Annual Report Santander Bank

1. ANNUAL
REPORT
2012

2. informe anual 2012 nombre del capítulo
ANNUAL REPORT 2012
4 Key figures
1
29 anco Santander’s
B
2
45 R
esults in 2012
6 Letter from the Chairman business model 46 Grupo Santander results
12 Letter from the Chief
31 anco Santander’s
B 48 Results by countries
Executive Officer commitment to its customers 57 Global businesses
20 Corporate governance 32 Commercial focus
24 Santander shares 34 isciplined use of capital and
D
26 Macroeconomic, financial and
financial strenght
regulatory context 35 Prudent risk management
27 Management priorities in 2012 36 Geographic diversification
28 International recognition 38 Subsidiaries model
39 Efficiency
40 The Santander team
42 Santander and sustainability
44 The Santander brand
2

3. 3
60 Corporate governance
4
90 Economic and financial
5
160 isk management report
R
report review 162 Executive summary
63 Ownership structure 92 Consolidated financial 164 Introduction
66 Banco Santander board of
report 166 orporate principles of risk
C
directors 92 General and regulatory
management, control and
84 hareholder rights and the
S background appetite
general shareholders’ meeting 97 2012 Summary of Grupo 172 orporate governance of the
C
86 antander Group
S Santander risks function
management team 100 Grupo Santander. Results 174 I
ntegral control and internal
88 ransparency and
T 105 rupo Santander. Balance
G validation of risk
independence sheet 176 Credit risk
114 Principal segments or 206 Market risk
geographic 226 iquidity risk and funding
L
116 Continental Europe 237 Operational risk
130 United Kingdom 244 ompliance and reputational
C
133 Latin America risk
146 United States 250 Capital
149 Corporate activities
152 econdary segments or
S 254 Historical data
business 256 General information
152 Retail banking
154 Global wholesale banking
157 A
sset management and
Insurance
3

4. informe report 2012 nombre del capítulo
annual anual
key figures
Balance sheet and income statent (Million euros) 2012 2011 % 2012/2011 2010
Total assets 1,269,628 1,251,525 1.4 1,217,501
Customer loans (net) 720,483 750,100 (3.9) 724,154
Customer deposits 626,639 632,533 (0.9) 616,376
Managed customer funds 968,987 984,353 (1.6) 985,269
Shareholder’s funds(1) 80,821 80,400 0.5 75,273
Total managed funds 1,387,769 1,382,980 0.3 1,362,289
Net interest income 30,147 29,110 3.6 27,728
Gross income 43,675 42,754 2.2 40,586
Pre-provision profit (net operating income) 23,559 23,195 1.6 22,682
Profit from continuing operations 6,148 7,812 (21.3) 9,077
Attributable profit to the Group 2,205 5,351 (58.8) 8,181
Ratios (%) 2012 2011 2010
Efficiency (with amortization) 46.1 45.7 44.1
ROE 2.80 7.14 11.80
ROTE(2) 4.11 10.81 18.11
ROA 0.24 0.50 0.76
RoRWA 0.55 1.06 1.54
Core capital (BIS II) 10.33 10.02 8.80
Tier I 11.17 11.01 10.02
BIS II ratio 13.09 13.56 13.11
Loan-to-deposit ratio(3) 113 117 117
Non-performing loan (NPL) ratio 4.54 3.89 3.55
NPL coverage 72.6 61.4 72.7
THE SHARE AND CAPITALISATION 2012 2011 % 2012/2011 2010
Number of shares in circulation (million)(4) 10,321 8,909 15.9 8,329
Share price (euros) 6.100 5.870 3.9 7.928
Market capitalisation (million euros) 62,959 50,290 25.2 66,033
Shareholders’ funds per share (euros)(1) 7.87 8.59 8.58
Share price/shareholders’ funds per share (times) 0.78 0.68 0.92
PER (share price/attributable profit per share) (times) 27.02 9.75 8.42
Attributable profit per share (euros) 0.23 0.60 (62.5) 0.94
Remuneration per share (euro) 0.60 0.60 0.60
Total shareholder remuneration (million euros) 6,086 5,260 15.7 4,999
Other figures 2012 2011 % 2012/2011 2010
Number of shareholders 3,296,270 3,293,537 0.1 3,202,324
Number of employees 186,763 189,766 (1.6) 175,042
Number of branches 14,392 14,756 (2.5) 14,082
Information on ordinary profit 2012 2011 % 2012/2011 2010
Attributable profit to the Group 5,251 7,021 (25.2) 8,181
Attributable profit per share (euros) 0.54 0.79 (31.9) 0.94
ROE 6.66 9.37 11.80
ROTE 9.80 14.18 18.11
ROA 0.48 0.63 0.76
RoRWA 1.08 1.35 1.54
PER (share price/attributable profit per share) (times) 11.34 7.43 8.42
(1) In 2012, scrip dividend for May 2013 estimate.
(2) Return on tangible equity.
(3) Includes retail commercial paper in Spain.
(4) In 2011, includes shares issued to meet the exchange of preferential shares in December 2011.
4

5. Santander posted attributable profit of EUR 2,205 million in 2012 and assigned
EUR 18,806 million to provisions, while strengthening its solvency and maintaining
shareholder remuneration at EUR 0.60 per share for the fourth consecutive year.
gross income pre-provision profit
Million euros (net operating income)
Million euros
43,675 23,559
23,195
42,754
22,682
40,586
+2.2% +1.6%
2010 2011 2012 2012/2011 2010 2011 2012 2012/2011
ATTRIBUTABLE PROFIT(5) total dividend payout
Million euros Million euros
6,086
8,181
5,260
5,351 4,999
2,205
-58.8% +15.7%
2010 2011 2012 2012/2011 2010 2011 2012 2012/2011
EFFICIENCY Core Capital
Cost to income ratio. % BIS II criteria. %
10.33
45.7 46.1
44.1 10.02
8.80
+0.4 p.p. +0.31 p.p.
2010 2011 2012 2012/2011 2010 2011 2012 2012/2011
(5) Before the impact of real estate provisions net of capital gains: EUR 5,251 million (-25.2%).
5

6. annual report 2012
Letter from the Chairman
6

7. Against a backdrop of a particularly difficult 1. Balance sheet strength and liquidity
economic and regulatory environment, Banco • anco Santander increased its core capital ratio
B
Santander posted a net attributable profit of EUR to 10.33% at the end of 2012 and passed the
2,205 million, 58.8% less than in 2011. strictest capital tests, such as those conducted
by the European Banking Authority (EBA). In
The key factor behind this decline was EUR the stress tests of the the Spanish financial
6,140 million of provisions for real estate system, carried out under the supervision of
loans in Spain, which was only partly offset by the European Central Bank, the European
extraordinary gains of EUR 1,241 million. Commission and the International Monetary
Fund, our Group had a capital surplus of
Despite the crisis, the Group’s profit before EUR 25,297 million even in the most adverse
provisions rose 1.6% during the year to EUR macroeconomic scenarios.
23,559 million, thanks to the international
diversification of our revenues. This amount places • ur objective is always to maintain a
O
us among the top three international banks by comfortable surplus of core capital above the
this measure and underscores the Group’s strong regulatory requirements and a ratio according
capacity to generate profits once we return to with the EBA’s criteria of more than 9%.
normal levels of provisions and writedowns.
• rupo Santander made provisions in 2012
G
A strong capital base, above the European amounting to EUR 18,806 million and
Banking Authority’s minimum requirements and improved coverage of non-performing loans by
Basel II, enabled us to maintain shareholder 11 points to 73%.
remuneration at EUR 0.60 per share in 2012,
which represented a dividend yield of 10.9%. • he Group’s commercial banking model is
T
essentially financed by retail deposits. The
The bases of loan-to-deposit ratio improved notably in 2012
Banco Santander’s strategy to 113% and we also placed issues in the
Banco Santander is one of the international market totalling EUR 43,000 million, despite
financial institutions that has most successfully the financial difficulties of the environment.
tackled the financial crisis. This is due to four key
principles and a consistently maintained strategy
over the years.
“ espite the crisis, the Group increased its profit before provisions by 1.6%,
D
thanks to the international diversification of its revenues“
7

8. annual report 2012
Letter from the Chairman
I want to particularly mention the measures we between mature markets (45%) and emerging
took during the year to strengthen the balance markets (55%).
sheet and liquidity in Spain.
Banco Santander’s international structure is based
• e set aside EUR 6,140 million in provisions to
W on a model of subsidiaries that are autonomous
cover exposure to problematic real estate assets, in capital and liquidity, some of which are listed.
thus exceeding the requirements under the Each subsidiary is responsible for maintaining
Spanish government’s two royal decree laws. sufficient capital and liquidity in accordance with
With the provisions made in 2012, the writing the features and regulation of the markets in
down of the Spanish real estate portfolio has which they operate, thereby avoiding the risk of
been completed. contamination among the Group’s units.
• lso, during the year, we reduced our exposure to
A • t the end of 2012, in light of the
A
the real estate sector in Spain, net of provisions, restructuring of the Spanish financial system,
by EUR 12,400 million, down from EUR 24,900 we decided to integrate Banesto and Banif into
million in 2011 to EUR 12,500 million in 2012. Banco Santander. Before the end of 2013, the
This was thanks largely to the sale of 33,500 Group’s retail networks in Spain will be fully
properties owned by the Bank and real estate unified under the Santander brand, recognised
developers, as well as loan portfolios. As a result, as the first one in Spain and the fourth in the
the exposure to the real estate sector in Spain at world according to Brand Finance in 2012.
the end of 2012 represented, net of provisions, This transaction, which will be submitted for
1.7% of the Group’s total lending. approval to the annual general meeting of
shareholders in March, is very positive:
• n terms of liquidity, we have a loan-to-deposit
I
ratio of 96% in Spain, thanks to the successful • For Grupo Santander’s customers in Spain,
intake of deposits by the branch networks of who will have a larger number of branches to
Santander and Banesto. Their deposits rose by conduct their business and a broader range of
EUR 22,000 million in 2012. products.
2. Diversification and subsidiaries model • For employees, as the new business structure
Banco Santander has attained an excellent in Spain and our international diversification
geographic diversification of its businesses by will open up professional opportunities.
maintaining a commercial banking model with a
critical mass in its ten main markets. • nd for Banco Santander’s shareholders, as
A
the merger will generate cost synergies and
As a result of this diversification, the Group’s revenues of EUR 520 million before taxes and
ordinary profit in 2012 was almost equally split an increase in earnings per share of 3% from
“with the provisions made in 2012, the writing down of the spanish real
estate portfolio has been completed”
8

9. “ anco Santander’s international structure is based on
B
a model of subsidiaries autonomous in capital and liquidity,
some of which are listed”
the third year. Banesto’s shareholders will can realise their projects. A bank for your ideas
receive a premium of 25% in the exchange of reflects our culture and commitment to our
their shares for those of Santander. customers.
• s part of our policy of listing the Group’s
A 4. Risk management and efficiency in costs
subsidiaries, another major transaction in 2012 Prudent and integral management of risk and
was the flotation of Santander Mexico, which efficiency in costs are key drivers of Banco
enjoyed huge success. The placement of 25% Santander’s commercial banking model.
of the capital raised EUR 3,178 million and
demand for the shares, in the world’s third The Group’s NPL ratio rose by 65 basis points
largest transaction of its kind in 2012, was to 4.54%, largely due to the situation in Spain
five times higher than the supply. Between the where the ratio came to 6.74%. In almost all
placement and the end of 2012, the shares the countries where Banco Santander operates,
of Santander Mexico rose by 33.8%, valuing however, we have a NPL ratio below that of the
the unit at $21,959 million and making it sector’s average.
the 69th largest bank in the world by market
capitalisation. Management and control of the Group’s risks are
independent of the business areas. The ultimate
• t the beginning of 2013, the Group’s
A responsibility in risk management lies with the
subsidiary in Poland, Bank Zachodni WBK, and board. Its risk committee met 98 times in 2012
Kredyt Bank merged to create the country’s and the executive committee meets every week
third largest bank by deposits, lending and and dedicates a significant part of its time to
number of branches, with more than 3.5 risk-related issues. The discipline to maintain risk
million customers. profiles that are well known and well managed
had a key role during the financial crisis.
3. Commercial banking model
Banco Santander has developed a commercial A strict cost structure is a clear competitive
banking model that is the main base of our advantage in commercial banking. Shared
activity. The strategic decision to maintain this product factories, with significant economies
model is one of the Group’s essential hallmarks. of scale, and global management of businesses
are key elements of the Santander model, and
Some 88% of Santander’s revenues come from enable us to have the best efficiency ratio of
commercial banking and are generated by international banks.
14,400 branches that form the largest network
among international banks. This model produces * * *
recurring and well-diversified results from more
than 100 million individual customers, SMEs and In short, Banco Santander has a business model
companies. and a solid strategy that have adapted very well
to the current crisis. The prestigious magazine
Underscoring our commitment to this large Euromoney named us the Best Bank in the
customer base, in 2012 we launched a new World in 2012.
corporate claim, Santander, a bank for your
ideas. This conveys to our customers the Group’s
will and capacity to support them so that they
9

10. annual report 2012
Letter from the Chairman
Shareholder remuneration and the Corporate governance and corporate
Santander share social responsibility
Banco Santander has a very large number of Banco Santander’s board is balanced between
shareholders – 3.3 million in 14 countries. non-executive (69%) and executive directors
Transparent information, and constant attention (31%), all of them very knowledgeable
to shareholders, is one of our main priorities. about banking and finances and with wide
international experience. The board attaches
During 2012, despite the crisis, shareholder special importance to risk management and to
remuneration was, for the fourth year running, complying with the best banking principles and
EUR 0.60 per share. The total remuneration values.
over the last four years has been more than EUR
21,000 million. Banco Santander conducts its business in a
sustainable way and gives special attention
The Santander Dividendo Elección (scrip to fostering the professional growth of its
dividend) programme enables our shareholders employees, caring for the environment and
to opt to receive the dividend in shares or in helping to social development by supporting
cash. In 2012, 80% of the share capital chose to higher education.
be paid in shares.
Santander Universities is the main destiny
The performance of the Santander share was of the Bank’s investment in corporate social
affected in 2012 by market volatility, regulatory responsibility. It is a unique alliance in the world
uncertainty and by Spain’s recession. Even so, between banking and universities which began
the Santander share price ended the year up 16 years ago. Today Santander Universities has
3.9%, better than the Ibex-35 benchmark index. more than 1,000 agreements with universities
The total return for Santander shareholders in in 20 countries, contributing EUR 130 million
2012 was 17.3%. in 2012, and annually funds 28,303 study
scholarships, among other projects.
Banco Santander continues to be the largest
bank in the euro zone by market capitalisation. Mortgage evictions in Spain became a
The Santander share is also the most liquid stock particularly sensitive issue this year. Banco
in Eurostoxx. Santander is very clear about this. Evictions
are the last and worst option for everyone: for
The conversion of Valores Santander in 2012 our customers and also for the Bank. Proof of
resulted in the issue of 519,501,751 shares, this is that we anticipated the problem when
representing 5.03% of the capital at 31 we introduced a mortgage moratorium in the
December 2012. summer of 2011 that by the end of 2012 had
benefited more than 21,000 clients.
“ anco Santander has a business model and a solid strategy
B
that have adapted very well to the crisis”
10

11. “PROFIT BEFORE PROVISIONS REACHED A RECORD EUR 23,559 millIon, SANTANDER
ranks among THE TOP THREE INTERNATIONAL BANKs by this measure”
The outlook: Banco Santander’s In this environment, our Group is well placed to
unique positioning exploit its significant competitive advantages,
The economic and financial environment will as it has proven in these last particularly difficult
remain difficult in the short term, above all in years through its capacity to generate revenues
Europe. However, in the last months of 2012, and the soundness of its balance sheet.
there were some developments that laid the
foundations of recovery: This is thanks, in first place, to the diversification
of the Group’s revenues, with our wide growth
• urope is taking the necessary decisions to
E possibilities in emerging economies.
strengthen the euro and progress toward
greater integration. The European Banking Meanwhile, our commercial banking model
Union project should lower the funding costs is generating more stable, recurrent revenues
of European banks and improve the rating which, together with the normalisation of
of banks supervised by the European Central provisions and write-downs - which have been
Bank. extraordinarily high in the last few years - are
providing us with a margin to boost profits
• n Spain, the financial sector’s restructuring is
I considerably.
in its final phase and, once the recapitalisation
and reform of the nationalised banks is Lastly, the regulatory changes in the pipeline
completed, the country will have Europe’s for capital, liquidity and the business model
healthiest and most solvent banking system. affect Banco Santander less than other large
Moreover, the government’s measures put international banks, which are more focused
into effect during 2012 will begin to have a on capital markets or investment banking, and
positive impact on growth at the end of 2013. should not affect our strategy or business model.
The recent creation of the Company for the
Management of Assets Proceeding from the Our shareholders can expect from Banco
Bank Restructuring (SAREB in Spanish) will Santander the performance of a bank with
clearly have a very positive effect on reviving a comfortable capital base, a solid balance
the Spanish economy. Banco Santander’s board sheet, recurring revenues, 187,000 professional
decided to invest EUR 840 million in SAREB. employees, the best in international banking,
and considerable potential to increase profits as
• n Latin America, after a year of moderate
I the global economic situation returns to normal.
growth, Brazil will grow again at faster rates,
while the region’s other important economies,
Mexico and Chile, will maintain the positive
trend of 2012.
Emilio botín
Chairman
11

12. annual report 2012
LETTER FROM THE CHIEF EXECUTIVE OFFICER
12

13. 1. ntroduction - 2012 Results
I
2. 2012 environment and outlook
3. antander: results and priorities
S
by business unit
4. Conclusions for the future
1 Introduction – 2012 Results
Grupo Santander posted attributable profit of EUR Spain. Moreover, we made provisions above our usual
5,251 million in 2012, excluding capital gains and special levels in other markets, such as Brazil and Chile. To put
provisions, 25% lower than in 2011. Including provisions this into context, the Group had to set aside EUR 18,806
and capital gains, profit was EUR 2,205 million, down million of provisions in 2012 as a result of the crisis in
59% from 2011. Spain and the economic downturn in other parts of the
world. This compares with provisions of around EUR
Operating earnings continued to grow: profit before 12,200 million in 2011 and EUR 7,100 million in 2008.
provisions (the difference between revenues and
costs) rose 2% to EUR 23,559 million. The high level Our current profits in no way reflect Grupo Santander’s
of writedowns and loan-loss provisions, however, earnings potential. This year will mark a turning point:
continued to exert pressure on our results. Specifically, over the next few years our profitability will return to
in 2012, we had to absorb the requirements of Spanish higher levels, as our pre-provision profit will continue to
royal decree laws 2/2012 and 8/2012, which meant evolve well and our provisions get back to normal.
extra provisions to cover our real estate exposure in
“over the next few years, our profitability will return to higher levels,
as our PRE-PROVISION PROFIT continueS to evolve well and our provisions
get back to normaL”
13

14. annual report 2012
LETTER FROM THE CHIEF EXECUTIVE officer
2 2012 environment and outlook
Global economy 2. In the last five years, and given the improvement in
The global economy has undergone a profound adjustment Spain’s competitiveness, the current account deficit has
since 2008. To understand this process, it is vital to declined and, very probably, will register surplus in 2013.
understand the origin of the crisis: imbalances in the balance Spain already has trade surpluses with its European
of payments. On the one hand, an excess of domestic partners and exports to the US, Asia, Latin America and
demand in markets such as the US, the UK and Spain Africa are growing at a good pace.
(consumption excess, an oversized construction sector and
excesses in the granting of loans) - and, on the other hand, 3.
The government is making a great effort to reduce the
a lack of domestic demand in other markets, including Asia budget deficit and implement structural reforms. As the
and most emerging markets, and in mature economies such results of these efforts are recognised by the markets,
as Japan and Germany. In 2007 and 2008, we lived in a very the borrowing costs of the public and private sectors will
unbalanced world in which some countries such as the US, fall.
the UK, Spain, Ireland, etc., accumulated too much debt
while others, such as China, Germany, Japan and emerging 4.
Lastly, considerable progress has been made in cleaning
markets, accumulated excessive international reserves. up and restructuring the financial sector. The number
of banks and cajas, which was over 50 some years ago,
Over the last four years, the global economy has been will stabilise at below 10. Furthermore, the results of the
gradually re-balanced. We have seen improvements stress tests conducted in 2012 led to the recognition of
in savings rates and in the current account balance of losses and recapitalisation (partly with private capital
payments of the US, the UK, Ireland and Spain, which and partly with public capital). In my view, the solvency
have turned deficits into surpluses or are close to doing adjustment process for banks in Spain is almost over.
so. Meanwhile, there has been a significant adjustment in Once this process of consolidation, cleaning up and
the trade surpluses of countries such as China. Indeed, the recapitalisation is completed, the banking system can
Japanese and Brazilian economies have moved from surplus focus on improving its profitability.
to deficit or a lower surplus over the last four years.
In short, if this path is followed in the next three or four
A good example of a country that has adjusted its quarters, Spain will start to grow again at the end of 2013.
imbalances quite successfully is Spain:
At the same time, over the last few years we have
1. etween joining the euro in 1999 and 2008, Spanish
B seen how certain imbalances have arisen in emerging
labour costs rose 30% more than German ones. This economies, including high growth of salaries, too
made the country much less competitive in the global much investment in certain sectors and bottlenecks in
market. Since 2009, Spain has recovered almost 80% of infrastructure. These imbalances do not put at risk the high
the competitiveness lost with Germany; this is reflected potential of these markets in the medium and long term;
in the surge in Spanish exports, which for years will be however, in the short term they are reducing growth as the
the main source of the country’s economic growth. imbalances are adjusted.
14

15. In this type of environment, flexible, dynamic and well their profitability: consolidation and cutting costs, change
managed companies can generate good results, both in in pricing policies and reassigning capital to the more
mature as well as emerging economies. Economies that profitable segments.
put all their trust in macroeconomics, that do not know
how to interpret the changes in the environment or are not Meanwhile, banks in emerging markets have generally
sufficiently flexible to respond could have problems. enjoyed a golden decade. Since 2003, banking business in
emerging markets has grown constantly, with only a small
Global financial system dip in 2008-2009. This growth will continue but at a lower
The trends in the financial sector are very similar. Banks, pace than in the last few years.
after all, reflect the economy.
In the international financial system, as in the economy
In the last four years, the profits of banks in mature in general, we are beginning to see some convergence
markets have been under pressure from a combination between mature and emerging markets. And, as happens
of factors, such as weak economies, the deleveraging of with the economy as a whole, we are starting to see clear
companies and households, the pressure of deposit spreads differences between well managed and poorly managed
from low interest rates, liquidity tensions and tougher institutions, both in mature as well as emerging markets.
regulatory demands around the world. Those with local economies of scale, which manage
efficiency well and are able to fine tune their lending
As a result, during this period, the emphasis has been on criteria will be capable of generating good results.
strengthening balance sheets, which has caused collateral
damage in the form of lower profitability. For example,
Banco Santander has given priority to having comfortable
liquidity and capital buffers, even though this erodes profits
in the short term.
Over the next three or four years, we will begin to
see a recovery in the profitability of banks in mature
markets. Once the balance sheets have been repaired,
provisions will return to more normalised levels in most
markets. Moreover, banks are taking steps to recover
“ NTITIES WITH LOCAL ECONOMIES OF SCALE, WHICH MANAGE EFFICIENCY WELL
E
AND ARE ABLE TO FINE TUNE THEIR LENDING CRITERIA WILL BE CAPABLE
OF GENERATING GOOD RESULTS”
15

16. annual report 2012
LETTER FROM THE CHIEF EXECUTIVE officer
3 Santander: results and priorities by business unit
A. Mature markets • ortugal
P
• Spain
Profit in Portugal came to EUR 124 million, 29% lower
We generated aggregate profit of EUR 1,290 million in than in 2011. The fall was largely due to the impact of
2012. Despite being 12% more than in 2011, this profit provisions for loan losses. In 2012, our main priority
is low and reflects the significant effort made in ordinary continued to be the soundness of the balance sheet:
provisions. This figure does not include the provisions the loan-to-deposit ratio improved from 121% in 2011
required by the new Spanish rules on real estate to 108% in 2012 and the core capital ratio from 11% to
exposure. I would like to point out that we captured 12%.
EUR 22,000 million of deposits in 2012, which improved
our market share by two percentage points. We also We are the only bank in Portugal that did not need more
continued to improve the spreads on loans. capital and the only one still profitable, even though our
profit was lower than in other years.
In December 2012, we announced the merger of the
three networks we have in Spain (Santander, Banesto and Our objective for the next few years is to keep on
Banif) under the Santander brand. We also announced bolstering the balance sheet, while continuing to manage
an optimisation of the combined branch network which spreads and efficiency. Like Spain, the Portuguese
will enable us to strengthen our presence in the most economy is adjusting its imbalances (excessive debt
attractive segments: SMEs/companies, and personal and levels, current account deficit and budget deficit). Our
private banking. We expect cost synergies of EUR 420 unit in Portugal has strengthened its position during
million and revenue synergies of EUR 100 million. the crisis, and will be very well placed to exploit the
opportunities that arise when the Portuguese economy
The main objective of this merger is to take advantage starts to grow again.
of the opportunities to grow and gain market share
offered by the Spanish financial system over the next • est of Continental Europe/Santander Consumer
R
three years. We believe that we will gain market share in Finance
the next three years of at least three percentage points S
antander Consumer Finance’s attributable profit in 2012
in lending and deposits, thanks to the strength of being was 9% higher at EUR 727 million, as lower provisions
the market leader in Spain, the strong specialisation of offset reduced fee income in certain markets.
the networks in the mass market, companies and private
banking, and bearing in mind the weakness of many of Our goal for Santander Consumer Finance for the next
our competitors. few years is to continue to gain market share selectively,
with the main focus on profitability. Today, our consumer
The combination of the higher profitable market share finance business is the most profitable in Europe and we
(mainly in the most attractive products and services, want to continue to improve it even more. In order to do
including SMEs and personal banking), continuous this, we will continue to manage spreads very actively
management of spreads and greater efficiency, together and maintain an appropriate risk profile.
with normalisation of our provisions, will enable us to
achieve a clear improvement in the contribution of our I would like to stress the strong presence and results that
business in Spain. We have communicated to the market the consumer finance division achieved in Germany, the
a goal for increasing profit before tax in Spain of EUR UK, the Nordic countries, Poland and Spain.
2,500 million in three years.
16

17. In Germany, we continued to build our commercial The UK economy is gradually recovering: funding costs
banking business which, together with our consumer for banks are beginning to drop and demand for credit
finance business, generated a profit before taxes of is rising a bit. This, coupled with our gradual commercial
close to EUR 500 million. I draw your attention to the progress, leads us to expect higher profit in 2013 and
size of Banco Santander in Germany, where we have particularly in 2014.
EUR 30,000 million of customer deposits. Over the next
three years, this unit will be ready to take advantage of In October, the Group announced that the purchase
its expansion opportunities in the German market, and of the Royal Bank of Scotland (RBS) branches will not
this will enable it to attain even more attractive levels of proceed.
profitability.
• United States
• United Kingdom
Our business in the US generated profit of $1,042
Santander UK’s profit fell 10% in 2012 to £952 million, million, 26% less than in 2011, reflecting a lower stake in
mainly due to reduced revenues as a result of the higher our consumer finance unit.
cost of funding and the environment of low interest
rates, together with the expiry of coverage portfolios. Sovereign generated a profit of $733 million, excluding
extraordinaries, in line with 2011. We had extraordinary
However, the underlying customer spread of Santander costs from litigation that reduced our profit by $127
UK is improving thanks to balance sheet management million.
in 2012 and the good performance in business banking.
We improved more than any other bank in the FRS Our consumer finance business (Santander Consumer
customer satisfaction survey, which contributed to the USA), in which we have a 65% stake, contributed $436
good growth in transaction deposits. Balances in current million to the Group’s profit.
accounts rose 32% and we already have more than 1.3
million customers using 1/2/3 products. Our objective for the coming years is to exploit the
growth opportunities in segments where the bank has a
In 2012, we continued to strengthen our balance sheet. low presence, such as companies, insurance and cards.
The Tier 1 core capital ratio of 12.2% is one of the best Specifically, we are making significant investments in IT
in the UK system and the loan-to-deposit ratio of 129% systems and staff to be able to take advantage of these
is three points better than in 2011. We achieved this opportunities. These investments will begin to bear fruit
improvement by managing our mortgage book with risk in 2013 and, above all, in 2014.
criteria and diversifying our business toward companies,
as well as promoting deposits based on the relationship
with the customer (for example, current accounts and
ISAs). We also cut costs by 1%, despite inflation and
investment in the transformation of our business.
17

18. annual report 2012
LETTER FROM THE CHIEF EXECUTIVE officer
B. Emerging markets better monitor our exposure in Chile and improve our
• Brazil
commercial capacity with companies and high-income
Santander Brazil’s net profit was $3,600 million, 4% segments. This will enable us to grow again in 2013 and
lower than in 2011, at constant exchange rates. The fall particularly in 2014.
was largely due to the negative impact of higher loan-
loss provisions. • Argentina
Argentina’s net profit was 16% higher at $425 million,
Economic growth slowed down in Brazil. The growth partly affected by higher provisions as the operating
potential in the medium and long term, however, result was solid (net operating income rose 42%).
remains intact. Our objective is to keep on exploiting the Our goal for the coming years is to continue to take
growth opportunities offered by the Brazilian market advantage of the investments made in the last few years
while normalising our provisions in order to be able to and maintain, at the same time, an appropriate risk
recover our normal double-digit growth in profits. profile.
• Mexico • Poland
Net profit was $1,380 million, 12% more than in 2011 at Bank Zachodni WBK generated attributable profit of PZL
constant exchange rate. 1,379 million (EUR 330 million).
There are several factors that make us very optimistic In January 2013 we merged this subsidiary with
about Santander Mexico’s profit growth in the coming Kredyt Bank (the Polish subsidiary of KBC). After this
years: the Mexican banking market is still not very transaction, Santander controls 76.5% of the new
developed, its economy is not very indebted and the US resulting combined bank, Poland’s third largest.
economy, to which Mexico is closely tied, is growing.
Our unit in Poland has considerable growth potential in
In September, we placed 24.9% of our Mexican the next few years: as well as the opportunities provided
subsidiary in an IPO that valued the bank at $16,538 by the Polish market, there is the high potential to
million. The bank’s share price was 33.8% higher at the improve Kredyt Bank (its efficiency and profitability ratios
end of 2012. are clearly below those of Bank Zachodni WBK) and the
contribution of Grupo Santander to local business (for
Our objective for the coming years is to continue to example, in wholesale banking).
develop a strong commercial organisation that will
enable us to maintain double-digit profit growth. Our objective is to achieve an exemplary merger
of the banks, attaining or exceeding the level of
• Chile synergies promised. We have the best management
Our unit in Chile made a net profit of $915 million, 17% team in Poland, backed by the Group’s track record in
less than 2011 at constant exchange rate. The unit obtained integration. This will enable us to keep on growing at
good operating results despite regulatory effects. double-digit rates.
Higher loan-loss provisions, however, hit earnings.
This has already been corrected. We launched a plan to
18

19. “During the next three years, our priority will be to generate
profit growth. our objective is to increase profits in mature
as well as emerging markets”
4 Conclusions for the future
I would like to conclude with four clear messages on Net operating income rose from EUR 17,800 million
Grupo Santander’s strategy and prospects: in 2008 to EUR 23,559 million in 2012. Our return on
tangible capital, however, (excluding non-recurring
1. he first is that in the last four years one of our
T impacts) dropped from 20% to 10% and our profit
priorities has been strengthening the balance declined from close to EUR 9,000 million to EUR 5,251
sheet: we assigned more than EUR 53,000 million of million excluding non-recurring items.
provisions in four years, we finished the writing down
of real estate assets in Spain, core capital increased by 3. he third message is that, during the next three
T
EUR 19,000 million and we narrowed the commercial years, our priority will again be to generate
gap (the difference between loans and deposits) by EUR growth in profits. We expect 2013 to represent a
125,000 million. turning point. Our objective is to increase profits in
mature as well as emerging markets.
2. he second is that our strategic emphasis on
T
balance sheet soundness has exerted pressure on • n mature markets, we will do this by gaining
I
the income statement. profitable market share, developing the businesses
where we have a low presence, managing efficiency
• s a result of the decision to improve our capital
A and normalising provisions.
ratios, we decided to sell some businesses in which
we did not have sufficient economies of scale. At the • n the emerging markets, we can take advantage of
I
same time, we sold minority stakes in some units and structural growth opportunities to develop strong
reduced lending in some businesses regarded as non- commercial organisations, with an acceptable risk
core. profile and capable of exploiting the benefits of
belonging to Grupo Santander.
• ur strategic decision to strengthen liquidity led us to
O
issue securities at high yields and to be prepared to 4. he fourth message is that the Santander share does
T
pay a little more for deposits. not yet reflect this improvement potential. I believe
that as the market begins to understand this potential,
• he significant effort in provisions prevented good
T it will gradually be reflected in a higher share price. This
growth in net operating income from feeding allows me to continue to be very optimistic about your
through to satisfactory levels of return on capital. investment over the next three years.
Alfredo SÁEnz
Chief Executive Officer
19

20. annual report 2012
Corporate
governance
Banco Santander’s corporate
governance model
Balanced and Equality of Maximum Recognised by
committed board shareholders’ rights transparency, socially responsible
• f the 16 directors,
O • he principle of one share,
T particularly in investment indices
11 are non-executive one vote, one dividend. remunerations •
Santander has been in
and five executive. • anti-takeover measures
No • his is vital for
T the FTSE4Good and DJSI
in the corporate By-laws. generating confidence indices since 2003 and
• ostering informed
F and security in 2000, respectively.
participation of shareholders and
shareholders in meetings. investors.
The board of directors
Banco Santander’s board of The board has a balanced The appointment of Ms. Esther
directors is the maximum decision- composition between executive and Giménez-Salinas as an independent
making body, except for matters non-executive directors. All members director was also approved, bringing
reserved for the general meeting are recognised for their professional the presence of women in the board
of shareholders. It is responsible, integrity, capacity, experience and to 18.8%.
among other things, for the independence.
Group’s strategy. Its functioning The non-executive directors are
and activities are regulated by the There were changes to the board in noted for their financial experience.
Bank’s internal rules and principles of 2012. On 23 January, Mr. Francisco Among them are former chief
transparency, efficiency and defence Luzón resigned as an executive executives of banks and a former
of shareholders’ interests guide it. director and executive vice-president governor of a central bank, and
The board also oversees compliance responsible for the Americas people with deep knowledge of Latin
with the best international practices division. At the general meeting of America and the United Kingdom,
in corporate governance and shareholders on 30 March 2012, two of the markets where the
closely involves itself in the Group’s Mr. Antonio Basagoiti, Mr. Antonio Group has a substantial part of its
taking of risks. In particular, the Escámez and Mr. Luis Alberto businesses.
board, at the proposal of senior Salazar-Simpson stopped being part
management, is the body responsible of the board and Mr. Vittorio Corbo
for establishing and monitoring the Lioi, appointed in July 2011, was
risk appetite. ratified and re-elected.
20

21. The board’s activity
in 2012
• t held 11 meetings.
I
• uring 2012, the second
D
vice-president and chief
executive officer presented
10 management reports
to the board and the third
vice-president and head of
the risks division 10 reports
on risks.
• s well as overseeing
A
the Group’s businesses,
the board has analyzed
the Bank’s liquidity and
capital position, among
other issues.
Pereda building, Grupo Santander City, Boadilla del Monte, Madrid, Spain.
Remuneration policy
The remuneration policy for directors members of senior management and Composition of the board
and the Bank’s senior management is the remuneration of the rest of the 2
5
based on the following principles: supervised collective.
1
1. The remuneration is consistent with 4. Transparent information on
rigorous risk management without remuneration.
giving rise to inappropriate assumption
of risks. The board’s remuneration in 8
2012
Executive directors
2. Anticipating and adapting to All the details on the remuneration
Other non-executive directors
regulatory changes in remuneration policy for directors in 2012 is set out
Non-executive proprietary director
matters. in the report of the appointments Independent non-executive directors
and remuneration committee which
3. Involvement of the board, as, at is part of Banco Santander’s social
the proposal of the appointments and documentation.
remuneration committee, it approves
the report on the remuneration
policy for directors and submits it to
the general meeting of shareholders
on a consultative basis and as a
separate item on the agenda. The
board approves the remuneration and
contracts of directors and of the other
21

22. informe de actividades 2012
BOARD OF DIRECTORS
OF Banco Santander
Mr Ignacio Mr Javier Mr Juan Mr Guillermo Ms Esther
Benjumea Botín-Sanz Rodríguez Inciarte de la Dehesa Romero Giménez-Salinas
Cabeza de Vaca de Sautuola y O’Shea Director Director Director
General secretary Director
and of the board
Mr Manuel Mr Fernando Mr Emilio Botín-Sanz
Soto Serrano de Asúa Álvarez de Sautuola y García
4th vice-chairman 1st vice-chairman de los Ríos
Chairman
22

23. Executive committee
Risk committee
Audit and compliance committee
Appointments and remuneration committee
International committee
Technology, productivity and quality committee
Ms Isabel Mr Rodrigo Ms Ana Patricia Lord Burns Mr Ángel Jado Meeting of the board
Tocino Echenique Botín-Sanz (Terence) Becerro de Bengoa at the data processing
Biscarolasaga Gordillo de Sautuola y O’Shea Director Director centre in Cantabria, 17
Director Director Director December 2012, with the
bay of Santander in the
background.
Mr Alfredo Mr Matías Mr Abel Mr Vittorio
Sáenz Abad Rodríguez Inciarte Matutes Juan Corbo Lioi
2nd vice-chairman 3rd vice-chairman Director Director
and chief executive officer
23

24. annual report 2012
Banco Santander’s general shareholders’ meeting, March 2012, Santander, Spain.
Santander
shares
Shareholder remuneration remuneration, so that its shareholders crisis, the Santander share ended
Banco Santander assigned EUR 6,086 may benefit from tax advantages. 2012 at EUR 6.10 per share, 3.9%
million to dividends in 2012, 15.7% Some 80% of the Bank’s capital chose higher than a year earlier. The share
more than in 2011. to receive shares in 2012, despite performance was better than that of
volatility in the financial markets. the Ibex 35 (-4.7%), the benchmark
The Santander Dividendo Elección index of the Madrid stock market.
programme (scrip dividend), which Share performance
enables shareholders to receive the Santander remained in a privileged Despite the rise in Spain’s risk premium
equivalent of the dividend in the form of position as the largest bank in in 2012, the shareholder return was
cash or Santander shares, was applied the euro zone by market value very positive. The total return was
on the dates when the interim and and the 13th in the world, with a 17.3% compared to a 1.4% fall in
final dividends are traditionally paid. capitalisation of EUR 62,959 million that of the Ibex-35.
On each of these dates, the Bank paid at the end of 2012. Furthermore,
EUR 0.15 per share, resulting in a total Santander is the most liquid share on
remuneration for 2012 of EUR 0.60 per the Eurostoxx 50 index.
share. The dividend yield was 10.9%.
In an uncertain environment
With the Santander Dividendo worldwide, with intense market
Elección, the Bank offers flexible volatility due to the European debt
24

25. Comparative performance of Santander share Total shareholder remuneration
and indexes over the past decade
Dec. 2012 v. Dec. 2011 Million euros 6,086
5,260
4,919 4,999
130 4,812
120 4,070
110
3,256
100
2,605
90
1,837
80 SAN
DJ STOXX BANKS 1,444
70 Ibex35
DJ STOXX 50
60
Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Dividend per share Market capitalisation
0.60
euros
62,959
million euros
For the fourth Santander is the largest bank in
year running the euro zone by market value
High recurring profit, and the strength of Santander’s capital, has
enabled the Bank to remunerate shareholders with over 21,000
million euros during the past four years.
Why 3.3 million shareholders
put their trust in Banco
Santander
Shareholder base and capital gave rise to the issuance of
The number of Banco Santander 1,412,136,547 new shares, 13.7% • or its solvency, soundness and
F
shareholders continued to rise in 2012 of capital. geographic diversification.
to 3.3 million. • ecause it maintained a
B
Banco Santander continued to remuneration of EUR 0.60
At the end of the year, 1.9% of the strengthen its shareholder information per share for the fourth year
capital stock was in the hands of and attention channels in Spain, the running, when many other
the board of directors, 40% with United Kingdom, United States, Brazil, international banks were
individual shareholders and the rest Argentina, Mexico, Portugal and reducing dividends.
with institutional investors. Of the Chile. A new shareholder office was
total capital stock, 87.9% is located opened in Mexico in 2012 to tend • hey are attracted by the
T
in Europe, 11.7% in the Americas and to the new shareholders resulting Santander Scrip Dividend
0.4% in the rest of the world. from the flotation of the Mexican programme, which allows
subsidiary. These offices tended to them to choose to receive their
The number of Banco Santander 215,278 consultations by telephone dividend in cash or shares.
shares at the end of 2012 stood at and 22,710 e-mails. Some 17,910 • hanks to a dividend yield
T
10,321,179,750. The Santander shareholders attended 254 forums and of 10.9% in 2012 and total
Dividendo Elección programme and events held in various countries. shareholder return of 17.3%.
the exchange of Valores Santander
25

26. ANNUAL REPORT 2012
The global economy is undergoing a
profound re-balancing process. Europe
must continue to progress toward greater
integration to retain leadership in the
21st century, while emerging countries
must keep up their sustainable growth.
Santander’s geographic diversification
enables it to take advantage of
opportunities in all its markets.
Guillermo de la Dehesa
Non-executive director
(independent).
Macroeconomic,
financial and regulatory
context
Economic environment international environment. Mexico and of the scenarios applied, shows that
Banco Santander conducted its Chile grew more than expected. In the even in the most adverse situation
business in 2012 in a very complex case of Brazil, its economy was more Santander would be the only bank to
economic and financial environment. buoyant in the second half of the year increase its capital ratio – from 9.7%
In Europe, the first half of the year although for 2012 as a whole growth to 10.8% - and would have a large
was characterized by instability in the was below expectations. surplus of capital (EUR 25,297 million
financial markets triggered by the in 2014). It is the Spanish bank with
worsening of the euro crisis. The risk Regulatory environment the greatest ability to generate profits.
premium of the 10-year Spanish bond Banco Santander began 2012 with a
yield over German bund reached 650 core capital ratio of 10.02%, comfor- Third, the Spanish government
b.p. in May. The European Council tably meeting the requirements set by requested financial assistance from
meeting in June, which decided to the European Banking Authority for European institutions to recapitalize
push for a European Banking Union June 2012. those banks that required it. In line
with the creation of a single supervi- with the programme’s Memorandum
sion mechanism, and the financial aid In Spain, the government deepened of Understanding, the Asset Manage-
measures for countries requiring them the process of provisions for banks and ment Company for Assets Arising from
announced by the European Central recapitalization. The financial industry Bank Restructuring (known as Sareb)
Bank in September, marked a turning has been immersed in a profound was created in December. Santander’s
point and helped to gradually ease restructuring since 2009, via three board agreed to invest in the company
the risk premiums. As for economic routes. First, the requirement for extra and contribute up to EUR 840 million
activity, Europe was in its fifth year provisions for exposure to construction (25% in capital and 75% in subordi-
of recession and growth in 2012 was assets and real estate development, nated debt).
almost zero. differentiated by type of asset and
situation, including those up to date
In the US, the Federal Reserve decided with payments. These provisions, set
to maintain the monetary support, in two royal decree laws, raise the
which favoured some recovery in average coverage level of real estate
growth during the year. In the second exposure from 18% to 45%. Grupo
half, the agenda was determined by Santander met 100% of requirements
the risks linked to the non-renewal of at the end of the year.
the fiscal stimulus, the so-called fiscal
cliff, which was resolved at the very Second, the expert and independent
end of 2012. valuation of the balance sheets of the
Spanish financial system. This exercise,
Latin American economies kept up po- very rigorous in the amount of infor-
sitive growth despite the unfavourable mation used as well as the toughness
26

27. Management priorities in 2012
Management priorities Strategy and results
• ommercial strategy based on attracting funds in Continental Europe,
C
Manage liquidity
which resulted in deposits in Spain growing by EUR 22,000 million in
in a very volatile 2012.
environment in the
financial markets • mprovement in the Group’s loan-to-deposit ratio to 113% (150% in
I
2008) and in Spain to 96% (178% in 2008).
• he Group made EUR 43,000 million of medium- and long-term issues
T
and securitisations through more than 10 of its units in countries with
issuance capacity.
Increase the Group’s • antander had the best results in the stress tests of Spanish banks
S
capital base in the face conducted by the independent consultancy Oliver Wyman. These tests
showed that Santander would, in the most adverse scenario, have capital
of an unfavourable
of EUR 25,297 million above the minimum required in the analysis.
economic environment
and intensified • rganic generation of capital and active management of the business
O
regulatory pressure portfolios enabled the Group’s core capital ratio to increase by 31 basis
points in 2012 to 10.33%.
• eal estate exposure net of provisions in Spain declined by EUR 12,400
R
Reduce real estate risk
million in 2012 and by EUR 28,500 million, or 69%, since 2008.
in Spain and comply
with the Spanish • antander set aside EUR 6,140 million in provisions for real estate
S
goverment’s new rules exposure in 2012, exceeding the amount required under the Spanish
government’s two royal decree laws.
• eal estate exposure in Spain, net of provisions, represented only 1.7%
R
of the Group’s total lending.
List the Group’s • antander successfully floated 24.9% of its subsidiary in Mexico for EUR
S
main subsidiaries 3,178 million. The share price of Santander Mexico ended the year up
33.8% and the bank’s market value stood at $21,959 million.
27