 15
Alcaidesa Servicios, S.A.
Spain 0.00 % 44.87 % 50.01 % SERVICES 9 0 4
Alce Tenedora, S.L.
Spain 99.99 % 0.01 % 100.00 % SECURITIES INVESTMENT (22 ) 1 0
ALCF Investments Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Aljarafe Golf, S.A.
Spain 0.00 % 80.22 % 89.41 % PROPERTY 14 0 1
Aljardi SGPS, Lda.
Portugal 0.00 % 100.00 % 100.00 % HOLDING COMPANY 1,382 4 1,148
Alliance & Leicester (Europe) Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance & Leicester (Holdings) Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 0 0 0
Alliance & Leicester (Isle of Man) Limited
United Kingdom 0.00 % 100.00 % 100.00 % BANKING 6 0 6
Alliance & Leicester (Jersey) Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 9 0 0
Alliance & Leicester Cash Solutions Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE (23 ) 0 0
Alliance & Leicester Commercial Bank plc
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 25 0 25
Alliance & Leicester Commercial Finance (Holdings) plc
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 44 0 77
Alliance & Leicester Commercial Finance plc
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 79 24 163
Alliance & Leicester Covered Bonds LLP
United Kingdom — (b ) — SECURITIZATION 0 0 0
Alliance & Leicester Covered Bonds (LM) Limited
United Kingdom — (b ) — SECURITIZATION 0 0 0
Alliance & Leicester Direct Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance & Leicester Employee Share Scheme Trustees Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance & Leicester Equity Investments (Guarantee) Limited
United Kingdom — (b ) — FINANCE 0 0 0
Alliance & Leicester Estate Agents (Holdings) Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 0 0 0
Alliance & Leicester Estate Agents (Mortgage & Finance) Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance & Leicester Estates Limited
United Kingdom 0.00 % 100.00 % 100.00 % PROPERTY 6 0 0
Alliance & Leicester Finance Company Limited (j) (n)
Cayman Islands 0.00 % 100.00 % 100.00 % FINANCE 14 (8 ) 0
Alliance & Leicester Financing plc (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 7 0 7
Alliance & Leicester Independent Financial Advisers Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance & Leicester International Holdings Limited
Isle of Man 0.00 % 100.00 % 100.00 % HOLDING COMPANY 29 56 29
Alliance & Leicester International Limited
Isle of Man 0.00 % 100.00 % 100.00 % BANKING 204 (9 ) 29

F-222

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Alliance & Leicester Investment (Derivatives No 3) Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 21 1 16
Alliance & Leicester Investment (Derivatives) Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance & Leicester Investment (No 3) LLP
United Kingdom — (b ) — FINANCE 24 0 0
Alliance & Leicester Investment (No 4) Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 10 (1 ) 11
Alliance & Leicester Investments (Derivatives No.2) Limited (j) (n)
Jersey 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance & Leicester Investments (Jersey) Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance & Leicester Investments (No 2) Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 260 1 254
Alliance & Leicester Investments Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 486 10 450
Alliance & Leicester LM Holdings Limited
United Kingdom — (b ) — SECURITIZATION 0 0 0
Alliance & Leicester Mortgage Loans Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance & Leicester North America (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance & Leicester Personal Finance Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE (59 ) (189 ) 0
Alliance & Leicester plc
United Kingdom 0.00 % 100.00 % 100.00 % BANKING 1,345 (128 ) 2,210
Alliance & Leicester Print Services Limited
United Kingdom 0.00 % 100.00 % 100.00 % SERVICES 3 0 0
Alliance & Leicester QUEST Trustee Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance & Leicester Share Incentive Plan Trustee Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance & Leicester Share Ownership Trust Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance & Leicester Syndicated Loans Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance & Leicester Trade Services Limited (f) (j)
Hong Kong 0.00 % 100.00 % 100.00 % SERVICES 0 0 0
Alliance & Leicester Unit Trust Managers Limited
United Kingdom 0.00 % 100.00 % 100.00 % FUND AND PORTFOLIO MANAGER 9 0 5
Alliance Bank (U.K) Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance Bank Limited
United Kingdom 100.00 % 0.00 % 100.00 % FINANCE 0 0 0
Alliance Business Bank Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance Business Banking Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance Business Finance Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance Cash Solutions Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance Commercial Bank Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance Commercial Banking Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance Corporate Banking Services Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance Corporate Services Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 9 0 0
Alliance Estate Agents Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % PROPERTY 0 0 0
Alliance Group Public Limited Company (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance Life Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Alliance Mutual plc (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Almacenadora Serfin, S.A. De C.V.
Mexico 0.00 % 73.99 % 98.71 % WAREHOUSING 1 0 1
Almacenadora Somex, S.A. De C.V.
Mexico 0.00 % 72.88 % 97.24 % WAREHOUSING 7 0 1
Altamira Santander Real Estate, S.A.
Spain 93.62 % 6.38 % 100.00 % PROPERTY 20 (425 ) 0
Andaluza de Inversiones, S.A.
Spain 0.00 % 100.00 % 100.00 % HOLDING COMPANY 44 1 27
ANDSH Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 3 0 2
ANFP (US) LLC
United States 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
ANITCO Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 0 0 0
Aquanima Brasil Ltda.
Brazil 0.00 % 99.43 % 100.00 % e-COMMERCE 0 1 0
Aquanima Chile S.A.
Chile 0.00 % 99.43 % 100.00 % e-COMMERCE 1 0 0
Aquanima México S. de R.L. de C.V.
Mexico 0.00 % 99.43 % 100.00 % e-COMMERCE 1 0 1
Aquanima S.A.
Argentina 0.00 % 99.43 % 100.00 % SERVICES 0 0 0
Argenline, S.A.
Uruguay 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Asesoría Estratega, S.C.
Mexico 0.00 % 85.00 % 100.00 % SERVICES 0 0 0
Aurum S.A.
Chile 0.72 % 99.28 % 100.00 % HOLDING COMPANY 2 3 68
Ausant Holding Gesellschaft m.b.H.
Austria 0.00 % 100.00 % 100.00 % HOLDING COMPANY 9 0 10

F-223

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Aviación Intercontinental, A.I.E.
Spain 99.99 % 0.01 % 100.00 % LEASING 16 0 16
Aviación Real, A.I.E.
Spain 99.99 % 0.01 % 100.00 % LEASING 7 (1 ) 11
Aviación Regional Cántabra, A.I.E.
Spain 73.58 % 0.00 % 73.58 % LEASING 29 2 22
Aviación Tritón, A.I.E.
Spain 99.99 % 0.01 % 100.00 % LEASING 9 0 9
Aymoré Crédito, Financiamento e Investimento S.A.
Brazil 0.00 % 83.55 % 100.00 % FINANCE 248 25 252
Bajondillo, S.A.
Spain 0.00 % 89.72 % 100.00 % PROPERTY 0 0 0
Baker Street Risk and Insurance (Guernsey) Limited (e)
Guernsey 0.00 % 100.00 % 100.00 % INSURANCE 14 2 2
Banbou S.A.R.L.
France 0.00 % 90.00 % 100.00 % HOLDING COMPANY 0 0 0
BANBY PRO S.C.I.
France 0.00 % 90.00 % 100.00 % PROPERTY 54 (4 ) 43
BANBY S.A.S.
France 0.00 % 90.00 % 90.00 % PROPERTY 52 (4 ) 47
Banco ABN AMRO Real S.A. (l)
Brazil 0.00 % 0.00 % 0.00 % BANKING — — —
Banco Alicantino de Comercio, S.A.
Spain 0.00 % 89.72 % 100.00 % BANKING 9 0 8
Banco Bandepe S.A.
Brazil 0.00 % 83.55 % 100.00 % BANKING 1,460 139 1,131
Banco Banif, S.A.
Spain 100.00 % 0.00 % 100.00 % BANKING 377 35 184
Banco Comercial e de Investimento Sudameris S.A. (l)
Brazil 0.00 % 0.00 % 0.00 % BANKING — — —
Banco de Albacete, S.A.
Spain 100.00 % 0.00 % 100.00 % BANKING 12 0 9
Banco de Asunción, S.A. (j)
Paraguay 0.00 % 99.33 % 99.33 % BANKING 1 0 33
Banco Español de Crédito, S.A.
Spain 88.65 % 1.07 % 89.72 % BANKING 4,619 504 1,289
Banco Madesant — Sociedade Unipessoal, S.A.
Portugal 0.00 % 100.00 % 100.00 % BANKING 1,287 52 1,159
Banco Santander — Chile
Chile 0.00 % 76.74 % 76.91 % BANKING 1,856 590 1,159
Banco Santander (Brasil) S.A.
Brazil 0.00 % 83.55 % 83.55 % BANKING 25,306 389 9,995
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander
Mexico 0.00 % 74.95 % 99.99 % BANKING 3,164 591 1,586
Banco Santander (Panamá), S.A.
Panama 0.00 % 100.00 % 100.00 % BANKING 7 0 7
Banco Santander (Suisse) SA
Switzerland 0.00 % 100.00 % 100.00 % BANKING 480 (310 ) 325
Banco Santander Bahamas International Limited
Bahamas 0.00 % 100.00 % 100.00 % BANKING 1,233 61 785
Banco Santander Colombia, S.A.
Colombia 0.00 % 97.85 % 97.85 % BANKING 191 28 481
Banco Santander Consumer Portugal, S.A.
Portugal 0.00 % 100.00 % 100.00 % BANKING 110 10 240
Banco Santander International
United States 95.88 % 4.12 % 100.00 % BANKING 507 (143 ) 383
Banco Santander Perú S.A.
Peru 99.00 % 1.00 % 100.00 % BANKING 19 0 18
Banco Santander Puerto Rico
Puerto Rico 0.00 % 90.59 % 100.00 % BANKING 427 18 351
Banco Santander Río S.A.
Argentina 8.23 % 91.07 % 99.30 % BANKING 349 213 275
Banco Santander Totta, S.A.
Portugal 0.00 % 99.72 % 99.86 % BANKING 1,650 439 2,343
Banco Santander, S.A.
Uruguay 90.93 % 9.07 % 100.00 % BANKING 250 41 203
Banesto Banca Privada Gestión, S.A. S.G.I.I.C.
Spain 0.00 % 89.72 % 100.00 % FUND MANAGEMENT COMPANY 2 0 2
Banesto Banca Privada Inversiones SICAV, S.A.
Spain 0.00 % 61.44 % 68.48 % OPEN-END INVESTMENT COMPANY 8 0 3
Banesto Banco de Emisiones, S.A.
Spain 0.00 % 89.72 % 100.00 % BANKING 101 1 87
Banesto Bolsa, S.A., Sdad. Valores y Bolsa
Spain 0.00 % 89.72 % 100.00 % BROKER-DEALER 110 2 31
Banesto Financial Products, Plc.
Ireland 0.00 % 89.72 % 100.00 % FINANCE 0 0 0
Banesto Renting, S.A.
Spain 0.00 % 89.72 % 100.00 % FINANCE 10 0 2
Banesto Securities, Inc.
United States 0.00 % 89.72 % 100.00 % FINANCE 3 0 2
Banif Gestión, S.A., S.G.I.I.C.
Spain 0.00 % 97.94 % 100.00 % FUND MANAGEMENT COMPANY 25 0 15
Bansa Santander, S.A.
Chile 0.00 % 100.00 % 100.00 % PROPERTY 4 (1 ) 30
Bansamex, S.A.
Spain 50.00 % 0.00 % 50.00 % CARDS 5 1 1
Beacon Abstract, L.P.
United States 0.00 % 70.00 % 70.00 % INSURANCE 0 1 0
Bel Canto SICAV Erodiade (c)
Luxembourg 0.00 % 100.00 % 100.00 % OPEN-END INVESTMENT COMPANY 1 0 1
Beta Cero, S.A.
Spain 0.00 % 78.95 % 88.00 % FINANCE 0 0 0

F-224

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Billpay Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Bracken Securities Holdings Limited
United Kingdom — (b ) — SECURITIZATION 0 0 0
Bracken Securities Option Limited
United Kingdom — (b ) — SECURITIZATION 0 0 0
Bracken Securities plc
United Kingdom — (b ) — SECURITIZATION 0 0 0
Bradford & Bingley International Limited
Isle of Man 0.00 % 100.00 % 100.00 % BANKING 242 14 236
Brazil Foreign Diversified Payment Rights Finance Company
Cayman Islands — (b ) — SECURITIZATION 0 0 0
Brettwood Limited (j)
Jersey 0.00 % 100.00 % 100.00 % SERVICES 0 0 0
BRS Investments, S.A.
Argentina 0.00 % 100.00 % 100.00 % HOLDING COMPANY 24 6 77
BSN — Banco Santander de Negocios Portugal, S.A.
Portugal 0.00 % 99.86 % 100.00 % BANKING 84 18 28
BST International Bank, Inc.
Puerto Rico 0.00 % 99.72 % 100.00 % BANKING 5 16 3
CA Premier Banking Limited
United Kingdom 0.00 % 100.00 % 100.00 % BANKING 5 0 5
Caja de Emisiones con Garantía de Anualidades Debidas por el Estado, S.A.
Spain 0.00 % 56.41 % 62.87 % FINANCE 0 0 0
Cántabra de Inversiones, S.A.
Spain 100.00 % 0.00 % 100.00 % HOLDING COMPANY 53 (71 ) 170
Cantabric Financing LLC.
United States — (b ) — SECURITIZATION 0 0 0
Cantabric Financing, Plc.
Ireland — (b ) — SECURITIZATION 0 0 0
Cántabro Catalana de Inversiones, S.A.
Spain 100.00 % 0.00 % 100.00 % HOLDING COMPANY 187 2 140
Capital Riesgo Global, SCR de Régimen Simplificado, S.A.
Spain 91.77 % 8.23 % 100.00 % VENTURE CAPITAL COMPANY 532 6 482
Capital Street GP
Cayman Islands — (b ) — HOLDING COMPANY 0 0 0
Capital Street LP (o)
Cayman Islands 0.00 % 100.00 % 100.00 % HOLDING COMPANY 15 38 0
Capital Street S.A.
Luxembourg 0.00 % 100.00 % 100.00 % FINANCE (1 ) 0 0
Carfax (Guernsey) Limited (n)
Guernsey 0.00 % 100.00 % 100.00 % INSURANCE BROKERAGE 25 0 23
Carlton Park Developments Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % PROPERTY 0 0 0
Carlton Park Properties Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % PROPERTY 0 0 0
Carlton Park Property (Holdings) Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 0 0 0
Carpe Diem Salud, S.L.
Spain 100.00 % 0.00 % 100.00 % SECURITIES INVESTMENT 0 0 0
Cartera Mobiliaria, S.A., SICAV
Spain 0.00 % 80.05 % 92.46 % SECURITIES INVESTMENT 617 26 224
Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander
Mexico 0.00 % 74.94 % 99.97 % BROKER-DEALER 38 12 24
Cater Allen Holdings Limited
United Kingdom 0.00 % 99.99 % 100.00 % HOLDING COMPANY 119 223 97
Cater Allen International Limited
United Kingdom 0.00 % 99.99 % 100.00 % BROKER-DEALER 446 155 133
Cater Allen Limited
United Kingdom 0.00 % 100.00 % 100.00 % BANKING 245 26 251
Cater Allen Lloyd’s Holdings Limited
United Kingdom 0.00 % 99.99 % 100.00 % HOLDING COMPANY (10 ) 0 0
Cater Allen Pensions Limited
United Kingdom 0.00 % 100.00 % 100.00 % PENSION FUND MANAGEMENT COMPANY 0 0 0
Cater Allen Syndicate Management Limited
United Kingdom 0.00 % 99.99 % 100.00 % ADVISORY SERVICES 2 0 0
Cater Tyndall Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 32 (1 ) 150
Catmoll, S.L.
Spain 100.00 % 0.00 % 100.00 % CONCESSION HOLDER 9 0 6
Certidesa, S.L.
Spain 0.00 % 100.00 % 100.00 % LEASE OF AIRCRAFT (13 ) (5 ) 0
Chatsworth Securities (LM) Holdings Limited (j) (g)
United Kingdom — (b ) — SECURITIZATION 0 0 0
Chatsworth Securities (LM) Limited (j) (g)
United Kingdom — (b ) — SECURITIZATION 0 0 0
Chatsworth Securities LLP (j) (g)
United Kingdom — (b ) — SECURITIZATION 0 0 0
Clínica Sear, S.A.
Spain 0.00 % 45.38 % 50.58 % HEALTHCARE 5 0 1
Club Zaudin Golf, S.A.
Spain 0.00 % 76.30 % 95.11 % SERVICES 15 0 12
Comercializadora Al-fin, S.A. de C.V.
Mexico 0.00 % 85.00 % 100.00 % RETAIL TRADE 0 0 0
Companhia Real de Valores Distribuidora de Títulos e Valores Mobiliários S.A.
Brazil 0.00 % 83.55 % 100.00 % ASSET MANAGEMENT 30 3 25
Costa Canaria de Veneguera, S.A.
Spain 0.00 % 66.56 % 74.19 % PROPERTY 14 0 9
Crawfall, S.A.
Uruguay 100.00 % 0.00 % 100.00 % SERVICES 5 (8 ) 0
Credicenter Empreendimentos e Promoçôes Ltda. (l)
Brazil 0.00 % 0.00 % 0.00 % FINANCIAL SERVICES — — —

F-225

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Credisol, S.A.
Uruguay 0.00 % 100.00 % 100.00 % CARDS 0 0 6
Crefisa, Inc.
Puerto Rico 100.00 % 0.00 % 100.00 % FINANCE 428 (19 ) 387
Cruzeiro Factoring Sociedade de Fomento Comercial Ltda. (l)
Brazil 0.00 % 0.00 % 0.00 % FACTORING — — —
Darep Limited
Ireland 0.00 % 100.00 % 100.00 % REINSURANCE 5 0 4
Depósitos Portuarios, S.A.
Spain 0.00 % 89.72 % 100.00 % SERVICES 0 0 0
Digital Procurement Holdings N.V.
Netherlands 0.00 % 99.43 % 100.00 % HOLDING COMPANY 4 (1 ) 1
Diners Club Spain, S.A.
Spain 75.00 % 0.00 % 75.00 % CARDS 9 1 9
Dirección Estratega, S.C.
Mexico 0.00 % 85.00 % 100.00 % SERVICES 0 0 0
Drive Auto Receivables Trust 2006-1
United States — (b ) — SECURITIZATION 0 0 0
Drive Auto Receivables Trust 2006-2
United States — (b ) — SECURITIZATION 0 0 0
Drive Consumer GP LLC
United States 0.00 % 91.50 % 100.00 % INACTIVE 0 0 0
Drive Consumer LP
United States 0.00 % 91.50 % 100.00 % INACTIVE 25 0 25
Drive Receivables Corp. 11
United States 0.00 % 91.50 % 100.00 % SECURITIZATION 0 0 0
Drive Receivables Corp. 12
United States 0.00 % 91.50 % 100.00 % SECURITIZATION 0 0 0
Drive Residual Holdings GP LLC
United States 0.00 % 91.50 % 100.00 % HOLDING COMPANY 0 0 0
Drive Residual Holdings LP
United States 0.00 % 91.50 % 100.00 % AUXILIARY 0 0 0
Drive Trademark Holdings LP
United States 0.00 % 91.50 % 100.00 % AUXILIARY 0 0 0
Drive Warehouse GP LLC
United States 0.00 % 91.50 % 100.00 % HOLDING COMPANY 0 0 0
Drive Warehouse LP
United States 0.00 % 91.50 % 100.00 % AUXILIARY 136 324 0
Dudebasa, S.A.
Spain 0.00 % 89.72 % 100.00 % FINANCE 32 0 22
Efearvi, S.A.
Spain 0.00 % 89.72 % 100.00 % PROPERTY (1 ) 0 0
Elerco, S.A.
Spain 0.00 % 89.72 % 100.00 % PROPERTY 206 (1 ) 192
Empresas Banesto 1, Fondo de Titulización de Activos
Spain — (b ) — SECURITIZATION 0 0 0
Empresas Banesto 2, Fondo de Titulización de Activos
Spain — (b ) — SECURITIZATION 0 0 0
Empresas Banesto 3, Fondo de Titulización de Activos
Spain — (b ) — SECURITIZATION 0 0 0
Empresas Banesto 4, Fondo de Titulización de Activos
Spain — (b ) — SECURITIZATION 0 0 0
Enernuevas S.A.
Chile 0.00 % 99.90 % 99.90 % ELECTRICITY 0 0 0
Euro Alliance Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Eurobank Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Eurogiro Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Evansgrove Limited (f)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Fábricas Agrupadas de Muñecas de Onil, S.A. (consolidated) (g)
Spain 0.00 % 95.05 % 95.05 % HOLDING COMPANY 9 (27 ) 0
FFB — Participaçoes e Serviços, Sociedade Unipessoal, S.A.
Portugal 0.00 % 100.00 % 100.00 % HOLDING COMPANY 3,869 (202 ) 1,020
Fideicomiso 100740 SLPT
Mexico 0.00 % 74.95 % 100.00 % FINANCE 43 4 23
Fideicomiso Financiero Río Personales I
Argentina — (b ) — SECURITIES 5 1 0
Fideicomiso GFSSLPT Banca Serfín, S.A.
Mexico 0.00 % 74.95 % 100.00 % FINANCE 40 2 19
Fideicomiso Super Letras Hipotecarias Clase I
Argentina — (b ) — SECURITIES 1 0 0
Fideicomiso Super Letras Hipotecarias Clase II
Argentina — (b ) — SECURITIES 3 0 0
Financiación Banesto 1, Fondo de Titulización de Activos
Spain — (b ) — SECURITIZATION 0 0 0
Financiera Alcanza, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada
Mexico 0.00 % 85.00 % 100.00 % FINANCE 11 (11 ) 0
First Essex Capital Trust I
United States 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
First National Motor Business Limited
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
First National Motor Contracts Limited
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
First National Motor Facilities Limited
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
First National Motor Finance Limited
United Kingdom 0.00 % 100.00 % 100.00 % ADVISORY SERVICES 0 0 0
First National Motor Leasing Limited
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
First National Motor plc
United Kingdom 0.00 % 100.00 % 100.00 % LEASING (5 ) 5 0
First National Tricity Finance Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 206 1 115
Fomento e Inversiones, S.A.
Spain 100.00 % 0.00 % 100.00 % HOLDING COMPANY 44 (9 ) 17
Fondo de Titulización de Activos Santander 1
Spain — (b ) — SECURITIZATION 0 0 0

F-226

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Fondo de Titulización de Activos Santander 2
Spain — (b ) — SECURITIZATION 0 0 0
Fondo de Titulización de Activos Santander Empresas 1
Spain — (b ) — SECURITIZATION 0 0 0
Fondo de Titulización de Activos Santander Empresas 2
Spain — (b ) — SECURITIZATION 0 0 0
Fondo de Titulización de Activos Santander Empresas 3
Spain — (b ) — SECURITIZATION 0 0 0
Fondo de Titulización de Activos Santander Empresas 4
Spain — (b ) — SECURITIZATION 0 0 0
Fondo de Titulización de Activos Santander Empresas 5
Spain — (b ) — SECURITIZATION 0 0 0
Fondo de Titulización de Activos Santander Empresas 6
Spain — (b ) — SECURITIZATION 0 0 0
Fondo de Titulización de Activos Santander Empresas 7
Spain — (b ) — SECURITIZATION 0 0 0
Fondo de Titulización de Activos Santander Público 1
Spain — (b ) — SECURITIZATION 0 0 0
Fondo de Titulización Santander Financiación 1
Spain — (b ) — SECURITIZATION 0 0 0
Fondo de Titulización Santander Financiación 2
Spain — (b ) — SECURITIZATION 0 0 0
Fondo de Titulización Santander Financiación 3
Spain — (b ) — SECURITIZATION 0 0 0
Fondo de Titulización Santander Financiación 4
Spain — (b ) — SECURITIZATION 0 0 0
Fondos Santander, S.A. Administradora de Fondos de Inversión
Uruguay 0.00 % 100.00 % 100.00 % FUND MANAGEMENT COMPANY 0 0 0
Formación Integral, S.A.
Spain 0.00 % 89.72 % 100.00 % TRAINING 1 0 1
Fortensky Trading, Ltd.
Ireland 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Fosse (Master Issuer) Holdings Limited
United Kingdom — (b ) — SECURITIZATION 0 0 0
Fosse Funding (No.1) Limited
United Kingdom — (b ) — SECURITIZATION (84 ) 134 0
Fosse Master Issuer PLC
United Kingdom — (b ) — SECURITIZATION (2 ) 7 0
Fosse PECOH Limited
United Kingdom — (b ) — SECURITIZATION 0 0 0
Fosse Trustee Limited
Jersey — (b ) — SECURITIZATION 0 0 0
FTA Santander Consumer Spain 09-1
Spain — (b ) — SECURITIZATION 0 0 0
FTA Santander Consumer Spain Auto 06
Spain — (b ) — SECURITIZATION 0 0 0
FTA Santander Consumer Spain Auto 08-1
Spain — (b ) — SECURITIZATION 0 0 0
FTPYME Banesto 2 Fondo de Titulización de Activos
Spain — (b ) — SECURITIZATION 0 0 0
FTPYME Santander 2 Fondo de Titulización de Activos
Spain — (b ) — SECURITIZATION 0 0 0
GE Money Services GmbH
Germany 0.00 % 100.00 % 100.00 % SERVICES 1 (1 ) 0
Geoban UK Limited
United Kingdom 0.00 % 100.00 % 100.00 % SERVICES 0 0 0
Geoban, S.A.
Spain 100.00 % 0.00 % 100.00 % SERVICES 17 0 24
Gesban México Servicios Administrativos Globales, S.A. De C.V.
Mexico 0.00 % 100.00 % 100.00 % SERVICES 0 0 0
Gesban Santander Servicios Profesionales Contable Limitada
Chile 0.00 % 100.00 % 100.00 % INTERNET 0 0 0
Gesban Servicios Administrativos Globales, S.L.
Spain 99.99 % 0.01 % 100.00 % SERVICES 0 0 1
Gesban UK Limited
United Kingdom 0.00 % 100.00 % 100.00 % COLLECTION AND PAYMENT SERVICES 0 0 0
Gescoban Soluciones, S.A.
Spain 0.00 % 89.72 % 100.00 % FINANCE 5 1 1
Gestión de Instalaciones Fotovoltáicas, S.L., Sole-Shareholder Company
Spain 0.00 % 100.00 % 100.00 % ELECTRICITY 0 0 0
Gestión Industrial Hispamer, S.A.
Spain 99.99 % 0.01 % 100.00 % SECURITIES INVESTMENT (37 ) (7 ) 0
Gestión Santander, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión, Grupo Financiero Santander
Mexico 0.00 % 74.96 % 100.00 % FINANCE 5 3 0
Gestora de Procesos S.A., in liquidation (j)
Peru 0.00 % 100.00 % 100.00 % HOLDING COMPANY 1 0 1
Gire S.A.
Argentina 0.00 % 57.92 % 58.33 % COLLECTION AND PAYMENT SERVICES 8 4 1
Giro Investments (Jersey) Limited (j) (n)
Jersey 0.00 % 100.00 % 100.00 % FINANCE 1 2 0
Giro Investments Limited (j) (n)
Cayman Islands 0.00 % 100.00 % 100.00 % FINANCE 0 3 0
Girobank Carlton Investments Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 113 34 113
Girobank Investments Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 1 0 0
Girobank Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Global Debt Management Services Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % COLLECTION AND PAYMENT SERVICES 0 0 0
Golden Bar (SECURITIZATION) S.r.l.
Italy — (b ) — SECURITIZATION 0 0 0

F-227

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Golden Bar Securitization Programme I
Italy — (b ) — SECURITIZATION 0 0 0
Golden Bar Securitization Programme II
Italy — (b ) — SECURITIZATION 0 0 0
Golden Bar Securitization Programme III
Italy — (b ) — SECURITIZATION 0 0 0
Golden Bar Securitization Programme IV
Italy — (b ) — SECURITIZATION 0 0 0
Grupo Alcanza, S.A. de C.V.
Mexico 85.00 % 0.00 % 85.00 % HOLDING COMPANY 12 (11 ) 11
Grupo Empresarial Santander, S.L.
Spain 99.11 % 0.89 % 100.00 % HOLDING COMPANY 3,186 255 3,770
Grupo Financiero Santander, S.A. B de C.V.
Mexico 74.75 % 0.21 % 74.96 % HOLDING COMPANY 3,284 625 1,789
Guaranty Car, S.A., Sole-Shareholder Company
Spain 0.00 % 100.00 % 100.00 % AUTOMOTIVE 3 0 1
Hansar Finance Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 8 0 1
HBF Aluguer e Comercio de Viaturas, S.A. (j)
Portugal 0.00 % 100.00 % 100.00 % FULL-SERVICE LEASE 0 0 0
Hipototta No. 10 FTC
Portugal — (b ) — SECURITIZATION 0 0 0
Hipototta No 10 Plc
Ireland — (b ) — SECURITIZATION 0 0 0
Hipototta No. 1 FTC
Portugal — (b ) — SECURITIZATION 3 (1 ) 0
Hipototta No. 1 plc
Ireland — (b ) — SECURITIZATION (3 ) 0 0
Hipototta No. 2 FTC
Portugal — (b ) — SECURITIZATION 10 (4 ) 0
Hipototta No. 2 plc
Ireland — (b ) — SECURITIZATION (10 ) (2 ) 0
Hipototta No. 3 FTC
Portugal — (b ) — SECURITIZATION 13 (7 ) 0
Hipototta No. 3 plc
Ireland — (b ) — SECURITIZATION (16 ) (5 ) 0
Hipototta No. 4 FTC
Portugal — (b ) — SECURITIZATION 12 (6 ) 0
Hipototta No. 4 plc
Ireland — (b ) — SECURITIZATION (15 ) (3 ) 0
Hipototta No. 5 FTC
Portugal — (b ) — SECURITIZATION 5 (4 ) 0
Hipototta No. 5 plc
Ireland — (b ) — SECURITIZATION (6 ) (2 ) 0
Hipototta No. 6 FTC
Portugal — (b ) — SECURITIZATION 5 (4 ) 0
Hipototta No. 6 plc
Ireland — (b ) — SECURITIZATION (7 ) (2 ) 0
Hipototta No. 7 FTC
Portugal — (b ) — SECURITIZATION 5 (3 ) 0
Hipototta No. 7 plc
Ireland — (b ) — SECURITIZATION (7 ) (2 ) 0
Hipototta No. 8 FTC
Portugal — (b ) — SECURITIZATION 3 1 0
Hipototta No. 8 plc
Ireland — (b ) — SECURITIZATION (4 ) (1 ) 0
Hispamer Renting, S.A.U.
Spain 0.00 % 100.00 % 100.00 % FULL-SERVICE LEASE 13 (1 ) 1
Holbah II Limited
Bahamas 0.00 % 100.00 % 100.00 % HOLDING COMPANY 985 1 1,243
Holbah Limited
Bahamas 0.00 % 100.00 % 100.00 % HOLDING COMPANY 32 402 0
Holmes Financing (Nº1) plc
United Kingdom — (b ) — SECURITIZATION 0 8 0
Holmes Financing (Nº10) plc
United Kingdom — (b ) — SECURITIZATION 1 (2 ) 0
Holmes Financing (Nº8) plc (j)
United Kingdom — (b ) — SECURITIZATION 0 0 0
Holmes Financing (Nº9) plc
United Kingdom — (b ) — SECURITIZATION 0 1 0
Holmes Funding 2 Limited
United Kingdom — (b ) — SECURITIZATION 0 (267 ) 0
Holmes Funding Limited
United Kingdom — (b ) — SECURITIZATION 7 (104 ) 0
Holmes Holdings Limited
United Kingdom — (b ) — SECURITIZATION 0 0 0
Holmes Master Issuer 2 PLC
United Kingdom — (b ) — SECURITIZATION 0 141 0
Holmes Master Issuer plc
United Kingdom — (b ) — SECURITIZATION 308 (308 ) 0
Holmes Trustees Limited
United Kingdom — (b ) — SECURITIZATION 0 0 0
Holneth B.V.
Netherlands 0.00 % 100.00 % 100.00 % HOLDING COMPANY 46 (3 ) 10
Honeycomb SB Limited
United Kingdom 0.00 % 100.00 % 100.00 % SERVICES 0 0 0
HRE Investment Holdings II-A S.à.r.l. (c)
Luxembourg 0.00 % 73.70 % 0.00 % HOLDING COMPANY 0 0 0
HSH Delaware L.P. (c)
United States 0.00 % 69.20 % 0.00 % HOLDING COMPANY 83 (70 ) 5
Hualle, S.A.
Spain 0.00 % 89.72 % 100.00 % SECURITIES INVESTMENT 73 1 5
Ibérica de Compras Corporativas, S.L.
Spain 91.63 % 7.80 % 100.00 % e-COMMERCE 10 4 5
IEM (Holland) Aircraft Lease B.V.
Netherlands 0.00 % 100.00 % 100.00 % LEASING 0 0 0
IEM 757 Leasing I B.V.
Netherlands 0.00 % 100.00 % 100.00 % LEASING 0 0 0
IEM Airfinance B.V.
Netherlands 0.00 % 100.00 % 100.00 % LEASING (1 ) 0 0

F-228

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
IEM Lease Aircraft B.V.
Netherlands 0.00 % 100.00 % 100.00 % LEASING 0 0 0
Independence Community Bank Corp.
United States 0.00 % 100.00 % 100.00 % HOLDING COMPANY 2,400 (8 ) 2,424
Independence Community Commercial Reinvestment Corp.
United States 0.00 % 100.00 % 100.00 % HOLDING COMPANY 93 0 96
Infraestructuras Americanas, S.L.
Spain 0.00 % 100.00 % 100.00 % HOLDING COMPANY 64 (19 ) 65
Ingeniería de Software Bancario, S.L.
Spain 100.00 % 0.00 % 100.00 % IT SERVICES 70 6 86
Inmo Francia 2, S.A.
Spain 0.00 % 100.00 % 100.00 % PROPERTY 47 0 48
Instituto Santander Serfin, A.C.
Mexico 0.00 % 74.95 % 100.00 % NOT-FOR-PROFIT INSTITUTE 1 0 0
Insurance Funding Solutions Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE (7 ) 0 0
Integritas (Canada) Trustee Corporation Ltd.
Canada 100.00 % 0.00 % 100.00 % ASSET MANAGEMENT COMPANY 1 0 0
Integritas New Zealand Ltd.
New Zealand 0.00 % 100.00 % 100.00 % ASSET MANAGEMENT COMPANY 0 0 0
Integritas Trust SA
Switzerland 0.00 % 100.00 % 100.00 % ASSET MANAGEMENT COMPANY 3 1 0
Internacional Compañía de Seguros de Vida S.A.
Argentina 0.00 % 59.22 % 59.22 % INSURANCE 25 2 0
Intursa, S.A.
Spain 0.00 % 89.72 % 100.00 % PROPERTY (16 ) (92 ) 0
Inversiones ASP S.A.
Chile 0.00 % 100.00 % 100.00 % HOLDING COMPANY 294 16 310
Inversiones AyS Cuatro Limitada
Chile 0.00 % 100.00 % 100.00 % HOLDING COMPANY 294 16 310
Inversiones AyS Dos Limitada
Chile 0.00 % 100.00 % 100.00 % HOLDING COMPANY 155 (2 ) 154
Inversiones AyS Tres Limitada
Chile 0.00 % 100.00 % 100.00 % HOLDING COMPANY 155 (2 ) 153
Inversiones AyS Uno Limitada
Chile 0.00 % 100.00 % 100.00 % HOLDING COMPANY 58 (14 ) 53
Inversiones Marítimas del Mediterráneo, S.A.
Spain 100.00 % 0.00 % 100.00 % INACTIVE 12 (8 ) 3
Isban Argentina S.A.
Argentina 87.42 % 12.58 % 100.00 % FINANCIAL SERVICES 2 0 2
Isban Brasil S.A.
Brazil 0.00 % 100.00 % 100.00 % SERVICES 16 0 22
Isban Chile S.A.
Chile 0.00 % 100.00 % 100.00 % IT SERVICES 11 0 20
Isban DE GmbH
Germany 0.00 % 100.00 % 100.00 % IT SERVICES 0 1 0
Isban México, S.A. De C.V.
Mexico 100.00 % 0.00 % 100.00 % IT SERVICES 66 2 48
ISBAN PT — Engenheria e Software Bancário, S.A.
Portugal 0.00 % 99.93 % 100.00 % IT SERVICES 1 0 0
Isban U.K., Ltd.
United Kingdom 0.00 % 100.00 % 100.00 % IT SERVICES 4 2 0
Island Insurance Corporation
Puerto Rico 0.00 % 90.59 % 100.00 % INSURANCE 3 0 4
Itasant — Sociedade Gestora de Participações Sociais Sociedade Unipessoal, Lda.
Portugal 0.00 % 100.00 % 100.00 % HOLDING COMPANY 253 (22 ) 92
J.C. Flowers II-A L.P. (c)
Canada 0.00 % 69.90 % 4.43 % HOLDING COMPANY 68 (19 ) 54
James Hay Administration Company Limited
United Kingdom 0.00 % 100.00 % 100.00 % FUND AND PORTFOLIO MANAGER 16 16 10
James Hay Holdings Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY (5 ) 18 43
James Hay Insurance Company Limited (n)
Jersey 0.00 % 100.00 % 100.00 % INSURANCE BROKERAGE 16 10 13
James Hay Pension Trustees Limited
United Kingdom 0.00 % 100.00 % 100.00 % ASSET MANAGEMENT COMPANY 2 0 2
James Hay Wrap Managers Limited
United Kingdom 0.00 % 100.00 % 100.00 % FUND AND PORTFOLIO MANAGER 4 2 17
JCF BIN II-A (p)
Mauritania 0.00 % 69.53 % 4.43 % HOLDING COMPANY 4 0 3
JCF II-A AIV K L.P. (c)
Canada 0.00 % 69.54 % 0.00 % HOLDING COMPANY 4 (1 ) 4
JCF II-A Special AIV K L.P. (c)
Canada 0.00 % 72.29 % 4.99 % HOLDING COMPANY 4 (1 ) 4
JSC Santander Consumer Bank
Russia 0.00 % 100.00 % 100.00 % BANKING 35 (4 ) 32
Jupiter JCF AIV II A C.V. (c)
Netherlands 0.00 % 69.41 % 4.99 % HOLDING COMPANY 61 (37 ) 42
Jupiter III C.V. (c)
Netherlands 0.00 % 72.75 % 4.99 % HOLDING COMPANY 362 (241 ) 278
La Unión Resinera Española, S.A. (consolidated)
Spain 74.87 % 21.29 % 96.25 % CHEMICALS 48 0 28
Laboratorios Indas, S.A. (e)
Spain 0.00 % 73.22 % 100.00 % HEALTH PRODUCTS 63 27 266
Langton Funding (No.1) Limited
United Kingdom — (b ) — SECURITIZATION 0 0 0

F-229

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Langton Mortgages Trustee Limited
Jersey — (b ) — SECURITIZATION 0 0 0
Langton PECOH Limited
United Kingdom — (b ) — SECURITIZATION 0 0 0
Langton Securities (2008-1) plc
United Kingdom — (b ) — SECURITIZATION 0 0 0
Langton Securities (2008-2) plc
United Kingdom — (b ) — SECURITIZATION 0 0 0
Langton Securities (2008-3) plc
United Kingdom — (b ) — SECURITIZATION 0 0 0
Langton Securities Holdings Limited
United Kingdom — (b ) — SECURITIZATION 0 0 0
Laparanza, S.A.
Spain 61.59 % 0.00 % 61.59 % AGRICULTURE AND LIVESTOCK 30 1 16
Larix Chile Inversiones Limitada
Chile 0.00 % 89.72 % 100.00 % PROPERTY 0 0 0
Lease Totta No. 1 FTC
Portugal — (b ) — SECURITIZATION 0 0 0
Lease Totta No. 1 Limited
Ireland — (b ) — SECURITIZATION 0 0 0
Legal Debt Recovery Services Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % COLLECTION AND PAYMENT SERVICES 0 0 0
Liquidity Import Finance Limited (f)
United Kingdom 0.00 % 100.00 % 100.00 % FACTORING 0 0 0
Liquidity Limited (f)
United Kingdom 0.00 % 100.00 % 100.00 % FACTORING (1 ) (1 ) 1
Luresa Inmobiliaria, S.A.
Spain 0.00 % 96.16 % 100.00 % PROPERTY 21 1 9
Luri 1, S.A.
Spain 0.00 % 5.58 % 100.00 % PROPERTY 101 1 6
Luri 2, S.A.
Spain 0.00 % 4.81 % 100.00 % PROPERTY 97 0 5
Luri 3, S.A.
Spain 0.00 % 9.62 % 10.00 % PROPERTY 30 1 3
Luri Land, S.A.
Belgium 0.00 % 5.15 % 100.00 % PROPERTY 6 0 0
MAC No. 1 Limited (i)
United Kingdom — (b ) — MORTGAGE LOAN COMPANY 0 0 0
Magnolia Termosolar, S.L.
Spain 0.00 % 65.00 % 65.00 % ELECTRICITY 0 0 0
Marylebone Road CBO 3 BV
Netherlands — (b ) — SECURITIZATION 0 0 0
Mata Alta, S.L.
Spain 0.00 % 61.59 % 100.00 % PROPERTY 0 0 0
Merciver, S.L.
Spain 0.00 % 89.72 % 100.00 % SHIPPING COMPANY 0 0 0
Mesena Servicios de Gestión Inmobiliaria, S.A.
Spain 0.00 % 89.72 % 100.00 % SECURITIES INVESTMENT (17 ) (114 ) 0
Mitre Capital Partners Limited
United Kingdom 0.00 % 100.00 % 100.00 % MORTGAGE LOAN COMPANY (44 ) (17 ) 0
Money Card (Holdings) Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 2 0 10
Money Card Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCIAL SERVICES 20 0 0
Money Movers Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Mortgage Alliance Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Mugo Termosolar, S.L.
Spain 0.00 % 65.00 % 65.00 % ELECTRICITY 0 0 0
Multinegocios S.A.
Chile 0.00 % 99.53 % 100.00 % ADVISORY SERVICES 0 0 0
Multirent — Aluguer e Comércio de Automóveis, S.A.
Portugal 0.00 % 60.00 % 100.00 % FULL-SERVICE LEASE 18 (3 ) 17
Multiservicios de Negocios Limitada
Chile 0.00 % 100.00 % 100.00 % FINANCIAL SERVICES 0 0 0
N&P (B.E.S.) Loans Limited
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 3 0 4
National Alliance Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Naviera Mirambel, S.L.
Spain 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Naviera Trans Gas, A.I.E.
Spain 99.99 % 0.01 % 100.00 % SHIPPING COMPANY 10 (2 ) 33
Netbank Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
NIB Special Investors IV-A LP (c)
Canada 0.00 % 99.70 % 4.99 % HOLDING COMPANY 57 (21 ) 66
NIB Special Investors IV-B LP (c)
Canada 0.00 % 95.86 % 4.99 % HOLDING COMPANY 22 (9 ) 29
Norbest AS
Norway 7.94 % 92.06 % 100.00 % SECURITIES INVESTMENT 246 (213 ) 954
NW Services CO.
United States 0.00 % 99.43 % 100.00 % e-COMMERCE 1 0 2
Oil-Dor, S.A.
Spain 0.00 % 89.72 % 100.00 % FINANCE 155 3 110
Open Bank, S.A.
Spain 100.00 % 0.00 % 100.00 % BANKING 85 2 62
Optimal Alternative Investments, S.G.I.I.C., S.A.
Spain 0.00 % 99.99 % 100.00 % FUND MANAGEMENT COMPANY 1 0 1

F-230

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Optimal Investment Services (Asia) Pte. Ltd. (j)
Singapore 0.00 % 99.96 % 100.00 % FUND MANAGEMENT COMPANY 0 0 0
Optimal Investment Services SA
Switzerland 0.00 % 99.96 % 99.96 % FUND MANAGEMENT COMPANY 42 (5 ) 5
Optimal Multiadvisors Ireland Plc / Optimal Strategic US Equity Ireland € Fund
Ireland 73.24 % 7.94 % 79.69 % FUND MANAGEMENT COMPANY 27 0 0
Optimal Multiadvisors Ireland Plc / Optimal Strategic US Equity Ireland USD Fund
Ireland 2.98 % 90.22 % 93.09 % FUND MANAGEMENT COMPANY 2 0 0
Optimal Multiadvisors Ltd — Strategic US Equity Series (consolidated)
Bahamas 0.00 % 72.56 % 67.57 % FUND MANAGEMENT COMPANY 26 1 0
Pan American Bank Limited (j)
Bahamas 0.00 % 100.00 % 100.00 % BANKING 0 0 0
Parasant SA
Switzerland 100.00 % 0.00 % 100.00 % HOLDING COMPANY 1,288 0 1,214
Patagon Euro, S.L.
Spain 100.00 % 0.00 % 100.00 % HOLDING COMPANY 689 5 590
PBE Companies, LLC
United States 0.00 % 100.00 % 100.00 % PROPERTY 49 0 64
PECOH Limited
United Kingdom — (b ) — SECURITIZATION 0 0 0
Pereda Gestión, S.A.
Spain 99.99 % 0.01 % 100.00 % HOLDING COMPANY 74 308 4
Pingham International, S.A.
Uruguay 0.00 % 100.00 % 100.00 % SERVICES 0 0 0
Plus Direct Insurance Services Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Plus Direct Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Plus Insurance Services Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Plus Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Polskie Towarzystwo Finansowe S.A.
Poland 0.00 % 100.00 % 100.00 % SERVICES 3 0 35
Portada S.A., in liquidation (j)
Chile 0.00 % 96.17 % 96.17 % FINANCE 0 0 0
Portal Universia Argentina S.A.
Argentina 0.00 % 96.50 % 96.50 % INTERNET 1 0 0
Portal Universia Portugal, Prestaçao de Serviços de Informática, S.A.
Portugal 0.00 % 100.00 % 100.00 % INTERNET 1 (1 ) 0
Portal Universia, S.A.
Spain 0.00 % 67.77 % 67.77 % INTERNET 2 0 2
Préstamos de Consumo S.A.
Argentina 0.00 % 99.97 % 100.00 % FINANCE 0 0 4
Procura Digital de Venezuela, S.A.
Venezuela 0.00 % 99.43 % 100.00 % e-COMMERCE 1 (1 ) 0
Produban Servicios Informáticos Generales, S.L.
Spain 98.44 % 1.56 % 100.00 % SERVICES (12 ) 13 0
Produban Serviços de Informática S.A.
Brazil 0.00 % 100.00 % 100.00 % IT 3 4 5
Programa Hogar Montigalá, S.A.
Spain 0.00 % 89.72 % 100.00 % PROPERTY (21 ) (75 ) 0
Promociones y Servicios Monterrey, S.A. de C.V.
Mexico 0.00 % 100.00 % 100.00 % PROPERTY 6 0 6
Promociones y Servicios Polanco, S.A. de C.V.
Mexico 0.00 % 100.00 % 100.00 % PROPERTY 58 0 58
Promociones y Servicios Santiago, S.A. de C.V.
Mexico 0.00 % 100.00 % 100.00 % SERVICES 62 1 64
Promodomus Desarrollo de Activos, S.L.
Spain 0.00 % 45.76 % 51.00 % PROPERTY 2 (4 ) 0
PSB Inmobilien GmbH
Germany 0.00 % 100.00 % 100.00 % PROPERTY 0 0 0
Real Argentina S.A.
Argentina 0.00 % 82.71 % 99.00 % PROPERTY 0 0 0
Real Capitalização, S.A. (l)
Brazil 0.00 % 0.00 % 0.00 % INSURANCE — — —
Real CHP, S.A.
Brazil 0.00 % 77.51 % 92.78 % ASSET MANAGEMENT 0 1 1
Real Corretora de Seguros, S.A.
Brazil 0.00 % 83.55 % 100.00 % INSURANCE BROKERAGE 7 19 17
Real Microcrédito Assessoria Financeira, S.A.
Brazil 0.00 % 83.55 % 100.00 % FINANCIAL SERVICES 3 1 1
REB Empreendimentos e Administradora de Bens, S.A.
Brazil 0.00 % 100.00 % 100.00 % PROPERTY (9 ) 9 0
Redes y Procesos, S.A.
Spain 52.17 % 13.19 % 66.87 % CARDS 1 1 1
Retail Financial Services Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE (45 ) 1 0
Riobank International (Uruguay) SAIFE (j)
Uruguay 0.00 % 100.00 % 100.00 % BANKING 0 0 0
Ruevilliot 26, S.L.
Spain 0.00 % 70.00 % 70.00 % PROPERTY 25 0 18
S C Servicios y Cobranzas S.A. (j)
Colombia 0.00 % 97.96 % 100.00 % COLLECTION AND PAYMENT SERVICES 0 0 0
SAG International Finance Company Limited
Ireland 0.00 % 60.00 % 100.00 % SECURITIZATION 1 0 0
Sánchez Ramade Santander Financiera, S.L.
Spain 0.00 % 50.00 % 50.00 % FINANCIAL SERVICES 0 0 0
Sandgate S.á.r.l.
Luxembourg 0.00 % 100.00 % 100.00 % HOLDING COMPANY 0 (18 ) 1
Saninv Gestao e Investimentos, S.A.
Portugal 0.00 % 100.00 % 100.00 % HOLDING COMPANY 66 (47 ) 19

F-231

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Sansol S.r.l.
Italy 0.00 % 100.00 % 100.00 % ELECTRICITY PRODUCTION 0 0 0
Saniso S.r.l.
Italy 0.00 % 100.00 % 100.00 % ELECTRICITY PRODUCTION 0 0 0
Santander Administradora de Consórcios Ltda.
Brazil 0.00 % 83.55 % 100.00 % FINANCE 1 0 1
Santander Advisory Services S.A.
Brazil 0.00 % 83.55 % 100.00 % ADVISORY SERVICES 47 6 39
Santander Ahorro Inmobiliario 2 S.I.I., S.A.
Spain 69.11 % 0.01 % 69.12 % PROPERTY 60 (1 ) 41
Santander Airplus Corporate Payment Solutions, S.A.
Spain 75.00 % 0.00 % 75.00 % PAYMENT SYSTEMS 0 0 0
Santander AM Holding, S.L.
Spain 100.00 % 0.00 % 100.00 % HOLDING COMPANY 105 (13 ) 29
Santander Asset Management — Sociedade Gestora de Fundos de Investimento Mobiliário, S.A.
Portugal 0.00 % 99.86 % 100.00 % FUND MANAGEMENT COMPANY 16 5 7
Santander Asset Management Chile S.A.
Chile 0.01 % 99.83 % 100.00 % SECURITIES INVESTMENT 1 0 9
Santander Asset Management Corporation
Puerto Rico 0.00 % 90.59 % 100.00 % ASSET MANAGEMENT (2 ) 8 2
Santander Asset Management Distribuidora de Títulos e Valores Mobiliários Ltda. (l)
Brazil 0.00 % 0.00 % 0.00 % ASSET MANAGEMENT — — —
Santander Asset Management Ireland, Ltd.
Ireland 0.00 % 100.00 % 100.00 % FUND MANAGEMENT COMPANY 16 1 0
Santander Asset Management Luxembourg, S.A.
Luxembourg 0.00 % 97.94 % 100.00 % FUND MANAGEMENT COMPANY 6 4 0
Santander Asset Management S.A. Administradora General de Fondos
Chile 0.00 % 76.75 % 100.00 % FUND MANAGEMENT COMPANY 46 29 8
Santander Asset Management UK Holdings Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 106 0 106
Santander Asset Management UK Limited
United Kingdom 0.00 % 100.00 % 100.00 % FUND AND PORTFOLIO MANAGER 12 1 7
Santander Asset Management, S.A., S.G.I.I.C.
Spain 28.30 % 69.64 % 100.00 % FUND MANAGEMENT COMPANY 96 (2 ) 33
Santander Back-Offices Globales Mayoristas, S.A.
Spain 100.00 % 0.00 % 100.00 % SERVICES 1 0 1
Santander BanCorp
Puerto Rico 0.00 % 90.59 % 90.59 % HOLDING COMPANY 433 28 202
Santander Bank Limited
United Kingdom 0.00 % 100.00 % 100.00 % LEASING (3 ) 0 0
Santander Bank & Trust Ltd.
Bahamas 0.00 % 100.00 % 100.00 % BANKING 1,454 34 1,102
Santander Benelux, S.A./N.V.
Belgium 100.00 % 0.00 % 100.00 % BANKING 946 64 925
Santander Brasil Administradora de Consórcio Ltda.
Brazil 0.00 % 83.55 % 100.00 % SERVICES 22 15 7
Santander Brasil Arrendamento Mercantil S.A. (l)
Brazil 0.00 % 0.00 % 0.00 % LEASING — — —
Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A.
Brazil 0.00 % 83.55 % 100.00 % ASSET MANAGEMENT 82 12 61
Santander Brasil S.A. Corretora de Títulos e Valores Mobiliários (l)
Brazil 0.00 % 0.00 % 0.00 % BROKER-DEALER — — —
Santander Brasil Seguros S.A.
Brazil 0.00 % 83.55 % 100.00 % INSURANCE 52 6 39
Santander Capital Desarrollo, SGECR, S.A.
Spain 100.00 % 0.00 % 100.00 % VENTURE CAPITAL COMPANY 2 0 0
Santander Capitalização S.A.
Brazil 0.00 % 83.55 % 100.00 % INSURANCE 99 55 91
Santander Carbón Finance, S.A.
Spain 99.98 % 0.02 % 100.00 % SECURITIES INVESTMENT (19 ) 0 0
Santander Cards Ireland Limited
Ireland 100.00 % 0.00 % 100.00 % CARDS 0 (4 ) 0
Santander Cards Limited
United Kingdom 100.00 % 0.00 % 100.00 % FINANCIAL SERVICES 107 (20 ) 254
Santander Cards UK Limited
United Kingdom 100.00 % 0.00 % 100.00 % FINANCE 680 (149 ) 1,041
Santander Carteras, S.G.C., S.A.
Spain 0.00 % 100.00 % 100.00 % FUND MANAGEMENT COMPANY 20 0 8
Santander Central Hispano Finance (Delaware) Inc.
United States 100.00 % 0.00 % 100.00 % FINANCE 2 0 0
Santander Central Hispano Financial Services Limited
Cayman Islands 100.00 % 0.00 % 100.00 % FINANCE 2 1 0
Santander Central Hispano International Limited
Cayman Islands 100.00 % 0.00 % 100.00 % FINANCE 3 (1 ) 0
Santander Central Hispano Issuances Limited
Cayman Islands 100.00 % 0.00 % 100.00 % FINANCE 2 0 0

F-232

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Santander Chile Holding S.A.
Chile 22.11 % 77.42 % 99.53 % HOLDING COMPANY 808 229 280
Santander Commercial Paper, S.A., Sole-Shareholder Company
Spain 100.00 % 0.00 % 100.00 % FINANCE 0 0 0
Santander Consumer (UK) plc
United Kingdom 0.00 % 100.00 % 100.00 % ADVISORY SERVICES 153 12 181
Santander Consumer autoboerse.de AG
Germany 0.00 % 100.00 % 100.00 % HOLDING COMPANY 1 0 1
Santander Consumer Bank AG
Germany 0.00 % 100.00 % 100.00 % BANKING 1,366 407 1,449
Santander Consumer Bank AS
Norway 0.00 % 100.00 % 100.00 % FINANCE 411 57 468
Santander Consumer Bank GmbH
Austria 0.00 % 100.00 % 100.00 % FINANCE 836 (11 ) 856
Santander Consumer Bank S.p.A.
Italy 0.00 % 100.00 % 100.00 % FINANCE 224 1 397
Santander Consumer Bank Spólka Akcyjna
Poland 0.00 % 100.00 % 100.00 % BANKING 205 6 210
Santander Consumer Chile S.A.
Chile 89.00 % 0.00 % 89.00 % FINANCE 14 (1 ) 11
Santander Consumer Credit Services Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE (27 ) (8 ) 0
Santander Consumer Debit GmbH
Germany 0.00 % 100.00 % 100.00 % SERVICES 0 11 0
Santander Consumer Finance a.s.
Czech Republic 0.00 % 100.00 % 100.00 % LEASING 48 (14 ) 36
Santander Consumer Finance Benelux B.V.
Netherlands 0.00 % 100.00 % 100.00 % FINANCE 35 (20 ) 33
Santander Consumer Finance Correduría de Seguros, S.A.
Spain 0.00 % 100.00 % 100.00 % INSURANCE BROKERAGE 2 1 0
Santander Consumer Finance Media S.r.l.
Italy 0.00 % 65.00 % 65.00 % FINANCE 7 1 5
Santander Consumer Finance Oy
Finland 0.00 % 100.00 % 100.00 % FINANCE 46 1 52
Santander Consumer Finance Zrt.
Hungary 0.00 % 100.00 % 100.00 % FINANCE 14 (12 ) 0
Santander Consumer Finance, S.A.
Spain 63.19 % 36.81 % 100.00 % BANKING 6,021 467 4,333
Santander Consumer Finanzia S.r.l.
Italy 0.00 % 100.00 % 100.00 % FACTORING 31 3 31
Santander Consumer France (j)
France 0.00 % 100.00 % 100.00 % FINANCE 14 (11 ) 2
Santander Consumer Holding GmbH
Germany 0.00 % 100.00 % 100.00 % HOLDING COMPANY 838 193 1,891
Santander Consumer Iber-Rent, S.L.
Spain 0.00 % 60.00 % 60.00 % FULL-SERVICE LEASE 63 (3 ) 18
Santander Consumer Leasing Austria GmbH
Austria 0.00 % 100.00 % 100.00 % HOLDING COMPANY 863 0 863
Santander Consumer Leasing GmbH
Germany 0.00 % 100.00 % 100.00 % LEASING 6 15 6
Santander Consumer Leasing s.r.o.
Czech Republic 0.00 % 100.00 % 100.00 % FINANCE 1 0 1
Santander Consumer Multirent Spólka z ograniczoną odpowiedzialnością
Poland 0.00 % 60.00 % 60.00 % LEASING 6 (1 ) 4
Santander Consumer Receivables 2 LLC
United States 0.00 % 91.50 % 100.00 % AUXILIARY 0 0 0
Santander Consumer Receivables LLC
United States 0.00 % 91.50 % 100.00 % AUXILIARY 0 0 0
Santander Consumer Services GmbH
Austria 0.00 % 100.00 % 100.00 % SERVICES 0 0 0
Santander Consumer Spain Auto 07-1
Spain — (b ) — SECURITIZATION 0 0 0
Santander Consumer Spain Auto 07-2
Spain — (b ) — SECURITIZATION 0 0 0
Santander Consumer USA Inc.
United States 0.00 % 91.50 % 91.50 % FINANCE 191 (179 ) 790
Santander Consumer, EFC, S.A.
Spain 0.00 % 100.00 % 100.00 % FINANCE 444 (227 ) 415
Santander Consumo, S.A. de C.V., SOFOM, E.R.
Mexico 0.00 % 74.95 % 100.00 % CARDS 405 (9 ) 582
Santander Corredora de Seguros Limitada
Chile 0.00 % 76.80 % 100.00 % INSURANCE BROKERAGE 59 10 49
Santander de Desarrollos Inmobiliarios, S.A.
Spain 98.39 % 1.61 % 100.00 % PROPERTY 0 0 0
Santander de Leasing, S.A., E.F.C.
Spain 70.00 % 30.00 % 100.00 % LEASING 63 14 35
Santander de Titulización S.G.F.T., S.A.
Spain 81.00 % 19.00 % 100.00 % FUND MANAGEMENT COMPANY 1 3 1
Santander Drive Auto Receivables LLC
United States 0.00 % 91.50 % 100.00 % AUXILIARY 0 0 0
Santander Drive Auto Receivables Trust 2007-1
United States — (b ) — SECURITIZATION 0 0 0
Santander Drive Auto Receivables Trust 2007-2
United States — (b ) — SECURITIZATION 0 0 0
Santander Drive Auto Receivables Trust 2007-3
United States — (b ) — SECURITIZATION 0 0 0
Santander Energías Renovables I, SCR de Régimen Simplificado, S.A.
Spain 56.76 % 0.00 % 56.76 % VENTURE CAPITAL COMPANY 9 (1 ) 6
Santander Envíos, S.A.
Spain 100.00 % 0.00 % 100.00 % TRANSFER OF FUNDS FOR IMMIGRANTS 1 0 1
Santander Factoring S.A.
Chile 0.00 % 99.53 % 100.00 % FACTORING 28 2 6
Santander Factoring y Confirming, S.A., E.F.C.
Spain 100.00 % 0.00 % 100.00 % FACTORING 161 47 126
Santander Financial Exchanges Limited
United Kingdom 100.00 % 0.00 % 100.00 % FINANCE 300 4 300

F-233

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Santander Financial Products plc
Ireland 0.00 % 100.00 % 100.00 % FINANCE 190 1 162
Santander Financial Services, Inc.
Puerto Rico 0.00 % 90.59 % 100.00 % LENDING COMPANY 60 11 86
Santander Gestâo de Activos, SGPS, S.A.
Portugal 0.00 % 99.86 % 100.00 % HOLDING COMPANY 13 22 7
Santander Gestión de Recaudación y Cobranzas Ltda.
Chile 0.00 % 99.53 % 100.00 % FINANCIAL SERVICES 2 2 2
Santander Gestión Inmobiliaria, S.A.
Spain 0.01 % 99.99 % 100.00 % PROPERTY 2 0 0
Santander Global Consumer Finance Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 113 12 49
Santander Global Facilities, S.A.
Spain 99.94 % 0.06 % 100.00 % SERVICES 2 1 1
Santander Global Facilities, S.A. de C.V.
Mexico 100.00 % 0.00 % 100.00 % PROPERTY MANAGEMENT 108 (4 ) 114
Santander Global Property Alemania GmbH
Germany 0.00 % 100.00 % 100.00 % SERVICES 0 0 0
Santander Global Property México, S.A. de C.V.
Mexico 0.00 % 100.00 % 100.00 % PROPERTY 0 0 0
Santander Global Property USA Inc.
United States 0.00 % 100.00 % 100.00 % SERVICES 0 0 0
Santander Global Property, S.L.
Spain 97.21 % 2.79 % 100.00 % SECURITIES INVESTMENT 239 5 227
Santander Global Services, S.A.
Uruguay 0.00 % 100.00 % 100.00 % SERVICES 1 1 0
Santander Global Sport, S.A.
Spain 100.00 % 0.00 % 100.00 % SPORTS OPERATIONS 37 0 32
Santander Hipotecario 1 Fondo de Titulización de Activos
Spain — (b ) — SECURITIZATION 0 0 0
Santander Hipotecario 2 Fondo de Titulización de Activos
Spain — (b ) — SECURITIZATION 0 0 0
Santander Hipotecario 3 Fondo de Titulización de Activos
Spain — (b ) — SECURITIZATION 0 0 0
Santander Hipotecario 4 Fondo de Titulización de Activos
Spain — (b ) — SECURITIZATION 0 0 0
Santander Hipotecario 5 Fondo de Titulización de Activos
Spain — (b ) — SECURITIZATION 0 0 0
Santander Holanda B.V.
Netherlands 100.00 % 0.00 % 100.00 % HOLDING COMPANY 12 0 0
Santander Holding Gestión, S.L.
Spain 0.00 % 100.00 % 100.00 % HOLDING COMPANY (79 ) 0 0
Santander Holding Internacional, S.A.
Spain 99.95 % 0.05 % 100.00 % HOLDING COMPANY 28 19 0
Santander Infrastructure Capital Limited
United Kingdom 100.00 % 0.00 % 100.00 % LEASING 0 0 0
Santander Infrastructure Capital Management Limited
United Kingdom 100.00 % 0.00 % 100.00 % LEASING 2 (1 ) 1
Santander Insurance Agency, Inc.
Puerto Rico 0.00 % 90.59 % 100.00 % INSURANCE BROKERAGE 2 1 3
Santander Insurance Holding, S.L.
Spain 99.99 % 0.01 % 100.00 % HOLDING COMPANY 377 0 357
Santander Insurance Services UK Limited
United Kingdom 0.00 % 100.00 % 100.00 % ASSET MANAGEMENT COMPANY 25 2 35
Santander International Bank of Puerto Rico, Inc.
Puerto Rico 0.00 % 90.59 % 100.00 % BANKING 110 3 64
Santander International Debt, S.A., Sole-Shareholder Company
Spain 100.00 % 0.00 % 100.00 % FINANCE 0 1 0
Santander Inversiones Limitada
Chile 0.00 % 100.00 % 100.00 % HOLDING COMPANY 922 83 577
Santander Investimentos em Participações S.A. (l)
Brazil 0.00 % 0.00 % 0.00 % COLLECTION AND PAYMENT SERVICES — — —
Santander Investment Bank Limited
Bahamas 0.00 % 100.00 % 100.00 % BANKING 91 0 91
Santander Investment Bolsa, S.V., S.A.
Spain 0.00 % 100.00 % 100.00 % BROKER-DEALER 126 33 104
Santander Investment Chile Limitada
Chile 0.00 % 100.00 % 100.00 % FINANCE 226 22 126
Santander Investment Colombia S.A.
Colombia 0.00 % 100.00 % 100.00 % HOLDING COMPANY 6 0 48
Santander Investment I, S.A.
Spain 100.00 % 0.00 % 100.00 % HOLDING COMPANY (1,520 ) 33 0
Santander Investment Limited
Bahamas 0.00 % 100.00 % 100.00 % BROKER-DEALER (52 ) 10 0
Santander Investment Securities Inc.
United States 0.00 % 100.00 % 100.00 % BROKER-DEALER 54 29 295
Santander Investment Trust Colombia S.A., Sociedad Fiduciaria
Colombia 0.00 % 100.00 % 100.00 % FUND MANAGEMENT COMPANY 9 3 12
Santander Investment Valores Colombia S.A., Comisionista de Bolsa Comercial
Colombia 0.00 % 97.96 % 100.00 % BROKER-DEALER 5 1 1
Santander Investment, S.A.
Spain 100.00 % 0.00 % 100.00 % BANKING 233 109 14
Santander Issuances, S.A., Sole-Shareholder Company
Spain 100.00 % 0.00 % 100.00 % FINANCE 0 0 0
Santander Leasing S.A. Arrendamento Mercantil
Brazil 0.00 % 83.54 % 99.99 % LEASING 4,246 421 3,335
Santander Limited
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY (19 ) 20 0
Santander Mediación Operador de Banca-Seguros Vinculado, S.A.
Spain 21.00 % 75.06 % 100.00 % ADVISORY SERVICES 2 0 1
Santander Merchant Bank Limited (j)
Bahamas 0.00 % 100.00 % 100.00 % BANKING 0 0 0

F-234

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Santander Merchant S.A.
Argentina 0.00 % 100.00 % 100.00 % HOLDING COMPANY 1 0 3
Santander Overseas Bank, Inc. (h)
Puerto Rico 0.00 % 100.00 % 100.00 % BANKING 396 21 192
Santander PB UK (Holdings) Limited
United Kingdom 100.00 % 0.00 % 100.00 % FINANCE 154 0 219
Santander Pensiones, S.A., E.G.F.P.
Spain 21.20 % 76.75 % 100.00 % PENSION FUND MANAGEMENT COMPANY 45 11 50
Santander Pensôes — Sociedade Gestora de Fundos de Pensôes, S.A.
Portugal 0.00 % 99.86 % 100.00 % PENSION FUND MANAGEMENT COMPANY 4 1 1
Santander Perpetual, S.A., Sole-Shareholder Company
Spain 100.00 % 0.00 % 100.00 % FINANCE 1 0 0
Santander Portfolio Management UK Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 33 (2 ) 12
Santander PR Capital Trust I
Puerto Rico 0.00 % 90.59 % 100.00 % FINANCE 9 (6 ) 3
Santander Private Advisors, Ltd.
United States 100.00 % 0.00 % 100.00 % HOLDING COMPANY 1 1 0
Santander Private Banking s.p.a.
Italy 100.00 % 0.00 % 100.00 % BANKING 39 (16 ) 73
Santander Private Banking UK Limited
United Kingdom 0.00 % 100.00 % 100.00 % PROPERTY 301 0 307
Santander Private Equity, S.A., S.G.E.C.R.
Spain 90.00 % 9.97 % 100.00 % VENTURE CAPITAL MANAGEMENT COMPANY 3 1 4
Santander Private Real Estate Advisory, S.A. Sole-Shareholder Company
Spain 0.00 % 100.00 % 100.00 % PROPERTY 3 0 0
Santander Professional Services, S.A.
Spain 0.00 % 100.00 % 100.00 % SPORTS OPERATIONS 0 0 0
Santander Real Estate, S.G.I.I.C., S.A.
Spain 0.00 % 99.18 % 100.00 % FUND MANAGEMENT COMPANY 101 6 6
Santander Río Asset Management Gerente de Fondos Comunes de Inversión S.A.
Argentina 0.00 % 100.00 % 100.00 % FUND MANAGEMENT COMPANY 3 1 0
Santander Río Seguros S.A.
Argentina 0.00 % 100.00 % 100.00 % INSURANCE 7 4 8
Santander Río Servicios S.A.
Argentina 0.00 % 99.97 % 100.00 % ADVISORY SERVICES 0 1 0
Santander Río Sociedad de Bolsa S.A.
Argentina 0.00 % 99.34 % 100.00 % BROKER-DEALER 3 1 2
Santander Río Trust S.A.
Argentina 0.00 % 99.97 % 100.00 % FINANCIAL SERVICES 0 0 0
Santander S.A. — Corretora de Câmbio e Títulos
Brazil 0.00 % 83.55 % 100.00 % BROKER-DEALER 76 22 29
Santander S.A. — Serviços Técnicos, Administrativos e de Corretagem de Seguros
Brazil 0.00 % 83.55 % 100.00 % INSURANCE BROKERAGE 21 4 34
Santander S.A. Agente de Valores
Chile 0.00 % 76.96 % 100.00 % BROKER-DEALER 50 12 20
Santander S.A. Corredores de Bolsa
Chile 0.00 % 88.14 % 100.00 % BROKER-DEALER 54 10 28
Santander S.A. Sociedad Securitizadora
Chile 0.00 % 76.83 % 100.00 % FUND MANAGEMENT COMPANY 1 0 0
Santander Securities Corporation
Puerto Rico 0.00 % 90.59 % 100.00 % BROKER-DEALER 36 9 15
Santander Seguros de Vida S.A.
Chile 0.00 % 100.00 % 100.00 % INSURANCE 135 42 9
Santander Seguros Generales S.A.
Chile 99.51 % 0.49 % 100.00 % INSURANCE 12 (3 ) 11
Santander Seguros S.A.
Brazil 0.00 % 83.55 % 100.00 % INSURANCE 835 105 794
Santander Seguros y Reaseguros, Compañía Aseguradora, S.A.
Spain 0.00 % 95.99 % 100.00 % INSURANCE 463 98 246
Santander Seguros, S.A.
Uruguay 0.00 % 100.00 % 100.00 % INSURANCE 3 1 4
Santander Service GmbH
Germany 0.00 % 100.00 % 100.00 % SERVICES 0 2 0
Santander Servicios de Recaudación y Pagos Limitada
Chile 0.00 % 76.74 % 100.00 % SERVICES 6 0 4
Santander Totta Seguros, Companhia de Seguros de Vida, S.A.
Portugal 0.00 % 99.86 % 100.00 % INSURANCE 93 20 132
Santander Totta, SGPS, S.A.
Portugal 0.00 % 99.86 % 99.86 % HOLDING COMPANY 2,781 266 3,321
Santander Trade Services, Limited
Hong Kong 0.00 % 100.00 % 100.00 % SERVICES 15 1 15
Santander UK Investments
United Kingdom 100.00 % 0.00 % 100.00 % LEASING 51 (3 ) 45
Santander UK Loans Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 155 8 1
Santander UK Nominee Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Santander Unit Trust Managers UK Limited
United Kingdom 0.00 % 100.00 % 100.00 % FUND AND PORTFOLIO MANAGER 19 (2 ) 17
Santander US Debt, S.A., Sole-Shareholder Company
Spain 100.00 % 0.00 % 100.00 % FINANCE 1 0 0

F-235

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Santander Venezuela Sociedad Administradora de Entidades de Inversión Colectiva, C.A.
Venezuela 0.00 % 90.00 % 100.00 % FUND MANAGEMENT COMPANY 1 0 0
Santander Warehouse LLC
United States 0.00 % 91.50 % 100.00 % AUXILIARY 0 0 0
Santotta-Internacional, SGPS, Sociedade Unipessoal, Lda. (Zona Franca da Madeira)
Portugal 0.00 % 99.72 % 100.00 % HOLDING COMPANY 54 13 14
Santusa Holding, S.L.
Spain 69.64 % 30.36 % 100.00 % HOLDING COMPANY 9,388 660 9,158
Sarum Trustees Limited
United Kingdom 0.00 % 100.00 % 100.00 % ASSET MANAGEMENT COMPANY 0 0 0
Saturn Japan II Sub C.V. (c)
Netherlands 0.00 % 69.30 % 0.00 % HOLDING COMPANY 1 0 42
Saturn Japan III Sub C.V. (c)
Netherlands 0.00 % 72.71 % 0.00 % HOLDING COMPANY 354 (236 ) 278
Saturn Japan V C.V. (c)
Netherlands 0.00 % 100.00 % 99.99 % HOLDING COMPANY 210 (135 ) 112
SC Germany Auto 08-02 Limited
Ireland — (b ) — SECURITIZATION 0 (4 ) 0
SC Germany Auto 09-1 Limited
Ireland — (b ) — SECURITIZATION 0 0 0
SC Germany Consumer 08-01 Limited
Ireland — (b ) — SECURITIZATION 0 0 0
SC Germany Consumer 09-1 Limited
Ireland — (b ) — SECURITIZATION 0 0 0
SCF Rahoitus Oy
Finland 0.00 % 100.00 % 100.00 % FINANCE 62 (4 ) 80
Scottish Mutual Pensions Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 6 0 99
Seacoast Capital Trust II
United States 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Seguros Santander, S.A., Grupo Financiero Santander
Mexico 0.00 % 74.96 % 100.00 % INSURANCE 51 25 21
Sercoban, Gestión Administrativa de Empresas, S.A.
Spain 0.00 % 100.00 % 100.00 % SERVICES 10 0 10
Serfin International Bank and Trust, Limited
Cayman Islands 0.00 % 99.72 % 100.00 % BANKING 30 0 23
Services and Promotions Delaware Corporation
United States 0.00 % 100.00 % 100.00 % HOLDING COMPANY 80 0 72
Services and Promotions Miami LLC
United States 0.00 % 100.00 % 100.00 % PROPERTY 79 0 80
Servicio de Alarmas Controladas por Ordenador, S.A.
Spain 99.99 % 0.01 % 100.00 % SECURITY 2 0 1
Servicios Administrativos y Financieros Ltda.
Chile 0.00 % 100.00 % 100.00 % SERVICES 0 1 0
Servicios Corporativos Seguros Serfin, S.A. De C.V.
Mexico 0.00 % 75.46 % 100.00 % SERVICES 0 0 0
Servicios de Cobranza, Recuperación y Seguimiento, S.A. De C.V.
Mexico 0.00 % 100.00 % 100.00 % SERVICES 4 5 1
Servicios de Cobranzas Fiscalex Ltda.
Chile 0.00 % 99.53 % 100.00 % SERVICES 0 0 0
Servicios Universia Venezuela S.U.V., S.A.
Venezuela 0.00 % 82.99 % 82.99 % INTERNET 1 (1 ) 0
Sheppards Moneybrokers Limited
United Kingdom 0.00 % 99.99 % 100.00 % ADVISORY SERVICES 18 0 17
Silk Finance No. 3 Limited
Ireland — (b ) — SECURITIZATION 0 (10 ) 0
Sinvest Inversiones y Asesorías Limitada
Chile 0.00 % 100.00 % 100.00 % FINANCE 70 6 2
Sistema 4B, S.A.
Spain 52.17 % 13.19 % 66.87 % CARDS 38 4 9
SK Charter Hire (No.2) Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 7 (7 ) 0
SK Marine Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
Sociedad Integral de Valoraciones Automatizadas, S.A.
Spain 100.00 % 0.00 % 100.00 % APPRAISALS 1 1 1
Sodepro, S.A.
Spain 0.00 % 89.72 % 100.00 % FINANCE 16 0 12
Solarlaser Limited
United Kingdom 0.00 % 100.00 % 100.00 % PROPERTY 54 0 45
Southern Cone Water Management Ltd.
United Kingdom 100.00 % 0.00 % 100.00 % FINANCE 0 0 0
SOV APEX, LLC
United States 0.00 % 100.00 % 100.00 % HOLDING COMPANY 26,762 8 22,302
SOV Charter LTD (UK)
United Kingdom 0.00 % 100.00 % 100.00 % BROKER-DEALER 1 0 1
Sovereign Agency Massachusetts, LLC
United States 0.00 % 100.00 % 100.00 % INSURANCE 0 0 0
Sovereign Bancorp, Inc.
United States 100.00 % 0.00 % 100.00 % HOLDING COMPANY 6,379 (47 ) 6,379
Sovereign Bank
United States 0.00 % 100.00 % 100.00 % BANKING 6,586 (37 ) 8,255
Sovereign Capital Trust IV
United States 0.00 % 100.00 % 100.00 % FINANCE 163 0 163
Sovereign Capital Trust IX
United States 0.00 % 100.00 % 100.00 % FINANCE 3 0 3
Sovereign Capital Trust V
United States 0.00 % 100.00 % 100.00 % FINANCE 4 0 4
Sovereign Capital Trust VI
United States 0.00 % 100.00 % 100.00 % FINANCE 7 0 7
Sovereign Community Development Company
United States 0.00 % 100.00 % 100.00 % HOLDING COMPANY 33 0 31
Sovereign Delaware Investment Corporation
United States 0.00 % 100.00 % 100.00 % HOLDING COMPANY 111 0 68
Sovereign Finance (Northern) Limited (j) (g)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 1 0 0

F-236

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Sovereign Finance (Scotland) Limited (j) (e)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
Sovereign Finance Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
Sovereign Freeze Limited (n)
Bermuda 0.00 % 100.00 % 100.00 % LEASING 0 0 0
Sovereign Gimi Limited (n)
Bermuda 0.00 % 100.00 % 100.00 % LEASING 0 0 0
Sovereign Hilli Limited (n)
Bermuda 0.00 % 100.00 % 100.00 % LEASING 0 0 0
Sovereign Holdings Limited (j)
United Kingdom 0.00 % 100.00 % 100.00 % HOLDING COMPANY 0 0 0
Sovereign Khannur Limited (n)
Bermuda 0.00 % 100.00 % 100.00 % LEASING 0 0 0
Sovereign Leasing (Scotland) Limited (j) (e)
United Kingdom 0.00 % 100.00 % 100.00 % LEASING 0 0 0
Sovereign Leasing LLC
United States 0.00 % 100.00 % 100.00 % LEASING 1 0 0
Sovereign Precious Metals, LLC
United States 0.00 % 100.00 % 100.00 % TRADING OF PRECIOUS METALS 78 4 10
Sovereign REIT Holdings, Inc.
United States 0.00 % 100.00 % 100.00 % HOLDING COMPANY 5,129 8 3,739
Sovereign Securities Corporation, LLC
United States 0.00 % 100.00 % 100.00 % BROKER-DEALER 39 0 37
Sovereign Spirit Limited (n)
Bermuda 0.00 % 100.00 % 100.00 % LEASING 0 0 0
Sovereign Trade Services (HK) Limited
Hong Kong 0.00 % 100.00 % 100.00 % FINANCIAL SERVICES 0 0 0
Sterrebeeck B.V.
Netherlands 100.00 % 0.00 % 100.00 % HOLDING COMPANY 5,185 305 15,309
Suleyado 2003, S.L.
Spain 0.00 % 100.00 % 100.00 % SECURITIES INVESTMENT 7 (7 ) 0
Suzuki Servicios Financieros, S.L.
Spain 0.00 % 51.00 % 51.00 % INTERMEDIATION 0 2 0
Swesant SA
Switzerland 0.00 % 100.00 % 100.00 % HOLDING COMPANY 280 346 0
Task Moraza, S.L. (e)
Spain 0.00 % 73.22 % 73.22 % HOLDING COMPANY 16 1 27
Taxagest Sociedade Gestora de Participações Sociais, S.A.
Portugal 0.00 % 99.86 % 100.00 % HOLDING COMPANY 59 8 0
Teatinos Siglo XXI Inversiones Limitada
Chile 50.00 % 50.00 % 100.00 % HOLDING COMPANY 795 278 457
Teylada, S.A. in liquidation (j)
Spain 11.11 % 88.89 % 100.00 % SECURITIES INVESTMENT 0 0 0
The Alliance & Leicester Corporation Limited
United Kingdom 0.00 % 100.00 % 100.00 % PROPERTY 14 0 16
The HSH AIV 4 Trust (c)
United States 0.00 % 69.20 % 4.99 % HOLDING COMPANY 83 (71 ) 5
The JCF HRE AIV II-A Trust (c)
United States 0.00 % 73.70 % 4.99 % HOLDING COMPANY 46 (39 ) 0
The National & Provincial Building Society Pension Fund Trustees Limited (d)
United Kingdom — (b ) — ASSET MANAGEMENT COMPANY 0 0 0
The Prepaid Card Company Limited
United Kingdom 0.00 % 80.00 % 80.00 % FINANCE (22 ) (4 ) 10
The WF Company Limited
United Kingdom 0.00 % 100.00 % 100.00 % ADVISORY SERVICES 1 0 0
Time Finance Limited
United Kingdom 0.00 % 100.00 % 100.00 % SERVICES 0 0 0
Time Retail Finance Limited
United Kingdom 0.00 % 100.00 % 100.00 % SERVICES 22 0 2
Títulos de Renta Fija, S.A.
Spain 100.00 % 0.00 % 100.00 % SECURITIES INVESTMENT 0 0 0
Tornquist Asesores de Seguros S.A. (j)
Argentina 0.00 % 99.99 % 99.99 % ADVISORY SERVICES 0 0 0
Totta & Açores Financing, Limited
Cayman Islands 0.00 % 99.72 % 100.00 % FINANCE (1 ) 12 0
Totta & Açores Inc. Newark
United States 0.00 % 99.72 % 100.00 % BANKING 1 0 0
Totta (Ireland), PLC (h)
Ireland 0.00 % 99.72 % 100.00 % FINANCE 352 106 341
Totta Crédito Especializado, Instituiçao Financeira de Crédito, S.A. (IFIC)
Portugal 0.00 % 99.84 % 100.00 % LEASING 118 16 42
Totta Urbe — Empresa de Administraçâo e Construçôes, S.A.
Portugal 0.00 % 99.72 % 100.00 % PROPERTY 111 5 148
Tuttle & Son Limited
United Kingdom 0.00 % 100.00 % 100.00 % COLLECTION AND PAYMENT SERVICES 1 0 1
UNIFIN S.p.A.
Italy 0.00 % 100.00 % 100.00 % FINANCE 39 9 82
Universia Brasil S.A.
Brazil 0.00 % 100.00 % 100.00 % INTERNET 3 (2 ) 1
Universia Chile S.A.
Chile 0.00 % 84.32 % 84.32 % INTERNET 1 (1 ) 0
Universia Colombia, S.A.
Colombia 0.00 % 99.92 % 99.92 % INTERNET 0 0 0
Universia Holding, S.L.
Spain 99.97 % 0.03 % 100.00 % HOLDING COMPANY 27 (17 ) 14
Universia México, S.A. De C.V.
Mexico 0.00 % 100.00 % 100.00 % INTERNET 1 (1 ) 0
Universia Perú, S.A.
Peru 0.00 % 82.82 % 82.82 % INTERNET 1 (1 ) 0
Universia Puerto Rico, Inc.
Puerto Rico 0.00 % 100.00 % 100.00 % INTERNET 1 0 1

F-237

Table of Contents

Millions of euros (a)
% of Amount of
% of Ownership Held by the Bank Voting Capital and Net Profit/Loss Ownership
Entity Location Direct Indirect Power (k) Line of Business Reserves for the Year Interest
Valores Santander Casa de Bolsa, C.A.
Venezuela 0.00 % 90.00 % 90.00 % BROKER-DEALER 22 3 7
Viking Collections Services Limited
United Kingdom 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Vista Capital de Expansión, S.A. SGECR
Spain 0.00 % 50.00 % 50.00 % VENTURE CAPITAL MANAGEMENT COMPANY 3 1 0
Vista Desarrollo, S.A. SCR de Régimen Simplificado
Spain 100.00 % 0.00 % 100.00 % VENTURE CAPITAL COMPANY 250 11 158
W.N.P.H. Gestao e Investimentos Sociedade Unipessoal, S.A.
Portugal 0.00 % 100.00 % 100.00 % SECURITIES INVESTMENT 36 0 0
Wallcesa, S.A.
Spain 100.00 % 0.00 % 100.00 % SECURITIES INVESTMENT (784 ) 105 0
Waypoint Capital Trust I
United States 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Waypoint Capital Trust II
United States 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Waypoint Insurance Group, Inc.
United States 0.00 % 100.00 % 100.00 % HOLDING COMPANY 3 0 13
Waypoint Settlement Services, LLC
United States 0.00 % 90.00 % 90.00 % INSURANCE 0 0 0
Waypoint Statutory Trust III
United States 0.00 % 100.00 % 100.00 % FINANCE 0 0 0
Webmotors S.A.
Brazil 0.00 % 83.55 % 100.00 % SERVICES 12 5 6
Wex Point España, S.L.
Spain 0.00 % 89.72 % 100.00 % SERVICES 1 0 1
Whitewick Limited
Jersey 0.00 % 100.00 % 100.00 % HOLDING COMPANY 2 0 0
WIM Servicios Corporativos, S.A. de C.V.
Mexico 0.00 % 100.00 % 100.00 % ADVISORY SERVICES 0 0 0
(a)
Amount per books of each company at December 31, 2009, disregarding, where appropriate, any interim dividends paid in the year. The amount of the ownership interest (net of allowances) is the figure per the books of each holding company multiplied by the Group’s percentage of ownership, disregarding impairment of goodwill on consolidation. The data on foreign companies were translated to euros at the year-end exchange rates.
(b)
Companies over which effective control is exercised.
(c)
Data from the latest approved financial statements at December 31, 2008.
(d)
Data from the latest approved financial statements at March 31, 2009.

F-238

Table of Contents

(e)
Data from the latest approved financial statements at June 30, 2009.
(f)
Data from the latest approved financial statements at September 30, 2009.
(g)
Data from the latest approved financial statements at April 30, 2009.
(h)
Data from the latest approved financial statements at November 30, 2009.
(i)
Data from the latest approved financial statements at August 31, 2009.
(j)
Company in liquidation at December 31, 2009.
(k)
Pursuant to Article 3 of Royal Decree 1815/1991, of 20 December, approving the rules for the preparation of consolidated financial statements, in order to determine voting power, the voting power relating to subsidiaries or to other parties acting in their own name but on behalf of Group companies were added to the voting power directly held by the Parent. Accordingly, the number of votes corresponding to the Parent in relation to companies over which it exercises indirect control is the number corresponding to each subsidiary holding a direct ownership interest in such companies.
(l)
Company in merger process with another Group company. Awaiting registration at Mercantile Registry.
(m)
Data from the latest approved financial statements at April 2, 2009.
(n)
Company resident in the UK for tax purposes.
(o)
Company moved its residence to the US in February 2010.
(p)
Data from the latest available approved financial statements at September 30, 2008.
(1)
The preference share and security issuer companies are detailed in Appendix III, together with other relevant information.

F-239

Table of Contents

Exhibit II
Listed companies in which the Santander Group has ownership interests of more than 5% (g), Associates of the Santander Group and Jointly Controlled Entities
Millions of euros (a)
% of Net
% of Ownership Held by the Bank Voting Capital and Profit/Loss
Entity Location Direct Indirect Power (f) Line of Business Assets Reserves for the Year
26 Rue Villiot S.A.S.
France 0.00 % 35.00 % 50.00 % PROPERTY 138 49 2
ABSLine Multimedia, S.L.
Spain 0.00 % 47.50 % 47.50 % MARKETING 1 1 0
Accordfin España, E.F.C., S.A.
Spain 0.00 % 49.00 % 49.00 % FINANCE 369 36 (22 )
ACI Soluciones, S.L.
Spain 0.00 % 32.03 % 49.00 % SERVICES 3 2 0
Administrador Financiero de Transantiago S.A.
Chile 0.00 % 15.35 % 20.00 % COLLECTION AND PAYMENT SERVICES 588 9 (4 )
Affirmative Insurance Holdings Inc. (b)
United States 0.00 % 5.00 % 0.00 % INSURANCE 557 149 1
Affirmative Investment LLC (b)
United States 0.00 % 9.86 % 4.99 % HOLDING COMPANY 8 56 (48 )
Agres, Agrupación Restauradores, S.L.
Spain 0.00 % 38.59 % 43.01 % RESTAURANTS 3 2 0
Aguas de Fuensanta, S.A.
Spain 0.00 % 37.87 % 42.21 % FOOD 33 10 0
Alcover AG (m)
Switzerland 0.00 % 27.91 % 27.91 % INSURANCE 179 127 1
Algebris Global Financials Fund (b)
Cayman Islands 9.15 % 0.00 % 9.15 % HOLDING COMPANY 929 982 (202 )
Allfunds Alternative, S.V., S.A. (Sole-Shareholder Company)
Spain 0.00 % 50.00 % 50.00 % BROKER-DEALER 5 5 (1 )
Allfunds Bank, S.A.
Spain 50.00 % 0.00 % 50.00 % BANKING 207 96 3
Allfunds International S.A.
Luxembourg 0.00 % 50.00 % 50.00 % FINANCIAL SERVICES 4 4 (2 )
Allfunds Nominee Limited
United Kingdom 0.00 % 50.00 % 50.00 % HOLDING COMPANY 0 0 0
Andalucarthage Holding Société Holding Offshore S.A. (b)
Morocco 0.00 % 20.11 % 20.11 % HOLDING COMPANY 149 126 0
Anekis, S.A.
Spain 24.75 % 24.75 % 49.50 % ADVERTISING 3 3 0
Arena Communications Network, S.L.
Spain 20.00 % 0.00 % 20.00 % ADVERTISING 44 3 0
Asajanet Servicios Agropecuarios, S.L. (b)
Spain 30.00 % 0.00 % 30.00 % MARKETING 0 0 0
Attijari Bank Société Anonyme (consolidated) (b)
Tunisia 0.00 % 10.97 % 10.97 % BANKING 1,517 69 17
Attijari Factoring Maroc, S.A.
Morocco 0.00 % 28.41 % 28.41 % FACTORING 99 4 2
Attijari International Bank Société Anonymé (b)
Morocco 50.00 % 0.00 % 50.00 % BANKING 719 7 3
Autopistas del Sol S.A. (b)
Argentina 0.00 % 14.17 % 14.17 % MOTORWAY CONCESSIONS 260 59 (27 )
Baie Placements S.à.r.l. (b)
Luxembourg 0.00 % 24.93 % 25.00 % HOLDING COMPANY 0 0 0
Banco Caixa Geral Totta de Angola, S.A.
Angola 0.00 % 25.43 % 25.50 % BANKING 535 135 32
Banco Internacional da Guiné-Bissau, S.A. (d)
Guinea Bissau 0.00 % 48.86 % 49.00 % BANKING 12 (30 ) (1 )
Base Central — Rede Serviços Imobiliarios, S.A.
Portugal 0.00 % 49.80 % 49.80 % PROPERTY SERVICES 2 0 0
Benim — Sociedade Imobiliária, S.A. (consolidated) (b)
Portugal 0.00 % 24.93 % 25.00 % PROPERTY 12 8 (1 )
Bolsas y Mercados Españoles, Sociedad Holding de Mercados y Sistemas Financieros, S.A. (consolidated) (b)
Spain 2.76 % 2.34 % 5.10 % FINANCIAL SERVICES 5,798 367 191
Cantabria Capital, SGECR, S.A.
Spain 50.00 % 0.00 % 50.00 % VENTURE CAPITAL MANAGEMENT COMPANY 0 0 0
Carnes Estellés, S.A.
Spain 0.00 % 19.21 % 21.41 % FOOD 29 10 0
Cartera del Norte, S.A.
Spain 0.00 % 32.39 % 36.10 % FINANCE 1 1 0
Celta Holding S.A.
Brazil 0.00 % 21.72 % 26.00 % HOLDING COMPANY 127 106 (5 )
Centradia Group, Ltd. (b) (l)
United Kingdom 30.45 % 0.00 % 30.45 % ADVISORY SERVICES 0 0 0
Centro de Compensación Automatizado S.A.
Chile 0.00 % 25.58 % 33.33 % COLLECTION AND PAYMENT SERVICES 2 1 0
Centro para el Desarrollo, Investigación y Aplicación de Nuevas Tecnologías, S.A.
Spain 0.00 % 43.96 % 49.00 % TECHNOLOGY 1 1 0
Charta Leasing No.1 Limited (j)
United Kingdom 0.00 % 50.00 % 50.00 % LEASING 108 (4 ) (5 )
Charta Leasing No.2 Limited
United Kingdom 0.00 % 50.00 % 50.00 % LEASING 56 (5 ) (4 )
Companhia Brasileira de Meios de Pagamento (consolidated)
Brazil 0.00 % 7.20 % 7.20 % CARDS 999 (268 ) 611
Companhia Brasileira de Soluções e Serviços
Brazil 0.00 % 15.32 % 15.32 % SERVICES 481 26 29

F-240

Table of Contents

Millions of euros (a)
% of Net
% of Ownership Held by the Bank Voting Capital and Profit/Loss
Entity Location Direct Indirect Power (f) Line of Business Assets Reserves for the Year
Companhia de Arrendamento Mercantil RCI Brasil
Brazil 0.00 % 33.32 % 39.88 % LEASING 236 176 13
Companhia de Crédito, Financiamento e Investimento RCI Brasil
Brazil 0.00 % 33.12 % 39.64 % FINANCE 800 85 17
Compañía Concesionaria del Túnel de Sóller, S.A.
Spain 0.00 % 29.34 % 32.70 % CONSTRUCTION 42 15 2
Compañía Española de Seguros de Crédito a la Exportación, S.A., Compañía de Seguros y Reaseguros (b)
Spain 13.95 % 6.45 % 21.08 % CREDIT INSURANCE 645 184 (53 )
Comprarcasa Servicios Inmobiliarios, S.A.
Spain 0.00 % 47.50 % 47.50 % PROPERTY SERVICES 2 1 0
Dirgenfin, S.L.
Spain 0.00 % 35.89 % 40.00 % REAL ESTATE DEVELOPMENT 56 0 0
Ensafeca Holding Empresarial, S.L.
Spain 0.00 % 31.82 % 31.82 % SECURITIES INVESTMENT 11 10 0
Espais Promocat, S.L.
Spain 0.00 % 44.86 % 50.00 % PROPERTY 27 1 (1 )
FC2Egestión, S.L.
Spain 0.00 % 50.00 % 50.00 % ENVIRONMENTAL MANAGEMENT 1 0 1
Federal Home Loan Bank of Pittsburgh (b)
United States 0.00 % 16.00 % 16.00 % BANKING 63,033 2,870 13
Fondo de Titulización de Activos UCI 11
Spain — (h ) — SECURITIZATION 324 0 0
Fondo de Titulización de Activos UCI 14
Spain — (h ) — SECURITIZATION 825 0 0
Fondo de Titulización de Activos UCI 15
Spain — (h ) — SECURITIZATION 939 0 0
Fondo de Titulización de Activos UCI 18
Spain — (h ) — SECURITIZATION 1,514 0 0
Fondo de Titulización de Activos UCI 19
Spain — (h ) — SECURITIZATION 1,030 0 0
Fondo de Titulización Hipotecaria UCI 10
Spain — (h ) — SECURITIZATION 228 0 0
Fondo de Titulización Hipotecaria UCI 12
Spain — (h ) — SECURITIZATION 431 0 0
Fondo de Titulización Hipotecaria UCI 16
Spain — (h ) — SECURITIZATION 1,357 0 0
Fondo de Titulización Hipotecaria UCI 17
Spain — (h ) — SECURITIZATION 1,153 0 0
Friedrichstrasse, S.L.
Spain 0.00 % 35.68 % 35.68 % PROPERTY 43 43 0
Granoller’s Broker, S.L.
Spain 0.00 % 12.50 % 25.00 % FINANCE 0 0 0
Grupo Alimentario de Exclusivas, S.A.
Spain 0.00 % 36.30 % 40.46 % FOOD 6 0 0
Grupo Financiero Galicia (consolidated) (b)
Argentina 0.00 % 6.67 % 3.50 % FINANCE 4,517 305 32
Grupo Konecta Centros Especiales de Empleo, S.L.
Spain 0.00 % 48.21 % 48.21 % TELEMARKETING 0 0 0
Grupo Konecta Maroc S.A.R.L. à associé unique
Morocco 0.00 % 48.21 % 48.21 % TELEMARKETING 0 (1 ) 0
Grupo Konecta UK Limited
United Kingdom 0.00 % 48.16 % 48.16 % FINANCE 0 (1 ) 0
Grupo Konectanet México, S.A. de C.V.
Mexico 0.00 % 48.21 % 48.21 % TELEMARKETING 0 0 0
Grupo Konectanet, S.L.
Spain 0.00 % 48.21 % 48.21 % HOLDING COMPANY 18 5 0
HLC — Centrais de Cogeraçao, S.A. (c)
Portugal 0.00 % 24.46 % 24.49 % ELECTRICITY 2 (2 ) (2 )
Hyundai Capital Germany GmbH
Germany 0.00 % 49.99 % 49.99 % SERVICES 2 2 0
Imperial Holding S.C.A. (i)
Luxembourg 0.00 % 36.36 % 36.36 % SECURITIES INVESTMENT 161 39 0
Inmo Alemania Gestión de Activos Inmobiliarios, S.A.
Spain 0.00 % 16.82 % 17.52 % HOLDING COMPANY 99 99 0
Inmobiliaria Sitio de Baldeazores, S.A.
Spain 0.00 % 44.86 % 50.00 % PROPERTY 0 (5 ) 0
J.C. Flowers I L.P. (b)
United States 16.80 % 0.00 % 4.99 % HOLDING COMPANY 73 171 (98 )
JC Flowers AIV II L.P. (b)
United States 0.00 % 9.80 % 4.99 % HOLDING COMPANY 9 8 1
JC Flowers AIV P L.P. (b)
Canada 0.00 % 6.90 % 4.99 % HOLDING COMPANY 123 129 (8 )
Kapitalia Credit House Global, S.L.
Spain 0.00 % 48.21 % 48.21 % SERVICES 0 0 0
Kassadesign 2005, S.L.
Spain 0.00 % 44.86 % 50.00 % PROPERTY 57 10 (7 )
Kepler Weber S.A. (b)
Brazil 0.00 % 5.43 % 6.50 % STORAGE SYSTEMS 166 71 (1 )
Konecta Activos Inmobiliarios, S.L.
Spain 0.00 % 49.08 % 49.08 % PROPERTY 8 0 0
Konecta Brazil Outsourcing Ltda.
Brazil 0.00 % 48.20 % 48.20 % SERVICES 0 0 0
Konecta Broker, S.L.
Spain 0.00 % 48.21 % 48.21 % SERVICES 1 0 1
Konecta Bto, S.L.
Spain 0.00 % 48.21 % 48.21 % TELECOMMUNICATIONS 36 37 0
Konecta Chile S.A.
Chile 0.00 % 35.67 % 35.67 % SERVICES 4 3 1
Konecta Colombia Grupo Konecta Colombia Ltda
Colombia 0.00 % 48.21 % 48.21 % TELEMARKETING 0 0 0
Konecta Field Marketing, S.A.
Spain 0.00 % 48.21 % 48.21 % MARKETING 0 0 0
Konecta Portugal, Lda.
Portugal 0.00 % 48.21 % 48.21 % MARKETING 1 0 0
Konecta Servicios Administrativos y Tecnológicos, S.L.
Spain 0.00 % 48.21 % 48.21 % SERVICES 0 0 0
Konecta Servicios Auxiliares, S.L.
Spain 0.00 % 48.21 % 48.21 % SERVICES 0 (1 ) 0
Konecta Servicios de Empleo ETT, S.A.
Spain 0.00 % 48.21 % 48.21 % TEMPORARY EMPLOYMENT AGENCY 0 0 (1 )

F-241

Table of Contents

Millions of euros (a)
% of Net
% of Ownership Held by the Bank Voting Capital and Profit/Loss
Entity Location Direct Indirect Power (f) Line of Business Assets Reserves for the Year
Konecta Servicios Integrales de Consultoría, S.L.
Spain 0.00 % 12.04 % 24.98 % ADVERTISING 0 0 0
Konectanet Andalucía, S.L.
Spain 0.00 % 48.21 % 48.21 % SERVICES 0 0 0
Konectanet Comercialización, S.L.
Spain 0.00 % 48.21 % 48.21 % MARKETING 1 0 0
Kontacta Comunicaciones, S.A.
Spain 0.00 % 36.16 % 36.16 % SERVICES 1 1 0
Kontacta Top Ten, S.L.
Spain 0.00 % 36.16 % 36.16 % SERVICES 0 0 0
Maxamcorp Holding, S.L. (consolidated) (e)
Spain 0.00 % 22.62 % 22.62 % HOLDING COMPANY 1,017 166 56
Medimobiliario Ediçoes Period. e Multimedia, S.A.
Portugal 0.00 % 29.38 % 29.38 % PROPERTY SERVICES 0 0 0
Metrovacesa, S.A. (consolidated) (b)
Spain 14.51 % 8.19 % 23.63 % PROPERTY 9,527 2,529 (731 )
New Affirmative LLC (b)
United States 0.00 % 9.86 % 0.00 % HOLDING COMPANY 8 56 (48 )
New PEL S.a.r.l. (b)
Luxembourg 0.00 % 6.90 % 0.00 % HOLDING COMPANY 46 24 10
Norchem Holdings e Negócios S.A.
Brazil 0.00 % 18.17 % 21.75 % HOLDING COMPANY 91 39 5
Norchem Participações e Consultoria S.A.
Brazil 0.00 % 41.78 % 50.00 % BROKER-DEALER 52 22 1
Olivant Investments Switzerland S.A. (b)
Luxembourg 0,00 % 34,97 % 34,97 % HOLDING COMPANY 5 16 (1,555 )
Olivant Limited (consolidated) (b)
Guernsey 0.00 % 9.00 % 9.00 % HOLDING COMPANY 237 232 (229 )
Omega Financial Services GmbH
Germany 0.00 % 50.00 % 50.00 % SERVICES 2 0 1
Operadora de Activos Alfa, S.A. De C.V.
Mexico 0.00 % 49.98 % 49.98 % FINANCE 1 1 0
Operadora de Activos Beta, S.A. de C.V.
Mexico 0.00 % 49.99 % 49.99 % FINANCE 2 2 0
Partang, SGPS, S.A.
Portugal 0.00 % 49.86 % 50.00 % HOLDING COMPANY 87 22 0
Private Estate Life S.A. (b)
Luxembourg 0.00 % 5.87 % 0.00 % INSURANCE 2,662 53 14
Prodesur Mediterráneo, S.L.
Spain 0.00 % 44.86 % 50.00 % PROPERTY 58 19 (1 )
Programa Multi Sponsor PMS, S.A.
Spain 24.75 % 24.75 % 49.50 % ADVERTISING 22 4 0
Proinsur Mediterráneo, S.L.
Spain 0.00 % 44.86 % 50.00 % PROPERTY 68 25 (2 )
Promoreras Desarrollo de Activos, S.L.
Spain 0.00 % 31.40 % 35.00 % PROPERTY 166 14 0
PSA Finance PLC
United Kingdom 0.00 % 50.00 % 50.00 % LEASING 5 5 0
Puntoform, S.L.
Spain 0.00 % 48.21 % 48.21 % TRAINING 0 0 0
Q 205 Real Estate GmbH
Germany 0.00 % 17.84 % 17.84 % PROPERTY 255 61 2
Quiero Televisión, S.A., Sole-Shareholder Company
Spain 0.00 % 31.82 % 31.82 % TELECOMMUNICATIONS 7 6 0
Real Estate Investment Society España, S.A.
Spain 31.80 % 0.00 % 31.80 % PROPERTY 89 89 0
Real Seguros Vida e Previdência S.A. (k)
Brazil 0.00 % 0.00 % 0.00 % INSURANCE — — —
Redbanc S.A.
Chile 0.00 % 25.65 % 33.43 % SERVICES 15 6 1
Reintegra Contact Center, S.L.U.
Spain 0.00 % 45.00 % 45.00 % SERVICES 0 0 0
Reintegra, S.A.
Spain 0.00 % 45.00 % 45.00 % COLLECTION AND PAYMENT SERVICES 6 4 1
RFS Holdings B.V.
Netherlands 27.91 % 0.00 % 27.91 % HOLDING COMPANY 24,519 21,500 (127 )
Saudi Hollandi Bank (consolidated) (b) (m)
Saudi Arabia 0.00 % 11.16 % 11.16 % BANKING 11,370 831 226
Servicio Pan Americano de Protección, S.A. de C.V.
Mexico 0.00 % 15.78 % 21.05 % SECURITY 143 67 4
Servicios Financieros Enlace S.A. de C.V. (b)
El Salvador 21.48 % 0.00 % 21.48 % NOT-FOR-PROFIT COMPANY 6 2 0
Shinsei Bank, Ltd. (consolidated) (e)
Japan 0.00 % 8.46 % 0.00 % BANKING 89,735 6,837 (1,074 )
Sistarbanc S.R.L. (b)
Uruguay 0.00 % 20.00 % 20.00 % CARDS 2 2 (1 )
Sociedad Interbancaria de Depósitos de Valores S.A.
Chile 0.00 % 22.48 % 29.29 % SECURITIES DEPOSITORY INSTITUTION 2 1 0
Sociedad Promotora Bilbao Plaza Financiera, S.A. (b)
Spain 7.74 % 25.00 % 33.91 % ADVISORY SERVICES 2 2 0
Solar Energy Capital Europe S.à.r.l.
Luxembourg 0.00 % 33.33 % 33.33 % HOLDING COMPANY 6 1 0
Tecnologia Bancária S.A.
Brazil 0.00 % 20.69 % 20.69 % ATMs 163 62 1
Teka Industrial, S.A. (consolidated) (b)
Spain 0.00 % 10.00 % 10.00 % DOMESTIC APPLIANCES 766 291 3
Trabajando.com Chile S.A.
Chile 0.00 % 33.33 % 33.33 % SERVICES 5 5 (1 )
Transbank S.A.
Chile 0.00 % 25.11 % 32.71 % CARDS 273 8 1
Transolver Finance EFC, S.A.
Spain 0.00 % 50.00 % 50.00 % LEASING 251 29 (14 )
Turyocio Viajes y Fidelización, S.A.
Spain 0.00 % 32.21 % 32.21 % TRAVEL 0 0 0
U.C.I., S.A.
Spain 50.00 % 0.00 % 50.00 % HOLDING COMPANY 218 115 (7 )
UCI Servicios Inmobiliarios y Profesionales, S.L.
Spain 0.00 % 50.00 % 50.00 % SERVICES 33 4 (4 )
UFI Servizi S.r.l. (b)
Italy 0.00 % 23.17 % 23.17 % SERVICES 0 0 0
Unión de Créditos Inmobiliarios, S.A., EFC
Spain 0.00 % 50.00 % 50.00 % MORTGAGE LOAN COMPANY 7,980 191 30

F-242

Table of Contents

Millions of euros (a)
% of Net
% of Ownership Held by the Bank Voting Capital and Profit/Loss
Entity Location Direct Indirect Power (f) Line of Business Assets Reserves for the Year
Vector Software Factory, S.L.
Spain 0.00 % 19.20 % 19.20 % IT 7 2 0
Viking Consortium Holdings Limited (consolidated)
United Kingdom 0.00 % 24.99 % 24.99 % HOLDING COMPANY 1,076 197 (28 )
Wtorre Empreendimentos Imobiliários S.A. (consolidated) (b)
Brazil 0.00 % 7.14 % 8.55 % PROPERTY 1,255 303 (66 )
(a)
Amounts per the books of each company generally at December 31, 2009, unless otherwise stated, because the financial statements have not yet been authorised for issue. The data on foreign companies were translated to euros at the year-end exchange rates.
(b)
Data from the latest approved financial statements at December 31, 2008.
(c)
Data from the latest approved financial statements at December 31, 2003.
(d)
Data from the latest approved financial statements at April 30, 2002.
(e)
Data at March 31, 2009, this entity’s year-end.
(f)
Pursuant to Article 3 of Royal Decree 1815/1991, of 20 December, approving the rules for the preparation of consolidated financial statements, in order to determine voting power, the voting power relating to subsidiaries or to other parties acting in their own name but on behalf of Group companies were added to the voting power directly held by the Parent. Accordingly, the number of votes corresponding to the Parent in relation to companies over which it exercises indirect control is the number corresponding to each subsidiary holding a direct ownership interest in such companies.
(g)
Excluding the Group companies listed in Appendix I and those the interest of which with respect to the fair presentation that the consolidated financial statements must express (pursuant to Article 48 of the Spanish Commercial Code and Article 200 of the Spanish Public Limited Liability Companies Law ( Ley de Sociedades Anónimas )) is not material.
(h)
Companies over which effective control is exercised.
(i)
Data from the latest approved financial statements at July 31, 2009.
(j)
Data from the latest approved financial statements at September 30, 2009.
(k)
Company in merger process with another Group company. Awaiting registration at Mercantile Registry.
(l)
Company in liquidation at December 31, 2009.
(m)
Ownership interests held through RFS Holdings B.V.

F-243

Table of Contents

Exhibit III
Subsidiaries issuing preference shares and preferred participating securities
Millions of euros (a)
% of Ownership Held by the Bank Share Preference Net Profit/Loss
Entity Location Direct Indirect Line of Business Capital Reserves Share Cost for the Year
Abbey National Capital Trust I
United States — (b ) FINANCE 0 0 0 0
Banesto Holdings, Ltd.
Guernsey 0.00 % 89.72 % SECURITIES
INVESTMENT 		0 47 6 1
Banesto Preferentes, S.A.
Spain 0.00 % 89.72 % FINANCE 0 0 2 0
Santander Emisora 150, S.A., Sole-Shareholder Company
Spain 100.00 % 0.00 % FINANCE 0 0 381 0
Santander Finance Capital, S.A. Sole-Shareholder Company
Spain 100.00 % 0.00 % FINANCE 0 0 156 0
Santander Finance Preferred, S.A. Sole-Shareholder Company
Spain 100.00 % 0.00 % FINANCE 0 1 131 1
Santander International Preferred, S.A. Sole-Shareholder Company
Spain 100.00 % 0.00 % FINANCE 0 0 0 0
Sovereign Real Estate Investment Trust
United States 0.00 % 100.00 % FINANCE 2,828 (2,228 ) 57 2
(a)
Amounts per the books of each company at December 31, 2009, translated to euros (in the case of foreign companies) at the year-end exchange rates.
(b)
Companies over which effective control is exercised.

F-244

Table of Contents

Exhibit IV
Notifications of acquisitions and disposals of investments in 2009
(Article 86 of the Consolidated Spanish Public Limited Liability Companies Law ( Ley de Sociedades Anónimas ) and Article 53 of Securities Market Law 24/1998):
On February 26, 2009, the CNMV registered a notification from Banco Santander which disclosed that, at Group level, its ownership interest in METROVACESA, S.A. had reached 23.634%.
On June 19, 2009, the CNMV registered a notification from Banco Santander which disclosed that it held a significant ownership interest of 3.045% in the share capital of GRUPO FERROVIAL, S.A.
On June 19, 2009, the CNMV registered a notification from Banco Santander which disclosed that its ownership interest in GRUPO FERROVIAL, S.A. had fallen below 3%.
On August 5, 2009, the CNMV registered a notification from Banco Santander which disclosed that its ownership interest in CEPSA, S.A. had fallen below 30%.
On August 13, 2009, the CNMV registered a notification from Banco Santander which disclosed that Santander Group held a significant ownership interest of 3.019% in REPSOL YPF, S.A.
On August 13, 2009, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in REPSOL YPF, S.A. had fallen below 3%.
On December 24, 2009, the CNMV registered a notification from Banco Santander which disclosed that Santander Group held a significant ownership interest of 3.868% in GRUPO FERROVIAL, S.A.

F-245

Table of Contents

Exhibit V
Other information on the share capital of the Group’s banks
Following is certain information on the share capital of the Group’s banks.
1)
Banco Santander (Brasil) S.A.
a)
Number of equity instruments held by the Group
Santander Group holds 179,246,632,022 ordinary shares and 154,159,678,130 preference shares through its subsidiaries Sterrebeeck B.V., Grupo Empresarial Santander, S.L., Santander Insurance Holding, S.L. and Santander Seguros, S.A.
The shares composing the share capital of Banco Santander (Brasil) S.A. have no par value and there are no capital payments payable.
In accordance with current bylaws, the preference shares are not convertible into ordinary shares and do not confer voting rights on their holders, except under the following circumstances:
a)
In the event of the transformation, merger, consolidation or spin-off of the company.
b)
In the event of approval of agreements between the company and the shareholders, either directly, through third parties or other companies in which the shareholders hold a stake, provided that, due to legal or bylaw provisions, they are submitted to a general meeting.
c)
In the event of an assessment of the assets used to increase the company’s share capital.
d)
The selection of an institution or specialized company to determine the economic value of the company.
However, they do have the following advantages:
a)
Their dividends are 10% higher than those on ordinary shares.
b)
Priority in the distribution of dividends.
c)
Participation, on the same terms as ordinary shares, in capital increases resulting from the capitalization of reserves and profits and in the distribution of bonus shares arising from the capitalization of retained earnings, reserves or any other funds.
d)
Priority in the reimbursement of capital in the event of the dissolution of the company.
e)
In the event of a public offering due to a change in control of the company, the holders of the preference shares are guaranteed the right to sell at least 80% of the price paid for the block of shares that changed hands as part of the change of control, i.e. they are treated the same as shareholders with voting rights.
b)
Capital increases in progress
No approved capital increases are in progress.
c)
Capital authorized by the shareholders at the general shareholders’ meeting
The company is authorized to increase share capital, subject to approval by the board of directors but without the need to amend the bylaws, up to a limit of 500,000,000,000 ordinary shares or preference shares, and without the need to maintain any ratio between any of the different classes of shares, provided they remain within the limits of the maximum number of preference shares established by Law.
At present the share capital consists of 399,044,116,905 shares (212,841,731,754 ordinary shares and 186,202,385,151 preference shares).
d)
Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights
There are no rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights.
e)
Specific circumstances that restrict the availability of reserves
The only restriction on the availability of Banco Santander (Brasil) S.A.’s reserves relates to the legal reserve (restricted reserves), which can only be used to offset losses or to increase capital.

F-246

Table of Contents

f)
Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity
Not applicable.
g)
Listed equity instruments
All the shares are listed on the São Paulo Stock Exchange (BM&F BOVESPA S.A. Bolsa de Valores, Mercaderías e Futuros) and the share deposit certificates (Units) are listed on the New York Stock Exchange (NYSE).
2)
Banco Español de Crédito, S.A. (Banesto)
a)
Number of equity instruments held by the Group
The share capital of Banco Español de Crédito, S.A. consists of 687,386,798 fully subscribed and paid shares of € 0.79 par value each, all with identical voting and dividend rights.
At December 31, 2009, the Parent and its subsidiaries held 89.72% of the share capital (613,696,098 ordinary shares), of which Banco Santander held 606,345,555 shares (88.65%) and Cantabro Catalana de Inversiones held 7,350,543 shares (1.07%). At that date the Banesto Group held 3,382,126 treasury shares previously acquired under authorization of the general shareholders’ meeting, within the limits set forth in Articles 75 et seq.
b)
Capital increases in progress
No approved capital increases are in progress.
c)
Capital authorized by the shareholders at the general shareholders’ meeting
The annual general meeting of Banco Español de Crédito, S.A. held at first call on February 26, 2008 authorized the board of directors to increase capital at one or several times and at any time, within five years from the date of the annual general meeting, by an amount (par value) of up to half the share capital of the Bank at the date of the meeting, through the issuance of new shares, with or without share premium and with or without voting rights; the consideration for the new shares to be issued will be monetary contributions, and the Board may set the terms and conditions of the capital increase. Also, the Board was empowered to disapply preemptive subscription rights, fully or partially, in accordance with Article 159.2 of the Spanish Public Limited Liability Companies Law ( Ley de Sociedades Anónimas ).
d)
Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights
At December 31, 2009, no shares with these characteristics had been issued.
e)
Specific circumstances that restrict the availability of reserves
The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount (10% of any net profit reported each year must be transferred to the legal reserve until the balance of this reserve reaches 20% of share capital). Pursuant to the Spanish Public Limited Liability Companies Law, ( Ley de Sociedades Anónimas ), a restricted reserve has been recorded for an amount equal to the carrying amount of the Banesto shares owned by subsidiaries.
The revaluation reserve recorded pursuant to Royal Decree-Law 7/1996, of 7 June, can be used to increase capital. On February 26, 2008, the shareholders at the general shareholders’ meeting resolved to reduce capital with a charge to voluntary reserves and the corresponding amount was deducted from the restricted reserve to which Article 79.3 of the Spanish Public Limited Liability Companies Law ( Ley de Sociedades Anónimas ) refers and a reserve for retired capital of € 5,485,207 (the same amount as the par value of the retired shares) was recorded. This reserve will be unrestricted under the same conditions as for the share capital reduction, in accordance with Article 167.3 of the Spanish Public Limited Liability Companies Law ( Ley de Sociedades Anónimas ).
f)
Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity
Not applicable.
g)
Listed equity instruments
All the shares are listed on the Spanish Stock Exchanges.

F-247

Table of Contents

3)
Banco Santander Totta, S.A. (Totta)
a)
Number of equity instruments held by the Group
The Group holds 574,356,881 ordinary shares through Santander Totta, SGPS, S.A. and 14,593,315 ordinary shares through Taxagest Sociedade Gestora de Participaçoes Sociais, S.A. and Banco Santander Totta, S.A. The Group also holds 52,763 treasury shares, all of which have a par value of € 1 each, are fully subscribed and paid and carry the same voting and dividend rights.
b)
Capital increases in progress
No approved capital increases are in progress.
c)
Capital authorized by the shareholders at the general shareholders’ meeting
Not applicable.
d)
Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights
At December 31, 2009, no shares with these characteristics had been issued.
e)
Specific circumstances that restrict the availability of reserves
Under Article 296 of the Portuguese Companies’ Code, the legal and merger reserves can only be used to offset losses or to increase capital.
Non-current asset revaluation reserves are regulated by Decree-Law 31/1998, under which losses can be offset or capital increased by the amounts for which the underlying asset is depreciated, amortized or sold.
f)
Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity
Not applicable.
g)
Listed equity instruments
The shares of Banco Santander Totta, S.A. are not listed.
4)
Banco Santander- Chile
a)
Number of equity instruments held by the Group
The Group holds 66,822,519,695 ordinary shares through Santander Chile Holding, S.A., 78,108,391,607 ordinary shares through Teatinos Siglo XXI Inversiones Limitada and 16,577 ordinary shares through Santander Inversiones Limitada (Chile), all of which have no par value, are fully subscribed and paid and carry the same voting and dividend rights.
b)
Capital increases in progress
No approved capital increases are in progress.
c)
Capital authorized by the shareholders at the general shareholders’ meeting
Share capital amounted to CLP 891,302,881,691 at December 31, 2009. However, each year the annual general meeting must approve the balance sheet at December 31, of the previous year and, therefore, approve the share capital amount.
d)
Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights
At December 31, 2009, no shares with these characteristics had been issued.

F-248

Table of Contents

e)
Specific circumstances that restrict the availability of reserves
Remittances to foreign investors in relation to investments made under the Statute of Foreign Investment (Decree-Law 600/1974) and the amendments thereto require the prior authorization of the foreign investment committee.
f)
Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity
Not applicable.
g)
Listed equity instruments
All the shares are listed on the Chilean Stock Exchanges and, through American Depositary Receipts (ADRs), on the New York Stock Exchange (NYSE).
5)
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander
a)
Number of equity instruments held by the Group
At December 31, 2009, Santander Group holds 78,284,357,776 ordinary shares through Grupo Financiero Santander, S.A. B de C.V., 99.99% of the share capital of Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander.
b)
Capital increases in progress
No approved capital increases are in progress.
c)
Capital authorized by the shareholders at the general shareholders’ meeting
The shareholders at the extraordinary and annual general meeting held on August 18, 2008 resolved to set the authorized share capital of Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander at MXN 7,829,149,572, represented by a total of 78,291,495,726 fully subscribed and paid shares of € 0.1 par value each.
d)
Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights
In previous years, the entity issued unsecured subordinated preference debentures of USD 300 million that are voluntarily convertible into ordinary shares by their holders. These issues are private and the entire issue was bought by current shareholders of the Grupo Financiero. The ten-year issue matures in 2014, at which time the debentures will be converted into shares.
The shareholders at the extraordinary general meeting held on March 17, 2009 resolved to approve the arrangement of a group loan of USD 1,100,000,000 from the shareholders through the placement of unsecured subordinated non-preferential debentures which are not convertible into shares. It should be noted that although approved by the general meeting, this issue had not yet been launched at the reporting date.
e)
Specific circumstances that restrict the availability of reserves
Pursuant to the Mexican Credit Institutions Law and the general provisions applicable to credit institutions, to Mexican Companies Law and to the institutions’ own bylaws, universal banking institutions are required to constitute or increase capital reserves for the purposes of ensuring solvency and protecting payment systems and savers.
•
The Entity increases its legal reserve annually directly from the profit obtained in the year. The legal reserve can be used for any purpose but the balance must be replenished.
•
The Entity must recognize the various reserves as stipulated in the legal provisions applicable to credit institutions. Credit loss reserves are calculated on the basis of the credit rating assigned to each loan and are released when the rating of the related loan improves or when the loan is settled.
f)
Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity
Not applicable.

F-249

Table of Contents

g) Listed equity instruments
The company does not have any equity instruments listed on a stock exchange.
6)
Abbey National plc (now Santander UK plc)
a)
Number of equity instruments held by the Group
The Group holds 24,117,268,865 fully subscribed and paid ordinary shares of GBP 0.10 par value each, all with the same voting and dividend rights.
b)
Capital increases in progress
No approved capital increases are in progress.
c)
Capital authorized by the shareholders at the general shareholders’ meeting
The shareholders at the annual general meeting held on June 18, 2009 resolved to authorize an increase in share capital, subject to approval by the board of directors, with the following limits, the amounts used of which are as follows: GBP 2,475,000,000 (24,750,000,000 ordinary shares); GBP 1,000,000,000 (1,000,000,000 preference shares); USD 10,080,000 (1,008,000,000 preference shares) and € 10,000,000 (1,000,000,000 preference shares).
Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights
Abbey issued GBP 200 million of subordinated bonds with a 10.06% coupon convertible into preference shares with a par value of € 1 each at the issuer’s discretion. The exchange can be made at any time, provided the holders are given between 30 and 60 days’ notice.
Specific circumstances that restrict the availability of reserves
Not applicable.
d)
Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity
Not applicable.
e)
Listed equity instruments
Not applicable.

F-250

Table of Contents

7)
Sovereign Group (now Santander Holdings USA, Inc.)
a)
Number of equity instruments held by the Group
The Group holds 511,107,043 ordinary shares, all of which carry the same voting and dividend rights.
b)
Capital increases in progress
On January 20, 2010, the board of directors authorized a capital increase of USD 1,500,000,000.
This capital increase was carried out on March 2, 2010 in two tranches: USD 750,000,000 through the acquisition of subordinated debt and USD 750,000,000 through a direct capital increase.
c)
Capital authorized by the shareholders at the general shareholders’ meeting
Not applicable.
d)
Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights
Not applicable.
e)
Specific circumstances that restrict the availability of reserves
Not applicable.
f)
Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity
Not applicable.
g)
Listed equity instruments
Class C preference shares and equity securities are listed on the New York Stock Exchange (NYSE).

F-251

Table of Contents

Exhibit VI
Year end December 31,
2009 2008 2007 2006 2005
Including Excluding Including Excluding Including Excluding Including Excluding Including Excluding
interest on interest on interest on interest on interest on interest on interest on interest on interest on interest on
IFRS: deposits deposits deposits deposits deposits deposits deposits deposits deposits deposits
FIXED CHARGES:
Fixed charges
26,392,227 10,540,180 37,041,015 17,756,819 30,569,963 15,980,396 24,143,967 11,033,379 22,604,978 8,956,326
Preferred dividends
92,294 92,294 37,374 37,374 47,290 47,290 85,229 85,229 118,389 118,389
Fixed charges less Preferred dividends
26,299,933 10,447,886 37,003,641 17,719,445 30,522,673 15,933,106 24,058,738 10,948,150 22,486,589 8,837,937
EARNINGS:
Income from continuing operations before taxes and extraordinary items
10,587,800 10,587,800 10,849,325 10,849,325 10,970,494 10,970,494 8,853,774 8,853,774 7,195,394 7,195,394
Distributed earnings from associated companies
(5,870 ) (5,870 ) 695,880 695,880 291,401 291,401 259,269 259,269 434,428 434,428
Fixed charges
26,392,227 10,540,180 37,041,015 17,756,819 30,569,963 15,980,396 24,143,967 11,033,379 22,604,978 8,956,326
Total earnings
36,985,897 21,133,850 47,194,460 27,910,264 41,249,056 26,659,489 32,738,472 19,627,884 29,365,944 15,717,292
Less: Preferred dividends
92,294 92,294 37,374 37,374 47,290 47,290 85,229 85,229 118,389 118,389
Total earnings less preferred stock dividends
36,893,603 21,041,556 47,157,086 27,872,890 41,201,766 26,612,199 32,653,243 19,542,655 29,247,555 15,598,903
Ratio of earnings to fixed charges
1.40 2.01 1.27 1.57 1.35 1.67 1.36 1.78 1.30 1.75
Ratio of earnings to fixed charges less preferred stock dividends
1.40 2.01 1.27 1.57 1.35 1.67 1.36 1.79 1.30 1.76

F-252

TABLE OF CONTENTS
Part 1. Corporate Principles Of Risk ManagementPart 2. Corporate Governance Of The Risk FunctionPart 3. Integral Control Of RisksPart 4. Credit RiskPart 5. Operational RiskPart 6. Reputational RiskPart 7. Adjustment To The New Regulatory FrameworkPart 8. Economic CapitalPart 9. Risk Training ActivitiesPart 10. Market RiskItem 12. Description Of Securities Other Than Equity SecuritiesPart IIItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15. Controls and ProceduresItem 16. [reserved]Item 16A. Audit Committee Financial ExpertItem 16B. Code Of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemption From The Listing Standards For Audit CompaniesItem 16E. Purchases Of Equity Securities By The Issuer and Affiliated PurchasersItem 16F. Changes in Registrant S Certifying AccountantItem 16G. Corporate GovernancePart IIIItem 17. Financial StatementsItem 18. Financial StatementsItem 19. ExhibitsNote 3 Provide Information on The Most Significant Acquisitions and Disposals in 2009, 2008 and 2007Note 51 Contains A Detail Of The Residual Maturity Periods Of Loans and Receivables and Of The Related Average Interest RatesNote 36 Contains A Description Of The Group S Main HedgesNote 51 Contains A Detail Of The Residual Maturity Periods Of Financial Liabilities At Amortized Cost and Of The Related Average Interest RatesNote 51 Contains A Detail Of The Residual Maturity Periods Of Other Financial Assets and Liabilities At Each Year-end

Exhibits

Exhibit 1.1 Exhibit 1.2 Exhibit 4.1 Exhibit 12.1 Exhibit 12.2 Exhibit 12.3 Exhibit 13.1 Exhibit 15.1