F-1/A 1 d405440df1a.htm AMENDMENT # 2 TO THE FORM F-1 Amendment # 2 to the Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on September 4, 2012

Registration No. 333-183409

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2

to

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

GRUPO FINANCIERO SANTANDER MÉXICO, S.A.B. de C.V.

(Exact Name of Registrant as Specified in Its Charter)

SANTANDER MEXICO FINANCIAL GROUP, S.A.B. de C.V.

(Translation of Registrant’s Name into English)

 

 

 

United Mexican States   6029   Not Applicable
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

Grupo Financiero Santander México, S.A.B. de C.V. Avenida Prolongación Paseo de la Reforma 500

Colonia Lomas de Santa Fe

Delegación Álvaro Obregón

01219 México, D.F.

+(52) 55-5257-8000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Banco Santander, S.A. New York Branch 45 E. 53rd Street New York, New York 10022 Attn: James H. Bathon, Chief Legal Officer (212) 350-3500

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

With copies to:

Nicholas A. Kronfeld
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
 

Stuart K. Fleischmann

Shearman & Sterling LLP

599 Lexington Avenue

New York, New York 10022

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨            

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨            

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨            

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each Class of

Securities to be Registered

 

Amount

to be

Registered(2)

 

Proposed

Maximum

Offering Price

Per Share(3)

 

Proposed

Maximum Aggregate

Offering Price(2)(3)

  Amount of
Registration Fee(4)

Series B shares in the form of ADSs(1)

 

1,574,796,278

 

$2.54

 

$3,999,982,546

 

$458,398

 

 

(1) A separate Registration Statement on Form F-6 (File No. 333-          ) was filed on September 4, 2012. The Registration Statement on Form F-6 relates to the registration of American depositary shares, or ADSs, evidenced by the American depositary receipts, or ADRs, issuable upon deposit of the shares registered hereby. Each ADS represents five Series B shares.
(2) Includes Series B shares in the form of ADSs that the underwriters have the option to purchase, if any, and ADSs that are to be offered and sold outside the United States, but may be resold in the United States in transactions requiring registration under the Securities Act of 1933, as amended.
(3) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.
(4) Includes a $11,460 registration fee previously paid with the initial filing of this Form F-1 on August 17, 2012.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion

Preliminary Prospectus dated September 4, 2012

P R O S P E C T U S

235,104,325 ADSs

American depositary shares representing Series B shares

 

LOGO

Grupo Financiero Santander México, S.A.B. de C.V.

 

 

This is our initial public offering of American depositary shares, or ADSs. Each ADS represents five shares of the Series B common stock of Grupo Financiero Santander México, S.A.B. de C.V. and is evidenced by American depositary receipts, or ADRs. All of the ADSs included in this international offering are being offered by the selling shareholders, Banco Santander, S.A. and Santusa Holding, S.L. Banco Santander, S.A. is offering 235,104,325 ADSs in this international offering. Concurrently with this international offering, Banco Santander, S.A. is offering 293,880,404 shares of Series B common stock in an offering in Mexico, which commenced on the same date as this international offering. The international offering is being underwritten by the international underwriters named in this prospectus. The shares offered in the Mexican offering will be sold at the peso equivalent per Series B share of the U.S. dollar price of the Series B shares underlying the ADSs offered hereby, and are being underwritten by the Mexican underwriters. The closings of the international and Mexican offerings are conditioned upon each other. We will not receive any proceeds from the sale of Series B shares or ADSs offered by the selling shareholders.

Our capital stock is divided into two series of common shares, Series F shares and Series B shares. Series F shares are not included in this offering and may only be owned by a foreign financial institution, as defined in the Mexican Financial Groups Law (Ley para Regular las Agrupaciones Financieras). Series F shares may only be transferred with the prior approval of the Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, or SHCP). The Series B shares may be purchased by Mexican or non-Mexican individuals or entities, subject to certain transfer restrictions referred to in this prospectus. The Series F shares and the Series B shares generally have identical voting and economic rights. See “Description of Capital Stock.”

Prior to this offering, no public market existed for the ADSs. The initial public offering price of the ADSs is expected to be between U.S.$10.99 and U.S.$12.70 per ADS, which is equivalent to Ps.29.00 and Ps.33.50 per Series B share, based upon an exchange rate of Ps.13.1910 per U.S.$1.00 reported by the Mexican Central Bank (Banco de México) on September 3, 2012, at a ratio of five Series B shares for each ADS. We intend to apply to list the ADSs for trading on the New York Stock Exchange, or NYSE, under the symbol “BSMX.” Our Series B shares currently trade on the Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A.B. de C.V.) under the symbol “SANMEX.” Because only 0.27% of the Series B shares are publicly held, there has been low trading volume for our Series B shares on the Mexican Stock Exchange.

Investing in our ADSs and the underlying Series B shares involves risks. See “Risk Factors” beginning on page 24 of this prospectus.

 

     Per Series B Share      Per ADS      Total  

Public offering price

   U.S.$         U.S.$         U.S.$     

Underwriting discounts and commissions(1)

   U.S.$         U.S.$         U.S.$     

Proceeds, before expenses, to the selling shareholders

   U.S.$         U.S.$         U.S.$     

 

(1) Underwriting discounts and commissions exclude a separate financial advisory fee in the form of reimbursement of expenses being paid to UBS Securities LLC, or one of its affiliates, as sole financial advisor to Banco Santander, S.A. See “Underwriting (Conflicts of Interest).”

The international underwriters may also exercise their option to purchase up to an additional 35,265,648 ADSs, if any, from the selling shareholders, Banco Santander, S.A. and Santusa Holding, S.L., at the initial public offering price, less underwriting discounts and commissions, for 30 days after the date of this prospectus. The Mexican underwriters may also exercise their option to purchase up to an additional 44,082,064 Series B shares, if any, from the selling shareholders at the initial public offering price per Series B share in the Mexican offering, less underwriting discounts and commissions, for 30 days after the date of this prospectus. If either the international underwriters or the Mexican underwriters exercise their option to purchase additional ADSs or Series B shares, respectively, the underwriters will purchase first from Banco Santander, S.A. up to 138,953,311 additional Series B shares (including in the form of ADSs), then from Santusa Holding, S.L. up to 81,456,993 additional Series B shares (including in the form of ADSs). Santusa Holding, S.L. will only sell shares in this offering if the underwriters exercise their option to purchase more than additional 138,953,311 Series B shares (including in the form of ADSs), and will not sell any shares in this offering if the international underwriters or the Mexican underwriters do not exercise their option to purchase additional shares. We will not receive any proceeds from the sale of Series B shares or ADSs offered by the selling shareholders. The international and the Mexican options to purchase additional ADSs and Series B shares, respectively, may be exercised independently of each other but are expected to be exercised on a coordinated basis.

Neither the U.S. Securities and Exchange Commission, or SEC, the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

We expect that delivery of the ADSs will be made on or about                     , 2012.

 

 

Sole Financial Advisor to Banco Santander, S.A.

UBS Investment Bank

 

Global Coordinators
Santander    UBS Investment Bank    Deutsche Bank Securities    BofA Merrill Lynch

 

Joint Bookrunners
Barclays   Citigroup   Credit Suisse
Goldman, Sachs & Co.   J.P. Morgan   RBC Capital Markets   Itau BBA

 

Co-Managers
Banca IMI   BBVA   BNY Mellon Capital Markets, LLC   COMMERZBANK

 

Credit Agricole CIB   Mizuho Securities   UniCredit   Wells Fargo Securities

                    , 2012


Table of Contents

TABLE OF CONTENTS

 

     Page  

Presentation of Financial and Other Information

     iv   

Glossary of Selected Terms

     vi   

Prospectus Summary

     1   

The Offering

     14   

Summary Financial and Operating Data

     19   

Risk Factors

     24   

Special Note Regarding Forward-Looking Statements

     49   

Use of Proceeds

     51   

Exchange Rates

     52   

Market Information

     54   

Capitalization

     63   

Dilution

     64   

Dividends and Dividend Policy

     65   

Selected Financial and Operating Data

     66   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     73   

The Mexican Financial System

     127   

Business

     135   

Risk Management

     198   

Selected Statistical Information

     218   

Supervision and Regulation

     253   

Management

     278   

Principal and Selling Shareholders

     294   

Related Party Transactions

     297   

Description of Capital Stock

     303   

Description of American Depositary Shares

     315   

Taxation

     324   

Underwriting (Conflicts of Interest)

     330   

Expenses of the Offering

     343   

Validity of the Securities

     343   

Experts

     343   

Enforcement of Judgments Against Foreign Persons

     344   

Where You Can Find More Information

     345   

Index to Financial Statements

     F-1   

Neither we, the selling shareholders nor the underwriters have authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we may have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. Neither we, the selling shareholders nor the underwriters are making an offer to sell the ADSs or the Series B shares in any jurisdiction where the offer or sale is not permitted. This international offering is being made in the United States and elsewhere solely on the basis of the information contained in this prospectus. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of the ADSs or the Series B shares. Our business, financial condition, results of operations and prospects may have changed since the date on the front cover of this prospectus.

The selling shareholders are also offering Series B shares in Mexico through a Spanish-language Mexican prospectus. The Mexican prospectus, which will be filed for approval with, and approved by, the CNBV, is in a format different from that of this prospectus, but contains information substantially similar to the information contained in this prospectus.

 

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We have not taken any action to permit the possession or distribution of this prospectus outside the United States. In addition, except for the Mexican offering of Series B shares being made under the Mexican prospectus, we have not taken any action to permit a public offering of the ADSs outside the United States. Persons outside the United States who have come into possession of this prospectus must inform themselves about and observe restrictions relating to the offering of the ADSs and the distribution of this prospectus outside of the United States.

 

 

Unless otherwise indicated or the context otherwise requires, all references in this prospectus to “Grupo Financiero Santander Mexico,” “we,” “our,” “ours,” “us” or similar terms refer to Grupo Financiero Santander México, S.A.B. de C.V., together with its consolidated subsidiaries.

When we refer to “Banco Santander Spain” or the “Parent,” we refer to our controlling shareholder, Banco Santander, S.A., a Spanish bank.

When we refer to “Banco Santander Mexico” or the “Bank,” we refer to Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander, together with its consolidated subsidiaries. When we refer to “Casa de Bolsa Santander,” we refer to Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander, a Mexican broker-dealer. When we refer to “Gestión Santander” we refer to Gestión Santander, S.A. de C.V., Grupo Financiero Santander, a Mexican mutual fund manager. When we refer to “Seguros Santander” we refer to Zurich Santander Seguros Mexico, S.A. (formerly, Seguros Santander, S.A., Grupo Financiero Santander).

When we refer to the “Santander Group,” we refer to the worldwide Banco Santander Spain conglomerate and its consolidated subsidiaries.

References in this prospectus to certain financial terms have the following meanings:

 

   

References to “Mexican Banking GAAP” are to the accounting principles and regulations prescribed by the CNBV for credit institutions, as amended. These accounting principles apply to holding companies when the principal subsidiary is a bank.

 

   

References to “IFRS” are to the International Financial Reporting Standards as issued by the International Accounting Standards Board and interpretations issued by the International Financial Reporting Interpretations Committee.

 

   

References to “IAS 34” are to IAS 34, Interim Financial Reporting from the International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

   

References to our “audited financial statements” are to the audited consolidated financial statements of Grupo Financiero Santander Mexico as of January 1, 2010 and December 31, 2010 and 2011, and for each of the fiscal years ended December 31, 2010 and 2011, together with the notes thereto. The audited financial statements were prepared in accordance with IFRS and are contained in this prospectus.

 

   

References to our “unaudited condensed consolidated financial statements” are to the unaudited condensed consolidated financial statements of Grupo Financiero Santander Mexico as of June 30, 2012 and for each of the six-month periods ended June 30, 2011 and 2012, together with the notes thereto. The unaudited condensed consolidated financial statements were prepared in accordance with IAS 34 and are contained in this prospectus.

 

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As used in this prospectus, the following terms relating to our capital adequacy have the meanings set forth below, unless otherwise indicated. See “Supervision and Regulation.”

 

   

“Capital Ratio” refers to the ratio of the total net capital (capital neto) to risk-weighted assets, market risk, credit risk and operational risk calculated in accordance with the methodology established or adopted from time to time by the CNBV pursuant to the Mexican Capitalization Requirements.

 

   

“General Rules Applicable to Mexican Banks” means the General Provisions Applicable to Credit Institutions (Disposiciones de Carácter General Aplicables a las Instituciones de Crédito) issued by the CNBV.

 

   

“Mexican Capitalization Requirements” refers to the capitalization requirements for commercial banks set forth in the Mexican Banking Law (Ley de Instituciones de Crédito) and the General Rules Applicable to Mexican Banks, as such regulations may be amended from time to time or superseded.

As used in this prospectus, the term “billion” means one thousand million (1,000,000,000).

In this prospectus, the term “Mexico” refers to the United Mexican States. The terms “Mexican government” or the “government” refer to the federal government of Mexico, and the term “Mexican Central Bank” refers to Banco de México. References to “U.S.$,” “U.S. dollars” and “dollars” are to United States dollars and references to “Mexican pesos,” “pesos,” or “Ps.” are to Mexican pesos. References to “euros” or “€” are to the common legal currency of the member states participating in the European Economic and Monetary Union.

Our principal executive offices are located at Avenida Prolongación Paseo de la Reforma 500, Colonia Lomas de Santa Fe, Delegación Álvaro Obregón, 01219, México, Distrito Federal, Mexico. Our telephone number at that address is +52 55 5257-8000 and our website is www.santander.com.mx. None of the information contained on our website is incorporated by reference into, or forms part of, this prospectus.

 

 

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Market position. We make statements in this prospectus about our competitive position and market share in the Mexican financial services industry and the market size of the Mexican financial services industry. We have made these statements on the basis of statistics and other information from third-party sources, primarily the CNBV, that we believe are reliable.

Currency and accounting principles. We maintain our financial books and records in pesos. Our consolidated income statement data for each of the years ended December 31, 2010 and 2011 and our consolidated balance sheet data as of January 1, 2010 (transition date to IFRS) and December 31, 2010 and 2011, included in this prospectus, have been audited under the auditing standards of the Public Company Accounting Oversight Board, or PCAOB, as stated in the auditors’ report appearing herein, and are prepared in accordance with IFRS. Our unaudited condensed consolidated income statement data for each of the six-month periods ended June 30, 2011 and 2012 and our unaudited condensed consolidated balance sheet data as of June 30, 2012, included in this prospectus, have been prepared in accordance with IAS 34. For regulatory purposes, including Mexican Central Bank regulations and the reporting requirements of the CNBV, we concurrently prepare and will continue to prepare and make available to our shareholders statutory financial statements in accordance with the accounting rules of the CNBV, which prescribes generally accepted accounting principles for all financial institutions in Mexico. This prospectus refers to those accounting principles as Mexican Banking GAAP. We have included as supplemental information in this prospectus selected financial data which have been derived from our financial statements as of and for the years ended December 31, 2007, 2008, 2009, 2010 and 2011, and for the six-month period ended June 30, 2012, prepared in accordance with Mexican Banking GAAP.

IFRS differs in certain significant respects from Mexican Banking GAAP. See note 51 to our audited financial statements for a summary of the most significant differences between IFRS and Mexican Banking GAAP. While we have prepared our consolidated financial data as of and for the years ended December 31, 2010 and 2011 in accordance with IFRS (with a transition date of January 1, 2010) and our condensed financial data as of June 30, 2012 and for the six-month periods ended June 30, 2011 and 2012 in accordance with IAS 34, data reported by the CNBV for the Mexican financial sector as a whole as well as individual financial institutions in Mexico, including our own, is prepared in accordance with Mexican Banking GAAP and, thus, may not be comparable to our results prepared in accordance with IFRS. All statements in this prospectus regarding our relative market position and financial performance vis-à-vis the financial services sector in Mexico, including financial information as to net income, return on average equity and non-performing loans, among others, are based, out of necessity, on information obtained from CNBV reports, and accordingly are presented in accordance with Mexican Banking GAAP. Unless otherwise indicated, all financial information provided in this prospectus has been prepared in accordance with IFRS.

Effect of rounding. Certain amounts and percentages included in this prospectus and in our audited financial statements have been rounded for ease of presentation. Percentage figures included in this prospectus have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, certain percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in our audited financial statements. Certain other amounts that appear in this prospectus may not sum due to rounding.

Exchange rates and translation into U.S. dollars. This prospectus contains translations of certain peso amounts into dollars at specified rates solely for your convenience. These translations should not be construed as representations by us that the peso amounts actually represent such U.S. dollar amounts or could, at this time, be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, we have translated peso amounts into U.S. dollars at an exchange rate of Ps.13.4084 to U.S.$1.00, the rate calculated on June 29, 2012 and published on July 2, 2012 in the Official Gazette of the Federation (Diario Oficial de la Federación) by the Mexican Central Bank, as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico. The translation of income statement transactions expressed in pesos using such

 

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rates may result in presentation of dollar amounts that differ from the dollar amounts that would have been obtained by translating Mexican pesos into dollars at the exchange rate prevailing when such transactions were recorded. See “Exchange Rates” for information regarding exchange rates between the peso and the U.S. dollar for the periods specified therein.

References herein to “UDIs” are to Unidades de inversión, a peso-equivalent unit of account indexed for Mexican inflation. UDIs are units of account created by the Mexican Central Bank on April 4, 1995, the value of which in pesos is indexed to inflation on a daily basis, as measured by the change in the National Consumer Price Index (Índice Nacional de Precios al Consumidor, or NCPI). Under a UDI-based loan or financial instrument, the borrower’s nominal peso principal balance is converted either at origination or upon restructuring to a UDI principal balance and interest on the loan or financial instrument is calculated on the outstanding UDI balance of the loan or financial instrument. Principal and interest payments are made by the borrower in an amount of pesos equivalent to the amount due in UDIs at the stated value of UDIs on the day of payment. As of June 30, 2012, one UDI was equal to Ps.4.741055 (U.S.$0.3536).

 

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GLOSSARY OF SELECTED TERMS

The following is a glossary of selected terms used in this prospectus.

 

Afore

An entity established pursuant to Mexican law that manages independent retirement accounts. The main functions of an Afore include, among others, (i) managing pension funds, (ii) creating and managing individual pension accounts for each worker, (iii) creating, managing and operating specialized pension funds known as Siefores, (iv) distributing and purchasing Siefores’ stock, (v) contracting pension insurance, and (vi) distributing, in certain cases, the individual funds directly to the pensioned worker

 

ALCO

Our Assets and Liabilities Committee (Comité de Activos y Pasivos), which is responsible for determining guidelines for managing risk with respect to financial margin, net worth and long-term liquidity

 

Basel III

A capital and liquidity reform package for internationally active banking organizations around the world that includes, among other things, the definition of capital, capital requirements, the treatment of counterparty credit risk, the leverage ratio and the global liquidity standard. The Basel III framework was designed by the Group of Governors and Heads of Supervision of the Basel Committee on Banking Regulations and Supervisory Practices in 2010

 

Basel Committee

Basel Committee on Banking Regulations and Supervisory Practices, which includes the supervisory authorities of twelve major industrial countries

 

Cetes

Mexican Treasury bills (Certificados de la Tesorería de la Federación)

 

CNBV

Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores)

 

CNSF

Mexican National Insurance and Bonding Commission (Comisión Nacional de Seguros y Fianzas)

 

CONAPO

Mexican National Population Council (Consejo Nacional de Población)

 

CONSAR

Mexican National Commission for the Retirement Savings Systems (Comisión Nacional del Sistema de Ahorro para el Retiro)

 

CONDUSEF

Mexican National Commission for the Protection and Defense of Financial Service Users (Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros)

 

CRM

Customer Relationship Management

 

FINRA

U.S. Financial Industry Regulatory Authority

 

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IFRS

International Financial Reporting Standards, accounting standards issued by the International Accounting Standards Board, and interpretations issued by the International Financial Reporting Interpretations Committee

 

IMPI

Mexican Institute of Industrial Property (Instituto Mexicano de la Propiedad Industrial)

 

INEGI

Mexican National Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía)

 

Infonavit

Mexican Institute of the National Housing Fund for Workers (Instituto Nacional para el Fomento de la Vivienda de los Trabajadores)

 

IPAB

Mexican Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario)

 

IPC

Mexican Stock Exchange Prices and Quotations Index (Índice de Precios y Cotizaciones)

 

Law of the Mexican Central Bank

Ley del Banco de México

 

LCR

Liquidity coverage ratio

 

MexDer

Mexican Derivatives Exchange (Mercado Mexicano de Derivados, S.A. de C.V.)

 

Mexican Banking GAAP

The accounting principles and regulations prescribed by the CNBV for credit institutions, as amended

 

Mexican Banking Law

Ley de Instituciones de Crédito

 

Mexican Central Bank

Banco de México

 

Mexican Financial Groups Law

Ley para Regular las Agrupaciones Financieras

 

Mexican Mutual Funds Law

Ley de Sociedades de Inversión

 

Mexican Securities Market Law

Ley del Mercado de Valores

 

Mexican Stock Exchange

Bolsa Mexicana de Valores, S.A.B. de C.V.

 

MVE

Market value of equity

 

NAFIN

Nacional Financiera, Sociedad Nacional de Crédito, Institución de Banca de Desarrollo, a Mexican government bank that provides support for SMEs

 

NCPI

Mexico’s National Consumer Price Index (Índice Nacional de Precios al Consumidor)

 

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NIM

Net interest margin is net interest income (including income from equity investments) divided by average interest-earning assets, which are loans, receivables, debt instruments and other financial assets which yield interest or similar income

 

NYSE

New York Stock Exchange

 

NSFR

Net stable funding ratio

 

PRI

Partido Revolucionario Institucional, a political party in Mexico

 

RNV

Mexican National Securities Registry (Registro Nacional de Valores)

 

SHCP

Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público)

 

SHF

Federal Mortgage Agency (Sociedad Hipotecaria Federal)

 

Siefores

Specialized pension funds (Sociedades de Inversión Especializadas de Fondos para el Retiro) established pursuant to Mexican law

 

SME

Small and medium-sized enterprises, consisting of small companies with annual revenue of less than Ps.100,000,000 (U.S.$7,458,000)

 

Sofoles

Sociedades Financieras de Objeto Limitado, non-banking institutions in Mexico that focus primarily on offering credit or financing for specific purposes (housing, automobiles, personal loans, etc.) to middle- and low-income individuals. All existing Sofol authorizations will automatically terminate on July 19, 2013. Existing Sofoles have the option of converting to Sofomes or otherwise extending their corporate purpose to include activities carried out by Sofomes

 

Sofomes

Sociedades Financieras de Objeto Múltiple, non-banking institutions in Mexico that engage in lending and/or financial leasing and/or factoring services

 

TIIE

Mexican benchmark interbank money market rate (Tasa de Interés Interbancaria de Equilibrio)

 

UDI

Unidades de inversión, a peso-equivalent unit of account indexed for Mexican inflation

 

VaR

Value at risk, 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

 

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PROSPECTUS SUMMARY

This summary highlights selected information appearing elsewhere in this prospectus. While this summary highlights what we consider to be the most important information about us, you should carefully read this prospectus and the registration statement of which this prospectus is a part in their entirety before investing in our ADSs and the underlying Series B shares, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes beginning on page F-1. Unless otherwise indicated, all financial information provided in this section has been prepared in accordance with International Financial Reporting Standards, accounting standards issued by the International Accounting Standards Board, and interpretations issued by the International Financial Reporting Interpretations Committee, or IFRS.

Overview

Our Business

We are the second largest financial services holding company in Mexico based on net income and the fourth largest financial services holding company in Mexico based on total assets, loans and deposits as of June 30, 2012, in each case as determined in accordance with Mexican Banking GAAP, according to information published by the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV). Through our bank and other subsidiaries, we provide a wide range of financial and related services, principally in Mexico, including retail and commercial banking, securities underwriting and brokerage and custody services, and asset management. Our principal subsidiaries are Banco Santander Mexico, our commercial bank subsidiary, Casa de Bolsa Santander, our brokerage subsidiary, and Gestión Santander, our asset management subsidiary. As of June 30, 2012, we had total assets of Ps.837.1 billion (U.S.$62.4 billion) and shareholders’ equity of Ps.97.7 billion (U.S.$7.3 billion), and for the six months ended June 30, 2012, we had net income of Ps.9.4 billion (U.S.$0.7 billion), which represented a return on average shareholders’ equity, or ROAE, of 19.9% for that period. Our most significant subsidiary is Banco Santander Mexico, which as of June 30, 2012 accounted for 99.8% of our total assets and 101.1% of our shareholders’ equity, and for the six months ended June 30, 2012 accounted for 98.0% of our net income. As of June 30, 2012, Banco Santander Mexico had total loans net of allowance outstanding of Ps.338.0 billion (U.S.$25.2 billion), total deposits of Ps.489.1 billion (U.S.$36.5 billion) and 1,097 branches located throughout Mexico.

We offer a differentiated financial services platform in Mexico focused on the client segments that we believe are most profitable, such as high- and mid-income individuals and small and medium-sized enterprises, or SMEs, while also providing integrated financial services to low-income individuals, as well as to medium and large companies in Mexico. We began to implement our client segmentation strategy in 2008 through the development of our information technology systems, product offerings, distribution channels and internal practices.

 

 

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The following chart sets forth the Retail Banking and Global Wholesale Banking operating segments of the Bank and their main focus.

 

Retail Banking

  

Global Wholesale Banking

•    Individuals

 

•    Private banking, for individuals with net wealth in excess of Ps.3 million

 

•    SMEs, with annual gross revenues of less than Ps.100 million

 

•    Middle-market corporations, with annual gross revenues between Ps.100 million and Ps.1,050 million

 

•    Government institutions, comprised of Mexican federal government agencies, state agencies and municipalities, as well as Mexican universities

  

•    Global transaction banking, which includes cash management, global custody and security services, trade finance and funding alternatives for institutions with international operations

 

•    Credit markets, which includes origination units, distribution of structured credit and debt products, debt capital markets, project finance and asset and capital structuring

 

•    Corporate finance, which includes mergers and acquisitions as well as equity capital markets

 

•    Equity custodial and related services, which includes equity derivatives, exchange-traded derivatives, cash equities and equity research

 

•    Treasury trading activities, which offers our customers derivative products, foreign exchange transactions (including for individuals) and other financial products and structures

 

•    Proprietary trading, which is responsible for the management of our proprietary investment portfolio

 

•    Global wholesale banking products and solutions for retail customers, which offers retail segment clients tailor-made wholesale banking products and solutions in order to meet specific needs

In addition, we have a Corporate Activities operating segment comprised of all other operational and administrative activities that are not assigned to a specific segment or product listed above. These activities include the centralized management of our financial investments, the financial management of our structural interest rate risk and foreign exchange position and the management of our liquidity and equity through securities offerings and the management of assets and liabilities.

The following table sets forth the breakdown of our net interest income and operating profit before tax by operating segment.

 

    IFRS  
    Net interest income      Operating profit before tax  
    For the year ended
December 31,
    For the six months
ended June 30,
     For the year ended
December 31,
    For the six months
ended June 30,
 
    2010     2011     2011     2012      2010     2011     2011     2012  
    (Millions of pesos)  

Retail Banking

    Ps. 18,765        Ps. 21,107        Ps. 9,886        Ps. 12,376         Ps. 6,699        Ps. 12,587        Ps.6,778        Ps. 6,874   

Global Wholesale Banking

    2,060        3,690        1,701        1,905         4,144        2,949        1,527        2,123   

Corporate Activities

    5,421        3,814        1,679        2,182         5,313        2,788        1,102        3,694   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

    Ps. 26,246        Ps. 28,611        Ps. 13,266        Ps.16,463         Ps. 16,156        Ps. 18,324        Ps. 9,407        Ps. 12,691   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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The following table shows certain of our financial and operational data.

 

     IFRS  
     As of and for the year
ended December 31,
    As of and for the
six months ended
June 30,
 
     2010     2011     2012  
    

(Millions of pesos, except percentages,

branch and customer data)

 

Branches

     1,073        1,097        1,097   

Customers

     9,073,942        9,301,222        9,583,468   

Total assets

     Ps. 661,614        Ps. 744,204        Ps. 837,149   

Loans

     229,282        314,628        388,360   

Deposits(1)

     272,189        314,711        338,792   

Shareholders’ equity

     85,641        91,487        97,656   

Non-performing loans as a percentage of total loans(2)

     2.11     1.98     1.68

Efficiency(3)

     38.21        42.91        36.60   

Return on average shareholders’ equity (ROAE)(4)

     15.72        21.93        19.93   

 

(1) Includes demand and time deposits.
(2) Non-performing loans include (i) all credits past due by more than (x) 30 days, in the case of single-payment loans, (y) 60 days, in the case of revolving loans (including consumer loans and credit cards), and (z) 90 days, in the case of periodic-payment loans (including non-revolving consumer loans, mortgages and commercial loans), and (ii) other doubtful credits. Other doubtful credits include (i) if greater than 25% of a customer’s loans are considered non-performing, the rest of such customer’s loans and (ii) loans to borrowers in doubtful financial situations such as bankruptcy.
(3) Efficiency ratios are equal to administrative expenses plus depreciation and amortization, divided by total income.
(4) Calculated based upon the average daily balance of shareholders’ equity.

Banco Santander, S.A., or Banco Santander Spain, is our controlling shareholder and owns, directly or indirectly, 99.9% of our total capital stock. We believe that our relationship with Banco Santander Spain and the Santander Group as a whole offers us significant competitive advantages over other financial services holding companies in Mexico. As of June 30, 2012, the Santander Group had total assets of €1,292,677 million (U.S.$1,626,191 million), shareholders’ equity of €81,821 million (U.S.$102,931 million) and a market capitalization of €49,261 million (U.S.$61,970 million). It also generated an attributable profit of €1,704 million (U.S.$2,144 million) in the six months ended June 30, 2012. We represented approximately 12% of the Santander Group’s attributable profit in the six months ended June 30, 2012, making us the third largest contributor of attributable profits to the Santander Group. We also represented approximately 4% of the Santander Group’s assets in the six months ended June 30, 2012.

In Latin America, the Santander Group was one of the overall largest banking groups in terms of assets as of December 31, 2011, based on publicly available annual reports. The Santander Group had 5,991 branches, 90,622 employees and an attributable profit of €2,240 million (U.S.$2,818 million) for the six months ended June 30, 2012, according to the interim report of the Santander Group for the first half of 2012.

Market Opportunity

We believe that the current sustained growth of the Mexican economy, the young age of the Mexican population, the stable and well-regulated Mexican financial system and the low penetration rates of financial services in Mexico offer a significant opportunity for us to continue growing.

 

 

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Stable economy with high potential—Mexico has the second largest population in Latin America, according to the United Nations Development Program, and it is expected to grow by 9% from 2011 to 2025, according to estimates from the Mexican National Population Council (Consejo Nacional de Población, or CONAPO). Mexico’s economy, the second largest in Latin America in terms of GDP in 2011, according to the International Monetary Fund’s World Economic Outlook Database, posted GDP growth rates of 5.5% and 3.9% in 2010 and 2011, respectively, despite past disruptions and current uncertainty surrounding the global economy, according to figures from the Mexican National Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía, or INEGI). Mexico has been rated investment grade by Moody’s, Standard & Poor’s and Fitch since 2002.

Expansion of the middle class—According to the Mexican Group of Economists and Associates (Grupo de Economistas y Asociados, or GEA), from 1992 to 2006 the share of the population that has monthly income greater than five times the minimum salary tripled, which in turn increased the number of potential clients of financial institutions in Mexico. In addition, according to CONAPO, the dependency ratio of the Mexican population is expected to reach its lowest levels in the period from 2012 to 2028, which in turn would increase the number of working individuals that require financial services.

Low credit penetration—The country remains underbanked in comparison with more mature markets and even other countries in Latin America as demonstrated by relatively low ratios of total loans and total deposits as a percentage of nominal GDP, according to the International Monetary Fund’s Financial Access Survey. Also, the level of banking penetration in Mexico (as measured by the loans to GDP ratio) currently remains below the peak banking penetration levels reached before the 1994 crisis.

Stable and well-regulated financial system—The Mexican financial sector is regulated by several government agencies. Banking regulation in Mexico has undergone extensive reform and has improved over the past decade and we believe the Mexican banking system is among the most well-regulated financial systems in the world, based on the Financial System Stability Assessment published by the International Monetary Fund in December 2011. The Mexican government has stated that the country will be an early adopter of the Basel III international rules. According to the CNBV, as of May 2012, the banking system in Mexico had a 15.3% total capital ratio, above the 10.5% threshold that will be required by the Basel III international rules.

Our Competitive Strengths

We believe our business model provides us with the following competitive advantages:

Leading market position—We rank second in terms of net income and fourth in terms of total assets, deposits and loans among financial groups in Mexico as of June 30, 2012, according to information published by the CNBV. We believe that our scale and market leadership provide us with exceptional competitive opportunities, including the ability to gather market intelligence to support decision-making in determining business opportunities and in meeting our customers’ needs.

Focus on well-defined profitable client segments resulting in superior track record—We believe our increasing market share in our key client segments (high- and mid-income individuals and SMEs) will continue to contribute to our profitability.

Efficient and business-oriented operational platform—Our operational platform efficiently combines modern business-oriented IT, our multichannel distribution strategy and well-developed customer relationship management, or CRM, tools, enabling us to deliver better service to our clients and increase our sales ratios. Our distribution network provides integrated financial services and products to our customers through a variety of channels, including our traditional proprietary branch network and on-site service units and complementary distribution channels such as ATMs, our contact centers and other direct sales distribution channels like internet banking, which we refer to as alternative distribution channels. Our multichannel distribution strategy consists of

 

 

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using both traditional and alternative distribution channels tailored to each of our client segments and designed to reach a broad spectrum of customers in a cost-efficient manner. We believe our efficient operations allow us to realize synergies and more profitable growth. As of June 30, 2012, we were the second most efficient financial group among the seven largest financial groups in Mexico, as calculated in accordance with Mexican Banking GAAP, according to information published by the CNBV. We calculate the efficiency ratio as administrative expenses divided by total income, using information published by the CNBV. We believe our efficiency ratio provides us with operating flexibility and enables us to be competitive in pricing when compared to our peers.

Synergies from our affiliation with the Santander Group—We believe that being an affiliate of the Santander Group offers us significant competitive advantages including the ability to (i) benefit from the Santander Group’s operational expertise in areas such as internal control and risk management, (ii) leverage the Santander Group’s latest-generation, customer-centered, global information technology platform, and (iii) access the Santander Group’s multinational client base and benefit from the Santander Group’s global presence, particularly in Latin America. Although we benefit from our affiliation with the Santander Group, our executive officers are responsible for the management of our business independent from our Parent.

Proven risk management practices—The incorporation of the Santander Group’s worldwide risk management platform into various levels of our organization, as well as the application of rigorous credit assessment and approval processes, has been an integral part of our efforts to control the level of non-performing loans while growing our loan portfolio and we believe it will continue to do so. As of June 30, 2012, we had a non-performing loans ratio of 1.5% and a coverage ratio (defined as total reserves for loan losses divided by total non-performing loans) as calculated in accordance with Mexican Banking GAAP of 224.2%, compared to industry averages of 2.4% and 190.6%, respectively, according to information published by the CNBV, which we believe indicate our prudent levels of asset growth.

Strong and sustainable funding and capitalization profile—Since the Bank is primarily a transactional bank, customer deposits, a comparatively less expensive source of funding, constitute the main source of liquidity in our financing structure. We believe the Bank has attractive capitalization levels based on its Tier 1 capital ratio, which has been at or near the median of the seven largest banks in Mexico over the past 5 years. As of June 30, 2012, our total capitalization ratio was 14.6% and our Tier 1 capital ratio was 14.3%, in each case as calculated in accordance with Mexican Banking GAAP.

Experienced management team and skilled workforce—We benefit from a highly experienced management team. Our senior management has an average of 20 years of experience in the financial industry and 15 years in the Santander Group. Our management has concentrated its efforts on establishing a successful working environment and employee culture. The experience and commitment of our senior management team has been a critical component in the growth of our franchise, as well as in the continuing enhancement of our operations and financial performance.

Our Strategy

As demonstrated by our strong profitability and growth in key business lines, we believe our strategy of focusing on retail banking for Mexico’s emerging middle class and SMEs has been a success. We intend to continue leveraging our competitive advantages to expand our business in the most dynamic and profitable segments of the Mexican economy (which we consider to be individuals and SMEs based on our historical growth and profitability in these segments), focusing on deposit growth and enhancing our leading banking franchise in Mexico while focusing on sustained growth and profitability.

 

 

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We intend to achieve these objectives through the following strategies:

Leverage our leading market position to benefit from the significant growth potential of the Mexican banking sector—We seek to continue increasing our market penetration, focusing on our well-defined client segments and targeted products (such as mortgages, consumer lending and SME lending). At the same time we intend to continue developing our profitable and client-centered wholesale bank. To achieve these objectives, we will continue to leverage our strong brand name, distribution network and products. We intend to improve our competitiveness by further strengthening our brand awareness, particularly through the marketing of our products and the use of our multichannel distribution platform, and by continuing to focus on the development of innovative products that we believe satisfy the needs of each of our different client segments.

Continue to expand and develop our customer base in our focused client segments and enhance customer loyalty—We intend to continue to use our extensive distribution network to proactively pursue and strengthen our relationships with high- and mid-income customers through the offering of key products and business solutions for SMEs and middle-market corporations. We also believe our high quality customer service capabilities allow us to differentiate ourselves in the highly competitive Mexican banking environment.

Expand product offerings and distribution channels, particularly in the Retail Banking segment—We intend to further increase our business and operations throughout Mexico, expanding our retail banking services to existing and prospective retail customers. We plan to offer new products and services to existing customers according to client segmentation and the development of value-added offers. By improving our information technology and our processes, we believe we will be able to produce business intelligence by acquiring detailed information about the current and future needs and behaviors of our customers enabling us to improve the ways we serve our customers through our various distribution channels.

Capitalize on our risk management practices and cost-efficient culture to promote profitable and sustainable growth—As we pursue our growth and profitability objectives, we intend to continue to carefully monitor the credit quality of our asset portfolio while diversifying our balance sheet. We plan to maintain a balanced growth profile with a strong emphasis on liquidity, a stable, low-cost funding base and strong capital ratios.

We plan to make effective use of technology through alternative channels, such as mobile banking, internet banking and our telephone contact centers, in order to control the expenses associated with the continued expansion of our multichannel distribution strategy. At the same time, we will continue to monitor our administrative and promotional expenses in order to maintain a low efficiency ratio.

Risks and Challenges

Our ability to leverage our strengths and successfully pursue the strategies described above is subject to a high degree of risk. See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider before deciding to invest in the ADSs and the underlying Series B shares. Such risks include, but are not limited to, the following:

Continued adverse economic conditions or a worsening of those conditions globally and in Mexico could have an adverse effect on us—Continued adverse economic conditions globally, and in the United States in particular, could negatively impact the Mexican economy and lead to increased regulation of our industry, reduced demand for our products and services, the inability of our borrowers to timely or fully comply with their existing obligations and the inability to access capital and liquidity on financial terms acceptable to us, if at all, among other adverse consequences. In addition, decreases in the growth rate of the Mexican economy, periods of negative growth and/or increases in inflation or interest rates may result in lower demand for our services and products, lower real pricing of our services and products or a shift to lower margin services and products. Because a large portion of our costs and expenses are fixed, we may not be able to reduce costs and expenses upon the occurrence of any of these events, and our profit margins may suffer as a result.

 

 

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Mexican government laws and regulations, including possible restrictions on interest rates and increased reserve requirements, may have a material adverse effect on us—We are subject to extensive Mexican government laws and regulations regarding our organization, operations, lending and funding activities, capitalization, transactions with related parties, taxation and other matters. Future changes to the legal or regulatory system or in the interpretation and enforcement of laws and regulations, such as the possible imposition of limits on the interest rate that a bank may charge and or the implementation of increased reserve requirements in Mexico, could have a material adverse effect on us, for example by decreasing our revenues and operating cash flow, by increasing our operating costs and decreasing our margins or by subjecting us to fines and penalties in the event of violations.

Our financial results are constantly exposed to market risk—We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us. Changes in interest rates affect our net interest income, the volume of loans we originate, the market value of our securities holdings and our gains from the sale of loans and securities, among other aspects of our business. We are also exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies and to equity price risk in connection with our trading investments in equity securities. To the extent any of these risks materialize, our financial results, including our net interest income or the market value of our assets and liabilities, could be adversely affected.

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

The credit card industry is highly competitive and entails significant risks, including the possibility of over-indebtedness of customers, that could have a material adverse effect on us—The credit card industry in Mexico is dominated by institutions that may possess greater financial resources and broader coverage in this market than we do. Moreover, our credit card business is subject to a number of risks and uncertainties, including the possibility of over-indebtedness of our customers and the higher rate of consumer default in the credit card industry than other credit industries. Part of our current growth strategy is to increase volume in the credit card portfolio, at the same or a slightly greater rate than the market, which may increase our exposure to risk in our loan portfolio, which could have a material adverse effect on us.

Credit, market and liquidity risk may have a material adverse effect on our credit ratings and our cost of funds. Any downgrading in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and could have a material adverse effect on us, including our interest margins and our results of operations—We expect to issue debt in the international capital markets in the future as part of our funding strategy, although we have not yet defined the size or terms of such issuances. If we do so, we believe downgrades of Spain’s sovereign debt, Banco Santander Spain’s debt and our related downgrades could materially and adversely impact our cost of funding related to such debt issuances. Although we have not been required to post additional collateral as a result of the recent downgrades of Spain’s sovereign debt, Banco Santander Spain’s debt and our related downgrades, we may be contractually required to post additional collateral or terminate certain of our derivative contracts as a result of a future downgrade.

The retail banking market is exposed to macroeconomic shocks that may negatively impact household income, and a downturn in the economy could result in increased loan losses that could have a material adverse effect on us—One of our main strategies is to focus on the retail banking sector and to grow our retail loan portfolio. The recoverability of these loans and our ability to increase the amount of loans outstanding may become increasingly vulnerable to macroeconomic shocks that could negatively impact the household income of our retail customers and result in increased loan losses that could have a material adverse effect on us.

 

 

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Our increasing focus on individuals and small and medium-sized businesses could lead to higher levels of non-performing assets and subsequent charge-offs that could have a material adverse effect on us—As part of our business strategy, we are seeking to increase lending and other services to individuals and SMEs. However, individuals and SMEs are more likely to be adversely affected by downturns in the Mexican economy than large corporations and high-income individuals who have greater resources, which could have a material adverse effect on us.

Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services, which in turn could have a material adverse effect on usWe cannot guarantee that our new products and services will be responsive to client demands or successful once they are offered to our clients. In addition, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive and we may not be able to develop new products that meet our clients’ changing needs. As we expand the range of our products and services, we will be exposed to new and potentially increasingly complex risks and development expenses, with respect to which our experience and the experience of our partners may not be helpful. Any or all of these factors could have a material adverse effect on us.

Our businesses rely heavily on data collection, processing and storage systems, the failure of which could have a material adverse effect on us, including the effectiveness of our risk management and internal control systems—A partial or complete failure of our financial control, accounting or other data collection and processing systems could materially and adversely affect our decision-making process, our risk management and internal control systems and our ability to respond on a timely basis to changing market conditions. We may also experience operational problems with our information systems as a result of system failures (including failure to update systems), viruses, computer “hackers” or other causes, which could have a material adverse effect on us.

Our Corporate Structure

The following chart presents our corporate structure, indicating our principal subsidiaries and respective ownership interests as of June 30, 2012.

 

LOGO

 

IFRS at June 30, 2012

  

IFRS at June 30, 2012

  

IFRS at June 30, 2012

Total assets: Ps.835,101 million

(99.76% of total)

Net income: Ps.9,224 million

(97.96% of total)

Shareholders’ equity(1): Ps.98,706

million (101.08% of total)

  

Total assets: Ps.545 million

(0.07% of total)

Net income: Ps.40 million

(0.42% of total)

Shareholders’ equity(1): Ps.247

million (0.25% of total)

   Total assets: Ps.1,446 million

(0.17% of total)

Net income: Ps.103 million

(1.09% of total)

Shareholders’ equity(1): Ps.1,290 million

(1.32% of total)

 

(1) The aggregate shareholders’ equity of these subsidiaries was greater than 100% as of June 30, 2012 principally because the consolidated shareholders’ equity of Grupo Financiero Santander Mexico was equal to the aggregate shareholders’ equity of these subsidiaries less an amount of Ps.3,000 million in dividends with respect to 2012 declared on May 14, 2012. Such dividend will be paid in September 2012.

 

 

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All of our principal subsidiaries are incorporated in Mexico.

Our Series B shares trade on the Mexican Stock Exchange. Our free float as of the date of this prospectus is comprised of a total amount of 9,051,243 Series B shares representing 0.27% of our outstanding Series B shares, 0.13% of our total capital stock and 0.13% of our total voting interests.

Banco Santander Mexico

Banco Santander Mexico is a corporation (sociedad anónima) authorized to operate as a multiple-purpose banking institution (institución de banca múltiple) under the Mexican Banking Law (Ley de Instituciones de Crédito). Banco Santander Mexico is one of the top four multi-purpose banks in Mexico in terms of total assets, net income and loan portfolio as of June 30, 2012, as determined in accordance with Mexican Banking GAAP, according to the CNBV. For the six months ended June 30, 2012, Banco Santander Mexico had net income of Ps.9.2 billion (U.S.$0.7 billion), and as of June 30, 2012, Banco Santander Mexico had total assets of Ps.835.1 billion (U.S.$62.3 billion), total loans net of allowance outstanding of Ps.338.0 billion (U.S.$25.2 billion), total deposits of Ps.489.1 billion (U.S.$36.5 billion) and shareholders’ equity of Ps.98.7 billion (U.S.$7.4 billion). As of June 30, 2012, Banco Santander Mexico employed 12,224 people (including employees from the GE Capital mortgage business, as defined below) and had 1,097 branches located throughout Mexico. Its headquarters are located in Mexico City, Distrito Federal, and it operates in every state in Mexico.

Banco Santander Mexico provides a broad range of retail and commercial banking services to its customers, including peso- and foreign currency-denominated loans to finance a variety of commercial transactions, trade, foreign currency forward contracts and credit lines and a variety of retail banking services, including mortgage financing and credit cards. It seeks to offer its customers a wide range of products while providing high levels of service. In addition to its traditional banking operations, Banco Santander Mexico offers a variety of ancillary financial services including financial leasing, financial advisory services, insurance brokerage and investment management.

Gestión Santander

Gestión Santander is our asset management subsidiary with fully integrated investment, operational and commercial structures. It is the third largest asset management firm in Mexico, according to the Mexican Association of Securities Intermediaries (Asociación Mexicana de Intermediarios Bursátiles, or AMIB), with net assets under management (other than funds of funds) of approximately Ps.176,703 million (U.S.$13.2 billion) as of June 30, 2012 and a market share of 13.3%, as determined in accordance with Mexican Banking GAAP. As of June 30, 2012, Gestión Santander’s net income was Ps.40.0 million (U.S.$3.0 million), which represented 0.4% of our net income, and generated net fees of Ps.147.0 million (U.S.$10.9 million), representing 2.6% of our total net fees.

Gestión Santander provides expertise in a diverse range of equity, fixed income, structured products and investment management advisory strategies to institutional investors, financial intermediaries and private clients. Gestión Santander offers these solutions through mutual funds and managed accounts through Banco Santander Mexico’s branch network, independent brokers and Gestión Santander’s own sales force.

Gestión Santander manages 61 different funds, covering a wide variety of investment alternatives for the Mexican market. By fund class, 88% of the funds are fixed income or money market in terms of assets and the rest include equity, structured and funds of funds, among others, as determined in accordance with Mexican Banking GAAP.

 

 

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The following table shows the assets under management of our mutual funds by asset class as of June 30, 2012.

 

     Mexican Banking GAAP  
     As of June 30, 2012  

Asset Class

   Number of
Funds
     Assets in
millions of
pesos
 

Structured(1)

             12       Ps. 6,551   

Fixed income

     17         45,032   

Funds of funds

     5         3,980   

Money market

     9         110,689   

Equity

     11         5,822   

Currency-related

     3         1,017   

Mixed asset funds

     4         3,612   
  

 

 

    

 

 

 

Total

     61       Ps. 176,703   
  

 

 

    

 

 

 

 

(1) Includes 7 fixed income mutual funds (Ps.5,059 million), 4 equity mutual funds (Ps.1,157 million) and 1 foreign exchange mutual fund (Ps.335 million).

Our Board of Directors resolved to sell our asset management business (including all of Gestión Santander’s assets under management) to a holding company which would be a subsidiary of Banco Santander Spain and would acquire ownership of a significant number of the Santander Group’s asset management businesses as part of a global internal reorganization to centralize the Santander Group’s asset management business. Such sale is authorized to occur only at a price determined by a third party to be fair and upon satisfaction of certain other conditions. The reorganized global asset management business would seek to benefit from specialized portfolio management and capitalize on synergies, to expand product offerings and to make investments in and improvements to the information technology used in the business to streamline operations. We expect to enter into exclusive, long-term distribution contracts so that Banco Santander Mexico and Casa de Bolsa Santander would continue to offer mutual funds managed by Gestión Santander following the divestiture, if it is completed.

As of and for the six months ended June 30, 2012, Gestión Santander accounted for 0.07% of our total assets, 0.42% of our net income and 0.25% of our shareholders’ equity. Discussions relating to the potential transfer and sale, including relating to price, are ongoing, and there is currently no specific timing for the potential transfer and sale of our asset management business and the global internal reorganization. Furthermore, the divestiture of Gestión Santander is subject to approvals from the financial regulatory authorities in Mexico, and we can provide no assurances that such approvals will be obtained or, if approvals are obtained, that the aforementioned divestiture will be completed.

Casa de Bolsa Santander

Casa de Bolsa Santander is our broker-dealer subsidiary that provides comprehensive financial products and services to institutional investors, corporate customers and individuals, including the intermediation of equity and fixed income securities, financial advisory services, portfolio structuring, asset management of investment portfolios, investment banking and sale of investment funds. Casa de Bolsa Santander is an authorized broker-dealer for the Mexican Stock Exchange, where it conducts transactions for the purchase and sale of securities. It provides distribution and advisory services for companies seeking the placement of their securities, supported by a local and international equity research team of analysts, an institutional sales force and a national distribution network focused on individual investors. Our research team is part of the Santander Group’s Latin American equity research group.

 

 

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As of June 30, 2012, Casa de Bolsa Santander had 6,052 customer contracts and Ps.266.3 billion in assets under management, and accounted for 0.2% of our total assets and 1.3% of our shareholders’ equity. In the six months ended June 30, 2012, Casa de Bolsa Santander had net income of Ps.103.0 million (U.S.$7.7 million), which represented 1.1% of our net income.

Seguros Santander

Prior to its sale in November 2011 to ZS Insurance America, S.L., Seguros Santander offered life and home insurance. Its products were offered through our branch network.

On February 22, 2011, Banco Santander Spain publicly announced that it had reached an agreement with Zurich Financial Services Group to establish a strategic alliance for bancassurance in Mexico, Brazil, Chile, Argentina and Uruguay. The strategic alliance’s objective was to strengthen Banco Santander Spain’s operations in the insurance market by ensuring a wider range of products covering clients that are not currently served by insurers, and by leveraging distribution capacity. In accordance with the agreement, the insurance products of the alliance will be distributed for 25 years in the countries covered by the agreement.

On July 15, 2011, we announced that we had signed the definitive agreements with Zurich Financial Services Group regarding this long-term alliance. This agreement combines our commercial strength and distribution capabilities with the experience and leadership of the Zurich Financial Services Group in the development and management of insurance products and strengthens our offerings of life, savings and general insurance products.

On November 4, 2011, we announced that we had completed the final documentation and obtained the authorizations necessary to close the sale of our insurance company subsidiary Seguros Santander to ZS Insurance America, S.L., which was created as a consequence of the strategic alliance between Banco Santander Spain and Zurich Financial Services Group, for a price of Ps.7,441 million (U.S.$555.0 million). The sale and joint venture were completed on November 4, 2011. The joint venture is 51% controlled by Zurich Financial Services Group and 49% by Banco Santander Spain. Banco Santander Mexico does not hold shares in the joint venture. In connection with the sale and joint venture, Seguros Santander, as a subsidiary of ZS Insurance America, S.L., and Banco Santander Mexico entered into an exclusive distribution agreement with respect to all types of insurance other than auto insurance. As a result, Banco Santander Mexico will continue to sell insurance policies on behalf of this joint venture and to receive commissions from those sales.

As of December 31, 2010, Seguros Santander had approximately Ps.3.4 billion (U.S.$253.6 million) in premiums, total assets of Ps.7.5 billion (U.S.$559.4 million) and Ps.4.4 billion (U.S.$360.1 million) in liabilities under insurance contracts. Seguros Santander’s net income was Ps.493 million (U.S.$36.8 million) in 2010 and Seguros Santander accounted for 1.1% of our total assets, 3.9% of our net income and 0.9% of our shareholders’ equity as of December 31, 2010.

History

We were founded on November 14, 1991 in Mexico City, Mexico under the name Grupo Financiero InverMéxico. In 1997, we were renamed Grupo Financiero Santander Mexicano and in 1998, we merged with Grupo Financiero Santander México, S.A. de C.V., with Grupo Financiero Santander Mexicano as the surviving entity. In 2000, we acquired Grupo Financiero Serfin, S.A. and merged with that entity, with Grupo Financiero Santander Mexicano as the surviving entity. We were renamed Grupo Financiero Santander Serfin, S.A. de C.V. in 2001.

 

 

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In 2003, Bank of America Corporation purchased 24.9% of our shares from Banco Santander Spain. In 2006, we were renamed Grupo Financiero Santander, S.A. de C.V. and later that year we were converted into Grupo Financiero Santander, S.A.B. de C.V., a sociedad anónima bursátil de capital variable, or publicly traded variable capital corporation.

In 2010, Santusa Holding, S.L., a subsidiary of Banco Santander Spain, acquired Bank of America Corporation’s interest in our company, resulting in the Santander Group’s ownership of 99.9% of our shares. See “Principal and Selling Shareholders.” In order to make our company more identifiable to investors and to differentiate our company from our affiliates that operate in countries other than Mexico, we obtained shareholder approval on August 13, 2012 to change our name to Grupo Financiero Santander México, S.A.B. de C.V. The Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, or SHCP) has authorized this name change.

Banco Santander México

Banco Santander México was incorporated on November 16, 1932, under the name Banco Mexicano. In 1955, Sociedad Mexicana de Crédito Industrial (subsequently Banco Somex), which was incorporated in 1941, purchased a controlling portion of the shares of Banco Mexicano. In 1958, Banco Mexicano merged with Banco Español, with Banco Mexicano as the surviving entity.

In 1970, Banco de Londres y México merged with Compañía General de Aceptaciones (formerly a shareholder of Banco de Londres), with Banco de Londres y México under its new name, Banca Serfin, as the surviving entity. In 1992, Grupo Financiero Serfin was incorporated following the acquisition of Banca Serfin by Operadora de Bolsa.

In 1979, Banco Mexicano changed its corporate name to Banco Mexicano Somex, S.A., operating as a multiple-purpose banking institution.

In 1982, Mexican commercial banks were nationalized by the Mexican government.

In 1990, the Mexican Constitution was amended to permit the total reprivatization of Mexican commercial banks, and the Mexican government enacted the Mexican Banking Law, which led to the reprivatization of such banks starting in 1991. As part of this banking privatization process, in 1992, Grupo InverMéxico acquired Banco Mexicano Somex, which then took the corporate name of Banco Mexicano, S.A., Institución de Banca Múltiple, Grupo Financiero InverMéxico.

In April 1997, Banco Santander Central Hispano (subsequently Banco Santander Spain) acquired Grupo InverMéxico, which became Grupo Financiero Santander Mexicano. Banco Mexicano later became Banco Santander Mexicano. In May 2000, Banco Santander Spain acquired Grupo Financiero Serfin, which was merged into Grupo Financiero Santander Mexicano and changed its corporate name to Grupo Financiero Santander Serfin. In 2001, Banco Santander Mexicano adopted the corporate name of Banco Santander Mexicano, S.A., Institución de Banca Múltiple, Grupo Financiero Santander Serfin.

Banco Santander Mexicano and Banca Serfin initially operated independently. In 2004, Banca Serfin was merged into Banco Santander Mexicano, with the surviving entity being Banco Santander Serfin, S.A., Institución de Banca Múltiple, Grupo Financiero Santander Serfin. Subsequently, in 2006, the bank was renamed Banco Santander, S.A., Institución de Banca Múltiple, Grupo Financiero Santander.

On February 21, 2008, the corporate name of the Bank was changed to Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander. We own 99.99% of the Bank’s capital stock.

 

 

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On December 23, 2010, Banco Santander Mexico entered into a stock and assets purchase agreement to acquire the residential mortgage business of General Electric Capital Corporation and its subsidiaries, or GE Capital, in Mexico, or the GE Capital mortgage business. The purchase price for the acquisition was Ps.2,042 million (U.S.$152 million) and, in addition, we repaid at closing to GE Capital the Ps.21,009 million (U.S.$1,567 million) intercompany debt at that date relating to the GE Capital mortgage business, which GE Capital historically had financed through intercompany debt. The total volume of assets at the time of closing was Ps.23,904 million (U.S.$1,783 million), including a total loan portfolio of Ps.21,926 million (U.S.$1,635 million), while the total volume of liabilities was Ps.21,494 million (U.S.$1,603 million). The transaction closed on April 29, 2011. The acquisition made us the second-largest provider of residential mortgages in Mexico in terms of residential mortgages outstanding in 2011, as determined in accordance with Mexican Banking GAAP.

Debt Offering

We expect to issue senior unsecured notes in the international capital markets by the end of 2012, depending on market conditions and if we determine that we can issue such debt on terms that are acceptable to us. The expected purpose of any such debt offering would be to extend the duration of our liabilities and to partly or entirely refinance indebtedness maturing in the first half of 2013, which currently is an aggregate of Ps.9,700 million. We have not yet defined the size or terms of any such debt offering.

 

 

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THE OFFERING

 

Issuer

Grupo Financiero Santander México, S.A.B. de C.V.

 

Selling shareholders

Banco Santander, S.A. and Santusa Holding, S.L.

 

International offering

Banco Santander, S.A. is offering 235,104,325 ADSs, evidenced by ADRs and each representing five Series B shares, through the international underwriters in the United States and in other jurisdictions outside of the United States and Mexico.

 

Mexican offering

Concurrently with the international offering, Banco Santander, S.A. is offering 293,880,404 Series B shares through the Mexican underwriters, in a public offering in Mexico authorized by the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV), to investors in Mexico, by means of a prospectus in Spanish, satisfying the requirements of Mexican law, containing information substantially similar to that included in this prospectus. We refer to this offering as the “Mexican offering.”

 

Global offering

The global offering consists of the international offering and the Mexican offering, totaling 1,469,402,029 Series B shares, including the Series B shares underlying ADSs. The closings of the international and Mexican offerings are conditioned upon each other. The number of shares, evidenced by ADSs, to be offered in the international offering, and the number of Series B shares to be offered in the Mexican offering, are subject to reallocation between the offerings.

 

Options to purchase additional ADSs and Series B shares

The selling shareholders will grant the international underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an additional 35,265,648 ADSs, if any, at the initial public offering price per ADS, less underwriting discounts and commissions. The selling shareholders will also grant the Mexican underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an additional 44,082,064 Series B shares, if any, at the initial public offering price per Series B share, less underwriting discounts and commissions, in the Mexican offering. If either the international underwriters or the Mexican underwriters exercise their option to purchase additional shares, the underwriters will purchase first from Banco Santander, S.A. up to 138,953,311 additional Series B shares (including in the form of ADSs), then from Santusa Holding, S.L. up to 81,456,993 additional Series B shares (including in the form of ADSs). Santusa Holding, S.L. will only sell shares in this offering if the underwriters exercise their option to purchase more than 138,953,311 additional Series B shares (including in the form of ADSs), and will not sell any shares in this offering if the international underwriters or the Mexican underwriters do not exercise their option to purchase additional shares. The international and the Mexican options to purchase additional ADSs and Series B shares, respectively, may be exercised independently of each other but are expected to be exercised on a coordinated basis.

 

 

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Conflicts of interest

Because Santander Investment Securities Inc., a member of the U.S. Financial Industry Regulatory Authority, or FINRA, and an underwriter in this offering, is an affiliate of, and under common control with, the issuer and the selling shareholders, FINRA views the participation of Santander Investment Securities Inc. as an underwriter in this offering as the public distribution of securities issued by a company with which Santander Investment Securities Inc. has a conflict of interest and/or an affiliation, as those terms are defined in FINRA Rule 5121. Because of this relationship, the offering will be conducted in accordance with FINRA Rule 5121. This rule requires, among other things, that a qualified independent underwriter has participated in the preparation of, and has exercised the usual standards of “due diligence” in respect to, the registration statement and this prospectus. Deutsche Bank Securities Inc. has agreed to act as qualified independent underwriter for the international offering and to undertake the legal responsibilities and liabilities of the underwriter under the Securities Act of 1933 (the “Securities Act”), specifically including those inherent in Section 11 of the Securities Act. We have agreed to indemnify Deutsche Bank Securities Inc. against liabilities incurred in connection with acting as a qualified independent underwriter, including liabilities under the Securities Act.

 

The ADSs

Each ADS will represent five Series B shares. The ADSs will be evidenced by ADRs. The ADSs will be issued under a deposit agreement among us, JPMorgan Chase Bank, N.A., as depositary, and the registered holders and beneficial owners from time to time of ADSs issued thereunder.

 

Listing

We intend to apply to list the ADSs on the New York Stock Exchange, or NYSE, under the symbol “BSMX.” Our Series B shares are currently listed on the Mexican Stock Exchange under the symbol “SANMEX.” Prior to the global offering there has been a very limited trading market for the Series B shares in Mexico. We cannot assure you that a trading market for the Series B shares or ADSs will develop or will continue if developed.

 

Share capital before and after global offering

Our share capital is divided into Series F shares and Series B shares. Each Series F share and Series B share represents the same economic and voting interest in us. See “Description of Capital Stock.” Series F shares may only be held by Banco Santander Spain or an affiliate because we have received and operate under the approval from the Mexican financial authorities to act as a foreign-controlled holding company for financial services subsidiaries. Series F shares may not represent less than 51% of our issued and outstanding shares.

 

  As of the date of this prospectus, our share capital consists of 3,322,085,768 Series B shares and 3,464,309,145 Series F shares, or 100% of our issued and outstanding shares. We do not have any shares in treasury. For a description of the material terms of the Series B shares and Series F shares, see “Description of Capital Stock.”

 

 

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  Our share capital will not change as a result of the global offering.

 

  As of the date of this prospectus, Banco Santander Spain beneficially owns 99.7% of our Series B shares, and 100% of our Series F shares. See “Principal and Selling Shareholders.”

 

  After giving effect to the global offering, Banco Santander Spain will beneficially own 55.5% of our Series B shares and 100% of our Series F shares (or 48.9% and 100%, respectively, assuming full exercise of the option to purchase additional ADSs and the option to purchase additional Series B shares).

 

Transfer restrictions

Under the Mexican Financial Groups Law (Ley para Regular las Agrupaciones Financieras), foreign entities with governmental authority and Mexican financial entities, including those that form part of a financial group, cannot purchase our shares.

 

  In addition, pursuant to the Mexican Financial Groups Law and our bylaws, no person or entity or group of persons or entities may acquire (i) more than 2% of our shares, unless any such person or entity notifies the Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, or SHCP), (ii) 5% or more of our shares, unless any such person or entity obtains the prior approval by the SHCP, and (iii) 30% or more of our shares, unless any such person or entity (a) obtains the prior approval of the SHCP, and (b) with the approval of the CNBV, undertakes a public tender offer to purchase (x) if the intended acquisition is for shares representing less than 50% plus one of our shares, the greater of an additional 10% of our aggregate outstanding shares or the percentage of additional shares intended to be acquired, or (y) if the intended acquisition is for shares representing more than 50% of our shares, 100% of our aggregate outstanding shares.

 

Use of proceeds

The selling shareholders will receive all of the net proceeds from the sale of ADSs and Series B shares. We will not receive any of the net proceeds from the sale of ADSs or Series B shares offered by the selling shareholders.

 

Dividends and dividend policy

Although we have no current plans to adopt a formal dividend policy in respect of the amount and payment of dividends, we currently intend to declare and pay dividends on an annual basis. The declaration and payment of dividends in respect of any period is subject to a number of factors, including our debt service requirements, capital expenditure and capital requirements, investment plans, other cash requirements, our shareholders having approved our financial statements and the payment of dividends, and such other factors as may be deemed relevant at the time. We cannot assure you that we will pay any dividends in the future. Under Mexican law, dividends may only be paid from retained earnings resulting from the relevant year or prior years’ results if (i) the legal

 

 

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reserve has been created or maintained, by annually segregating 5% of net earnings, until the legal reserve equals at least 20% of the fully paid-in capital, (ii) shareholders, at a duly called meeting, have approved the results reflecting the earnings and the payment of dividends, and (iii) losses for prior fiscal years have been repaid or absorbed. All shares of our capital stock rank pari passu with respect to the payment of dividends.

 

Voting rights

All holders of the Series B shares and of the Series F shares are entitled to one vote per share at each of our shareholders’ meetings. Subject to the terms of our bylaws and the terms of the deposit agreement among us, the depositary and the holders of the ADSs, holders of our ADSs will be entitled to instruct the depositary to vote or cause to be voted the number of shares represented by such ADSs. See “Description of Capital Stock” and “Description of American Depositary Shares.”

 

Controlling shareholder

Banco Santander Spain owns, directly or indirectly, 99.7% of our Series B shares and directly owns 100% of our Series F shares. Such share ownership is sufficient for Banco Santander Spain to control all shareholders’ decisions and to appoint the majority of our board.

 

  After giving effect to the global offering, Banco Santander Spain will own, directly or indirectly, 55.5% of our Series B shares and will directly own 100% of our Series F shares. Such share ownership will be sufficient for Banco Santander Spain to continue to control all shareholders’ decisions and to appoint the majority of our board.

 

ADR depositary

JPMorgan Chase Bank, N.A.

 

Taxation

Under current Mexican law, dividends paid to holders of ADSs or Series B shares who are not residents of Mexico for tax purposes are not subject to any Mexican withholding or other similar tax, but will be subject to corporate taxes, payable by us, if not paid from a net after-tax profits account. We currently intend for dividends to be paid from such account.

 

  The sale of ADS, or of the Series B shares, subject in the case of Series B shares to certain requirements, by holders who are not residents of Mexico for tax purposes, made through the Mexican Stock Exchange or in any other securities market recognized by Mexico’s Tax Administration Service (Servicio de Administración Tributaria), is not subject to any Mexican capital gain or similar taxes. See “Taxation.”

 

  For a discussion of the material U.S. tax consequences relating to an investment in our Series B shares or the ADSs, see “Taxation.”

 

 

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Lock-up agreements

We have agreed with the international and Mexican underwriters, subject to certain exceptions, not to issue, offer, sell, grant an option to sell or otherwise dispose of, directly or indirectly, any shares of our capital stock (or ADSs representing such shares) or any securities convertible into or exercisable or exchangeable for our capital stock (or ADSs representing such shares) during the 365-day period following the date of this prospectus. Each of our principal shareholders, including the selling shareholders, has agreed to substantially similar lock-up agreements. See “Underwriting (Conflicts of Interest).”

 

Risk factors

Investing in our ADSs and in the underlying Series B shares involves risks. See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider before deciding to invest in the ADSs and the underlying Series B shares.

 

Proposed NYSE symbol

“BSMX.”

 

Mexican Stock Exchange symbol for currently traded Series B shares

“SANMEX.”

 

 

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SUMMARY FINANCIAL AND OPERATING DATA

The following tables present our summary consolidated financial data for each of the periods indicated. You should read this information in conjunction with our audited financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

We have derived our summary consolidated income statement data for the years ended December 31, 2010 and 2011 and our summary consolidated balance sheet data as of January 1, 2010 and December 31, 2010 and 2011 from our audited financial statements included in this prospectus, which have been prepared in accordance with IFRS.

We have derived our summary consolidated income statement data for the six months ended June 30, 2011 and 2012 and our summary consolidated balance sheet data as of June 30, 2012 from our unaudited condensed consolidated financial statements included in this prospectus, which have been prepared in accordance with IAS 34. These unaudited condensed statements include all adjustments that management believes are necessary to fairly present our results of operations and financial condition at the date and for the periods presented. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the remainder of the year ended December 31, 2012. See “Presentation of Financial and Other Information.”

CONSOLIDATED INCOME STATEMENT DATA IN ACCORDANCE WITH IFRS

 

    For the year ended December 31,     For the six months ended June 30,  
    2010     2011     2011     2011     2012     2012  
   

(Millions of

pesos)(1)

   

(Millions of
U.S.

dollars)(1)(2)

   

(Millions of

pesos)(1)

   

(Millions of
U.S.

dollars)(1)(3)

 

Interest income and similar income

    Ps. 39,237        Ps. 46,587      U.S.$ 3,474        Ps. 21,477        Ps. 27,392      U.S.$  2,043   

Interest expenses and similar charges

    (12,991     (17,976     (1,341     (8,211     (10,929     (815
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    26,246        28,611        2,133        13,266        16,463        1,228   

Income from equity instruments

    289        299        22        183        155        12   

Fee and commission income (net)

    9,276        10,199        761        5,081        5,717        426   

Gains/(losses) on financial assets and liabilities (net)

    3,622        279        21        478        515        38   

Exchange differences (net)

    (14     30        2        (12     (3     0   

Other operating income

    581        536        40        284        281        21   

Other operating expenses

    (1,413     (1,590     (119     (771     (871     (65
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income

    38,587        38,364        2,860        18,509        22,257        1,660   

Administrative expenses

    (13,347     (15,001     (1,119     (6,767     (7,393     (552

Personnel expenses

    (6,578     (7,344     (548     (3,564     (4,016     (300

Other general administrative expenses

    (6,769     (7,657     (571     (3,203     (3,377     (252

Depreciation and amortization

    (1,398     (1,461     (109     (700     (753     (56

Impairment losses on financial assets (net)

    (6,972     (5,435     (405     (2,286     (3,515     (262

Loans and receivables(4)

    (6,972     (5,435     (405     (2,286     (3,515     (262

Impairment losses on other assets (net)

    (92     (100     (7     (93     0        0   

Other intangible assets

    (27     (30     (2     (30     0        0   

Non-current assets held for sale

    (65     (70     (5     (63     0        0   

Provisions (net)(5)

    (562     1,890        141        738        313        23   

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

    (77     13        1        1        1,733        129   

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

    17        54       4        5        49        4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit before tax

    16,156        18,324        1,366        9,407        12,691        946   

Income tax

    (4,449     (4,813     (359     (2,471     (3,274     (244
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit from continuing operations

    11,707        13,511        1,007        6,936        9,417        702   

Profit from discontinued operations (net)

    880        4,260        318        277        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated profit for the year

    Ps. 12,587        Ps. 17,771      U.S.$ 1,325        Ps. 7,213        Ps. 9,417      U.S.$  702   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit attributable to the Parent

    12,586        17,770        1,325        7,212        9,416        702   

Profit attributable to non-controlling interests

    1        1        0        1        1        0   

 

 

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     For the year ended December 31,      For the six months ended June 30,  
     2010      2011      2011      2011      2012      2012  
    

(Millions of

pesos)(1)

    

(Millions of
U.S.

dollars)(1)(2)

    

(Millions of

pesos)(1)

    

(Millions of
U.S.

dollars)(1)(3)

 

Earnings per share from continuing and discontinued operations:

                 

Basic earnings per share

     1.85         2.62         0.19         1.06         1.39         0.10   

Diluted earnings per share

     1.85         2.62         0.19         1.06         1.39         0.10   

Earnings per share from continuing operations:

                 

Basic earnings per share

     1.73         1.99         0.14         1.02         1.39         0.10   

Diluted earnings per share

     1.73         1.99         0.14         1.02         1.39         0.10   

Cash dividend per share(6)

     0.94         1.67         0.12         1.67         n/a         n/a   

Weighted average shares outstanding

     6,786,395         6,786,395         6,786,395         6,786,395         6,786,395         6,786,395   

Adjusted number of shares

     6,786,395         6,786,395         6,786,395         6,786,395         6,786,395         6,786,395   

 

(1) Except per share amounts. Share amounts are presented in thousands of shares.
(2) Results for the year ended December 31, 2011 have been translated into U.S. dollars, for convenience purposes only, using the exchange rate of Ps.13.4084 per U.S.$1.00 as calculated on June 29, 2012 and reported by the Mexican Central Bank (Banco de México) in the Official Gazette of the Federation (Diario Oficial de la Federación) on July 2, 2012 as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.
(3) Results for the six months ended June 30, 2012 have been translated into U.S. dollars, for convenience purposes only, using the exchange rate of Ps.13.4084 per U.S.$1.00 as calculated on June 29, 2012 and reported by the Mexican Central Bank in the Official Gazette of the Federation on July 2, 2012 as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.
(4) Provisions to the credit loss allowance less recoveries of loans previously written off.
(5) Principally includes provisions for taxes and legal contingencies and contingent liabilities and commitments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(6) On February 2, 2011, we paid a dividend of Ps.6,400 million, equal to Ps.0.94 per share, with respect to fiscal year 2010. On March 5, 2012, we paid a dividend of Ps.11,350 million, equal to Ps.1.67 per share, with respect to fiscal year 2011. We have not paid any dividend in advance with respect to fiscal year 2012. On May 14, 2012, we declared a dividend of Ps.3,000 million and on August 13, 2012, we declared a dividend of Ps.4,300 million. The aggregate amount of dividends declared is Ps.7,300 million, equal to Ps.1.08 per share. We will pay the aggregate amount of these dividends in September 2012.

 

 

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CONSOLIDATED BALANCE SHEET DATA IN ACCORDANCE WITH IFRS

 

    As of
January 1,
    As of December 31,     As of June 30,  
    2010     2010     2011     2012     2012  
    (Millions of pesos)     (Millions of U.S.
dollars)(1)
 

Assets

         

Cash and balances with Mexican Central Bank

    Ps. 44,170        Ps. 44,136        Ps. 44,143        Ps. 42,049      U.S.$ 3,136   

Financial assets held for trading

    190,613        238,613        242,463        291,910        21,771   

Other financial assets at fair value through profit or loss

    12,000        12,661        21,589        31,521        2,351   

Available-for-sale financial assets

    76,450        60,426        61,582        54,881        4,093   

Loans and receivables

    243,540        271,879        346,187        388,934        29,007   

Hedging derivatives

    928        1,287        897        571        43   

Non-current assets held for sale

    260        7,811        464        525        39   

Investments in associates

    284        —          —          —          —     

Reinsurance assets

    437        —          —          —          —     

Tangible assets

    5,705        5,488        5,607        3,774        280   

Intangible assets

    1,849        1,879        3,462        3,414        255   

Tax assets

    15,806        15,146        13,384        14,747        1,100   

Other assets

    3,557        2,288        4,426        4,823        360   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    Ps. 595,599        Ps. 661,614        Ps. 744,204        Ps. 837,149      U.S.$ 62,435   

Liabilities

         

Financial liabilities held for trading

    Ps. 101,487        Ps. 116,535        Ps. 125,291        Ps. 133,670      U.S.$ 9,969   

Other financial liabilities at fair value through profit or loss

    120,236        112,239        118,269        167,267        12,475   

Financial liabilities at amortized cost

    277,731        326,448        391,773        422,517        31,512   

Hedging derivatives

    70        28        2,501        1,726        129   

Liabilities associated with non-current assets held for sale

    —          5,368        —          —          —     

Liabilities under insurance contracts

    3,449        —          —          —          —     

Provisions(2)

    8,921        8,680        6,151        5,567        415   

Tax liabilities

    70        118        866        604        45   

Other liabilities

    5,240        6,557        7,866        8,142        607   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    Ps. 517,204        Ps. 575,973        Ps. 652,717        Ps. 739,493      U.S.$  55,152   

Shareholders’ equity

         

Share capital

    Ps. 25,658        Ps. 25,658        Ps. 25,658        Ps. 25,658      U.S.$ 1,914   

Share premium

    11,415        11,415        11,415        11,415        851   

Accumulated reserves

    40,425        34,025        35,261        50,031        3,731   

Profit for the year attributable to the Parent

    —          12,586        17,770        9,416        702   

Valuation adjustments

    888        1,947        1,372        1,124        84   

Non-controlling interests

    9        10        11        12        1   

Total shareholders’ equity

    78,395        85,641        91,487        97,656        7,283   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

    Ps. 595,599        Ps. 661,614        Ps. 744,204        Ps. 837,149      U.S.$ 62,435   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Results for the six months ended June 30, 2012 have been translated into U.S. dollars, for convenience purposes only, using the exchange rate of Ps.13.4084 per U.S.$1.00 as calculated on June 29, 2012 and reported by the Mexican Central Bank in the Official Gazette of the Federation on July 2, 2012 as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.
(2) Includes provisions for pensions and similar obligations, taxes and legal contingencies and contingent liabilities and commitments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

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SELECTED RATIOS AND OTHER DATA

All of the selected ratios and other data below (except for number of share, branch and employee data) are presented in accordance with IFRS unless otherwise noted.

 

    As of and for the year
ended
December 31,
    As of and for the six
months ended June 30,
 
    2010     2011     2011     2012  
    (Millions of pesos or percentages, except
per share, branch and employee data)
 

Profitability and performance

       

Net interest margin(1)

    6.09     5.08     5.21     4.93

Total margin(2)

    8.22     6.87     7.18     6.62

Return on average total assets (ROAA)(3)

    2.36     2.66     2.35     2.41

Return on average shareholders’ equity (ROAE)(4)

    15.72     21.93     16.44     19.93

Efficiency ratio(5)

    38.21     42.91     40.34     36.60

Net fee and commission income as a percentage of operating expenses(6)

    62.91     61.95     68.05     70.18

Yield on average interest-earning assets

    9.01     8.18     8.32     8.12

Average cost of interest-bearing liabilities

    3.65     3.71     3.75     3.97

Net interest spread

    5.36     4.47     4.57     4.15

Common stock dividend payout ratio(7)

    50.85     63.87     —          —     

Average interest-earning assets

    435,651        569,502        516,280        674,784   

Average interest-bearing liabilities

    356,059        483,925        437,595        550,381   

Capital adequacy

       

Net tangible book value

    83,762        88,025        86,492        94,242   

Net tangible book value per share

    12.34        12.97        12.74        13.89   

Average shareholders’ equity as a percentage of average total assets

    14.99     12.15     14.31     12.12

Total capital (Mexican Banking GAAP)

    69,792        73,144        71,558        75,107   

Tier 1 capital (Mexican Banking GAAP)

    68,703        71,674        70,177        73,579   

Tier 1 capital to risk-weighted assets (Mexican Banking GAAP)

    15.31     14.53     14.53     14.33

Total capital to risk-weighted assets(8) (Mexican Banking GAAP)

    15.56     14.82     14.82     14.63

Asset quality

       

Non-performing loans as a percentage of total loans(9)

    2.11     1.98     1.81     1.68

Non-performing loans as a percentage of computable credit risk(9)(10)

    1.93     1.83     1.69     1.57

Loan charge-offs as a percentage of average total loans

    4.93     2.38     2.67     2.12

Loan charge-offs as a percentage of computable credit risk(10)

    4.01     1.98     2.23     1.85

Impairment losses on financial assets as a percentage of average total loans

    3.58     2.49     2.58     2.48

Impairment losses as a percentage of non-performing loans(9)(11)

    151.04     113.55     127.10     138.27

Impairment losses as a percentage of loan charge-offs(11)

    72.60     104.76     96.44     117.19

Impairment losses as a percentage of total loans(11)

    3.19     2.25     2.30     2.32

Liquidity

       

Liquid assets as a percentage of deposits(12)

    79.69     78.96     91.15     84.85

Loans and leases, net of allowance, as a percentage of deposits(13)

    84.24     99.97     101.72     99.87

Total loans and leases, as a percentage of total funding(14)

    55.73     65.99     58.13     61.43

Deposits as a percentage of total funding(13)(14)

    64.05     64.52     55.84     60.08

Operations

       

Branches

    1,073        1,097        1,073        1,097   

Employees (full-time equivalent)

    11,828        12,395        12,231        12,461   

 

(1) Net interest margin is defined as net interest income (including income from equity investments) divided by average interest-earning assets, which are loans, receivables, debt instruments and other financial assets which yield interest or similar income.
(2) Total margin is defined as net interest income (including income from equity investments) plus fee and commission income (net) over average interest-earning assets.
(3) Calculated based upon the average daily balance of total assets.
(4) Calculated based upon the average daily balance of shareholders’ equity.
(5) Efficiency ratio is defined as administrative expenses plus depreciation and amortization, divided by total income.
(6) Net fee and commission income divided by administrative expenses plus depreciation and amortization.
(7) Dividends paid per share divided by net income per share.

 

 

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(8) Tier 1 plus Tier 2 capital divided by total risk-weighted assets, calculated according to the Mexican Capitalization Requirements.
(9) Non-performing loans include (i) all credits past due by more than (x) 30 days, in the case of single-payment loans, (y) 60 days, in the case of revolving loans (including consumer loans and credit cards), and (z) 90 days, in the case of periodic-payment loans (including non-revolving consumer loans, mortgages and commercial loans), and (ii) other doubtful credits. Other doubtful credits include (i) if greater than 25% of a customer’s loans are considered non-performing, the rest of such customer’s loans and (ii) loans to borrowers in doubtful financial situations such as bankruptcy.
(10) Computable credit risk is the sum of the face amounts of loans and leases (including non-performing assets), guarantees and documentary credits. When guarantees or documentary credits are contracted, we book them as off-balance sheet accounts. As of the date we make the payment to the beneficiary, we claim the payment from the solicitor (i.e., the debtor in the case of a guarantee or the buyer in the case of a documentary credit). The account becomes non-performing as of the date when the payment was due if we do not receive payment from the solicitor on that date. We maintain the account as a non-performing loan until recovery or, in the case of practical impossibility for recovery (e.g., when the creditor is declared bankrupt or upon the death of a creditor who is a natural person), until our Comprehensive Risk Management Committee decides to charge off the account. Such decision is at the discretion of our Comprehensive Risk Management Committee.
(11) Impairment losses were Ps.7,558 million and Ps.7,247 million as of December 31, 2010 and 2011, respectively. Impairment losses were Ps.6,824 million and Ps.8,032 million as of June 30, 2011 and 2012, respectively.
(12) Liquid assets include cash, due from banks and government securities recorded at market prices. We believe we could obtain cash for our liquid assets immediately, although under systemic stress scenarios, we would likely be subject to a discount to the face value of these assets. As of December 31, 2010 and 2011, we had a total amount of liquid assets of Ps. 216,913 million and Ps. 248,505 million, respectively. For the years ended December 31, 2010 and 2011, the average amounts outstanding were Ps.201,854 million and Ps.220,444 million, respectively. As of June 30, 2010 and 2011, we had a total amount of liquid assets of Ps.260,323 million and Ps.287,457 million, respectively. For the six months ended June 30, 2011 and 2012, the average amounts outstanding were Ps.210,287 million and Ps.263,582 million, respectively.
     As of December 31, 2010, liquid assets were composed of the following: 20.3% cash and balances with the Mexican Central Bank (cash at our branches and ATMs and the Depósito de Regulación Monetaria (Monetary Regulation Deposit)); 49.5% debt instruments issued by the Mexican Government and 30.1% debt instruments issued by the Mexican Central Bank. As of June 30, 2011, liquid assets were composed of the following: 19.8% cash and balances with the Mexican Central Bank (cash at our branches and ATMs and the Depósito de Regulación Monetaria (Monetary Regulation Deposit)); 55.7% debt instruments issued by the Mexican Government and 24.5% debt instruments issued by the Mexican Central Bank.
     As of December 31, 2011, liquid assets were composed of the following: 17.8% cash and balances with the Mexican Central Bank (cash at our branches and ATMs and the Depósito de Regulación Monetaria (Monetary Regulation Deposit)); 53.9% debt instruments issued by the Mexican Government and 28.3% debt instruments issued by the Mexican Central Bank. As of June 30, 2012, liquid assets were composed of the following: 14.6% cash and balances with the Mexican Central Bank (cash at our branches and ATMs and the Depósito de Regulación Monetaria (Monetary Regulation Deposit)); 53.0% debt instruments issued by the Mexican Government and 32.4% debt instruments issued by the Mexican Central Bank.
(13) For the purpose of calculating this ratio, the amount of deposits includes the sum of demand deposits and time deposits. “See Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Composition of Deposits.”
(14) For the purpose of calculating this ratio, the amount of total funding comprises the total of our deposits and reverse repurchase agreements and the amount of our marketable debt securities. For December 31, 2010 and 2011, our deposits and reverse repurchase agreements amounted to Ps.412,956 million and Ps.463,841 million, respectively, and our marketable debt securities amounted to Ps.12,005 million and Ps.23,894 million, respectively, For June 30, 2011 and June 30, 2012, our deposits and reverse repurchase agreements amounted to Ps.473,096 million and Ps.541,911 million, respectively, and our marketable debt securities amounted to Ps.38,432 million and Ps.21,963 million, respectively.

 

 

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RISK FACTORS

Investing in the ADSs and/or our Series B shares involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before making a decision whether to invest in the ADSs and Series B shares. If any of the following risks actually occurs, it may materially harm our business, results of operations or financial condition. In this event, the market price of the ADSs or our Series B shares could decline and you could lose part or all of your investment. The risks described below are those known to us or that we currently believe may materially and adversely affect us; other risks not currently known to us may arise in the future or may reach a greater level of materiality, which may materially and adversely affect us and our business.

Risks Associated with Our Business

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

In the past five years, the financial systems worldwide have experienced difficult credit and liquidity conditions and disruptions leading to less liquidity, greater volatility, general widening of spreads and, in some cases, lack of price transparency on interbank lending rates. Global economic conditions deteriorated significantly between 2007 and 2009, and many countries, including the United States, fell into recession. Many major financial institutions, including some of the world’s largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies, have been experiencing significant difficulties. Around the world, there have also been runs on deposits at several financial institutions, numerous institutions have sought additional capital or have been assisted by governments, and many lenders and institutional investors have reduced or ceased providing funding to borrowers (including to other financial institutions). The global economic slowdown and U.S. economic slowdown in particular had a negative impact on the Mexican economy and have adversely affected our business.

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

 

   

We potentially face increased regulation of our industry. Compliance with such regulation may increase our costs, may affect the pricing for our products and services, and limit our ability to pursue business opportunities.

 

   

Reduced demand for our products and services.

 

   

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

 

   

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

 

   

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

 

   

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

Some uncertainty remains concerning the future economic environment and there is no assurance when such conditions will improve. While certain segments of the global economy are currently experiencing a moderate recovery, we expect these conditions to continue to have an ongoing negative impact on our business and results of operations. Global investor confidence remains cautious and recent downgrades of the sovereign debt of Ireland, Greece, Portugal, Spain, Italy and France have caused renewed volatility in the capital markets. A slowing or failing of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.

 

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

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

Mexican government laws and regulations may have a material adverse effect on us.

We are subject to extensive laws and regulations regarding our organization, operations, lending and funding activities, capitalization, transactions with related parties, taxation and other matters. These laws and regulations impose numerous requirements on us, including the maintenance of minimum risk-based and operating-risk capital levels and loan loss reserves, regulation of our business practices, regulation on money laundering, rates charged, application of required accounting regulations and tax obligations. Many of the applicable laws and regulations have changed extensively in recent years, with a negative impact on us. There may be future changes in the legal or regulatory system or in the interpretation and enforcement of the laws and regulations, including changes in tax legislation, that could have a material adverse effect on us.

As a reaction to the 2008 economic crisis, Mexican regulatory entities increased loan loss reserves requirements for credit cards in 2009, which resulted in substantial increases to our loan loss reserves in the amount of Ps.5,952 million as of December 31, 2009, as calculated in accordance with Mexican Banking GAAP. The regulatory model for determining loan loss reserves for credit cards that was implemented in 2009 used a 12-month observation window to determine reserves as compared to the 36-month observation window that would be used under IFRS. Since the condition of our credit card portfolio improved between 2008 and 2009 because of decreased credit card originations and increased write-offs, we believe that the loan loss reserves that we recognized under Mexican Banking GAAP in 2009 are smaller than the loan loss reserves that we would have been required to recognize under IFRS with its longer observation window.

We believe that recoveries of non-performing loans as a percentage of our total non-performing loan portfolio are likely to decline over time because of the aging of our non-performing loan portfolio. In addition, because the mortgage foreclosure process relating to collateral in Mexico takes two to three years on average to be fully completed due to procedural requirements under Mexican law, other factors such as third-party claims, mechanic liens and deterioration of the relevant property may impair the value of the collateral during the foreclosure process.

In July 2010, the Mexican government enacted the Federal Law for Protection of Personal Data Held by Private Persons (Ley Federal de Protección de Datos Personales en Posesión de los Particulares) that protects personal data collected and requires that we ensure the confidentiality of information received from clients. We have begun to modify our processes, procedures and systems as required to implement this law and the supervision of our activities thereunder. We can provide no assurances as to how this legislation will be interpreted and how strictly Mexican authorities will enforce its application. However, if strictly interpreted and enforced, this legislation could have a material adverse effect on us, including increasing our operating costs and subjecting us to fines and penalties in the event of violations of the provisions of such law.

Given the current environment affecting the financial services sector, there may be future changes in the regulatory system or in the interpretation and enforcement of the laws and regulations that could adversely affect us and our subsidiaries, including our operating costs and margins. See “Supervision and Regulation” for a discussion of the governmental authorities that regulate us.

 

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Future Mexican government restrictions on interest rates or changes in reserves could have a material adverse effect on us.

In Mexico, the Law for the Protection and Defense of Financial Services Users (Ley de Protección y Defensa al Usuario de Servicios Financieros) does not impose any limit on the interest rate, subject to certain exceptions, that a bank may charge. However, the possibility of imposing such limits has been and continues to be debated by the Mexican Congress, Mexican regulators and different borrowers’ groups on a conceptual level. Although the Mexican government could impose limitations or additional informational requirements regarding such interest rates in the future, as of the date of this prospectus the Mexican Congress and Mexican regulators have not yet proposed any specific limit to the interest rates we may charge. A portion of our revenues and operating cash flow is generated by the interest rates we charge to our customers, and any such limitations or additional informational requirements could have a material adverse effect on us.

In September 2010, the Basel Committee on Banking Regulations and Supervisory Practices, or the Basel Committee, proposed comprehensive changes to the capital adequacy framework, known as Basel III. On December 16, 2010 and January 13, 2011, the Basel Committee issued its final guidance on a number of regulatory reforms to the regulatory capital framework in order to strengthen minimum capital requirements, including the phasing out of innovative Tier 1 and 2 Capital instruments with incentive-based redemption clauses and implementing a leverage ratio on institutions in addition to current risk-based regulatory requirements. In June 2011, the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV) distributed an outline of the projected implementation of Basel III standards in Mexico, which is expected to result in changes to Mexican regulations, that are likely to result in new requirements in respect of regulatory capital, liquidity/funding and leverage ratios that will be applicable to Mexican banks such as our subsidiary, Banco Santander Mexico.

If, as is likely, Mexican governmental authorities require Mexican banks to increase their reserve requirements for loan losses or change the manner in which such loan reserves are calculated or change capitalization requirements, it could have a material adverse effect on us, including our results of operations.

Loan loss reserves requirements in Mexico differ from those under IFRS.

Except for loans to the Mexican government and the Mexican Central Bank (Banco de México), the Mexican Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario, or IPAB) and certain international organizations, we are generally required to classify each loan or type of loan according to an assessment of risk based on criteria set forth by Mexican banking regulations and to establish corresponding reserves. Although we have estimated our loan loss reserves using an incurred loss model in accordance with IFRS for the purposes of the audited financial statements included elsewhere in this prospectus, our loan loss reserves for capital and other regulatory purposes, including safety and soundness regulation, are determined based on an expected loss model in accordance with Mexican Banking GAAP. The Mexican Banking GAAP criteria to establish reserves include both qualitative and quantitative factors. Mexican banking regulations relating to loan classification and determination of loan loss reserves are generally different and may be less stringent than those applicable to banks under IFRS. If IFRS were applicable in Mexico today, the level of our loan loss reserves would be lower than our actual reserves under Mexican Banking GAAP. However, our Mexican Banking GAAP loan loss reserves have been lower than they would have been under IFRS in the past and may be lower than what they would be under IFRS in the future.

In addition, with respect to our commercial, corporate and financial institutions portfolios, we have requested and received permission from the CNBV to use a proprietary methodology to determine loan loss reserves as an alternative to the standard methodology starting as of January 1, 2012. Our approach is based on the Foundation Internal Ratings-Based Approach as defined in the Basel II accords and is based on the evaluation of four main factors: country risk, financial risk, industry risk and payment performance. This results in an overall determination of debtor risk, which is then applied to each loan operation and mitigated by any collateral

 

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to obtain a risk grade which is associated to a provision factor. We have a mapping between this risk grade and the internal customer rating that has been approved by the CNBV. While our proprietary methodology has resulted in the calculation of probabilities of default that are lower than the probabilities of default calculated and established by the CNBV in its standard methodology, the use of a proprietary methodology does not necessarily result in a reduction of capital requirements or provisions.

We may be required or deem it necessary to materially increase our loan loss reserves in the future. Increasing loan loss reserves could have a material adverse effect on us.

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

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

 

   

net interest income;

 

   

the volume of loans originated;

 

   

the market value of our securities holdings; and

 

   

gains from sales of loans and securities.

Variations in short-term interest rates could affect our net interest income, which comprises the majority of our revenue. When interest rates rise, we may be required to pay higher interest on our floating-rate borrowings while interest earned on our fixed-rate assets does not rise as quickly, which could cause profits to grow at a reduced rate or decline in some parts of our portfolio. Interest rate variations could adversely affect us, including our net interest income, reducing its growth rate or even resulting in losses. We monitor our interest rate risk using the Net Interest Margin, or NIM, sensitivity, which is the difference between the return on assets and the financial cost of our financial liabilities based on a one-year time frame and a parallel movement of 100 basis points (1%) in market interest rates. As of June 30, 2012, the 1% NIM sensitivity was Ps.845 million.

Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of our customers to prepay or refinance fixed-rate loans. Increases in interest rates may reduce the value of our financial assets. We hold a substantial portfolio of loans and debt securities that have both fixed and floating interest rates.

If interest rates decrease, although this is likely to decrease our funding costs, it is likely to adversely impact the income we receive arising from our investments in securities.

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

Increases in interest rates may reduce gains or require us to record losses on sales of our loans or securities. In recent years, interest rates have been low by historical standards. However, there can be no assurance that such low rates will continue in the future.

We are also exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies and to equity price risk in connection with our trading investments in equity

 

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securities. As a commercial bank, we are also exposed to credit risk as part of our normal course of business. To the extent any of these risks materialize, our net interest income or the market value of our assets and liabilities could be adversely affected.

The volatility in peso exchange rates and interest rates in Mexico could have a material adverse effect on us.

We are exposed to currency risk any time we hold an open position in a currency other than pesos and to interest rate risk when we have an interest rate repricing gap or carry interest-earning securities having fixed real or nominal interest rates. Peso exchange rates and interest rates in Mexico have been subject to significant fluctuations in recent years. Because of the historical volatility in peso exchange rates and interest rates in Mexico, the risks associated with such positions may be greater than in certain other countries. Our foreign currency liabilities are subject to regulation by the Mexican Central Bank, which imposes liquidity requirements in matching currencies, depending upon the maturities of such liabilities. As of June 30, 2012, the value at risk, or VaR, associated with our financial instruments sensitive to interest rates and foreign currency exchange rates was U.S.$8.80 million (Ps.118 million) and U.S.$0.93 million (Ps.12.5 million), respectively. Although we follow various risk management procedures in connection with our trading and treasury activities and are subject to regulations that seek to avoid important mismatches, there can be no assurance that we will not experience losses with respect to these positions in the future, any of which could have a material adverse effect on us, including our results of operations.

Severe devaluation or depreciation of the peso may have an adverse effect on us by, for example, increasing in peso terms the amount of our foreign currency-denominated liabilities and the rate of default among our borrowers or affecting our results of operations when measured in U.S. dollar terms. In addition, severe devaluations may result, as in the past, in the implementation of exchange controls that may impact our ability to convert pesos into U.S. dollars or to transfer currencies outside of Mexico, which may have an impact on our business and results of operations.

As a result of the negative economic conditions in the United States and in other parts of the world, local and international markets have experienced high volatility, which has contributed to the devaluation of the peso by 26.7% in 2008. Although the peso increased in value relative to the U.S. dollar by 5.5% and 5.5% in 2009 and 2010, respectively, it depreciated in 2011 by 12.9%, closing at 13.95 pesos per U.S. dollar at the end of December. At the end of March 2012, the peso had appreciated to 12.81 pesos per U.S. dollar, and at the end of June 2012, the peso had depreciated to 13.41 pesos per U.S. dollar compared to the exchange rate at the end of March 2012 but appreciated slightly relative to the exchange rate at the end of December 2011. As of August 31, 2012, the peso had appreciated to Ps.13.26 pesos per U.S. dollar relative to the end of June 2012 exchange rate. The peso continues to be affected by uncertainty and volatility in the global markets. The Mexican government has consistently implemented a series of measures to limit the volatility of the peso, varying from auctioning U.S. dollars to intervening in interest rates and regulating hedges of foreign currency-denominated liabilities of Mexican banks. However, we cannot assure you that such measures will be effective or maintained or how such measures will impact the Mexican economy.

Severe devaluation or depreciation of the peso may also result in government intervention, as has occurred in other countries, or disruption of international foreign exchange markets. While the Mexican government does not currently restrict, and for many years has not restricted, the right or ability of Mexican or foreign persons or entities to convert pesos into dollars or to transfer other currencies outside of Mexico, the Mexican government has taken such measures in the past and could institute restrictive exchange control policies in the future. Accordingly, fluctuations in the value of the peso against the dollar could have a material adverse effect on us.

Fluctuations in the exchange rate between the peso and the U.S. dollar, particularly depreciations in the value of the peso, may adversely affect the U.S. dollar equivalent of the peso price of the Series B shares on the Mexican Stock Exchange. Such peso depreciations also will likely affect our revenues and earnings when measured in U.S. dollar terms and the market price of the ADSs. Exchange rate fluctuations would also affect the U.S. dollar equivalent value of any peso cash dividends and other distributions that we pay in pesos in respect of the Series B shares.

 

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

Non-performing or low credit quality loans can negatively impact our results of operations. We cannot assure you that we will be able to effectively control the level of the impaired loans in our total loan portfolio. In particular, the amount of our reported non-performing loans may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that we may acquire in the future, or factors beyond our control, such as the impact of economic trends and political events affecting Mexico, events affecting certain industries or events affecting financial markets and global economies. As part of our business strategy, we are seeking to increase lending and other services to individuals and SMEs, which are more likely to be adversely affected by downturns in the Mexican economy than large corporations and high-income individuals who have greater resources. Consequently, in the future we may experience higher levels of non-performing assets, which could result in higher provisions for loan losses, which in turn will affect our financial condition and results of operations. Part of our current growth strategy is also to increase volume in the credit card portfolio, at the same or a slightly higher rate than the market, which may increase the level of non-performing loans in our loan portfolio. In addition, the introduction of new products, such as Hipoteca Light (a residential mortgage product that has increasing payments over time and a fixed interest rate) may lead to greater loan losses.

As of June 30, 2012, our allowance for impairment losses was Ps.8,032 million under IFRS. We believe our current loan loss and other reserves are adequate to cover all known or knowable losses in our loan and securities portfolio. However, our current loan loss reserves may not be adequate to cover an increase in the amount of non-performing loans or any future deterioration in the overall credit quality of our total loan portfolio. As a result, if the quality of our total loan portfolio deteriorates, for any reason, including the increase in lending to individuals and SMEs, the volume increase in the credit card portfolio and the introduction of new products, we may be required to increase our loan loss reserves, which may adversely affect us. Moreover, there is no precise method for predicting loan and credit losses, and we cannot assure you that our loan loss reserves will be sufficient to cover actual losses. If we are unable to control or reduce the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.

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

Our loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a declining interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. While we did not experience a significant increase in prepayments on our loan portfolios from 2010 to 2011, prepayment risk is inherent to our commercial activity and an increase in prepayments could have a material adverse effect on us.

Competition with other financial institutions could adversely affect us.

We face substantial competition in all parts of our business, including in originating loans and in attracting deposits. The competition in originating loans comes principally from other Mexican and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other lenders and purchasers of loans. We anticipate that we will encounter greater competition as we expand our operations. In addition, certain of our competitors, such as Sociedades Financieras de Objeto Limitado, or Sofoles, and Sociedades Financieras de Objeto Múltiple, or Sofomes, are not licensed financial institutions and, as such, not

 

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subject to the same extensive banking regulation, including capitalization and reserve requirements. As a result, certain of our competitors may have advantages in conducting certain businesses and providing certain services and particularly, may be more aggressive in their loan origination activities.

Our principal competitors are BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer; Banco Nacional de México, S.A., Integrante del Grupo Financiero Banamex; Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC; Banco Inbursa, S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa; and Scotiabank Inverlat, S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank.

For a number of years, foreign financial institutions have been permitted to establish subsidiary financial groups, banks, broker-dealers and other financial entities in Mexico. According to the CNBV, as of June 30, 2012, Mexico’s ten largest domestic banks, measured in terms of assets, held 85.2% of the total assets in the Mexican banking system. Seven of these ten banks are foreign-owned. These foreign financial institutions are generally well-capitalized, and have substantial resources (such as personnel, technology and product development and organization); if any of them pursue the Mexican market aggressively, by establishing or expanding operations, we may be unable to compete with them.

The CNBV continues, from time to time, to grant banking licenses, including licenses to niche banks, that are solely permitted to engage in limited activities. Newly licensed banks are likely to aggressively pursue market expansion, which may adversely affect our activities and results of operations.

In addition, legal and regulatory reforms in the Mexican banking industry have also increased competition among banks and among other financial institutions. We believe that the Mexican government’s policies of adopting market-oriented reforms in the financial industry have brought greater competition. As financial sector reform continues, foreign financial institutions, some having greater resources than we do, have entered and may continue to enter the Mexican market either by themselves or in partnership with existing Mexican financial institutions and compete with us. There can be no assurance that we will be able to compete successfully with such domestic or foreign financial institutions.

Increasing competition could also require that we increase our rates offered on deposits or lower the rates we charge on loans, which could also have a material adverse effect on us, including our profitability.

Our brokerage and asset management subsidiaries also face intense competition. See “Business—Competition.”

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 funds, hedge funds and other institutional clients. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties. In 2011, the financial health of a number of European governments was shaken by the European sovereign debt crisis, contributing to volatility of the capital and credit markets, and the risk of contagion throughout and beyond the Eurozone remains, as a significant number of financial institutions throughout Europe have substantial exposures to sovereign debt issued by nations which are under considerable financial pressure. These liquidity concerns have had, and may continue to have, an adverse effect on interbank financial transactions in general. Should any of these nations default on their debt, or experience a significant widening of credit spreads, major financial institutions and banking systems throughout Europe could be destabilized. A default by a significant financial counterparty, or liquidity problems in the financial services industry generally, could have a material adverse effect on us.

 

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We may be required to make significant contributions to IPAB.

IPAB manages the bank savings protection system and the financial support granted to banks in Mexico. Under Mexican law, banks are required to make monthly contributions to IPAB to support its operations that are equal to 1/12 of 0.004% (the annual rate) multiplied by the average of certain liabilities minus the average of certain assets. Mexican authorities impose regular assessments on banking institutions covered by IPAB for funding. We contributed to IPAB Ps.1,146 million in 2009, Ps.982 million in 2010, Ps.1,228 million in 2011 and Ps.646 million in the six months ended June 30, 2012. In the event that IPAB’s reserves are insufficient to manage the Mexican bank savings protection system and provide the necessary financial support required by troubled banking institutions, IPAB maintains the right to require extraordinary contributions to participants in the system that we may be required to make. Although we have not been required to make extraordinary contributions to the IPAB in the past, we may be required to make extraordinary contributions in the future. Such extraordinary contributions would increase our expenses and could have a material adverse effect on us.

We are subject to Mexican regulatory inspections, examinations, inquiries or audits, and future sanctions, fines and other penalties resulting from such inspections and audits could have a material adverse effect on us.

We are subject to comprehensive regulation and supervision by Mexican regulatory authorities, such as the Mexican Central Bank, the CNBV and the Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, or SHCP). See “The Mexican Financial System.” These regulatory authorities have broad powers to adopt regulations and other requirements affecting or restricting virtually all aspects of our capitalization, organization and operations, including changes to capital adequacy and reserve requirements, supervision of compliance with rules relating to secrecy, the imposition of anti-money laundering measures and the authority to regulate the terms of products, including the interest rates we charge and the fees we collect in exchange for services. Moreover, Mexican financial regulatory authorities possess significant powers to enforce applicable regulatory requirements, including the imposition of fines, requiring that new capital be contributed, inhibiting us from paying dividends to shareholders or paying bonuses to employees, or the revocation of licenses to operate our business (including our banking or broker-dealer licenses). In the event we encounter significant financial problems or become insolvent or in danger of becoming insolvent, Mexican banking authorities would have the power to take over our management and operations. See “Supervision and Regulation.”

Liquidity risks could have a material adverse effect on us.

Many Mexican banks have suffered severe liquidity problems from time to time.

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

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

We have not suffered material liquidity problems since the 1995 to 1996 period, when we experienced a significant increase in the cost of funding as a result of the financial crisis in Mexico. During this period, we were able to obtain the required funding, but at a higher cost. While we have not suffered material liquidity problems

 

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in recent years, we cannot assure you that liquidity problems will not affect the Mexican banking system in the future or that liquidity constraints will not affect us in the future. While we expect to be able to refinance our liabilities, we cannot assure you that we will be able to repay our liabilities or refinance our liabilities on favorable terms or at all.

The credit card industry is highly competitive and entails significant risks, including the possibility of over-indebtedness of customers, which could have a material adverse effect on us.

The credit card industry in Mexico is dominated by institutions that may possess greater financial resources and broader coverage in this market than we do. There is no assurance that we will be able to effectively compete for and retain customers in this competitive industry or that we will be able to implement our experience in the Mexican market successfully.

Our credit card business is subject to a number of risks and uncertainties, including the possibility of over-indebtedness of our customers, despite our focus on low-risk, medium- and high-income customers. We currently use a segmentation policy in order to measure the risk of our credit card portfolio. Pursuant to this segmentation policy, we segment our credit card portfolio into ten groups based on a composite score comprised of a behavior score based on internal and external data and a credit capacity score based primarily on external data. We perform monthly validations of our scores to test their predictive capacity so that the methodologies can be adjusted, if necessary. We measure the loss rates for each of the ten groups over a one-year period and compare the average loss rate to our appetite for risk within the credit card portfolio. As of June 30, 2012, approximately 70% of our credit card portfolio was included in the top five groups, which together had an average loss rate of 3.7%, which we consider to be low risk.

The credit card industry is characterized by higher consumer default than other credit industries, and defaults are highly correlated with macroeconomic indicators that are beyond our control. From 2008 to 2010, our credit card portfolio decreased by Ps.22,832 million, or 48%, primarily due to write-offs, tightening of credit policies and a reduction in the origination of new credit cards, all of which were a response to a material deterioration in credit quality in our credit card portfolio. Part of our current growth strategy is to increase volume in the credit card portfolio, at the same or a slightly higher rate than the market, which may increase our exposure to risk in our loan portfolio. If Mexican economic growth slows or declines, or if we fail to effectively analyze the creditworthiness of our customers (including by targeting certain sectors), we may be faced with unexpected losses that could have a material adverse effect on us.

Failure to successfully implement and continue to improve our credit risk management system could materially and adversely affect us.

As a commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management system is to employ an internal credit rating system to assess the particular risk profile of a customer. As this process involves detailed analyses of the customer or credit risk, taking into account both quantitative and qualitative factors, it is subject to human error. In exercising their judgment, our employees may not always be able to assign an accurate credit rating to a customer or credit risk, which may result in our exposure to higher credit risks than indicated by our risk rating system. In addition, we have been trying to refine our credit policies and guidelines to address potential risks associated with particular industries or types of customers, such as affiliated entities and group customers. However, we may not be able to timely detect these risks before they occur, or due to limited tools available to us, our employees may not be able to effectively implement them, which may increase our credit risk. Failure to effectively implement, consistently follow or continuously refine our credit risk management system may result in a higher risk exposure for us, which could have a material adverse effect on us.

 

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

Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our debt are based on a number of factors, including our financial strength as well as conditions affecting the financial services industry generally.

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

The long-term debt of Banco Santander, S.A., or Banco Santander Spain, is currently rated investment grade by the major rating agencies—Baa2 by Moody’s Investors Service España, S.A., A- by Standard & Poor’s Ratings Services and BBB+ by Fitch Ratings Ltd.—all of which have a negative outlook due to the difficult economic environment in Spain. All three agencies downgraded Banco Santander Spain’s rating in October 2011 and February 2012 together with that of the other main Spanish banks, due to the weaker-than-previously-anticipated macroeconomic and financial environment in Spain with dimming growth prospects in the near term, depressed real estate market activity and heightened turbulence in the capital markets. In addition, Standard & Poor’s Ratings Services downgraded Banco Santander Spain’s rating by two notches in April 2012 together with that of 15 other Spanish banks following that rating agency’s decision to downgrade Spain’s sovereign debt rating by two notches. Moody’s Investors Service España, S.A. further downgraded Banco Santander Spain’s rating in May 2012, together with downgrades of 15 other Spanish banks and Santander UK plc, a United Kingdom-domiciled subsidiary of Banco Santander Spain. In June 2012, Fitch Ratings Ltd. cut the rating of Spanish sovereign debt three notches to BBB- with a negative outlook, and Moody’s followed shortly thereafter by downgrading Spanish sovereign debt three notches to Baa3, its lowest investment grade rating. Following its downgrade of Spanish sovereign debt, Fitch Ratings Ltd. further downgraded Banco Santander Spain’s rating on June 11, 2012 from A to BBB+. Moody’s Investors Service downgraded Banco Santander Spain’s rating on June 25, 2012 from A3 to Baa2.

On June 13, 2012, as a result of its downgrade of Banco Santander Spain, Fitch Ratings Ltd. took various rating actions against Banco Santander Mexico, including downgrading its long-term debt rating for any issuances in the international capital markets from A- to BBB+ with a negative outlook while affirming its rating with respect to long-term issuances in the local Mexican market of AAA(mex) with a stable outlook.

On June 28, 2012, as a result of its downgrade of Banco Santander Spain, Moody’s Investors Service took various rating actions against Banco Santander Mexico, including downgrading its standalone financial strength rating to C-, its long-term peso-denominated debt rating for any issuances in the international capital markets from A2 to A3 and its short-term peso-denominated debt rating for any international issuances to Prime-2 from Prime 1. However, Moody’s Investors Service’s long-term debt rating for issuances in the local Mexican market was maintained at AAA.mx with a stable outlook.

On July 11, 2012, Standard & Poor’s Ratings Services raised the local and foreign currency short-term debt ratings of Banco Santander Mexico for any issuances in the international capital markets from A-3 to A-2, which mirrored Standard & Poor’s Ratings Services’s decision to raise Mexico’s sovereign short-term foreign currency

 

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rating to A-2 on July 9, 2012. Standard &Poor’s Ratings Services’s rating of our long-term debt issued in the local Mexican market was maintained at mxAAA.

Our funding costs have not been affected by the recent downgrades of Spain’s sovereign debt, Banco Santander Spain’s debt and our related downgrades because we currently do not have outstanding debt securities in the international capital markets. For debt financing, we currently rely entirely on local, peso-denominated issuances and we continue to be rated mxAAA, Aaa.mx and AAA(mex) by Standard & Poor’s Ratings Services, Moody’s Investors Service and Fitch Ratings Ltd., respectively, with respect to our local peso-denominated long-term debt, with equivalent ratings for our local peso-denominated short-term debt. Nor have we been required to post additional collateral or take other actions under any of our derivative contracts.

However, we expect to issue debt in the international capital markets by the end of 2012. If we proceed with the debt offering, downgrades of Spain’s sovereign debt, Banco Santander Spain’s debt and our related downgrades would adversely affect our cost of funding related to the offering. While certain potential impacts are contractual and quantifiable, the full consequences of a credit ratings downgrade to a financial institution are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a firm’s long-term credit ratings precipitates downgrades to its short-term credit ratings, and assumptions about the potential behaviors of various customers, investors and counterparties. However, we estimate that if the rating agencies were to downgrade our long-term senior debt ratings by one or two notches, it would increase our borrowing costs for debt issued in the international capital markets by approximately 10 to 20 basis points for our short-term debt. The effect on our long-term debt is much more uncertain due to the factors described above; however, we estimate that there would be an increase of approximately 30 to 50 basis points in our borrowing costs for long-term debt issued in the international capital markets in the event of a downgrade by one or two notches. In addition, we expect that we would be required to post up to U.S.$51.8 million in additional collateral in respect of our derivative arrangements in the event of such a downgrade, based on our derivatives portfolio as of June 30, 2012. As a result, any such downgrade could have a material adverse effect on us. In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace such contracts, our market risk profile could be altered. For a further discussion of liquidity matters, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

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 our current ratings or outlooks. Our failure to maintain favorable ratings and outlooks would likely increase our cost of funding and adversely affect our interest margins, which could have a material adverse effect on us.

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

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

In addition, in connection with Mexican domestic derivative transactions, Mexican courts have had limited experience in dealing with issues related to derivative transactions, as most disputes have typically been resolved through negotiations among Mexican financial institutions. As a result, the outcomes of disputes regarding derivatives reaching the Mexican judicial system are not fully predictable.

 

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Our ability to adequately monitor, analyze and report derivative transactions continues to depend, to a great extent, on our information technology systems. This factor further increases the risks associated with these transactions and could have a material adverse effect on us.

The retail banking market is exposed to macroeconomic shocks that may negatively impact household income, and a downturn in the economy could result in increased loan losses.

One of our main strategies is to focus on the retail banking sector and to grow our retail loan portfolio. The recoverability of these loans in particular and our ability to increase the amount of loans outstanding, and our results of operations and financial condition in general, may become increasingly vulnerable to macroeconomic shocks that could negatively impact the household income of our retail customers and result in increased loan losses that could have a material adverse effect on us.

Furthermore, because the penetration of bank lending products in the Mexican retail sector historically has been low, there is little basis on which to evaluate how the retail sector will perform in the event of an economic crisis, such as a recession or a significant devaluation, among others. Consequently, our historical loan loss experience may not be indicative of the performance of our loan portfolio in the future.

Our increasing focus on individuals and small and medium-sized businesses could lead to higher levels of non-performing assets and subsequent charge-offs that could have a material adverse effect on us.

As part of our business strategy, we are seeking to increase lending and other services to individuals and to small and medium-sized enterprises, or SMEs. Individuals and SMEs are, however, more likely to be adversely affected by downturns in the Mexican economy than large corporations and high-income individuals who have greater resources. Consequently, in the future we may experience higher levels of non-performing assets, which could result in higher provisions for loan losses, which in turn will affect our financial condition and results of operations. For the six months ended June 30, 2012, non-performing assets were Ps.5,809 million and total charge-offs against credit loss allowance were Ps.3,427 million. Non-performing assets related to individuals and SMEs represented 71.7% and 10.6%, respectively, of our total non-performing assets for the six months ended June 30, 2012, as compared to 53.8% and 8.8%, respectively, for the six months ended June 30, 2011. Charge-offs related to individual and SME loans represented 78.8% and 17.4%, respectively, of our total charge-offs for the six months ended June 30, 2012, as compared to 85.0% and 11.8%, respectively, for the six months ended June 30, 2011. There can be no assurance that the levels of non-performing assets and subsequent charge-offs will not be materially higher in the future.

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

The success of our operations and our profitability depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties. However, we cannot guarantee that our new products and services—such as Autocompara (a program that allows potential clients to compare automobile insurance quotes from the seven largest insurance companies in Mexico), Hipoteca Light (a residential mortgage product that has increasing payments over time and a fixed interest rate) and Banca Móvil (a program that allows banking operations to be carried out by means of cell phones and other mobile devices)—will be responsive to client demands or successful once they are offered to our clients, or that they will be successful in the future. In addition, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive and we may not be able to develop new products that meet our clients’ changing needs. If we cannot respond in a timely fashion to the changing needs of our clients, we may lose clients, which could in turn materially and adversely affect us.

 

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

Our businesses rely heavily on data collection, processing and storage systems, the failure of which could have a material adverse effect on us, including the effectiveness of our risk management and internal control systems.

All of our principal businesses are highly dependent on the ability to timely collect and process a large amount of financial and other information across numerous and diverse markets and products at our various branches, at a time when transaction processes have become increasingly complex with increasing volume. The proper functioning of financial control, accounting or other data collection and processing systems is critical to our businesses and to our ability to compete effectively. A partial or complete failure of any of these primary systems could materially and adversely affect our decision-making process, our risk management and internal control systems, as well as our ability to respond on a timely basis to changing market conditions. If we cannot maintain an effective data collection, management and processing system, we may be materially and adversely affected.

We are also dependent on information systems to operate our website, process transactions, respond to customer inquiries on a timely basis and maintain cost-efficient operations. We may experience operational problems with our information systems as a result of system failures (including failure to update systems), viruses, computer “hackers” or other causes.

Technological services are provided to us by two different companies that are part of the Santander Group: Produban for hardware, production environment and information security and Isban for software development and implementation. We have a local information security officer who is responsible for assessing that security policies are properly implemented and that our technological environment is secure. We are required to report every event related to information security issues, such as hacking or hacking attempts, events where customer information may be compromised, unauthorized access and other security breaches, to the CNBV. As of the date of this prospectus, we have not experienced information security problems and we have not had to report any such events to the CNBV. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or to be delivered to our clients with delays or errors, which could reduce demand for our services and products and could materially and adversely affect us.

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

Our ability to remain competitive depends in part on our ability to upgrade our information technology on a timely and cost-effective basis. We must continually make significant investments and improvements in our information technology infrastructure in order to remain competitive. For 2012, 30% of our capital expenditures budget for information technology is designated for information technology infrastructure in order to decrease technological risk. We cannot assure you that in the future we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our information technology infrastructure. Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on us.

 

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

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

While we have adopted policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and related activities, such policies and procedures have in some cases only been recently adopted and may not completely eliminate instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. In addition, the personnel we employ in supervising these activities may not have experience that is comparable to the level of sophistication of criminal organizations. While we have not been subject to fines or other penalties as a result of money laundering activities, to the extent we fail to fully comply with applicable laws and regulations, the relevant government agencies to which we report have the power and authority to impose fines and other penalties on us, including the revocation of licenses. In addition, although we have not suffered business or reputational harm as a result of money laundering activities in the past, our business and reputation could suffer if customers use our banking network for money laundering or illegal or improper purposes.

We are a holding company and depend upon dividends and other funds from subsidiaries to fund our operations and, to the extent we decide to do so, pay dividends.

We are a holding company and our operations are conducted through our financial services subsidiaries. As a result, our ability to fund our limited operations and, to the extent we decide to do so, pay dividends, primarily depends on the ability of our subsidiaries to generate earnings and to pay dividends to us. Pursuant to the Mexican Capitalization Requirements, Banco Santander Mexico, our commercial bank subsidiary, may be restricted from paying dividends to us if it does not meet its required regulatory capital ratios, does not have sufficient retained earnings or does not maintain legal reserves at required levels. Payment of dividends, distributions and advances by our subsidiaries will be contingent upon our subsidiaries’ earnings and business considerations and is or may be limited by legal, regulatory and contractual restrictions. Additionally, our right to receive any assets of any of our subsidiaries as an equity holder of such subsidiaries, upon their liquidation or reorganization, will be effectively subordinated to the claims of our subsidiaries’ creditors, including trade creditors. For additional information regarding our dividend policy, see “Dividends and Dividend Policy.”

Under the Statutory Responsibility Agreement entered into with our financial services subsidiaries pursuant to the Mexican Financial Groups Law, we are responsible secondarily and without limitation for performance of the obligations incurred by our subsidiaries.

Under the Statutory Responsibility Agreement entered into with our financial services subsidiaries pursuant to the Mexican Financial Groups Law (Ley para Regular las Agrupaciones Financieras), we are responsible secondarily and without limitation for the performance of the obligations incurred by our subsidiaries as a result of the authorized activities of such subsidiaries, and we are fully responsible for certain losses of our subsidiaries, up to the total amount of our assets. For such purposes, a subsidiary is deemed to have losses if (i) its shareholders’ equity represents an amount that is less than the amount the subsidiary is required to have as minimum paid-in capital under applicable law, (ii) its capital and reserves are less than the subsidiary is required to maintain under applicable law, or (iii) in the judgment of the regulatory commission supervising the subsidiary’s activities, the subsidiary is insolvent and cannot fulfill its obligations.

 

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Furthermore, if Banco Santander Mexico is deemed to have losses, it will not be allowed to pay any dividends or transfer any monetary benefit to us as a shareholder, from the date on which the IPAB determines Banco Santander Mexico’s losses up to the date on which we pay such losses. Also, we would be required, among other things, to guarantee to IPAB the payment of such losses. Pursuant to the Mexican Financial Groups Law, our shares and the shares of our subsidiaries would be required to be posted as collateral to secure the payment of Banco Santander Mexico’s losses in favor of IPAB. Pursuant to Article 28 Bis of the Mexican Financial Groups Law, our shareholders, by virtue of their holding of our shares, accept that their shares could be posted as a collateral in favor of IPAB and that such shares will be transferred to IPAB, if we are unable to pay for any amounts due to IPAB as a result of Banco Santander Mexico’s losses. Although Mexican law is unclear on this point, it is possible that the obligation to provide collateral to IPAB would extend to all our Series B shares (including the shares offered in the Mexican offering and represented by our ADSs offered in the international offering) if Series F shares held by Banco Santander Spain were insufficient.

We cannot assure you that in the future, Banco Santander Mexico or any other of our subsidiaries, will not be deemed to have losses, and if so, that we will have sufficient assets to cover such losses. See “Supervision and Regulation—Financial Groups’ Statutory Responsibility.”

Series F shares or Series B shares (the shares offered in the Mexican offering and represented by our ADSs offered in the international offering) of Grupo Financiero Santander Mexico may be required to be posted as collateral to IPAB to secure liabilities of Banco Santander Mexico to IPAB in the event Banco Santander Mexico suffers losses that are covered by IPAB.

Under the Statutory Responsibility Agreement and the Mexican Financial Groups Law, if IPAB were to determine that Banco Santander Mexico has suffered losses which are covered by IPAB, Grupo Financiero Santander Mexico would be required, within 15 days from the date of such determination, to (i) create an adequate reserve covering such losses and (ii) post collateral to secure performance of Banco Santander Mexico’s obligations to IPAB to repay funds advanced by IPAB to Banco Santander Mexico to cover such losses. Collateral posted by Grupo Financiero Santander Mexico may be its own assets, shares of subsidiaries, or Series F shares or Series B shares (the shares offered in the Mexican offering and represented by our ADSs offered in the international offering) of Grupo Financiero Santander Mexico. Grupo Financiero Santander Mexico would be required to repay IPAB within sixty days from the final determination by IPAB of its losses relating to Banco Santander Mexico. Although Mexican law is unclear on this point, it is possible that the obligation to provide collateral to IPAB would extend to all our Series B shares (including the shares offered in the Mexican offering and represented by our ADSs offered in the international offering) if Series F shares held by Banco Santander Spain were insufficient.

If such losses are not timely repaid by Grupo Financiero Santander Mexico to IPAB, then IPAB would be entitled to immediately foreclose on the posted collateral, including, if applicable, any Series F shares posted as collateral by our Parent. As a result, IPAB would acquire a participation in Grupo Financiero Santander Mexico or, if such losses were significant, IPAB could assume control of Grupo Financiero Santander Mexico. If IPAB were to assume ownership of our Series F shares or Series B shares, the value and liquidity of our Series B shares and ADSs could be materially adversely affected and our operations would likely be impacted, which would likely materially adversely affect us.

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

We and our subsidiaries and affiliates have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others. In 2011, the aggregate amount of our expenses related to the service agreements we have with our subsidiaries and affiliates was Ps.2,045 million, or 13.6% of our administrative expenses, and we had an insignificant amount of income related to such agreements. In addition, Banco Santander Mexico has entered into services agreements with

 

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certain affiliates to allow these companies to offer their products and services within Banco Santander Mexico’s branch network or that assist with Banco Santander Mexico activities in consideration for certain fees.

Mexican law applicable to public companies and financial groups and institutions, as well as our bylaws, provide for several procedures designed to ensure that the transactions entered into with or among our financial subsidiaries do not deviate from prevailing market conditions for those types of transactions, including the requirement that our Board of Directors approve such transactions.

We are likely to continue to engage in transactions with our subsidiaries or affiliates (including Banco Santander Spain). While the CNBV has not disagreed with our determinations that the terms of these transactions are “substantially on market conditions” in the past, we can provide no assurances that the CNBV will agree with any of our future determinations. In addition, future conflicts of interests between us and any of our subsidiaries or affiliates, or among our subsidiaries and affiliates, may arise, which conflicts are not required to be and may not be resolved in our favor. See “Related Party Transactions.”

Our controlling shareholder has a great deal of influence over our business and its interests could conflict with yours.

As of the date of this prospectus, Banco Santander Spain, our controlling shareholder, directly and indirectly beneficially owns 99.7% of our Series B shares and 100% of our Series F shares, which grant control. Upon completion of the global offering, assuming full exercise of the option to purchase additional ADSs and the option to purchase additional Series B shares, Banco Santander Spain will, directly or indirectly, control approximately % of our total voting interests. Following the global offering, our controlling shareholder will continue to be able to control us and our subsidiaries, including the ability to:

 

   

elect the majority of the directors and exercise control over our company and subsidiaries;

 

   

cause the appointment of our principal officers;

 

   

declare the payment of any dividends;

 

   

agree to sell or otherwise transfer its controlling stake in us; and

 

   

determine the outcome of substantially all actions requiring shareholder approval, including amendments of our bylaws, transactions with related parties, corporate reorganizations, acquisitions and disposals of assets and issuance of additional equity securities, if any.

We operate as a stand-alone subsidiary within the Santander Group. Our principal shareholders have no liability for our banking operations, except for the amount of their respective holdings of our capital stock. The interests of Banco Santander Spain may differ from our interests or those of our other shareholders and the concentration of control in Banco Santander Spain will limit other shareholders’ ability to influence corporate matters. As a result, we may take action that our other shareholders do not view as beneficial.

We may make acquisitions that may not be successful.

From time to time, we evaluate acquisition opportunities that we believe offer additional value to our shareholders and are consistent with our business strategy. These acquisitions may be acquisitions of assets or of existing operations, such as the GE Capital mortgage business that we acquired in 2011. However, we may not be able to identify suitable acquisition candidates, and we may not be able to acquire promising targets on favorable terms or at all. In additional, our ability to benefit from any such acquisitions will depend in part on our successful integration of those businesses. The integration of acquired businesses entails significant risks, including:

 

   

unforeseen difficulties in integrating operations and systems;

 

   

inability to modify accounting standards rapidly;

 

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problems assimilating or retaining the employees of acquired businesses;

 

   

challenges retaining customers of acquired businesses;

 

   

unexpected liabilities or contingencies relating to the acquired businesses, including legal claims;

 

   

the possibility that management may be distracted from day-to-day business concerns by integration activities and related problem-solving; and

 

   

the possibility of regulatory restrictions that prevent us from achieving the expected benefits of the acquisition.

In addition, an acquisition could result in the loss of key employees and inconsistencies in standards, controls, procedures and policies. Moreover, the success of the acquisition will at least in part be subject to a number of political, economic and other factors that are beyond our control. Any or all of these factors, individually or collectively, could have a material adverse effect on us.

We recently began preparing our financial statements in accordance with IFRS and, as a result, some of our financial data are not easily comparable from period to period.

For purposes of this global offering, we have begun preparing our financial statements, traditionally prepared in accordance with Mexican Banking GAAP, in accordance with IFRS. As a result, our financial data as of and for the years ended December 31, 2010 and 2011 presented in this prospectus has been derived from our audited financial statements prepared in accordance with IFRS. Our financial data as of June 30, 2012 and for the six-month periods ended June 30, 2011 and 2012 is derived from our unaudited condensed consolidated financial statements prepared in accordance with IAS 34. Prior to the year ended December 31, 2010, we prepared our financial statements solely in accordance with Mexican Banking GAAP. For regulatory purposes, including Mexican Central Bank regulations and CNBV reporting requirements, we currently prepare and will continue to prepare and make available to our shareholders statutory financial statements in accordance with Mexican Banking GAAP. We have included as supplemental information in this prospectus selected financial data which have been derived from our financial statements at and for the years ended December 31, 2007, 2008, 2009, 2010 and 2011, and the six-month periods ended June 30, 2011 and 2012, prepared in accordance with Mexican Banking GAAP. The prospectus that is used for purposes of the concurrent offering in Mexico will include information prepared under Mexican Banking GAAP. Also, we will continue to report to Mexican regulators under Mexican Banking GAAP. Because IFRS differs in certain significant respects from Mexican Banking GAAP, our Mexican Banking GAAP financial information presented in this prospectus for any period is not directly comparable to our IFRS financial data. The lack of comparability of our financial data may make it difficult to gain a full and accurate understanding of our operations and financial condition.

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

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

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

 

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U.S. courts, of liabilities based solely on the U.S. federal securities laws. See “Enforcement of Judgments Against Foreign Persons.”

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, including tax litigation. These issues, including appropriately dealing with potential conflicts of interest, and legal and regulatory requirements, could increase the amount of damages asserted against us or subject us to regulatory enforcement actions, fines and penalties. The current regulatory environment, which suggests an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, may lead to material operational and compliance costs.

We are from time to time subject to certain claims and parties to certain legal proceedings incidental to the normal course of our business, including in connection with our lending activities, relationships with our employees and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in the early stages of discovery, we cannot state with confidence what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have made adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings. As of June 30, 2012, we have set aside Ps.1,323 million (U.S.$98.7 million) as provisions for these legal actions (including tax-related litigation). See note 11 to our unaudited condensed consolidated financial statements. 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 us. As a result, the outcome of a particular matter may be material to our operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period. See “Business—Legal Proceedings.”

Risks Relating to Mexico

Adverse economic conditions in Mexico could have a negative effect on us.

We are a holding company for Mexican financial institutions, and substantially all of our operations and assets are in Mexico and are dependent upon the performance of the Mexican economy. As a result, our business, financial condition and results of operations may be affected by the general condition of the Mexican economy, the devaluation of the peso as compared to the dollar, price instability, inflation, interest rates, regulation, taxation, social instability and other political, social and economic developments in or affecting Mexico, over which we have no control. In the past, Mexico has experienced both prolonged periods of weak economic conditions and deteriorations in economic conditions that have had a negative impact on us. We cannot assume that such conditions will not return or that such conditions will not have a material and adverse effect on us.

According to the Mexican National Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía, or INEGI), and the Mexican Central Bank, in 2007, the Mexican gross domestic product, or GDP, grew by approximately 3.3% and inflation declined to 3.8%. In 2008, GDP grew by approximately 1.2% and inflation was 6.5%. Mexico was in a recession for five consecutive quarters from the fourth quarter of 2008 until the fourth quarter of 2009. In 2009, GDP decreased by approximately 6.2% and inflation reached 3.6%. In 2010, GDP was 5.5% and inflation was 4.4%. In 2011, GDP was 3.9% and inflation was 3.8%. In the six months ended June 30, 2012, GDP increased by 4.3% and inflation reached 4.3%.

Mexico also has, and is expected to continue to have, volatility in exchange and interest rates. The annualized interest rates on 28-day Mexican Treasury bills (Certificados de la Tesorería de la Federación, or Cetes) averaged approximately 7.2%, 7.7%, 5.4%, 4.4% and 4.2% for 2007, 2008, 2009, 2010 and 2011, respectively. Relative to the U.S. dollar, the peso depreciated by 1.0% in 2007, depreciated by 26.7% in 2008, appreciated by 5.5% in 2009, appreciated by 5.5% in 2010, depreciated by 12.9% in 2011, all in nominal terms.

 

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The peso continues to be affected by uncertainty and volatility in the global markets. While the peso appreciated by 3.9% in the first six months of 2012, the exchange rate was Ps.13.95 per U.S. dollar at the end of December 2011, Ps.12.81 per U.S. dollar at the end of March 2012 and Ps.13.41 at the end of June 2012. As of August 31, 2012, the peso had appreciated to Ps.13.26 pesos per U.S. dollar compared to Ps.13.41 per U.S. dollar at the end of June 2012 and Ps.13.95 at the end of December 2011. To the extent that we incur peso-denominated debt in the future, it could be at high interest rates.

Our business may be significantly affected by the general condition of the Mexican economy, by the rate of inflation in Mexico, interest rates in Mexico and exchange rates for the Mexican peso or by changes in oil prices. Decreases in the growth rate of the Mexican economy, periods of negative growth and/or increases in inflation or interest rates may result in lower demand for our services and products, lower real pricing of our services and products or a shift to lower margin services and products. Because a large percentage of our costs and expenses are fixed, we may not be able to reduce costs and expenses upon the occurrence of any of these events, and our profit margins may suffer as a result.

Political events in Mexico could have a material adverse effect on us.

The Mexican government exercises significant influence over many aspects of the Mexican economy. As a result, the actions of the Mexican government concerning the economy and regulating certain industries, including the financial services sector, could have a significant effect on Mexican private sector entities, including us, and on market conditions, prices and returns on Mexican securities, including our securities.

Presidential and federal congressional elections in Mexico were held in July 2012. The candidate from the Partido Revolucionario Institucional, or PRI, Enrique Peña Nieto, was declared the winner of the presidential election. In his economic platform, Peña Nieto proposed structural reforms such as labor, energy and fiscal reforms in order to promote economic growth. However, since the PRI did not win a majority in Congress, the approval of these reforms would require extensive negotiations between the political parties in Congress. The winner of the election is scheduled to take office in December 2012. We cannot predict whether changes in Mexican governmental and economic policy will result from the change in administration. Any such changes could adversely affect economic conditions in Mexico or the sector in which we operate and therefore could have an adverse effect on us.

We cannot provide any assurance that future political developments in Mexico, over which we have no control, will not have an unfavorable impact on our financial position or results of operations. In particular, the current government or the next government may implement significant changes in laws, public policies and/or regulations that could affect Mexico’s political and economic situation, which could have a material adverse effect on us.

Developments in other countries may affect us, including the prices for our securities.

The Mexican economy may be, to varying degrees, affected by economic and market conditions in other countries. Although economic conditions in other countries may differ significantly from economic conditions in Mexico, investors’ reactions to adverse developments in other countries may have an adverse effect on the market value of securities of Mexican issuers. For example, during 2007 and 2008, prices of both Mexican debt and equity securities decreased substantially as a result of the global financial crisis. According to Bloomberg, the Dow Jones Industrial Average fell by 39% from its average level in July 2007 to its January 2009 average level, while Mexico’s National Consumer Price Index (Índice Nacional de Precios al Consumidor, or NCPI) fell by 36% in the same period. In 2009, 2010, 2011 and the first six months of 2012, the Dow Jones Industrial Average increased by approximately 19%, 11%, 6% and 5%, respectively, while Mexico’s Stock Exchange Prices and Quotations Index (Índice de Precios y Cotizaciones, or IPC) increased by 44% and 20% in 2009 and 2010, respectively, fell by approximately 4% in 2011, and increased by approximately 8% in the first six months of 2012.

 

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In addition, in recent years economic conditions in Mexico have become increasingly correlated to economic conditions in the United States as a result of the North American Free Trade Agreement, or NAFTA, and increased economic activity between the two countries, which was highlighted during the recent economic crisis affecting the United States. The Mexican economy continues to be influenced by the U.S. economy, and therefore, the deterioration of the United States’ economy, the termination of NAFTA or other related events, or delays in the recovery of the U.S. economy may impact the economy of Mexico. In 2009, the gross domestic product of the United States contracted by 3.5% while Mexican gross domestic product fell by 6.2%. This recession caused unemployment to increase from an average of 5.8% in 2008 to an average of 9.3% in 2009 in the United States and from 4.3% in September 2008 to 6.4% in September 2009 in Mexico. This sudden change in economic conditions reduced credit demand, caused a 32.8% depreciation of the peso from September 2008 to March 2009 and triggered a monetary policy response by the Mexican Central Bank that resulted in lower interest rates, which dropped to 4.5% in December 2009 from its December 2008 level of 8.0%. These changes in macroeconomic conditions in Mexico did not have a material impact on our business or operations. However, we cannot assure you that any developments in the United States or elsewhere will not materially and adversely affect us in the future.

During 2011 and the first half of 2012, the developments in the global economy, and particularly in Europe, have increased the risk premiums in global credit markets, which in turn have generated volatility in the Mexican financial markets. Given the transitory nature of such volatility, due to several measures taken by the European authorities, the Mexican economy has not been materially affected by it. In turn, these developments in Europe have not had a material impact on us. However, if the risks associated with the developments in Europe increase, these developments could have a material adverse effect on us. We cannot assure you that the events in the Europe or elsewhere will not materially and adversely affect us in the future.

The recent increase in violence in Mexico has adversely impacted, and may continue to adversely impact, the Mexican economy and could have a material adverse effect on us.

Mexico has experienced a significant increase over the past few years in violence relating to illegal drug trafficking, particularly in Mexico’s northern states near the U.S. border. This increase in violence has had an adverse impact on the economic activity in Mexico generally. Also, social instability in Mexico or adverse social or political developments in or affecting Mexico could adversely affect us, our ability to conduct our business and offer our services and our ability to obtain financing. We cannot assure you that the levels of violent crime in Mexico, over which we have no control, will not increase or decrease and will have no further adverse effects on Mexico’s economy or on us.

Furthermore, illegal activities have resulted in more detailed and comprehensive anti-money laundering rules and an increased supervision of such activities by Mexican regulators, which have impacted the way in which we conduct our foreign-currency cash business and have resulted in an enhancement of our systems and the reinforcement of our compliance measures. Our failure to detect and report anti-money laundering activities may result in fines and may have an impact on our business and results of operations.

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

Issuers of securities in Mexico are required to make public disclosures that are different from, and that may be reported under presentations that are not consistent with, disclosures required in countries with more developed capital markets, including the United States. In particular, for regulatory purposes, we currently prepare and will continue to prepare and make available to our shareholders statutory financial statements in accordance with Mexican Banking GAAP, which differs from IFRS in a number of respects. In addition, as a foreign private issuer, we are not subject to the same disclosure requirements in the United States as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports, or the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting

 

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and short-swing profit rules under Section 16 of the Exchange Act. Accordingly, the information about us available to you will not be the same as the information available to shareholders of a U.S. company and may be reported in a manner that you are not familiar with.

As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain New York Stock Exchange, or NYSE, corporate governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. This may afford less protection to holders of our ADSs.

Section 303A of the NYSE Listed Company Manual sets forth certain corporate governance requirements that a company must fulfill in order to be listed on the NYSE. However, exemptions from many of the requirements are available to foreign private issuers such as us. As a foreign private issuer, we are permitted to, and we will, follow home country practice in lieu of the NYSE corporate governance standards from which we are exempt. In particular, we are exempt from the requirement to have a majority of our directors be independent, as defined by the NYSE. Under our bylaws and in accordance with the Mexican Financial Groups Law and the Mexican Securities Market Law, at least 25% of the members of our Board of Directors must be independent, but independence is determined in accordance with Article 24 of the Mexican Financial Groups Law and our bylaws rather than NYSE standards. The independence standards in Article 24 of the Mexican Financial Groups Law and our bylaws may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. Since a majority of our Board of Directors may not consist of independent directors as defined by the NYSE as long as we rely on the foreign private issuer exemption, the management oversight of our Company may be more limited than if we were not exempt from the director independence requirements of Section 303A.

In addition, we are exempt from the requirements to have regularly scheduled executive sessions of non-management directors outside of the presence of management, to give shareholders the opportunity to vote on equity-compensation plans, and to have a nominating or corporate governance committee and a compensation committee composed entirely of independent directors, as defined by the NYSE, and governed by written charters. Like U.S. companies, we are required to have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act, including basic independence standards. However, as a foreign private issuer we are exempt from additional requirements relating to independence and the audit committee charter. As a result, the oversight of our audit committee may be different from, or more limited than, the oversight provided by audit committees of U.S. companies listed on the NYSE.

Risks Relating to the ADSs and Our Series B Shares

Preemptive rights may be unavailable to non-Mexican holders of our Series B shares and ADSs and, as a result, they may suffer dilution.

Except in certain circumstances (including a follow-on public offering), under Mexican law, if we issue new shares of common stock as part of a capital increase, we generally grant our shareholders the right to subscribe and pay for a sufficient number of shares to maintain their existing ownership percentage. Rights to subscribe and pay for shares in these circumstances are known as preemptive rights. We may not legally be permitted to allow holders of our Series B shares or ADSs in the United States to exercise any preemptive rights in any future capital increase, unless we file a registration statement with the SEC with respect to that future issuance of shares or the offering qualifies for an exemption from the registration requirements of the Securities Act. Similar restrictions may apply to holders of our Series B shares or ADSs in other jurisdictions. We cannot assure you that we will file a registration statement with the SEC, or any other regulatory authority, or that an exemption from registration will be available to allow holders of our Series B shares or ADSs in the United States, or any other jurisdiction, to participate in a preemptive rights offering. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC, and any other factors, that we consider important to determine whether we will file such a registration statement. Under Mexican law, sales or other transfers by the depositary of preemptive rights and distribution of the proceeds from such sales to ADS holders is not possible. See “Description of Capital Stock—Preemptive Rights.”

 

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You may be unable to exercise voting rights with respect to the Series B shares underlying your ADSs at our shareholders’ meetings.

As a holder of ADSs, we will not treat you as one of our shareholders and you may not be able to exercise shareholder rights. The depositary will be the holder of the Series B shares underlying your ADSs and holders may exercise voting rights with respect to the Series B shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are no provisions under Mexican law or under our bylaws that limit the exercise by ADS holders of their voting rights through the depositary with respect to the underlying Series B shares. However, there are practical limitations on the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with these holders. For example, holders of our Series B shares will receive notice of shareholders’ meetings generally through publications in newspapers of wide distribution in Mexico and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders, by comparison, will not receive notice directly from us. Instead, in accordance with the deposit agreement, we will provide the notice to the depositary. If we ask it to do so, the depositary will mail to holders of ADSs the notice of the meeting and a statement as to the manner in which voting instructions may be given by holders. To exercise their voting rights, ADS holders must then instruct the depositary as to voting the Series B shares represented by their ADSs. Due to these procedural steps involving the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of Series B shares. The Series B shares represented by ADSs for which the depositary fails to receive timely voting instructions may, if requested by us, be voted as we instruct at the corresponding meeting.

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

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

 

   

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

 

   

distributions on the Series B shares represented by your ADSs will be paid to the depositary, and before the depositary makes a distribution to you on behalf of your ADSs, withholding taxes, if any, that must be paid will be deducted and the depositary will be required to convert the Mexican pesos received into U.S. dollars. Additionally, if the exchange rate fluctuates significantly during a time when the depositary cannot convert the Mexican pesos received into U.S. dollars, or while it holds the Mexican pesos, you may lose some or all of the U.S. dollar value of the distribution;

 

   

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

 

   

the depositary may take other actions inconsistent with the best interests of ADS holders.

Under Mexican law, shareholder rights may be fewer, different or less well-defined than in other jurisdictions.

Our corporate affairs are governed by our bylaws and by Mexican law (including specific laws that regulate us as a financial services holding company), which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the States of Delaware or New York, or in other jurisdictions outside Mexico. For example, under Mexican law, the protections afforded to minority shareholders and the fiduciary duties of officers and directors are, in some respects, less than, or different from, those existing in the United States and certain other jurisdictions. In particular, the Mexican legal regime concerning fiduciary duties of directors is not as comprehensive or developed as in the United States. Also, the criteria to ascertain the independence of corporate directors are different from the criteria applicable under corresponding Mexican laws.

 

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Your rights as a holder of our ADSs or Series B shares protect your interests relative to actions by our Board of Directors and any of its members for breach of their duties of care or loyalty, or our principal officers, and may be fewer and less well-defined than under the laws of those other jurisdictions. In particular, actions against officers and directors may only be initiated by holders of blocks of 5% of our outstanding Series B shares (including Series B shares underlying ADSs), as opposed to a single shareholder or group of affected shareholders, and are shareholders’ derivative suits, which benefit us (as the affected company) rather than affected shareholders directly. Rules and policies against self-dealing and regarding conflicts of interest may also be less well-defined and enforced in Mexico than in the United States, putting holders of our Series B shares and ADSs at a potential disadvantage. In addition, to date, the duties of care and loyalty of directors and officers are solely defined by the Mexican Securities Market Law (Ley del Mercado de Valores) and has not been interpreted or defined by courts and, as a result, the judicial interpretation of the meaning and extent of such duties is uncertain. Although Mexico recently passed laws that permit the initiation of class actions, rules implementing applicable law have not fully developed procedural requirements for class action lawsuits. There has not been a significant number of claims relating to breach of duties, whether as class actions or as derivative suits, to encourage litigation based upon breaches of fiduciary duties or to assist in the predictability of the outcome of any potential action. As a result, it may be more difficult in practice for our minority shareholders to decide to exercise or enforce their rights against us and our directors, officers or controlling shareholders than it would be for shareholders of a U.S. company.

Certain provisions of Mexican law and our bylaws impose limitations on the trading of our securities and may delay or limit a change of control of Grupo Financiero Santander Mexico.

Pursuant to the Mexican Financial Groups Law and our bylaws, no person or entity or group of persons or entities may acquire (i) more than 2% of our shares, unless any such person or entity notifies the SHCP, (ii) 5% or more of our shares, unless any such person or entity obtains the prior approval by the SHCP, and (iii) 30% or more of our shares, unless any such person or entity (a) obtains the prior approval of the SHCP, and (b) with the approval of the CNBV, undertakes a public tender offer to purchase (x) if the intended acquisition is for shares representing less than 50% plus one of our shares, the greater of an additional 10% of our aggregate outstanding shares or the percentage of additional shares intended to be acquired, or (y) if the intended acquisition is for shares representing more than 50% of our shares, 100% of our aggregate outstanding shares.

Also, under the Mexican Financial Groups Law, foreign entities with governmental authority and Mexican financial entities, including those that are part of a financial group, unless such entities are institutional investors as defined in the Mexican Financial Groups Law, cannot purchase our shares.

The aforementioned provisions may delay or limit a change of control of Grupo Financiero Santander Mexico or a change in our management.

You may not be able to sell your ADSs at the time or the price you desire because an active or liquid market may not develop.

Prior to this international offering, there has not been an active or liquid market for the Series B shares and there has not been a public market for our ADSs. Our Series B shares are listed on the Mexican Stock Exchange. We intend to apply to list the ADSs on the NYSE. A liquid market may not develop for the ADSs or for our Series B shares, which may reduce the price at which the ADSs or the Series B shares may be sold. Also, the liquidity and the market for the ADSs or for our Series B shares may be affected by a number of factors, including variations in interest rates, the deterioration and volatility of the markets for similar securities and any changes in our liquidity, financial condition, creditworthiness, results of operations and profitability.

We or other intermediaries may be required to withhold U.S. tax on payments made on our Series B shares to certain non-U.S. financial institutions after December 31, 2016.

Under certain provisions of the U.S. Internal Revenue Code (commonly referred to as “FATCA”), we may be subject to 30% U.S. withholding tax on certain payments we receive unless we enter into an agreement (a

 

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“FATCA agreement”) with the U.S. Internal Revenue Service (the “IRS”) pursuant to which we agree to report to the IRS information about any of our “United States accounts” and comply with certain procedures to be determined by the IRS. We currently intend to enter into such an agreement with the IRS and thereby become a participating foreign financial institution (“participating FFI”) unless we otherwise become eligible for an exemption (e.g., pursuant to an intergovernmental agreement between the United States and Mexico). The U.S. Treasury Department and the IRS recently proposed regulations that would implement certain provisions of FATCA. Under FATCA and the proposed regulations, if we enter into a FATCA agreement, we (or another intermediary that is a participating FFI) may be required, pursuant to our FATCA agreement, to withhold 30% U.S. withholding tax from any payment made on the Series B shares after December 31, 2016 to the extent the payment is considered to be a “foreign passthru payment,” but only if such payment is made to a “foreign financial institution” (which is broadly defined for this purpose and in general includes investment vehicles) that is not a participating FFI. Under currently proposed regulations, the term “foreign passthru payment” is not defined and it is not yet clear whether or to what extent payments on the Series B shares will be treated as foreign passthru payments. If any such withholding is imposed, a beneficial owner of Series B shares that is not a foreign financial institution generally will be entitled to a refund of any amounts withheld by filing a U.S. federal income tax return, which may entail significant administrative burden. A beneficial owner of Series B shares that is a foreign financial institution, but not a participating FFI will be able to obtain a refund only to the extent an applicable income tax treaty with the United States entitles such beneficial owner to an exemption from, or reduced rate of, tax on the payment that was subject to withholding under FATCA. Holders of Series B shares should consult their tax advisers regarding the application of FATCA to an investment in the Series B shares and their ability to obtain a refund of any amounts withheld under FATCA. See “Taxation—Material U.S. Federal Income Tax Consequences—Potential U.S. FATCA withholding after December 31, 2016.”

There is no market for our ADSs and substantially no liquidity for our Series B shares and we cannot assure you that one will develop.

Prior to this offering, there has been no public market for our ADSs and substantially no liquidity of our Series B shares. We intend to apply to list the ADSs on the NYSE under the symbol “BSMX” and our Series B shares will continue to trade on the Mexican Stock Exchange under the symbol “SANMEX.” However, we cannot predict the extent to which investor interest in our ADSs will lead to the development of an active trading market in the United States, Mexico or elsewhere. If the trading volume of our ADSs on the NYSE or our Series B shares on the Mexican Stock Exchange were to decline below certain levels, the ADSs or the Series B shares could be delisted or deregistered, further reducing liquidity of our ADSs and Series B shares. In addition, the ADSs and Series B shares could trade at prices that may be lower than the face value of the securities as a result of many factors beyond our control.

The relative volatility and illiquidity of the Mexican securities markets may substantially limit your ability to sell the Series B shares underlying the ADSs at the price and time you desire.

Investing in securities that trade in emerging markets, such as Mexico, often involves greater risk than investing in securities of issuers in the United States, and such investments are considered to be more speculative in nature. The Mexican securities market is substantially smaller, less liquid, more concentrated in a limited number of broker-dealers and institutional participants, and can be more volatile than securities markets in the United States. There is also significantly greater concentration in the Mexican securities market than in major securities markets in the United States. As of June 30, 2012, total market capitalization amounted to Ps.6,086 billion and the ten largest companies in terms of market capitalization (which is likely to include us after the offering described in this prospectus) represented approximately 63% of the aggregate market capitalization of the Mexican Stock Exchange. Accordingly, although you are entitled to withdraw the Series B shares underlying the ADSs from the depositary at any time, your ability to sell such shares in the Mexican securities market at a price and time you desire may be limited.

 

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The price our new investors pay for the Series B shares or ADSs they purchase in this offering will be greater than the average price our existing shareholders paid for their Series B shares.

Our existing shareholders paid an average price of Ps.5.46 per share, representing the sum of share capital and share premium as of December 31, 2011, divided by the total number of shares of our capital stock (including Series B and Series F shares) outstanding at December 31, 2011. At the initial public offering price of U.S.$11.85 per ADS, the midpoint of the price range per ADS set forth on the cover page of this prospectus, we currently expect that our new investors will pay Ps.25.79 per share or U.S.$9.78 per ADS (based on a Series B share-to-ADS ratio of 5-to-1) more than our existing shareholders paid for their shares. See “Dilution.”

Actual or anticipated sales of our Series B shares or the ADSs after this global offering could cause the price of the Series B shares or of the ADSs to decrease.

After the global offering, our controlling shareholder will continue to hold, directly and indirectly, a large number of shares. We and our controlling shareholder have agreed with the international and Mexican underwriters, subject to certain exceptions, not to offer, sell, contract to sell or otherwise dispose of or hedge our shares of capital stock or ADSs or securities convertible into or exercisable or exchangeable for shares of capital stock or ADSs during the 365-day period following the date of this prospectus. We expect that these lock-up agreements will cover 99.0% of the shares (including in the form of ADSs) that are not sold in the global offering. After these lock-up agreements expire, we and our controlling shareholder will be able to sell our securities in the public market. The market price of our Series B shares or the ADSs could drop significantly if we or our controlling shareholder sell our Series B shares or the ADSs or the market anticipates that such sale is likely to be made.

Our shareholders may be subject to liability for certain votes of their securities.

Shareholders who have a conflict of interest with us and do not abstain from voting on a resolution that ultimately causes damages and losses to us, may be held liable for such damages and losses, but only if the transaction would not have been approved without the favorable vote of such shareholders. See “Description of Capital Stock—Conflicts of Interest.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements, principally under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements appear throughout this prospectus and include statements regarding our intent, belief or current expectations in connection with:

 

   

asset growth and sources of funding;

 

   

growth of our fee-based business;

 

   

expansion of our distribution network;

 

   

financing plans;

 

   

competition;

 

   

impact of regulation;

 

   

exposure to market risks including interest rate risk, foreign exchange risk and equity price risk;

 

   

exposure to credit risks including credit default risk and settlement risk;

 

   

projected capital expenditures;

 

   

capitalization requirements and level of reserves;

 

   

liquidity;

 

   

trends affecting the economy generally; and

 

   

trends affecting our financial condition and our results of operations.

Many important factors, in addition to those discussed elsewhere in this prospectus, could cause our actual results to differ substantially from those anticipated in our forward-looking statements, including, among other things:

 

   

changes in capital markets in general that may affect policies or attitudes towards lending to Mexico or Mexican companies;

 

   

changes in economic conditions, in Mexico in particular, in the United States or globally;

 

   

the monetary, foreign exchange and interest rate policies of the Mexican Central Bank (Banco de México);

 

   

inflation;

 

   

deflation;

 

   

unemployment;

 

   

unanticipated turbulence in interest rates;

 

   

movements in foreign exchange rates;

 

   

movements in equity prices or other rates or prices;

 

   

changes in Mexican and foreign policies, legislation and regulations;

 

   

changes in requirements to make contributions to, for the receipt of support from programs organized by or requiring deposits to be made or assessments observed or imposed by, the Mexican government;

 

   

changes in taxes;

 

   

competition, changes in competition and pricing environments;

 

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our inability to hedge certain risks economically;

 

   

economic conditions that affect consumer spending and the ability of customers to comply with obligations;

 

   

the adequacy of allowance for loans and other losses;

 

   

increased default by borrowers;

 

   

technological changes;

 

   

changes in consumer spending and saving habits;

 

   

increased costs;

 

   

unanticipated increases in financing and other costs or the inability to obtain additional debt or equity financing on attractive terms;

 

   

changes in, or failure to comply with, banking regulations; and

 

   

the other risk factors discussed under “Risk Factors” in this prospectus.

The words “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “forecast” and similar words are intended to identify forward-looking statements. You should not place undue reliance on such statements, which speak only as of the date they were made. We undertake no obligation to update publicly or to revise any forward-looking statements after we distribute this prospectus because of new information, future events or other factors. Our independent public auditors have neither examined nor compiled the forward-looking statements and, accordingly, do not provide any assurance with respect to such statements. In light of the risks and uncertainties described above, the future events and circumstances discussed in this prospectus might not occur and are not guarantees of future performance. Because of these uncertainties, you should not make any investment decision based upon these estimates and forward-looking statements.

 

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USE OF PROCEEDS

The selling shareholders will receive all of the net proceeds from the sale of ADSs and Series B shares.

Banco Santander Spain is offering up to 1,608,355,340 Series B shares (including in the form of ADSs), including up to 138,953,311 Series B shares (including in the form of ADSs) pursuant to the underwriters’ option to purchase additional Series B shares (including in the form of ADSs), in the global offering. Santusa Holding, S.L. is offering up to 81,456,993 Series B shares (including in the form of ADSs) pursuant to the underwriters’ option to purchase additional Series B shares (including in the form of ADSs) in the global offering.

Santusa Holding, S.L. will only sell Series B shares (including in the form of ADSs) in this offering if the underwriters exercise their option to purchase more than 138,953,311 additional Series B shares (including in the form of ADSs), and will not sell any Series B shares in this offering if the international underwriters or the Mexican underwriters do not exercise their option to purchase additional Series B shares.

If the international underwriters and the Mexican underwriters exercise their option to purchase additional Series B shares (including in the form of ADSs) in full in the global offering, Banco Santander Spain will receive net proceeds of U.S.$         and Santusa Holding, S.L. will receive net proceeds of U.S.$            , for total estimated net proceeds of U.S.$          to the selling shareholders, after deducting underwriting discounts and commissions.

We will not receive any of the net proceeds from the sale of ADSs or Series B shares offered by the selling shareholders.

 

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EXCHANGE RATES

Mexico has had a free market for foreign exchange since 1994 and the Mexican government allows the peso to float against the U.S. dollar. There can be no assurance that the Mexican government will maintain its current policies with regard to the peso or that the peso will not depreciate or appreciate significantly in the future.

The following tables set forth, for the periods indicated, the low, high, average and period-end exchange rates expressed in pesos per U.S. dollar published by the Mexican Central Bank (Banco de México) in the Official Gazette of the Federation (Diario Oficial de la Federación) as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico. The rates shown below are in nominal pesos and have not been restated in constant currency units. No representation is made that the peso amounts referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all. As of September 3, 2012, the exchange rate for U.S. dollars was Ps.13.19 per U.S. dollar.

 

Year

   Low      High      Average(1)      Period End  

2007

     Ps. 10.66         Ps. 11.27         Ps. 10.93         Ps. 10.92   

2008

     9.92         13.92         11.21         13.83   

2009

     12.60         15.37         13.57         13.07   

2010

     12.16         13.18         12.64         12.35   

2011

     11.50         14.24         12.47         13.95   

 

(1) Average end-of-month exchange rates for 2007, 2008, 2009, 2010 and 2011.

 

Quarter

   Low      High      Average(1)      Period End  

First Quarter 2011

     Ps. 11.91         Ps. 12.26         Ps. 12.06         Ps. 11.91   

Second Quarter 2011

     11.50         11.96         11.61         11.72   

Third Quarter 2011

     11.57         13.89         12.63         13.80   

Fourth Quarter 2011

     13.11         14.24         13.58         13.95   

First Quarter 2012

     12.63         13.93         13.00         12.81   

Second Quarter 2012

     12.73         14.39         13.57         13.41   

 

(1) Average end-of-month exchange rates for the quarters ended March 31, 2011, June 30, 2011, September 30, 2011, December 31, 2011, March 31, 2012 and June 30, 2012.

 

Month

   Low      High      Average(1)      Period End  

November 2011

     Ps. 13.39         Ps. 14.24         Ps. 13.70         Ps. 13.61   

December 2011

     13.48         13.99         13.77         13.95   

January 2012

     12.93         13.93         13.42         13.01   

February 2012

     12.65         12.89         12.78         12.79   

March 2012

     12.63         12.98         12.76         12.81   

April 2012

     12.73         13.23         13.07         12.99   

May 2012

     12.96         14.30         13.66         14.30   

June 2012

     13.41         14.39         13.92         13.41   

July 2012

     13.12         13.68         13.37         13.28   

August 2012

     13.07         13.42         13.18         13.26   

September 2012 (through September 3)

     13.19         13.19         13.19         13.19   

 

(1) Average daily exchange rates for November, December, January, February, March, April, May, June, July, August and September (through September 3).

Unless otherwise indicated, U.S. dollar amounts that have been translated from pesos have been so translated at an exchange rate of Ps.13.4084 to U.S.$1.00, the exchange rate as calculated on June 29, 2012 and reported by the Mexican Central Bank in the Official Gazette of the Federation on July 2, 2012 as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.

 

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The Mexican economy has suffered balance of payment deficits and shortages in foreign exchange reserves in the past. While the Mexican government, for more than ten years, has not restricted the ability of both Mexican and foreign individuals or entities to convert pesos into U.S. dollars, we cannot assure you that the Mexican government will not institute restrictive exchange control policies in the future. To the extent that the Mexican government institutes restrictive exchange control policies in the future, our ability to transfer or convert pesos into U.S. dollars and other currencies would be adversely affected.

 

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MARKET INFORMATION

Market Price of Our Series B Shares and ADSs

We intend to apply to list the ADSs for trading on the New York Stock Exchange, or NYSE, under the symbol “BSMX.” Our Series B shares are currently traded on the Mexican Stock Exchange under the symbol “SANMEX.” There has been low trading volume for our Series B shares on the Mexican Stock Exchange due to a low volume of publicly traded securities. Therefore, past high and low closing prices may not represent actual transactions or prices that would have been quoted on a more liquid trading market. The table below shows the high and low closing prices in pesos, the U.S. dollars equivalent per ADS and the average daily trading volume for our Series B shares on the Mexican Stock Exchange for the periods indicated:

 

     Ps. per Series B share      U.S.$ equivalent
per ADS(1)
     Average daily
trading volume
of Series B
shares
 
     High      Low      High      Low     

Year

              

2011

     Ps. 16.50         Ps. 13.15         Ps. 5.91         Ps. 4.71         4,046   

2010

     16.80         13.00         6.80         5.26         631   

2009

     16.00         13.00         6.12         4.97         164   

2008

     19.28         16.30         6.97         5.89         128   

2007

     22.17         15.52         10.16         7.11         307   

Quarter

              

Second Quarter 2012

     14.00         14.00         5.22         5.22         1,614   

First Quarter 2012

     15.00         14.95         5.86         5.84         158   

Fourth Quarter 2011

     15.00         13.15         5.38         4.71         1,120   

Third Quarter 2011

     15.00         15.00         5.44         5.44         303   

Second Quarter 2011

     16.50         15.10         7.04         6.44         11,003   

First Quarter 2011

     16.50         15.00         6.93         6.30         3,813   

Fourth Quarter 2010

     16.80         16.70         6.80         6.76         2,406   

Third Quarter 2010

     16.80         16.80         6.67         6.67         15   

Second Quarter 2010

     15.80         15.80         6.13         6.13         77   

First Quarter 2010

     14.80         13.00         6.00         5.27         206   

Month

              

September 2012 (through September 3)

     29.95         29.95         11.35         11.35         5,634   

August 2012

     30.00         14.00         11.31         5.28         584   

July 2012(2)

     16.00         16.00         6.02         6.02         450   

June 2012(2)

     —           —           —           —           —     

May 2012

     14.00         14.00         5.00         5.00         3,182   

April 2012

     14.00         14.00         5.39         5.39         1,662   

March 2012

     14.95         14.95         5.84         5.84         9   

February 2012

     15.00         15.00         5.86         5.86         481   

January 2012(2)

     —           —           —           —           —     

 

Source: Bloomberg.

 

(1) Provided for convenience purposes only, based on a ratio of five Series B shares for each ADS and the exchange rate for U.S. dollars on the last day of each period presented, as published in the Official Gazette of the Federation (Diario Oficial de la Federación) by the Mexican Central Bank (Banco de México) as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.
(2) Market information for January and June is not available due to the lack of trading during those periods.

On September 3, 2012, the closing price for our Series B shares on the Mexican Stock Exchange was Ps.29.95 per share, or U.S.$11.35 per ADS, based on a ratio of five Series B shares to one ADS, and translating pesos to U.S. dollars at the exchange rate of Ps.13.1910 per U.S.$1.00, the exchange rate for U.S. dollars for that date published in the Official Gazette of the Federation by the Mexican Central Bank as the exchange rate for the

 

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payment of obligations denominated in currencies other than pesos and payable within Mexico. There has been no trading of the Series B shares on the Mexican Stock Exchange since September 3, 2012.

The trading volume index (índice de bursatilidad) of our Series B shares was 3.403 as of June 2012, according to the sensitivity and market risk indicators of the Mexican Stock Exchange. The trading volume index is used to measure the liquidity of shares on a scale of 1 to 10 during a given time period; there are no minimum trading volume requirements, except as specified below under “—The Mexican Securities Market.” We are not aware of any suspension in trading of the Series B shares on the Mexican Stock Exchange during the past three fiscal years.

The Mexican Securities Market

We have prepared the information concerning the Mexican securities market set forth below based on materials obtained from public sources, including the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV), the Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A.B. de C.V.), the Mexican Central Bank (Banco de México) and publications by market participants. The following summary does not purport to be a comprehensive description of all of the material aspects related to the Mexican securities market.

We cannot predict the liquidity of the Mexican Stock Exchange. If the trading volume of our Series B shares in such market is such that fewer than 100 unrelated investors hold our Series B shares or less than 12% of our aggregate outstanding shares are held by the public, our Series B shares could be delisted from the Mexican Stock Exchange or deregistered from the Mexican National Securities Registry (Registro Nacional de Valores, or RNV).

Trading on the Mexican Stock Exchange

The Mexican Stock Exchange, located in Mexico City, is the only stock exchange in Mexico. Operating continuously since 1907, the Mexican Stock Exchange is organized as a variable capital public stock corporation. Securities trading on the Mexican Stock Exchange occurs each business day from 8:30 a.m. to 3:00 p.m., Mexico City time subject to adjustments to operate uniformly with certain US markets.

Trading on the Mexican Stock Exchange is effected electronically. The Mexican Stock Exchange may impose a number of measures to promote an orderly and transparent trading price of securities, including the operation of a system of automatic suspension of trading in shares of a particular issuer when price fluctuation exceeds certain limits.

Settlement on the Mexican Stock Exchange is effected three business days after a share transaction. Deferred settlement is not permitted without the approval of the Mexican Stock Exchange, even where mutually agreed. Most securities traded on the Mexican Stock Exchange are on deposit with Indeval, a privately owned securities depositary that acts as a clearinghouse, depositary, and custodian, as well as a settlement, transfer, and registration agent for Mexican Stock Exchange transactions, eliminating the need for physical transfer of securities. Transactions must be settled in pesos except under limited circumstances in which settlement in foreign currencies may be permitted.

Market Regulation

In 1925, the Mexican National Banking Commission (Comisión Nacional Bancaria) was established to regulate banking activity and in 1946, the Mexican Securities Commission (Comisión Nacional de Valores) was established to regulate stock market activity. In 1995, these two entities merged to form the CNBV.

Among other activities, the CNBV regulates the public offering and trading of securities and participants in the Mexican securities market, and imposes sanctions for the illegal use of insider information and other

 

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violations of the Mexican Securities Market Law. The CNBV regulates the Mexican securities market, the Mexican Stock Exchange, and brokerage firms through its staff and a board of governors comprised of thirteen members.

Mexican Securities Market Law

The current Mexican Securities Market Law was enacted on December 5, 2005 and published in the Official Gazette of the Federation, and became effective on June 30, 2006. The Mexican Securities Market Law changed Mexican securities laws in various material respects to further align Mexican laws with the securities and corporate governance standards laws in effect in other jurisdictions.

In particular, the Mexican Securities Market Law:

 

   

establishes the variable capital public stock corporation, a corporate form of organization that is subject to the general requirements of the Mexican Corporations Law (Ley General de Sociedades Mercantiles), but is subject to specific requirements for issuers with stock registered with the CNBV and listed in the Mexican Stock Exchange;

 

   

includes private placement exemptions and specifies the requirements that need to be satisfied for an issuer or underwriter to fall within the exemption when offering securities in Mexico;

 

   

includes improved rules for tender offers, classifying such tender offers as either voluntary or mandatory;

 

   

establishes standards for disclosure of holdings applicable to shareholders, including directors, of public companies;

 

   

expands and strengthens the role of the board of directors of public companies;

 

   

defines the standards applicable to the board of directors and the duties and potential liabilities and penalties applicable to each director, the chief executive officer (director general) and other executive officer (introducing concepts such as the duty of care, duty of loyalty and safe harbors);

 

   

generally replaces the statutory auditor (comisario) with the audit committee and establishes the corporate practices committee with clearly defined responsibilities;

 

   

improves the rights of minority shareholders and sets forth the requirements for shareholders’ derivative suits;

 

   

defines applicable sanctions for violations under the Mexican Securities Market Law; and

 

   

fully regulates broker-dealers, stock exchanges, depository institutions and other securities market participants.

Registration and Listing Standards

To offer securities to the public in Mexico, an issuer must meet specific qualitative and quantitative requirements. Securities that have been registered with the RNV, pursuant to CNBV approval, may be listed on the Mexican Stock Exchange.

The general regulations applicable to issuers and other securities market participants (Disposiciones de carácter general aplicables a las emisoras de valores y a otros participantes del Mercado de Valores, or the General Regulations) issued by the CNBV require the Mexican Stock Exchange to adopt minimum requirements for issuers that seek to list their securities in Mexico. These requirements relate to operating history, financial and capital structure, and minimum public floats applicable to shares of public companies, among other things. The General Regulations also require the Mexican Stock Exchange to implement minimum requirements (including minimum public floats) for issuers to maintain their listing in Mexico. These requirements relate to the issuer’s financial condition and capital structure, among others. The CNBV may waive some of these requirements in certain circumstances.

 

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The CNBV’s approval for registration does not imply any kind of certification or assurance related to the investment quality of the securities, the solvency of the issuer, or the accuracy or completeness of any information delivered to the CNBV.

The Mexican Stock Exchange may review compliance with the foregoing requirements and other requirements at any time, but will normally do so on an annual, semi-annual and quarterly basis. The Mexican Stock Exchange must inform the CNBV of the results of its review, and this information must, in turn, be disclosed to investors. If an issuer fails to comply with any of these minimum requirements, the Mexican Stock Exchange has the authority to request that the issuer propose a plan to cure the violation. If the issuer fails to propose a plan, if the plan is not satisfactory to the Mexican Stock Exchange, or if an issuer does not make substantial progress with respect to the implementation of the corrective plan, trading of the relevant series of shares on the Mexican Stock Exchange may be temporarily suspended. In addition, if an issuer fails to implement the plan in full, the CNBV may suspend or cancel the registration of the shares with the RNV, in which case the majority shareholder or any controlling group will be required to carry out a tender offer to acquire all of the outstanding shares of the issuer in accordance with the tender offer provisions set forth in the Mexican Securities Market Law.

Reporting Obligations

Issuers of listed securities are required to file unaudited quarterly financial statements and audited annual financial statements and to provide periodic reports, in particular reports dealing with material events, with the CNBV and the Mexican Stock Exchange. Mexican issuers must file the following reports with the CNBV:

 

   

a comprehensive annual report prepared in accordance with the General Regulations, by no later than April 30 of each year;

 

   

quarterly reports, within 20 days following the end of each of the first three quarters and 40 days following the end of the fourth quarter;

 

   

reports disclosing material information promptly;

 

   

reports and disclosure memoranda revealing corporate restructurings such as mergers, spin-offs or acquisitions or sales of assets, approved or to be approved by a shareholders’ meeting or the board of directors; and

 

   

reports regarding the policies and guidelines with respect to the use of the company’s (or its subsidiaries’) assets by related persons.

The General Regulations and the rules of the Mexican Stock Exchange require issuers of listed securities to publicly disclose information that relates to any event or circumstance that could influence the issuers’ share price. If listed securities experience unusual price volatility, the Mexican Stock Exchange must immediately request that the relevant issuer inform the public of the causes of the volatility or, if the issuer is unaware of the causes, that it make a statement to that effect. In addition, the Mexican Stock Exchange must immediately request that issuers disclose any information relating to material events when it deems the available public information to be insufficient, as well as instruct issuers to clarify the information when necessary. The Mexican Stock Exchange may request that issuers confirm or deny any material event that has been disclosed to the public by third parties when it deems that the material event may affect or influence the price of the listed securities. The Mexican Stock Exchange must immediately inform the CNBV of any such request. In addition, the CNBV may also make any of these requests directly to issuers. An issuer may delay the disclosure of material events if:

 

   

the issuer implements adequate confidentiality measures (including maintaining a log with information relating to parties in possession of the confidential information);

 

   

the information is related to incomplete transactions;

 

   

there is no misleading public information relating to the material event; and

 

   

no unusual price or volume fluctuation occurs.

 

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Similarly, if an issuer’s securities are traded on both the Mexican Stock Exchange and a foreign securities exchange, the issuer must simultaneously file the information that it is required to file pursuant to the laws and regulations of the foreign jurisdiction with the CNBV and the Mexican Stock Exchange.

Suspension of Trading

In addition to the authority of the Mexican Stock Exchange under its internal regulations as described above, the CNBV and the Mexican Stock Exchange may suspend trading in an issuer’s securities:

 

   

if the issuer does not disclose a material event; or

 

   

upon price or volume volatility or changes in the trading of the relevant securities that are not consistent with the historic performance of the securities and cannot be explained solely through information made publicly available pursuant to the General Regulations.

The Mexican Stock Exchange must immediately inform the CNBV and the general public of any suspension. An issuer may request that the CNBV or the Mexican Stock Exchange permit trading to resume if it demonstrates that the causes triggering the suspension have been resolved and that it is in full compliance with periodic reporting requirements. If an issuer’s request has been granted, the Mexican Stock Exchange will determine the appropriate mechanism to resume trading. If trading in an issuer’s securities is suspended for more than 20 business days and the issuer is authorized to resume trading without conducting a public offering, the issuer must disclose before trading may resume a description of the causes that resulted in the suspension and the reasons why it has been authorized to resume trading.

Certain Disclosures

Pursuant to the Mexican Securities Market Law, the following persons must notify the CNBV of any transactions undertaken by them with respect to a listed issuer’s securities:

 

   

members of a listed issuer’s board of directors;

 

   

shareholders controlling 10% or more of a listed issuer’s outstanding capital stock;

 

   

certain advisors;

 

   

groups controlling 25% or more of a listed issuer’s outstanding capital stock; and

 

   

other insiders.

These persons must also inform the CNBV of the effect of the transactions within three days following their completion, or, alternatively, that the transactions have not been consummated. In addition, insiders must abstain from purchasing or selling securities of the issuer within three months from the last sale or purchase, respectively.

Subject to certain exceptions, any acquisition of a public company’s shares that results in the acquirer owning 10.0% or more, but less than 30.0%, of an issuer’s outstanding capital stock must be publicly disclosed to the CNBV and the Mexican Stock Exchange by no later than one business day following the acquisition.

Any acquisition by an insider that results in the insider holding an additional 5% or more of a public company’s outstanding capital stock must also be publicly disclosed to the CNBV and the Mexican Stock Exchange no later than one business day following the acquisition. Some insiders must also notify the CNBV of share purchases or sales that occur within any calendar quarter or five day period and that exceed certain value thresholds. Shareholders and board members and officers as well as individuals owning, respectively, 5% or 1% of our outstanding shares are required to report to the issuer, on a yearly basis, their shareholdings. The Mexican Securities Market Law requires that convertible securities, warrants and derivatives to be settled in kind be taken into account in the calculation of share ownership percentages.

 

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Tender Offers

The Mexican Securities Market Law contains provisions relating to public tender offers and certain other share acquisitions occurring in Mexico. Under the law, tender offers may be voluntary or mandatory. Voluntary tender offers, or offers where there is no requirement that they be initiated or completed, are required to be made to all shareholders on a pro rata basis, without differentiating between classes of shares. Any intended acquisition of a public company’s shares that results in the acquirer owning 30% or more, but less than a percentage that would result in the acquirer obtaining control, of a company’s voting shares requires the acquirer, with the prior approval of the CNBV, to make a mandatory public tender offer for the greater of (a) the percentage of the capital stock intended to be acquired or (b) 10% of the company’s outstanding capital stock. Finally, any intended acquisition of a public company’s shares that is aimed at obtaining control requires the potential acquirer to make a mandatory tender offer for 100% of the company’s outstanding capital stock (however, under certain circumstances the CNBV may permit an offer for less than 100%). The tender offer must be made at the same price to all shareholders and classes of shares. The board of directors, with the advice of the corporate practices committee, must issue its opinion of any tender offer resulting in a change of control, which opinion must take into account minority shareholder rights and which may be accompanied by an independent fairness opinion. Directors and principal officers are required to disclose whether they will participate in the tender.

Under the Mexican Securities Market Law, all tender offers must be open for at least 20 business days and purchases thereunder are required to be made pro rata to all tendering shareholders. The Mexican Securities Market Law only permits the payment of certain amounts to controlling shareholders over and above the offering price if these amounts are fully disclosed, approved by the board of directors and paid solely in connection with non compete or similar obligations. The law also provides exceptions to the mandatory tender offer requirements and specifically sets forth remedies for noncompliance with these tender offer rules (e.g., suspension of voting rights, possible annulment of purchases, etc.) and other rights available to prior shareholders of the issuer.

Joint Trading of Common Shares and Limited or Non Voting Shares

The Mexican Securities Market Law does not permit issuers to implement mechanisms for common shares and limited or non voting shares to be jointly traded or offered to public investors, unless the limited or non voting shares are convertible into common shares within a period of up to five years, or when, because of the nationality of the holder, the shares or the securities representing the shares limit the right to vote to comply with foreign investment laws. In addition, the aggregate amount of shares with limited or non voting rights may not exceed 25% of the aggregate amount of publicly held shares. The CNBV may increase this 25% limit by an additional 25%, provided that the limited or non voting shares exceeding 25% of the aggregate amount of publicly held shares are convertible into common shares within five years of their issuance.

Anti Takeover Protections

The Mexican Securities Market Law provides that public companies may include anti takeover provisions in their bylaws if such provisions (i) are approved by a majority of the shareholders, without shareholders representing 5% or more of the capital stock present at the meeting voting against the approval of such provision, (ii) do not exclude any shareholders or group of shareholders, (iii) do not restrict, in an absolute manner, a change of control, and (iv) do not contravene legal provisions related to tender offers or have the effect of disregarding the economic rights related to the shares held by the acquiring party. Our bylaws do not include any such provisions.

Board of Directors and Committees

Under the Mexican Securities Market Law, public companies must have a board of directors comprised of no more than 21 members, of which at least 25% must be independent. Independent members must be selected based on their experience, ability and reputation at the issuer’s shareholders’ meeting; whether or not a director is independent must be determined by the issuer’s shareholders and such determination may be challenged by the

 

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CNBV. As a departure from legislative precedents, the Mexican Securities Market Law permits then acting members of the board of directors to select, under certain circumstances and on a temporary basis, new members of the board of directors.

Boards of directors of public companies are required to meet at least four times during each calendar year and have the following principal duties:

 

   

determine general strategies applicable to the issuer;

 

   

approve guidelines for the use of corporate assets;

 

   

approve, on an individual basis, transactions with related parties, subject to certain limited exceptions;

 

   

approve unusual or non-recurrent transactions and any transactions that imply the acquisition or sale of assets with a value equal to or exceeding 5% of the issuer’s consolidated assets or that imply the provision of collateral or guarantees or the assumption of liabilities equal to or exceeding 5% of the issuer’s consolidated assets;

 

   

approve the appointment or removal of the chief executive officer;

 

   

approve accounting and internal control policies; and

 

   

approve policies for disclosure of information.

Directors have the general duty to act for the benefit of the issuer, without favoring a shareholder or group of shareholders.

The Mexican Securities Market Law requires the creation of one or more committees that perform audit and corporate practices functions, each of which must maintain at least three members appointed by the board of directors and which members must all be independent (except for corporations controlled by a person or group maintaining 50% or more of the outstanding capital stock like us, where solely the majority must be independent). The audit committee (together with the board of directors, which has added duties) replaces the statutory auditor (comisario) that previously had been required by the Mexican Corporations Law.

The committee that performs corporate practices functions is required to, among other activities, provide opinions to the board of directors, request and obtain opinions from independent third party experts, call shareholders meetings, provide assistance to the board of directors in the preparation of annual reports and provide a report to the board of directors.

The audit committee’s principal role is to supervise the external auditors of the issuer, analyze the external auditor’s reports, inform the board of directors in respect of existing internal controls, supervise the execution of related party transactions, require the issuer’s executive to prepare reports when deemed necessary, inform the board of any irregularities that it encounters, supervise the activities of the issuer’s chief executive officer and provide an annual report to the board of directors.

Duty of Care and Loyalty of Directors

The Mexican Securities Market Law also imposes duties of care and of loyalty on directors.

The duty of care requires that directors obtain sufficient information and be sufficiently prepared to support their decisions and to act in the best interest of the issuer. The duty of care is discharged, principally, by obtaining and requesting from the issuer and its officers all the information required to participate in discussions, obtaining information from third parties, attending board meetings and disclosing material information in possession of the relevant director. Failure to act with care by one or more directors subjects the relevant directors to joint liability for damages and losses caused to the issuer and its subsidiaries, which may be limited (except in the instances of bad faith, illegal acts or willful misconduct).

 

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The duty of loyalty primarily consists of acting for the benefit of the issuer and includes a duty to maintain the confidentiality of information received in connection with the performance of a director’s duties and to abstain from discussing or voting on matters where the director has a conflict of interest. In addition, the duty of loyalty is breached if a shareholder or group of shareholders is knowingly favored or if, without the express approval of the board of directors, a director takes advantage of a corporate opportunity. The duty of loyalty is breached if the director discloses false or misleading information or fails to register (or cause the registration of) any transaction in the issuer’s records that could affect its financial statements or if the director uses corporate assets or approves the use of corporate assets in violation of an issuer’s policies, discloses false or misleading information, orders or causes material information not to be disclosed or to be modified. The violation of the duty of loyalty subjects the offending director to joint liability for damages and losses caused to the issuer and its subsidiaries. Liability for breach of the duty of loyalty may not be limited by the company’s bylaws, by resolution of a shareholders’ meeting or otherwise.

Claims for breach of the duty of care or the duty of loyalty may be brought solely for the benefit of the issuer (as a derivative suit) and may only be brought by the issuer or by shareholders representing at least 5% of any outstanding shares.

As a safe harbor for directors, the liabilities specified above will not be applicable if the director acted in good faith and (i) complies with applicable law and the bylaws, (ii) facts based upon information are provided by officers or third-party experts, the capacity and credibility of which may not be the subject of reasonable doubt, (iii) selects the more adequate alternative in good faith or in a case where the negative effects of such decision may not have been foreseeable and (iv) actions were taken in compliance with resolutions adopted at the shareholders’ meeting.

Under the Mexican Securities Market Law, the issuer’s chief executive officer and principal executives are also required to act for the benefit of the company and not of a shareholder or group of shareholders. These executives are required to submit to the board of directors for approval the principal strategies for the business, to submit to the audit committee proposals relating to internal control systems, to disclose all material information to the public and to maintain adequate accounting and registration systems and internal control mechanisms.

Disclosure of Shareholders’ Agreements

Any shareholders’ agreements containing non compete clauses, any agreements related to the sale, transfer or exercise of preemptive rights, any agreements which allow for the sale and purchase of shares, voting rights, and sale of shares in a public offering, must be notified to the company within five business days following their execution in order to allow the company to disclose such agreements to investors through the stock exchanges on which its securities are being traded to the public through an annual report prepared by the company. These agreements (i) will be available for the public to review at the company’s offices, (ii) will not be enforceable against the company and a breach of such agreements will not affect the validity of the vote at a shareholders’ meeting, and (iii) will only be effective between the parties once they have been disclosed to the public.

Miscellaneous

The Mexican Securities Market Law also specifies that any transaction or series of transactions that, during any fiscal year, represent 20% or more of the consolidated assets of the issuer, must be considered and approved by a meeting of shareholders of any public company.

In addition to the right granted to minority shareholders of a public company representing 5% or more of the outstanding shares to initiate a shareholder derivative suit against directors for a breach of the duty of care or the duty of loyalty, the Mexican Securities Market Law recognizes the right of shareholders representing 10% of the outstanding shares entitled to appoint a director, call a shareholder’s meeting and request that vote on resolutions in respect of which they were not sufficiently informed, be postponed. Also, holders of 20% of the outstanding voting shares may judicially oppose resolutions that were passed by a shareholders’ meeting and file a petition

 

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for a court order to suspend the resolution, if the claim is filed within 15 days following the adjournment of the meeting at which the action was taken, provided that (i) the challenged resolution violates Mexican law or the company’s bylaws, (ii) the opposing stockholders either did not attend the meeting or voted against the challenged resolution, and (iii) the opposing stockholders deliver a bond to the court to secure payment of any damages that we may suffer as a result of suspending the resolution in the event that the court ultimately rules against the opposing stockholder. These provisions have seldom been invoked in Mexico and, as a result, how a competent court may interpret these provisions is uncertain.

 

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CAPITALIZATION

The following table sets forth our consolidated capitalization as of June 30, 2012, derived from our unaudited condensed consolidated financial statements prepared in accordance with IAS 34.

This table should be read in conjunction with, and is qualified in its entirety by reference to, “Selected Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Statistical Information” and our audited financial statements and the related notes included elsewhere in this prospectus.

 

     As of June 30, 2012  
     (Millions of pesos or U.S.
dollars, as indicated)
 
     Pesos      U.S. dollars(1)  

Long-term indebtedness:

     

Current portion of long-term debt(2)

     Ps. 9,145       U.S.$ 682   

Long-term debt, less current portion(3)

     12,818         956   

Total indebtedness

     21,963         1,638   
  

 

 

    

 

 

 

Shareholders’ equity:

     

Share capital

     25,658         1,914   

Share premium

     11,415         851   

Accumulated reserves

     50,031         3,731   

Profit for the year attributable to the Parent

     9,416         702   

Valuation adjustments(4)

     1,124         84   

Non-controlling interests

     12         1   

Total shareholders’ equity

     97,656         7,283   
  

 

 

    

 

 

 

Total capitalization(5)

     Ps. 119,619       U.S.$  8,921   
  

 

 

    

 

 

 

 

(1) Converted, for convenience purposes only, using the exchange rate for U.S. dollars of Ps.13.4084 per U.S.$1.00 as calculated on June 29, 2012 and reported by the Mexican Central Bank (Banco de México) in the Official Gazette of the Federation (Diario Oficial de la Federación) on July 2, 2012 as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.
(2) Consists of structured bank bonds (bonos bancarios estructurados) and promissory notes (certificados de depósito bancario de dinero a plazo). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Long-term Funding Outstanding.”
(3) Consists of structured bank bonds (bonos bancarios estructurados) and unsecured bonds (certificados bursátiles bancarios). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Long-term Funding Outstanding.”
(4) Includes valuation of available-for-sale financial assets and valuation of hedging derivative swaps in cash flow hedges.
(5) Total capitalization equals total indebtedness plus total shareholders’ equity.

For a discussion of our capital adequacy, including total Tier 1 and Tier 2 Capital and related ratios, pursuant to Mexican Banking GAAP, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Risk-Weighted Assets and Regulatory Capital.”

 

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DILUTION

As of June 30, 2012, we had a net tangible book value under IFRS of Ps.13.89 per common share, or U.S.$5.18 per ADS, based on a share-to-ADS ratio of 5-to-1. Net tangible book value represents the amount of our total tangible assets less total liabilities, divided by 6,786,394,913, the total number of shares of our capital stock (including Series B and Series F shares) outstanding at June 30, 2012, or 1,357,278,983, the total number of ADSs that would represent such total number of shares based on a share-to-ADS ratio of 5-to-1.

The following table summarizes on a pro forma basis, as of June 30, 2012, the difference between our existing shareholders and new investors with respect to the number of Series B shares purchased, the total consideration paid and the average price per share paid, based on the midpoint of the price range set forth on the cover page of the prospectus:

 

     Number of
Shares
Purchased
    Total
Consideration
Amount
     Average Price
per Share
 
     (Millions of pesos)  

Existing Shareholders

     6,786,394,913 (1)      Ps.37,073         Ps.  5.46 (2) 

New Investors

     1,469,402,029        Ps.45,919         Ps.31.25   

 

(1) Includes the Series B shares offered in the global offering.
(2) Represents the sum of share capital and share premium as of June 30, 2012, divided by the total number of shares of our capital stock (including Series B and Series F shares) outstanding at June 30, 2012.

 

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DIVIDENDS AND DIVIDEND POLICY

We paid dividends in December 2008, January 2010, February 2011 and March 2012 in an aggregate amount of Ps.7,287 million, Ps.4,000 million, Ps.6,400 million and Ps.11,350 million, respectively, equivalent to Ps.1.07, Ps.0.59, Ps.0.94 and Ps.1.67 per share, respectively. We have not paid any dividend in advance with respect to fiscal year 2012. On May 14, 2012, we declared a dividend of Ps.3,000 million and on August 13, 2012, we declared a dividend of Ps.4,300 million. The aggregate amount of dividends declared is Ps.7,300 million, equal to Ps.1.08 per share. We will pay the aggregate amount of these dividends in September 2012.

Although we have no current plans to adopt a formal dividend policy in respect of the amount and payment of dividends, we currently intend to declare and pay dividends on an annual basis, subject to approval by our shareholders. The declaration and payment of dividends in respect of any period is subject to a number of factors, including our debt service requirements, capital expenditure and investment plans, other cash requirements, our shareholders having approved our financial statements and the payment of dividends, and such other factors as may be deemed relevant at the time. We cannot assure you that we will pay any dividends in the future.

The declaration, payment and amount of any dividend are considered and proposed by our Board of Directors and approved at the general shareholders’ meeting by the affirmative vote of a majority of our shareholders in accordance with the applicable regulatory, corporate, tax and accounting rules and are subject to the statutory limitations set forth below.

Under Mexican law, dividends may only be paid from retained earnings resulting from the relevant year or prior years’ results if (i) the legal reserve has been created or maintained, by annually segregating 5% of net earnings, until the legal reserve equals at least 20% of the fully paid-in capital, (ii) shareholders, at a duly called meeting, have approved the results reflecting the earnings and the payment of dividends, and (iii) losses for prior fiscal years have been repaid or absorbed. All shares of our capital stock rank pari passu with respect to the payment of dividends. The reserve fund is required to be funded on a stand-alone basis for each company, rather than on a consolidated basis. The level of earnings available for the payment of dividends is determined by Mexican Banking GAAP. As of June 30, 2012, Grupo Financiero Santander Mexico (on an individual basis) had set aside Ps.291 million in legal reserves compared to paid-in capital of Ps.25,658 million, and thus was in compliance with the regulations pertaining to its legal reserve.

 

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SELECTED FINANCIAL AND OPERATING DATA

The following tables present our selected historical consolidated financial data for each of the periods indicated. You should read this information in conjunction with our audited financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

We have derived our selected consolidated income statement data for the years ended December 31, 2010 and 2011 and our selected consolidated balance sheet data as of January 1, 2010 and December 31, 2010 and 2011 from our audited financial statements included in this prospectus, which have been prepared in accordance with IFRS. We have derived our selected consolidated income statement data for the six months ended June 30, 2011 and 2012 and our selected consolidated balance sheet data as of June 30, 2012 from our unaudited condensed consolidated financial statements included in this prospectus, which have been prepared in accordance with IAS 34. These unaudited condensed statements include all adjustments that management believes are necessary to fairly present our results of operations and financial condition at the date and for the periods presented. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the remainder of the year ended December 31, 2012. See “Presentation of Financial and Other Information.”

Our selected financial data as of and for the years ended December 31, 2007, 2008, 2009, 2010 and 2011, and the six months ended June 30, 2011 and June 30, 2012, have been derived from our financial statements prepared in accordance with Mexican Banking GAAP. See “Presentation of Financial and Other Information.” Because of the material differences in accounting criteria and presentation between Mexican Banking GAAP and IFRS, such information is not comparable with our financial statements prepared in accordance with IFRS.

CONSOLIDATED INCOME STATEMENT DATA IN ACCORDANCE WITH IFRS

 

    For the year ended December 31,     For the six months ended June 30,  
    2010     2011     2011     2011     2012     2012  
   

(Millions of

pesos)(1)

    (Millions of U.S.
dollars)(1)(2)
   

(Millions of

pesos)(1)

    (Millions of U.S.
dollars)(1)(3)
 

Interest income and similar income

    Ps. 39,237        Ps. 46,587      U.S.$ 3,474        Ps. 21,477        Ps. 27,392      U.S.$  2,043   

Interest expenses and similar charges

    (12,991     (17,976     (1,341     (8,211     (10,929     (815
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    26,246        28,611        2,133        13,266        16,463        1,228   

Income from equity instruments

    289        299        22        183        155        12   

Fee and commission income (net)

    9,276        10,199        761        5,081        5,717        426   

Gains/(losses) on financial assets and liabilities (net)

    3,622        279        21        478        515        38   

Exchange differences (net)

    (14     30        2        (12     (3     0   

Other operating income

    581        536        40        284        281        21   

Other operating expenses

    (1,413     (1,590     (119     (771     (871     (65
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income

    38,587        38,364        2,860        18,509        22,257        1,660   

Administrative expenses

    (13,347     (15,001     (1,119     (6,767     (7,393     (552

Personnel expenses

    (6,578     (7,344     (548     (3,564     (4,016     (300

Other general administrative expenses

    (6,769     (7,657     (571     (3,203     (3,377     (252

Depreciation and amortization

    (1,398     (1,461     (109     (700     (753     (56

Impairment losses on financial assets (net)

    (6,972     (5,435     (405     (2,286     (3,515     (262

Loans and receivables(4)

    (6,972     (5,435     (405     (2,286     (3,515     (262

Impairment losses on other assets (net)

    (92     (100     (7     (93     0        0   

Other intangible assets

    (27     (30     (2     (30     0        0   

Non-current assets held for sale

    (65     (70     (5     (63     0        0   

Provisions (net)(5)

    (562     1,890        141        738        313        23   

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

    (77     13        1        1        1,733        129   

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

    17        54       4        5        49        4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    For the year ended December 31,     For the six months ended June 30,  
    2010     2011     2011     2011     2012     2012  
   

(Millions of

pesos)(1)

    (Millions of
U.S.
dollars)(1)(2)
   

(Millions of

pesos)(1)

    (Millions of
U.S.
dollars)(1)(3)
 

Operating profit before tax

    16,156        18,324        1,366        9,407        12,691        946   

Income tax

    (4,449     (4,813     (359     (2,471     (3,274     (244
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit from continuing operations

    11,707        13,511        1,007        6,936        9,417        702   

Profit from discontinued operations (net)

    880        4,260        318        277        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated profit for the year

    Ps. 12,587        Ps. 17,771        U.S.$1,325        Ps. 7,213        Ps. 9,417        U.S.$ 702   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit attributable to the Parent

    12,586        17,770        1,325        7,212        9,416        702   

Profit attributable to non-controlling interests

    1        1        0        1        1        0   

Earnings per share from continuing and discontinued operations:

           

Basic earnings per share

    1.85        2.62        0.19        1.06        1.39        0.10   

Diluted earnings per share

    1.85        2.62        0.19        1.06        1.39        0.10   

Earnings per share from continuing operations:

           

Basic earnings per share

    1.73        1.99        0.14        1.02        1.39        0.10   

Diluted earnings per share

    1.73        1.99        0.14        1.02        1.39        0.10   

Cash dividend per share(6)

    0.94        1.67        0.12        1.67        n/a        n/a   

Weighted average shares outstanding

    6,786,395        6,786,395        6,786,395        6,786,395        6,786,395        6,786,395   

Adjusted number of shares

    6,786,395        6,786,395        6,786,395        6,786,395        6,786,395        6,786,395   

 

(1) Except per share amounts. Share amounts are presented in thousands of shares.
(2) Results for the year ended December 31, 2011 have been translated into U.S. dollars, for convenience purposes only, using the exchange rate of Ps.13.4084 per U.S.$1.00 as calculated on June 29, 2012 and reported by the Mexican Central Bank (Banco de México) in the Official Gazette of the Federation (Diario Oficial de la Federación) on July 2, 2012 as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.
(3) Results for the six months ended June 30, 2012 have been translated into U.S. dollars, for convenience purposes only, using the exchange rate of Ps.13.4084 per U.S.$1.00 as calculated on June 29, 2012 and reported by the Mexican Central Bank in the Official Gazette of the Federation on July 2, 2012 as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.
(4) Provisions to the credit loss allowance less recoveries of loans previously written off.
(5) Principally includes provisions for taxes and legal contingencies and contingent liabilities and commitments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(6) On February 2, 2011, we paid a dividend of Ps.6,400 million, equal to Ps.0.94 per share, with respect to fiscal year 2010. On March 5, 2012, we paid a dividend of Ps.11,350 million, equal to Ps.1.67 per share, with respect to fiscal year 2011. We have not paid any dividend in advance with respect to fiscal year 2012. On May 14, 2012, we declared a dividend of Ps.3,000 million and on August 13, 2012, we declared a dividend of Ps.4,300 million. The aggregate amount of dividends declared is Ps.7,300 million, equal to Ps.1.08 per share. We will pay the aggregate amount of these dividends in September 2012.

 

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Table of Contents

CONSOLIDATED BALANCE SHEET DATA IN ACCORDANCE WITH IFRS

 

    As of January 1,     As of December 31,     As of June 30,  
    2010     2010     2011     2012     2012  
    (Millions of pesos)     (Millions of U.S.
dollars)(1)
 

Assets

         

Cash and balances with Mexican Central Bank

    Ps. 44,170        Ps. 44,136        Ps. 44,143        Ps. 42,049      U.S.$ 3,136   

Financial assets held for trading

    190,613        238,613        242,463        291,910        21,771   

Other financial assets at fair value through profit or loss

    12,000        12,661        21,589        31,521        2,351   

Available-for-sale financial assets

    76,450        60,426        61,582        54,881        4,093   

Loans and receivables

    243,540        271,879        346,187        388,934        29,007   

Hedging derivatives

    928        1,287        897        571        43   

Non-current assets held for sale

    260        7,811        464        525        39   

Investments in associates

    284        —          —          —          —     

Reinsurance assets

    437        —          —          —          —     

Tangible assets

    5,705        5,488        5,607        3,774        280   

Intangible assets

    1,849        1,879        3,462        3,414        255   

Tax assets

    15,806        15,146        13,384        14,747        1,100   

Other assets

    3,557        2,288        4,426        4,823        360   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    Ps. 595,599        Ps. 661,614        Ps. 744,204        Ps. 837,149      U.S.$  62,435   

Liabilities

         

Financial liabilities held for trading

    Ps. 101,487        Ps. 116,535        Ps. 125,291        Ps. 133,670      U.S.$ 9,969   

Other financial liabilities at fair value through profit or loss

    120,236        112,239        118,269        167,267        12,475   

Financial liabilities at amortized cost

    277,731        326,448        391,773        422,517        31,512   

Hedging derivatives

    70        28        2,501        1,726        129   

Liabilities associated with non-current assets held for sale

    —          5,368        —          —          —     

Liabilities under insurance contracts

    3,449        —          —          —          —     

Provisions(2)

    8,921        8,680        6,151        5,567        415   

Tax liabilities

    70        118        866        604        45   

Other liabilities

    5,240        6,557        7,866        8,142        607