Form 20-F

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)


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

OR

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

For the fiscal year ended December 31, 2010

OR

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

for the transition period from to

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

Date of event requiring this shell company report

Commission file number 001-12518

BANCO SANTANDER, S.A.

(Exact name of Registrant as specified in its charter)

Kingdom of Spain
(Jurisdiction of incorporation)
Ciudad Grupo Santander
28660 Boadilla del Monte (Madrid), Spain
(address of principal executive offices)

José Antonio Álvarez
Banco Santander, S.A.
Ciudad Grupo Santander
28660 Boadilla del Monte
Madrid, Spain
Tel: +34 91 289 32 80
Fax: +34 91 257 12 82
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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


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


*		Banco Santander Shares are not listed for trading, but are only listed in connection with the registration of the American Depositary Shares, pursuant to requirements of the New York Stock Exchange.

**		The guarantee is not listed for trading, but is listed only in connection with the registration of the corresponding Non-cumulative Guaranteed Preferred Stock of Santander Finance Preferred, S.A. Unipersonal (a wholly owned subsidiary of Banco Santander, S.A.)

Securities registered or to be registered pursuant to Section 12(g) of the Act.
None.
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act
None.
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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


Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o

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


US GAAP o		International Financial Reporting Standards as issued by the International Accounting Standards Board þ		Other o

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

Item 17 o Item 18 þ

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close
of business covered by the annual report.
8,440,275,004 shares

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Accounting Principles

Under Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements in conformity with the International Financial Reporting Standards previously adopted by the European Union (“EU-IFRS”). The Bank of Spain Circular 4/2004 of December 22, 2004 on Public and Confidential Financial Reporting Rules and Formats (“Circular 4/2004”) requires Spanish credit institutions to adapt their accounting systems to the principles derived from the adoption by the European Union of International Financial Reporting Standards. Therefore, Grupo Santander (“the Group” or “Santander”) is required to prepare its consolidated financial statements for the year ended December 31, 2010 in conformity with the EU-IFRS and Bank of Spain’s Circular 4/2004. Differences between EU-IFRS, Bank of Spain’s Circular 4/2004 and International Financial Reporting Standards as issued by the International Accounting Standard Board (IFRS-IASB) are not material. Therefore, we assert that the financial information contained in this annual report on Form 20-F complies with IFRS-IASB.

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

Our auditors, Deloitte, S.L., an independent registered public accounting firm, have audited our consolidated financial statements in respect of the three years ended December 31, 2010, 2009 and 2008 in accordance with IFRS-IASB. See page F-1 to our consolidated financial statements for the 2010, 2009 and 2008 report prepared by Deloitte, S.L.

General Information

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

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

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

•		“one billion”, we mean 1,000 million.

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

When we refer to “loans”, we mean loans, leases, discounted bills and accounts receivable, unless otherwise noted.

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

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

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

	•		exposure to various types of market risks;

	•		management strategy;

	•		capital expenditures;

	•		earnings and other targets; and

	•		asset portfolios.

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

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

Economic and Industry Conditions

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

•		general economic or industry conditions in Spain, the United Kingdom, the United States, other European countries, Latin America and the other areas in which we have significant business activities or investments;

•		the sovereign debt rating for Spain, and the other countries where we operate;

•		a decrease or reversal of the moderate economic recovery in the economies of the United Kingdom, other European countries, Latin America, and the United States, and an increase of the volatility in the capital markets;

•		a further deterioration of the Spanish economy;

•		the effects of a continued decline in real estate prices, particularly in Spain, the UK and the US;

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

•		inflation or deflation;

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

•		changes in competition and pricing environments;

•		the inability to hedge some risks economically;

•		the adequacy of loss reserves;

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

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

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

Political and Governmental Factors

•		political stability in Spain, the United Kingdom, other European countries, Latin America and the US;

•		changes in Spanish, UK, EU, Latin American, US or foreign laws, regulations or taxes, and

•		increased regulation in light of the global financial crisis.

Transaction and Commercial Factors

•		damage to our reputation;

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

•		the outcome of our negotiations with business partners and governments.

Operating Factors

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

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

•		the impact of changes in the composition of our balance sheet on future net interest income; and

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

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

PART I

Item 1. Identity of Directors, Senior Management and Advisers

A. Directors and Senior Management

Not applicable.

B. Advisers

Not applicable.

C. Auditor.

Not applicable.

Item 2. Offer Statistics and Expected Timetable

A. Offer Statistics

Not applicable.

B. Method and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected financial data

Selected Consolidated Financial Information

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

In the F-pages of this Form 20-F, the audited financial statements for the years 2010, 2009 and 2008 are presented. The audited financial statements for 2007 and 2006 are not included in this document, but they can be found in our previous annual reports on Form 20-F.

Under IFRS-IASB, revenues and expenses of discontinued businesses must be reclassified from each income statement line item to “Profit from discontinued operations”. Revenues and expenses from prior years are also required to be reclassified for comparison purposes to present the same businesses as discontinued operations. This change in presentation does not affect “Consolidated profit for the year” (see Note 37 to our consolidated financial statements).

In addition, the income statement for the period ended December, 31, 2009 reflects the impact of the consolidation of Banco Real, Alliance & Leicester Bradford & Bingley, Sovereign and other consumer businesses.


	Year ended December 31,
	2010			2009			2008			2007			2006
	(in thousands of euros, except percentages and per share data)

Interest and similar income		52,906,754			53,173,004			55,043,546			45,512,258			36,669,337
Interest expense and similar charges		(23,682,375	)		(26,874,462	)		(37,505,084	)		(31,069,486	)		(24,879,598	)
Interest income / (charges)		29,224,379			26,298,542			17,538,462			14,442,772			11,789,739
Income from equity instruments		362,068			436,474			552,757			419,997			412,554
Income from companies accounted for using the equity method		16,921			(520	)		791,754			438,049			423,875
Fee and commission income		11,679,702			10,726,368			9,741,400			9,290,043			8,147,164
Fee and commission expense		(1,945,552	)		(1,646,234	)		(1,475,105	)		(1,421,538	)		(1,251,132	)
Gains/losses on financial assets and liabilities (net)		2,164,423			3,801,645			2,892,249			2,306,384			2,048,725
Exchange differences (net)		441,148			444,127			582,215			648,528			95,936
Other operating income		8,195,567			7,928,538			9,436,308			6,739,670			6,075,564
Other operating expenses		(8,089,330	)		(7,784,621	)		(9,164,487	)		(6,449,120	)		(5,800,019	)
Total income		42,049,326			40,204,319			30,895,553			26,414,785			21,942,406
Administrative expenses		(16,255,988	)		(14,824,605	)		(11,665,857	)		(10,776,670	)		(9,783,902	)
Personnel expenses		(9,329,556	)		(8,450,283	)		(6,813,351	)		(6,434,343	)		(5,886,871	)
Other general administrative expenses		(6,926,432	)		(6,374,322	)		(4,852,506	)		(4,342,327	)		(3,897,031	)
Depreciation and amortization		(1,939,984	)		(1,596,445	)		(1,239,590	)		(1,247,207	)		(1,130,159	)
Provisions (net)		(1,132,621	)		(1,792,123	)		(1,640,561	)		(895,552	)		(1,007,037	)
Impairment losses on financial assets (net)		(10,443,149	)		(11,578,322	)		(6,283,052	)		(3,430,122	)		(2,454,985	)
Impairment losses on other assets (net)		(285,864	)		(164,630	)		(1,049,226	)		(1,548,218	)		(20,066	)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		350,323			1,565,013			101,156			1,810,428			348,199
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations		(290,170	)		(1,225,407	)		1,730,902			643,050			959,318
Operating profit/(loss) before tax		12,051,873			10,587,800			10,849,325			10,970,494			8,853,774
Income tax		(2,923,190	)		(1,206,610	)		(1,836,052	)		(2,322,107	)		(2,255,585	)
Profit from continuing operations		9,128,683			9,381,190			9,013,273			8,648,387			6,598,189
Profit/(loss) from discontinued operations (net)		(26,922	)		30,870			319,141			987,763			1,647,564
Consolidated profit for the year		9,101,761			9,412,060			9,332,414			9,636,150			8,245,753
Profit attributable to the Parent		8,180,909			8,942,538			8,876,414			9,060,258			7,595,947
Profit attributable to non-controlling interest		920,852			469,522			456,000			575,892			649,806

Per share information:
Average number of shares (thousands) (1)		8,686,522			8,554,224			7,271,470			6,801,899			6,701,728
Basic earnings per share (euros)		0.9418			1.0454			1.2207			1.3320			1.1334
Basic earnings per share continuing operation (euros)		0.9449			1.0422			1.1780			1.2003			0.9233
Diluted earnings per share (euros)		0.9356			1.0382			1.2133			1.3191			1.1277
Diluted earnings per share continuing operation (euros)		0.9387			1.0350			1.1709			1.1887			0.9186
Remuneration paid (euros) (2)		0.6000			0.6000			0.6325			0.6068			0.4854
Remuneration paid (US$) (2)		0.8017			0.8644			0.8802			0.8932			0.6393


	Year ended December 31,
	2010			2009			2008			2007			2006
	(in thousands of euros, except percentages and per share data)
Total assets		1,217,500,683			1,110,529,458			1,049,631,550			912,914,971			833,872,715
Loans and advances to credit institutions (net) (3)		79,855,351			79,836,607			78,792,277			57,642,604			69,757,056
Loans and advances to customers (net) (3)		724,153,897			682,550,926			626,888,435			571,098,513			527,035,514
Investment securities (net) (4)		174,257,145			173,990,918			124,673,342			132,035,268			136,760,433
Investments: Associates		272,915			164,473			1,323,453			15,689,127			5,006,109

Contingent liabilities (net)		59,795,253			59,256,076			65,323,194			76,216,585			58,769,309

Liabilities
Deposits from central banks and credit institutions (5)		140,112,185			142,091,587			129,877,370			112,897,308			113,038,061
Customer deposits (5)		616,375,819			506,976,237			420,229,450			355,406,519			330,947,770
Debt securities (5)		192,872,222			211,963,173			236,403,290			233,286,688			203,742,817

Capitalization
Guaranteed subordinated debt excluding preferred securities and preferred shares (6)		10,933,818			13,866,889			15,747,915			16,742,134			11,186,480
Secured subordinated debt		—			—			—			—			—
Other subordinated debt		12,188,524			15,192,269			14,452,488			11,666,663			12,399,771
Preferred securities (6)		6,916,930			7,315,291			7,621,575			7,261,382			6,836,570
Preferred shares (6)		435,365			430,152			1,051,272			522,558			668,328
Non-controlling interest (including net income of the period)		5,896,119			5,204,058			2,414,606			2,358,269			2,220,743
Stockholders’ equity (7)		75,018,339			68,666,584			57,586,886			55,199,882			44,851,559
Total capitalization		111,389,095			110,675,243			98,874,742			93,750,888			78,163,451
Stockholders’ equity per share (7)		8.64			8.03			7.92			8.12			6.69

Other managed funds
Mutual funds		113,509,684			105,216,486			90,305,714			119,210,503			119,838,418
Pension funds		10,964,711			11,309,649			11,127,918			11,952,437			29,450,103
Managed portfolio		20,314,226			18,364,168			17,289,448			19,814,340			17,835,031
Total other managed funds		144,788,621			134,890,303			118,723,080			150,977,280			167,123,552

Consolidated ratios
Profitability ratios:
Net yield (8)		2.68	%		2.62	%		2.05	%		1.80	%		1.68	%
Return on average total assets (ROA)		0.76	%		0.86	%		1.00	%		1.10	%		1.01	%
Return on average stockholders’ equity (ROE)		11.80	%		13.90	%		17.07	%		21.91	%		21.39	%
Capital ratio:
Average stockholders’ equity to average total assets		5.82	%		5.85	%		5.55	%		4.71	%		4.36	%
Ratio of earnings to fixed charges (9)
Excluding interest on deposits		2.28	%		2.01	%		1.57	%		1.67	%		1.79	%
Including interest on deposits		1.52	%		1.40	%		1.27	%		1.35	%		1.36	%

Credit quality data
Loans and advances to customers
Allowances for impaired balances including country risk and excluding contingent liabilities as a percentage of total gross loans		2.65	%		2.55	%		1.95	%		1.50	%		1.53	%
Impaired balances as a percentage of total gross loans		3.75	%		3.43	%		2.19	%		1.05	%		0.86	%
Allowances for impaired balances as a percentage of impaired balances		70.6	%		74.3	%		89.1	%		143.2	%		177.0	%
Net loan charge-offs as a percentage of total gross loans		1.31	%		1.27	%		0.60	%		0.46	%		0.34	%
*Ratios adding contingent liabilities to loans and advances to customers and excluding country risk ()**
Allowances for impaired balances (**) as a percentage of total loans and contingent liabilities		2.58	%		2.44	%		1.83	%		1.42	%		1.45	%
Impaired balances (**) (10) as a percentage of total loans and contingent liabilities		3.55	%		3.24	%		2.02	%		0.94	%		0.78	%
Allowances for impaired balances () as a percentage of impaired balances ()		72.74	%		75.33	%		90.64	%		150.55	%		187.23	%
Net loan and contingent liabilities charge-offs as a percentage of total loans and contingent liabilities		1.21	%		1.17	%		0.55	%		0.41	%		0.31	%


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

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

(1)		Average number of shares has been calculated on the basis of the weighted average number of shares outstanding in the relevant year, net of treasury stock.

(2)		The shareholders at the annual shareholders’ meeting held on June 19, 2009 approved a dividend of €0.6508 per share to be paid out of our profits for 2008. In accordance with IAS 33, for comparative purposes, dividends per share paid, as disclosed in the table above, take into account the adjustment arising from the capital increase with pre-emptive subscription rights carried out in December 2008. As a result of this adjustment, the dividend per share for 2008 amounts to €0.6325. The shareholders also approved a new remuneration scheme (scrip dividend), whereby the Bank offered the shareholders the possibility to opt to receive an amount equivalent to the second interim dividend on account of the 2009 financial year in cash or new shares. In light of the acceptance of this remuneration program (81% of the capital opted to receive shares instead of cash), at the general shareholders’ meeting held on June 11, 2010, the shareholders approved to offer again this option to the shareholders as payment for the second and third interim dividends on account of 2010. The remuneration per share for 2009 and 2010 disclosed above, €0.60, are calculated assuming that the four dividends for both years were paid in cash.

(3)		Equals the sum of the amounts included under the headings “Financial assets held for trading”, “Other financial assets at fair value through profit or loss” and “Loans and receivables” as stated in our consolidated financial statements.

(4)		Equals the amounts included as “Debt instruments” and “Equity instruments” under the headings “Financial assets held for trading”, “Other financial assets at fair value through profit or loss”, “Available-for-sale financial assets” and “Loans and receivables” as stated in our consolidated financial statements.

(5)		Equals the sum of the amounts included under the headings “Financial liabilities held for trading”, “Other financial liabilities at fair value through profit or loss” and “Financial liabilities at amortized cost” included in Notes 20, 21 and 22 to our consolidated financial statements.

(6)		In our consolidated financial statements, preferred securities and preferred shares are included under “Subordinated liabilities”.

(7)		Equals the sum of the amounts included at the end of each year as “Own funds” and “Valuation adjustments” as stated in our consolidated financial statements. We have deducted the book value of treasury stock from stockholders’ equity.

(8)		Net yield is the total of net interest income (including dividends on equity securities) divided by average earning assets. See “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Earning Assets—Yield Spread”.

(9)		For the purpose of calculating the ratio of earnings to fixed charges, earnings consist of pre-tax income from continuing operations before adjustment for income or loss from equity investees plus fixed charges. Fixed charges consist of total interest expense (including or excluding interest on deposits as appropriate) and the interest expense portion of rental expense.

(10)		Impaired loans reflect Bank of Spain classifications. These classifications differ from the classifications applied by U.S. banks in reporting loans as non-accrual, past due, restructured and potential problem loans. See “Item 4. Information on the Company—B. Business Overview—Classified Assets—Bank of Spain Classification Requirements”.

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


	IFRS-IASB
	Year Ended December 31,
Allowances refers to:	2010			2009			2008			2007			2006
	(in thousands of euros)

Allowances for impaired balances (*) (excluding country risk)		20,747,651			18,497,070			12,862,981			9,302,230			8,626,937
Allowances for contingent liabilities and commitments (excluding country risk)		(1,011,448	)		(623,202	)		(622,330	)		(587,485	)		(541,519	)

Allowances for Balances of Loans (excluding country risk):		19,736,203			17,873,868			12,240,651			8,714,745			8,085,418
Allowances referred to country risk and other		121,409			191,486			660,150			173,379			293,032

Allowances for impaired balances (excluding contingent liabilities)		19,857,612			18,065,354			12,900,801			8,888,124			8,378,450

Of which:
Allowances for Loans and receivables:		19,738,975			17,898,632			12,719,623			8,796,371			8,288,128
Allowances for Customers		19,696,998			17,873,096			12,466,056			8,695,204			8,163,444
Allowances for Credit institutions and other financial assets		16,559			25,536			253,567			101,167			124,684
Allowances for Debt Instruments		25,418			—			—			—			—
Allowances for Debt Instruments available for sale		118,637			166,722			181,178			91,753			90,322


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

Exchange Rates

Fluctuations in the exchange rate between euros and dollars have affected the dollar equivalent of the share prices on Spanish stock exchanges and, as a result, are likely to affect the dollar market price of our American Depositary Shares, or ADSs, in the United States. In addition, dividends paid to the depositary of the ADSs are denominated in euros and fluctuations in the exchange rate affect the dollar conversion by the depositary of cash dividends paid on the shares to the holders of the ADSs. Fluctuations in the exchange rate of euros against other currencies may also affect the euro value of our non-euro denominated assets, liabilities, earnings and expenses.

The following tables set forth, for the periods and dates indicated, certain information concerning the exchange rate for euros and dollars (expressed in dollars per euro), based on the Noon Buying Rate as announced by the Federal Reserve Bank of New York for the dates and periods indicated.

The New York Federal Reserve Bank announced its decision to discontinue the publication of foreign exchange rates on December 31, 2008. From that date, the exchange rates shown are those published by the European Central Bank (“ECB”), and are based on the daily consultation procedures between central banks within and outside the European System of Central Banks, which normally takes place at 14:15 p.m. ECB time.


	Rate During Period
	Period End		Average Rate(1)
Calendar Period	($)		($)
2006		1.3197		1.2661
2007		1.4603		1.3797
2008		1.3919		1.4695
2009		1.4406		1.3948
2010		1.3362		1.3257


(1)		The average of the Noon Buying Rates for euros on the last day of each month during the period.


	Rate During Period
Last six months	High $		Low $
2010
November		1.4244		1.2998
December		1.3435		1.3064
2011
January		1.3716		1.2903
February		1.3834		1.3440
March		1.4211		1.3773
April		1.4860		1.4141
May (through May 26)		1.4882		1.4020

On May 26, 2011, the exchange rate for euros and dollars (expressed in dollars per euro), as published by the ECB, was $1.4168.

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

B. Capitalization and indebtedness.

Not Applicable.

C. Reasons for the offer and use of proceeds.

Not Applicable.

D. Risk factors.

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

Our loan portfolio is concentrated in Continental Europe (in particular, Spain), the United Kingdom and Latin America. At December 31, 2010, Continental Europe accounted for approximately 45% of our total loan portfolio (Spain accounted for 31% of our total loan portfolio), while the United Kingdom and Latin America accounted for 32% and 18%, respectively. Therefore, adverse changes affecting the economies of Continental Europe (in particular, Spain), the United Kingdom or the Latin American countries where we operate would likely have a significant adverse impact on our loan portfolio and, as a result, on our financial condition, cash flows and results of operations. See “Item 4. Information on the Company—B. Business Overview.”

Some of our business is cyclical and our income may decrease when demand for certain products or services is in a down cycle.

The level of income we derive from certain of our products and services depends on the strength of the economies in the regions where we operate and certain market trends prevailing in those areas. Therefore, negative cycles may adversely affect our income in the future.

Our business could be affected if our capital is not managed effectively.

Effective management of our capital position is important to our ability to operate our business, to continue to grow organically and to pursue our business strategy. Any future change that limits our ability to manage our balance sheet and capital resources effectively or to access funding on commercially acceptable terms could have a material adverse effect on our financial condition and regulatory capital position.

A sudden shortage of funds could increase our cost of funding and have an adverse effect on our liquidity and funding.

Historically, our principal source of funds has been customer deposits (demand, time and notice deposits). At December 31, 2010, 25.2% of these customer deposits were time deposits in amounts greater than $100,000. Total time deposits (including repurchase agreements) represented 53.0%, 46.8% and 48.8% of total customer deposits at the end of 2010, 2009 and 2008, respectively. Large-denomination time deposits may be a less stable source of deposits than other type of deposits. The widespread crisis in investor confidence and resulting liquidity crisis experienced in 2008 and early 2009 increased our cost of funding and limited our access to some of our traditional sources of liquidity, such as domestic and international capital markets and the interbank market, and there can be no assurance that these conditions will not occur in the future.

The possibility of the moderate economic recovery returning to recessionary conditions or of turmoil or volatility in the financial markets would likely have an adverse effect on our business, financial position and results of operations.

The global economy began to recover from severe recessionary conditions in mid-2009 and is currently in the midst of a moderate economic recovery. The sustainability of the moderate recovery is dependent on a number of factors that are not within our control, such as a return of job growth and investment in the private sector, strengthening of housing sales and construction, continuation of the economic recovery globally and timing of the exit from government credit easing policies. We continue to face risks resulting from the aftermath of the severe recession and the moderate pace of the current recovery. A slowing or failing of the economic recovery could result in a return of some or all of the adverse effects of the earlier recessionary conditions.

Since the middle of 2007, there has been disruption and turmoil in financial markets around the world. Throughout many of our largest markets, including Spain, there have been dramatic declines in the housing market, with falling home prices and increasing foreclosures, high levels of unemployment and underemployment, and reduced earnings, or, in some cases, losses, for businesses across many industries, with reduced investments in growth.

This overall environment resulted in significant stress for the financial services industry, led to distress in credit markets, reduced liquidity for many types of financial assets, including loans and securities and caused concerns regarding the financial strength and adequacy of the capitalization of financial institutions. Some financial institutions around the world have failed, some have needed significant additional capital, and others have been forced to seek acquisition partners.

Concerned about the stability of the financial markets generally, the strength of counterparties and about their own capital and liquidity positions, many lenders and institutional investors reduced or ceased providing funding to borrowers. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets exacerbated the state of economic distress and hampered, and to some extent continues to hamper, efforts to bring about sustained economic recovery.

These economic conditions have had an adverse effect on our business and financial performance. While the global economy as a whole is currently experiencing a moderate recovery, we expect these conditions to continue to have an ongoing negative impact on us. 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.

In an attempt to prevent the failure of the financial system, Spain, the United States and other European governments intervened on an unprecedented scale. In Spain, the government increased consumer deposit guarantees, made available a program to guarantee the debt of certain financial institutions, created a fund to purchase assets from financial institutions and the Spanish Ministry of Economy and Finance was authorized, on an exceptional basis and until December 31, 2009, to acquire, at the request of credit institutions resident in Spain, shares and other capital instruments (including preferred shares) issued by such institutions. Additionally, in 2009 the Spanish government created the Orderly Banking Restructuring Fund (FROB) to manage the restructuring processes of credit institutions and reinforce the equity of institutions undergoing integration. In the United States, the federal government took equity stakes in several financial institutions, implemented a program to guarantee the short-term and certain medium-term debt of financial institutions, increased consumer deposit guarantees, and brokered the acquisitions of certain struggling financial institutions, among other measures. In the United Kingdom, the government effectively nationalized some of the country’s largest banks, provided a preferred equity program open to all financial institutions and a program to guarantee short-term and certain medium-term debt of financial institutions, among other measures. For more information on recent regulatory changes, see “—Changes in the regulatory framework in the jurisdictions where we operate could adversely affect our business.”

Despite the extent of the aforementioned intervention, global investor confidence remains cautious. The world’s largest developed economies, including the United States and United Kingdom, grew during 2010, although, in most cases, still at a slow pace. Spain, however, continued to suffer from a recession. In addition, recent downgrades of the sovereign debt of Greece, Portugal and Spain have caused volatility in the capital markets. Continued or worsening disruption and volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers. Any such increase in capital markets funding costs or deposit rates would entail a repricing of loans, which would result in a reduction of volume, and may also have an adverse effect on our interest margins. A further economic downturn, especially in Spain, the United Kingdom, other European countries, the United States and certain Latin American countries, could also result in a further reduction in business activity and a consequent loss of income for us.

Risks concerning borrower credit quality and general economic conditions are inherent in our business.

Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in Spanish, United Kingdom, Latin American, United States or global economic conditions, or arising from systemic risks in the financial systems, could reduce the recoverability and value of our assets and require an increase in our level of allowances for credit losses. Deterioration in the economies in which we operate could reduce the profit margins for our banking and financial services businesses.

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

Market turmoil and economic recession, especially in Spain, the United Kingdom, the United States and certain Latin American countries, could materially and adversely affect the liquidity, businesses and/or financial conditions of our borrowers, which could in turn increase our non-performing loan (“NPL”) ratios’, impair our loan and other financial assets and result in decreased demand for borrowings in general. In the context of recovery from the recent market turmoil and economic recession and with high unemployment coupled with low consumer spending, the value of assets collateralizing our secured loans, including homes and other real estate, could still decline significantly, which could result in the impairment of the value of our loan assets. Moreover, in 2010 we experienced an increase in our non-performing ratios and a deterioration in asset quality as compared to 2009. In addition, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.

We are exposed to risks faced by other financial institutions.

We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual 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. These liquidity concerns have had, and may continue to have, a chilling effect on inter-institutional financial transactions in general. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties. A default by a significant financial counterparty, or liquidity problems in the financial services industry generally, could have a material adverse effect on our business, financial condition and results of operations.

Our exposure to Spanish and UK real estate markets makes us more vulnerable to adverse developments in these markets.

Mortgage loans are one of our principal assets, comprising 51% of our loan portfolio as of December 31, 2010. As a result, we are highly exposed to developments in real estate markets, especially in Spain and the United Kingdom. In addition, we have exposure to a number of large real estate developers in Spain. From 2002 to 2007, demand for housing and mortgage financing in Spain increased significantly driven by, among other things, economic growth, declining unemployment rates, demographic and social trends, the desirability of Spain as a vacation destination and historically low interest rates in the Eurozone. The United Kingdom experienced a similar increase in housing and mortgage demand driven by, among other things, economic growth, declining unemployment rates, demographic trends and the increasing prominence of London as an international financial center. During late 2007, the housing market began to adjust in Spain and the United Kingdom as a result of excess supply (particularly in Spain) and higher interest rates. Since 2008, as economic growth stalled in Spain and the United Kingdom, housing oversupply has persisted, unemployment has continued to increase, housing demand has continued to decrease and home prices have declined while mortgage delinquencies increased. As a result, our NPL ratio increased from 0.94% at December 31, 2007, to 2.02% at December 31, 2008 and to 3.24% at December 31, 2009. On December 31, 2010, the ratio reached 3.55%, but has since begun to stabilize. These trends, especially higher unemployment rates coupled with declining real estate prices, could have a material adverse impact on our mortgage payment delinquency rates, which in turn could have a material adverse effect on our business, financial condition and results of operations.

Portions of our loan portfolio are subject to risks relating to force majeure events and any such event could materially adversely affect our operating results.

Our financial and operating performance may be adversely affected by force majeure events, such as natural disasters, particularly in locations where a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage which could impair the asset quality of our loan portfolio and could have an adverse impact on the economy of the affected region.

We may generate lower revenues from brokerage and other commission- and fee-based businesses.

Market downturns are likely to lead to a decline in the volume of transactions that we execute for our customers and, therefore, to a decline in our non-interest revenue. In addition, because the fees that we charge for managing our clients’ portfolios are in many cases based on the value or performance of those portfolios, a market downturn that reduces the value of our clients’ portfolios or increases the amount of withdrawals would reduce the revenues we receive from our asset management, private banking and custody businesses.

Even in the absence of a market downturn, below-market performance by our mutual funds may result in increased withdrawals and reduced inflows, which would reduce the revenue we receive from our asset management business.

Market risks associated with fluctuations in bond and equity prices and other market factors are inherent in our business. Protracted market declines can reduce liquidity in the markets, making it harder to sell assets and leading to material losses.

The performance of financial markets may cause changes in the value of our investment and trading portfolios. In some of our businesses, protracted adverse market movements, particularly asset price declines, can reduce the level of activity in the market, reducing market liquidity. These developments can lead to material losses if we cannot close out deteriorating positions in a timely way. This risk is especially great for assets with normally less liquid markets. Assets that are not traded on stock exchanges or other public trading markets, such as derivative contracts between banks, may have values that we calculate using models other than publicly quoted prices. Monitoring the deterioration of prices of assets like these is difficult and could lead to losses that we did not anticipate.

The volatility of world equity markets due to the recent economic uncertainty has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in entities in this sector and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results.

Volatility in interest rates may negatively affect our net interest income and increase our non-performing loan portfolio.

Changes in market interest rates could affect the interest rates charged on our interest-earning assets differently than the interest rates paid on our interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income leading to a reduction in our net interest income. Income from treasury operations is particularly vulnerable to interest rate volatility. Because the majority of our loan portfolio reprices in less than one year, rising interest rates may also lead to an increasing non-performing loan portfolio. Interest rates are highly sensitive to many factors beyond our control, including deregulation of the financial sector, monetary policies, domestic and international economic and political conditions and other factors.

As of December 31, 2010, our interest rate risk measured in daily Value at Risk (“VaRD”) terms amounted to €309.8 million.

Foreign exchange rate fluctuations may negatively affect our earnings and the value of our assets and shares.

Fluctuations in the exchange rate between the euro and the US dollar will affect the US dollar equivalent of the price of our securities on the stock exchanges in which our shares and ADSs are traded. These fluctuations will also affect the conversion to US dollars of cash dividends paid in euros on our ADSs.

In the ordinary course of our business, we have a percentage of our assets and liabilities denominated in currencies other than the euro. Fluctuations in the value of the euro against other currencies may adversely affect our profitability. For example, the appreciation of the euro against some Latin American currencies and the US dollar will depress earnings from our Latin American and US operations, and the appreciation of the euro against the sterling will depress earnings from our UK operations. Additionally, while most of the governments of the countries in which we operate have not imposed prohibitions on the repatriation of dividends, capital investment or other distributions, no assurance can be given that these governments will not institute restrictive exchange control policies in the future. Moreover, fluctuations among the currencies in which our shares and ADSs trade could reduce the value of your investment.

As of December 31, 2010, our largest exposures on temporary positions (with a potential impact on the income statement) were concentrated on, in descending order, the pound sterling, the Mexican peso and the Chilean peso. On December 31, 2010, our largest exposures on permanent positions (with a potential impact on equity) were concentrated on, in descending order, the Brazilian real, the pound sterling, the Mexican peso, the US dollar and the Chilean peso.

Despite our risk management policies, procedures and methods, we may nonetheless be exposed to unidentified or unanticipated risks.

Our risk management techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate. Some of our qualitative tools and metrics for managing risk are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. If existing or potential customers believe our risk management is inadequate, they could take their business elsewhere. This could harm our reputation as well as our revenues and profits.

Our recent and future acquisitions may not be successful and may be disruptive to our business.

We have acquired controlling interests in various companies and have engaged in other strategic partnerships. See “Item 4. Information on the Company — A. History and development of the Company.” Additionally, we may consider other strategic acquisitions and partnerships from time to time. While we are optimistic about the acquisitions we have made, there can be no assurances that we will be successful in our plans regarding the operation of these or other acquisitions and strategic partnerships.

We can give no assurance that our recent and any future acquisition and partnership activities will perform in accordance with our expectations. We base our assessment of potential acquisitions and partnerships on limited and potentially inexact information and on assumptions with respect to operations, profitability and other matters that may prove to be incorrect. We can give no assurances that our expectations with regards to integration and synergies will materialize.

Increased competition in the countries where we operate may adversely affect our growth prospects and operations.

Most of the financial systems in which we operate are highly competitive. Financial sector reforms in the markets in which we operate have increased competition among both local and foreign financial institutions, and we believe that this trend will continue. In particular, price competition in Europe, Latin America and the US has increased recently. Our success in the European, Latin American and US markets will depend on our ability to remain competitive with other financial institutions. In addition, there has been a trend towards consolidation in the banking industry, which has created larger and stronger banks with which we must now compete. There can be no assurance that this increased competition will not adversely affect our growth prospects, and therefore our operations. We also face competition from non-bank competitors, such as brokerage companies, department stores (for some credit products), leasing and factoring companies, mutual fund and pension fund management companies and insurance companies.

Changes in the regulatory framework in the jurisdictions where we operate could adversely affect our business.

Extensive legislation affecting the financial services industry has recently been adopted in Spain, the United States, the European Union and other jurisdictions, and regulations are in the process of being implemented. In Spain, the Bank of Spain issued Circular 9/2010 on December 22, 2010, which amends certain rules in order to establish more restrictive conditions regarding capital requirements for credit risk, credit risk mitigation techniques, securitization and treatment of counterparty and trading book risk. The Circular was issued following the passage of two EU Directives on risk management (Directive 2009/27/CE and Directive 2009/83/CE).

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

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

In December 2010, the Basel Committee on Banking Supervision announced revisions to its Capital Accord, which will require higher capital ratio requirements for banks, narrow the definition of capital, and introduce short term liquidity and term funding standards, among other things. Also being considered is the imposition of a bank surcharge on institutions that are determined to be “globally significant financial institutions.” These requirements could increase our funding and operational costs.

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

We may also face increased compliance costs and limitations on our ability to pursue certain business opportunities. Changes in regulations, which are beyond our control, may have a material effect on our business and operations. As some of the banking laws and regulations have been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, no assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have material adverse effect on our business.

Operational risks are inherent in our business.

Our businesses depend on the ability to process a large number of transactions efficiently and accurately. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems or from external events that interrupt normal business operations. We also face the risk that the design of our controls and procedures prove to be inadequate or are circumvented. We have suffered losses from operational risk in the past and there can be no assurance that we will not suffer material losses from operational risk in the future.

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

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

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

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

Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis has damaged the reputation of the industry as a whole.

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

Different disclosure and accounting principles between Spain and the US may provide you with different or less information about us than you expect.

There may be less publicly available information about us than is regularly published about companies in the United States. While we are subject to the periodic reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), the disclosure required from foreign private issuers under the Exchange Act is more limited than the disclosure required from US issuers. Additionally, we present our financial statements under IFRS-IASB which differs from U.S. GAAP.

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

We face various issues that may give rise to risk of loss from legal and regulatory proceedings. These issues, including appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues and conduct by companies in which we hold strategic investments or joint venture partners, could increase the number of litigation claims and the amount of damages asserted against the Group or subject the Group to regulatory enforcement actions, fines and penalties. Currently, the Bank and its subsidiaries are the subject of a number of legal proceedings and regulatory actions. An adverse result in one or more of these proceedings could have a material adverse effect on our operating results for any particular period, could require changes to our business practices and may even require that we exit certain businesses. For information relating to the legal proceedings involving our businesses, see “Item 8. Financial Information—A. Consolidated statements and other financial information—Legal proceedings.”

Credit, market and liquidity risks may have an adverse effect on our credit ratings and our cost of funds. Any reduction in our credit rating could increase our cost of funding and adversely affect our interest margins.

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

Any downgrade in our ratings could increase our borrowing costs, limit our access to capital markets and adversely affect the ability of our business to sell or market our products, engage in business transactions—particularly longer-term and derivatives transactions—and retain our customers. This, in turn, could reduce our liquidity and have an adverse effect on our operating results and financial condition.

The Group’s long-term debt is currently rated investment grade by the major rating agencies (Aa2 by Moody’s Investors Service España, S.A. and AA by each of Standard & Poor’s Ratings Services and Fitch Ratings Ltd., respectively). Standard & Poor’s maintains our outlook at negative reflecting the higher credit risk of our Latin American exposures as well as likely high credit losses from exposures to the Spanish real estate market. Moody’s also maintains a negative outlook based on the Group’s high borrower concentration, the high exposure to developing markets with its Latin American franchise, and the ongoing macroeconomic challenges faced in many of Santander’s core markets (i.e. Spain, UK, US and, consequently, Mexico). In light of the difficulties in the financial services industry and the financial markets, there can be no assurance that the rating agencies will maintain their current ratings or outlooks, or with regard to those rating agencies who have a negative outlook on the Group, there can be no assurances that such agencies will revise such outlooks upward. The Group’s failure to maintain favorable ratings and outlooks could increase the cost of its funding and adversely affect the Group’s interest margins.

Our Latin American subsidiaries’ growth, asset quality and profitability may be adversely affected by volatile macroeconomic and political conditions.

The economies of the eight Latin American countries where we operate have experienced significant volatility in recent decades, characterized, in some cases, by slow or regressive growth, declining investment and hyperinflation. This volatility has resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economies to which we lend. Latin American banking activities (including Retail Banking, Global Wholesale Banking, Asset Management and Private Banking) accounted for €4,804 million of our profit attributable to the Parent bank for the year ended December 31, 2010 (an increase of 25% from €3,834 million for the year ended December 31, 2009). Negative and fluctuating economic conditions, such as a changing interest rate environment, impact our profitability by causing lending margins to decrease and leading to decreased demand for higher margin products and services. Negative and fluctuating economic conditions in some Latin American countries could also result in government defaults on public debt. This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is high in several of the Latin American countries in which we operate.

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

No assurance can be given that our growth, asset quality and profitability will not be affected by volatile macroeconomic and political conditions in the Latin American countries in which we operate.

Latin American economies can be directly and negatively affected by adverse developments in other countries.

Financial and securities markets in the Latin American countries where we operate are, to varying degrees, influenced by economic and market conditions in other countries in Latin America and beyond. Negative developments in the economy or securities markets in one country, particularly in an emerging market, may have a negative impact on other emerging market economies. These developments may adversely affect the business, financial condition and operating results of our subsidiaries in Latin America.

Item 4. Information on the Company

A. History and development of the company

Introduction

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

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

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

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

Principal Capital Expenditures and Divestitures

Acquisitions, Dispositions, Reorganizations

Our principal acquisitions and dispositions in 2010, 2009 and 2008 are as follows:

Tender offer for subordinated notes

On January 11, 2010, Banco Santander, S.A. offered to purchase for cash 13 series of subordinated notes issued by several entities of Grupo Santander for an aggregate nominal amount of €3.3 billion.

The acceptance level of the exchange offers reached 60% and the nominal amount of the securities accepted for purchase was approximately €2 billion.

Also, on February 17, 2010, Banco Santander, S.A. offered to purchase for cash perpetual subordinated notes issued by Santander Perpetual, S.A.U. for a total nominal amount of US$1.5 billion (of which Santander held approximately US$350 million). The aggregate nominal amount of securities accepted for purchase was US$1.1 billion, representing 95% of the outstanding notes not held by Santander.

Bolsas y Mercados Españoles (“BME”)

On February 22, 2010, we sold to institutional investors 2,099,762 shares of BME representing approximately 2.5% of its share capital, at a price of €20.0 per share, which amounts to a total of approximately €42 million. The capital gain for Grupo Santander was of €30.4 million. Grupo Santander maintains a stake of 2.5% in the capital of BME and will continue to be represented on its board of directors.

James Hay Holdings Limited

On March 10, 2010, Santander Private Banking UK Limited completed the sale of James Hay Holdings Limited (including its five subsidiaries) through the transfer of all the shares of James Hay Holdings Limited to IFG UK Holdings Limited, a subsidiary of the IFG Group, for a total of £39 million.

Companhia Brasileira de Soluções e Serviços (“CBSS”) and Cielo S.A.

On April 25, 2010, we announced that we had reached an agreement with Banco do Brasil S.A. and Banco Bradesco S.A. for the sale of the entire stake held by Grupo Santander in the companies Companhia Brasileira de Soluções e Serviços (15.32% of the capital), and Cielo S.A. – formerly Visanet – (7.20% of the capital).

The total agreed sale price was BRL200 million (approximately €89 million) for the 15.32% of CBSS and BRL1,487 million (approximately €650.7 million) for the 7.20% of Cielo.

The net capital gain generated for Grupo Santander was approximately €245 million.

The closing of the transactions took place in July 2010.

Acquisition of AIG Bank Polska Spolka Akcyina

On June 8, 2010, Santander Consumer Bank S.A. (Poland) increased capital through the issuance of 1,560,000 new shares, fully subscribed by AIG Consumer Finance Group Inc. who made a contribution of 11,177,088 shares of AIG Bank Polska S.A. representing a 99.92% of its share capital. The amount of the capital increase amounted to 452 million Poland slotys (€109 million approximately as of the date of the transaction).

The capital increase has diluted the Group’s share capital of Santander Consumer Bank S.A. (Poland), which is now 70%.

Acquisition of 24.9% of Banco Santander Mexico

On June 9, 2010, we announced that Banco Santander had reached an agreement with Bank of America to acquire the 24.9% stake held by the latter in Grupo Financiero Santander (“Banco Santander Mexico”) for an amount of US$ 2.5 billion. Following this transaction, our holding in Banco Santander Mexico will amount to 99.9%.

In 2003, Bank of America acquired this 24.9% stake from Santander for an amount of US$1.6 billion.

The transaction was completed on September 23, 2010.

Agreement for the acquisition of RBS branches

On June 18, 2010, we announced that our affiliate Santander UK had submitted an offer in the tender process of approximately 300 branches of Royal Bank of Scotland that was taking place in the United Kingdom.

On August 4, 2010, we announced that our affiliate Santander UK had reached an agreement to acquire the parts of the banking businesses of the Royal Bank of Scotland Group (“RBS”) which are carried out through its RBS branches in England and Wales and its NatWest branches in Scotland. The consideration for the acquisition of £1,650 million (approximately €1,987 million), subject to completion adjustments, which comprises £350 million (approximately €421 million) of goodwill.

The acquisition includes 311 RBS branches in England and Wales, 7 NatWest branches in Scotland, 40 SME banking centers, more than 400 relationship managers, 4 corporate banking centers and 3 private banking centers. The transaction affects 1.8 million retail customers, around 244,000 SME customers and around 1,200 midcorporate customers.

The European Commission authorized the transaction.

Completion is expected during 2012 and is subject to necessary approvals.

Acquisition of CitiFinancial Auto’s auto loan portfolio

On June 24, 2010, we announced that we had reached an agreement with Citigroup Inc. (“Citi”) to purchase US$3.2 billion of CitiFinancial Auto’s auto loan portfolio. In addition, Santander and Citi have entered into an agreement under which Santander will service a portfolio of US$7.2 billion of auto loans that will be retained by Citi.

Santander purchased the US$ 3.2 billion portion of the portfolio at a price equal to 99% of the value of the gross receivables.

The transaction closed on September 3, 2010.

Acquisition of the commercial banking business of Skandinaviska Enskilda Banken in Germany

On July 12, 2010, we announced that we had reached an agreement with Skandinaviska Enskilda Banken (SEB Group) for the acquisition by our affiliate Santander Consumer Bank AG of SEB’s commercial banking business in Germany for an amount of approximately €494 million (€555 million deducting certain amendments to the purchase price agreed between the parties).

Following the acquisition of SEB’s commercial banking business in Germany, which includes 173 branches and serves one million customers, the number of branches of Santander Consumer Bank’s network in Germany almost doubled.

The transaction closed on January 31, 2011, once the appropriate regulatory approvals were obtained.

Tender offer for Santander Bancorp shares

On July 23, 2010, we announced the completion of the tender offer by our wholly-owned subsidiary, Administración de Bancos Latinoamericanos Santander, S.L. (“ABLASA”), for all outstanding shares of common stock of Santander BanCorp not owned by ABLASA at US$12.69 per share.

The offer expired at 12:00 midnight, New York City time, on July 22, 2010. Based on information provided by BNY Mellon Shareowner Services, the depositary for the tender offer, 3,644,906 Santander BanCorp shares were validly tendered and not withdrawn. The tendered shares represented approximately 7.8% of Santander BanCorp’s outstanding shares of common stock. Together with the 90.6% of the outstanding shares already held by ABLASA, ABLASA held a total of approximately 45,886,244 shares or 98.4% of the 46,639,104 Santander BanCorp shares outstanding after the expiration of the tender offer. All Santander BanCorp shares that were validly tendered and not withdrawn immediately prior to the expiration of the tender offer were accepted and purchased by ABLASA.

ABLASA acquired the remaining publicly held shares of Santander BanCorp through a short-form merger under Puerto Rico law on July 29, 2010. As a result of the merger, any remaining shares of Santander BanCorp common stock were cancelled pursuant to the merger in consideration for the same offer price of US$12.69 cash paid in the tender offer, without interest and less any required withholding taxes (other than shares of Santander BanCorp common stock for which appraisal rights were validly exercised under Puerto Rico law). Upon completion of the merger, Santander BanCorp became a wholly owned subsidiary of Banco Santander, its shares ceased to be traded on the New York Stock Exchange, and Santander BanCorp was no longer required to file certain information and periodic reports with the U.S. Securities and Exchange Commission.

Acquisition of auto loan portfolio in the USA from HSBC

On August 27, 2010, we purchased a US$ 4.3 billion auto loan portfolio in the USA from HSBC, for a total consideration of approximately US$ 4 billion. The portfolio amount represents the carrying amount of the loans at June 30, 2010, and the purchase price is subject to final adjustments.

Santander Consumer USA is already servicing the auto loan portfolio that was acquired.

The transaction required only US$ 342 million financing from Grupo Santander, since it carries financing from a third party as well as assumptions of existing securitizations pertaining to part of the portfolio.

Conversion of “Valores Santander”

With regard to the currently outstanding “Valores Santander”, which are securities mandatorily convertible into newly-issued ordinary shares of the Bank issued in 2007 to partially finance the takeover bid of ABN AMRO, we informed on October 13, 2010 that conversion of 33,544 of such “Valores Santander” was requested in the ordinary conversion period that ended on October 4, 2010. Pursuant to the terms of such securities, Banco Santander issued 11,582,632 new shares in exchange for those “Valores Santander”. The public deed formalizing the capital increase was registered with the Commercial Registry of Cantabria on October 8, 2010.

After this increase, Banco Santander’s share capital was 4,120,204,383.5 euros, represented by 8,240,408,767 shares, par value €0.50 each.

Agreement with Qatar Holding by which it will subscribe a bond issue

On October 18, 2010, Banco Santander announced that it had reached an agreement with Qatar Holding, by which the latter will subscribe bonds issued by Banco Santander amounting to US$ 2.719 billion, mandatorily exchangeable for existing or for new shares of Banco Santander Brasil, at the choice of Banco Santander.

This transaction represents 5% of the share capital of Banco Santander Brasil.

The bonds will mature on the third anniversary of the issuance date. The conversion or exchange price will be Brazilian reais 23.75 per share and the bonds will pay an annual coupon of 6.75% in U.S. dollars.

The transaction is part of Banco Santander’s commitment for its Brazilian affiliate to have a free float of 25% by the end of 2014.

Metrovacesa, S.A. (“Metrovacesa”)

On February 20, 2009, certain credit institutions, including Banco Santander, S.A. and Banco Español de Crédito, S.A., entered into an agreement for the restructuring of the debt of the Sanahuja Group, whereby they received shares representing 54.75% of the share capital of Metrovacesa in consideration for payment of the Sanahuja Group’s debt.

The agreement also included the acquisition by the creditor entities of an additional 10.77% of the share capital of Metrovacesa (shares for which the Sanahuja family was granted a call option for four years), which gave rise to an additional disbursement of €214 million for the Group, and other conditions concerning the administration of this company.

Following the execution of the agreement, Grupo Santander had an ownership interest of 23.63% in Metrovacesa, S.A., and 5.38% of the share capital was subject to the call option described above.

At 2009 year-end, the Group measured this investment at €25 per share, which gave rise to additional write-downs and impairment losses of €269 million net of tax.

At December 31, 2010, the value of this holding amounted to €402 million, after deducting the write-downs, equivalent to €24.4 per share. Also, the Group has granted the company loans amounting to €109 million, which were fully provisioned.

Acquisition of Real Tokio Marine Vida e Previdencia

In March 2009, the Santander Brazil Group acquired the 50% of the insurance company Real Seguros Vida e Previdencia (formerly Real Tokio Marine Vida e Previdencia) that it did not already own from Tokio Marine for BRL 678 million (€225 million).

CEPSA

On March 31, 2009, we announced that we had reached an agreement with the International Petroleum Investment Company (“IPIC”) of the Emirate of Abu Dhabi for the sale of our 32.5% stake in CEPSA to IPIC, at a price of €33 per share, which would be reduced by the amount of any dividends paid, prior to the closing of the transaction, charged to the 2009 fiscal year. With this transaction, our historical annual return derived from our investment in CEPSA was of 13%. The sale had no impact on Grupo Santander’s earnings.

On July 30, 2009, we announced that we had transferred to IPIC our 32.5% stake in CEPSA at the agreed price of €33 per share. The acquirer applied to the National Securities Market Commission for exemption from the obligation to launch a tender offer, in accordance with the provisions of article 4.2 of Royal Decree 1066/2007, owing to the existence of a shareholder with a higher stake in the share capital, the denial of which would be cause for termination of the contract. On September 15, 2009, the National Securities Market Commission granted this exemption.

France Telecom España, S.A. (“France Telecom”)

On April 29, 2009, we announced that we had reached an agreement with the company Atlas Services Nederland BV (a 100%-owned affiliate of France Telecom) on the sale of the 5.01% share package held by Grupo Santander in France Telecom España, S.A. for an amount of €378 million. The sale generated a loss for Grupo Santander of €14 million.

Triad Financial Corporation

In June 2008, Banco Santander’s executive committee authorized the acquisition by Santander Consumer USA Inc. of the vehicle purchase loan portfolio and an internet-based direct loan platform (www.roadloans.com) belonging to the US group Triad Financial Corporation. The acquisition price, US$615 million, was determined on the basis of an analysis of each individual loan. In July 2009, Banco Santander’s executive committee authorized Santander Consumer USA Inc. to acquire Triad Financial SM LLC with its remaining portfolio for US$260 million.

Banco de Venezuela

On July 6, 2009, we announced that we had closed the sale of our stake in Banco de Venezuela to Bank for Economic and Social Development of Venezuela (Banco de Desarrollo Económico y Social de Venezuela), a public institution of the Bolivarian Republic of Venezuela for US$1,050 million, of which US$630 million were paid on that date, US$210 million were paid in October 2009 and the remainder was paid in December 2009. This sale did not have a material impact on the Group’s income statement.

Offers to exchange perpetual issues for other financial instruments

On July 9, 2009, Banco Santander S.A. and its subsidiary Santander Financial Exchanges Limited launched various offers to exchange 30 issues of securities eligible to be included in capital for a total nominal amount of approximately €9.1 billion for securities to be issued by Santander and its subsidiaries. The exchange envisaged the delivery of new securities that meet the current market standards and regulatory requirements to be classified as equity at the consolidated Group level.

The purpose of these offers was to improve the efficiency of the Group’s capital structure and to strengthen Grupo Santander’s balance sheet. The Group’s annual borrowing costs were not increased as a result of exchange offers.

The acceptance level of the exchange offers reached 49.8% and the nominal amount of the new securities issued was €3,210 million.

The capital gains generated by this transaction amounted to €724 million which were used to strengthen the Group’s balance sheet.

Purchase of securitizations

On August 24, 2009, Banco Santander invited holders of certain securitization bonds for a total nominal amount of €25,273 million to tender any or all of the bonds for purchase by Banco Santander for cash.

The aggregate outstanding nominal amount of securities accepted for purchase was €609 million. The capital gains generated amounted to €97 million which were used to strengthen the Group’s balance sheet.

Initial Public Offering of Banco Santander (Brasil) S.A.

On October 13, 2009, our subsidiary Banco Santander (Brasil) S.A. (Santander Brasil) closed its initial public offering of 525,000,000 units, each unit representing 55 ordinary shares and 50 preference shares, without par value. The offered securities (units) are share deposit certificates. The units were offered in a global offering consisting of an international tranche in the United States and in other countries other than Brazil, in the form of American depositary shares (“ADSs”), in which each ADS represented a unit, and a domestic tranche of units in Brazil.

The initial public offering price was BRL 23.50 per unit and USD 13.4033 per ADS.

Additionally, Santander Brasil granted the international underwriters an option, exercisable before November 6, 2009, to purchase an additional 42,750,000 ADSs to cover any over-allotments in connection with the international tranche. Santander Brasil also granted the domestic underwriters an option, exercisable during the same period, to purchase an additional 32,250,000 units to cover any over-allotments in connection with the Brazilian tranche.

Once the global offering was completed and after the underwriters exercised their options, the capital increase amount was BRL 13,182 million (€5,092 million). The free float of Santander Brasil rose to approximately 16.45% of its share capital, from only 2.0% before the global offering. Santander Brasil undertook to raise the free float to at least 25% of its share capital within three years from the date of the initial public offering in order to maintain its listing on Level 2 of the Bolsa de Valores, Mercadorias e Futuros (BM&FBOVESPA). The ADSs are listed on the New York Stock Exchange.

Santander Group’s net gains from the placement amounted to €1,499 million.

Prior to the public offering, on August 14, 2009, the Group transferred to Santander Brasil, through share exchange transactions, all the share capital of certain Brazilian asset management, insurance and banking companies (including Santander Seguros S.A. and Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A.) which were owned by Santander Group and certain non-controlling shareholders. The total equity of the transferred businesses was valued at BRL 2.5 billion. The purpose of these transactions was to consolidate in a single entity Santander Group’s investments in Brazil, thus streamlining the current corporate structure and grouping the ownership interests held by Santander Group and by the non-controlling shareholders in those entities in the share capital of Santander Brasil. As a result of these transactions, the share capital of Santander Brasil was increased by approximately BRL 2.5 billion through the issuance of 14,410,886,181 shares, of which 7,710,342,899 were ordinary shares and 6,700,543,282 were preference shares. Additionally, on September 17, 2009, Banco Santander sold to Santander Brasil a loan portfolio consisting of loans to Brazilian companies and their affiliates abroad for US$ 806.3 million.

Santander Brasil intends to use the net proceeds from the global offering to expand its business in Brazil by growing its physical presence and increasing its capital base. Santander Brasil also intends to improve its funding structure and, along with its traditional funding sources, increase its credit transactions.

Santander Brasil is the third largest private-sector bank in Brazil, the largest bank controlled by an international financial group and the fourth largest bank overall in Brazil in absolute terms, with a market share of 10.2% in terms of assets. Santander Brasil carries on its business activity across the country, although its presence is concentrated in the Southern and South Eastern regions, where it has one of the largest branch networks, according to the Central Bank of Brazil.

In August 2008, Santander Brasil acquired Banco Real, which was then the fourth largest private-sector Brazilian bank in terms of volume of assets. At the time of the purchase, Santander Brasil was the fifth largest private-sector bank in Brazil in terms of volume of assets. The businesses of Banco Real and Santander Brasil were highly complementary before the acquisition. Santander Brasil considers that the acquisition provides considerable opportunities in terms of operational, commercial and technological synergies, building on the best practices of each bank. Banco Real’s strong representation in the states of Rio de Janeiro and Minas Gerais has further enhanced Santander Brasil’s position in the Southern and South Eastern regions of the country, adding to this entity’s already significant presence in those regions, particularly in the State of São Paulo. The acquisition of Banco Real consolidated Santander Brasil’s position as a full-service bank with nationwide coverage, whose size enables it to compete efficiently in its target markets.

In the third quarter of 2010, we sold 2.616% of the share capital of Santander Brasil. The sale price amounted to €867 million, which gave rise to increases of €162 million in Reserves and €790 million in Non-controlling interest, and a decrease of €85 million in Valuation adjustments — Exchange differences.

Sale of 10% of the share capital of Attijariwafa Bank

On December 28, 2009, we announced that we had sold to the Moroccan Société Nationale d’Investissement (SNI) 10% of the share capital of Attijariwafa Bank, at a price of Dirhams 4,149.4 million (approximately €367 million at the exchange rate on such date). The transaction generated for Grupo Santander a capital gain of approximately €218 million, which was recognized under Gains/(losses) on disposal of non-current assets held for sale in the consolidated income statement. Following the sale, Grupo Santander holds 4.55% of Attijariwafa Bank.

Acquisition of Sovereign

On October 13, 2008, we announced that we would acquire Sovereign through a share exchange. At the date of the announcement, we held 24.35% of the outstanding ordinary shares of Sovereign. The capital and finance committee of Sovereign, composed of independent directors, requested that Santander consider acquiring the 75.65% of the company that it did not own. The committee assessed the transaction and recommended it to the company’s board of directors.

Under the terms of the definitive transaction agreement, which was unanimously approved by the non-Santander directors of Sovereign and by the executive committee of Santander, Sovereign shareholders received 0.2924 Banco Santander American Depository Shares (ADSs) for every 1 ordinary Sovereign share they owned (or 1 Banco Santander ADS for every 3.42 Sovereign shares).

On January 26, 2009, Banco Santander held an extraordinary general meeting at which the shareholders approved the capital increase for the acquisition of 75.65% of Sovereign Bancorp Inc.

On January 28, 2009, the shareholders at the general meeting of Sovereign approved the acquisition.

On January 30, 2009, the acquisition of Sovereign was completed and Sovereign became a wholly-owned subsidiary of Grupo Santander. The transaction involved the issuance of 0.3206 ordinary shares of Banco Santander for each ordinary share of Sovereign (equivalent to the approved exchange of 0.2924 ADSs adjusted for the dilution arising from the capital increase carried out in December 2008). To this end, 161,546,320 ordinary shares were issued by Banco Santander for a cash amount (par value plus share premium) of €1.3 billion.

This transaction gave rise to initial goodwill of US$2,053 million (€1,601 million at the exchange rate on the date of the acquisition, €1,425 million at the exchange rate on December 31, 2009).

Acquisition of Alliance & Leicester plc

On July 14, 2008, Banco Santander, S.A. and Alliance & Leicester plc reached an agreement in relation to the terms of a recommended acquisition by Banco Santander, S.A. of the entire share capital of Alliance & Leicester plc.

As part of the transaction, the shareholders of Alliance & Leicester plc received a Banco Santander share for each three shares of Alliance & Leicester plc. Prior to the share exchange date, Alliance & Leicester plc approved (and paid) an interim dividend in cash amounting to 18 pence per share. Our shareholders, acting at the general shareholders’ meeting held on September 22, 2008, agreed to increase the Bank’s capital up to a nominal amount of €71,688,495 through the issuance of a maximum of 143,376,990 shares par value €0.50 in order to consummate the acquisition of Alliance & Leicester.

The acquisition, which was completed by means of a scheme of arrangement, was approved by the shareholders of Banco Santander, S.A. (in relation to the capital increase) and of Alliance & Leicester plc. In addition, the scheme of arrangement was approved by the UK courts and was granted the relevant permits by the UK and Spanish regulatory bodies and the relevant anti-trust authorities.

The acquisition was completed on October 10, 2008. As of that date we issued 140,950,944 new shares of Banco Santander par value €0.50 each, with a share premium of €10.73 per share. The consideration for such shares was 422,852,832 shares of Alliance & Leicester plc, par value £0.50 each, representing all of its issued ordinary capital. The new shares represent 2.2% of the total share capital of the Bank after the capital increase. The capital increase amounted to €1,583 million (share capital of €70 million and share premium of €1,513 million), giving rise to initial goodwill of £442 million (€554 million based on the exchange rate at the acquisition date).

Acquisition of Bradford & Bingley’s branch network and retail deposits

In September 2008, following the announcement by the UK’s HM Treasury (on September 29, 2008) to take Bradford & Bingley plc into public ownership, the retail deposits and branch network were transferred, under the provisions of the Banking (Special Provisions) Act 2008, to Santander UK.

As outlined in the HM Treasury statement, all of Bradford & Bingley’s customer loans and treasury assets, which included the £41 billion of mortgage assets, were placed under public ownership and were not transferred to Santander.

The transfer to Santander UK consisted of £20 billion retail deposit base with 2.7 million customers and Bradford & Bingley’s branch network, including 197 retail branches, 141 agencies (distribution outlets in third party premises) and related employees.

The acquisition price was £612 million, including the transfer of £208 million worth of capital relating to off-shore companies. The transaction was financed with the cash generated by the Group’s ordinary operations. Goodwill generated by this acquisition was £160 million (equivalent to €202 million at the exchange rate of the date of the transaction).

ABN AMRO Holding N.V. (“ABN AMRO”)

On July 20, 2007, having obtained the regulatory authorizations required to publish the documentation on the takeover bid for ABN AMRO, the Bank, together with the Royal Bank of Scotland Group plc, Fortis N.V. and Fortis S.A./N.V. (together, the “Banks”) formally launched, through RFS Holdings B.V., the offer for all the ordinary shares, ADSs and previously convertible preference shares of ABN AMRO. The initial acceptance period of this offer (the “Offer”) ended on October 5, 2007.

On October 10, 2007, the Banks declared the Offer to be unconditional. On that date, the owners of 86% of the ordinary share capital of ABN AMRO had accepted the Offer (including certain shares that the Banks already owned and had undertaken to contribute to RFS Holdings B.V.).

On the same date, the commencement of an additional offer period was announced, during which the holders of ordinary shares and ADSs of ABN AMRO could tender them, under the same terms and conditions as those of the Offer, until October 31, 2007.

Once the aforementioned additional offer period ended, the owners of 98.8% of the ordinary share capital of ABN AMRO (excluding its treasury shares) definitively accepted the Offer.

At December 31, 2007, the investment made by the Bank in ABN AMRO amounted to €20.6 billion and consisted of the Bank’s 27.9% ownership interest in the share capital of RFS Holdings B.V., the holding entity of the shares of ABN AMRO.

Following all of these actions, the business lines were spun off from ABN AMRO with a view to subsequently integrate them into each of the Banks. The following business lines corresponded to Banco Santander: the Latin American Business Unit of ABN AMRO, which primarily consists of Banco ABN AMRO Real S.A. (“Banco Real”) in Brazil and the Banca Antoniana Popolare Veneta Spa Banking Group (“Antonveneta”), the cash relating to the sale of the consumer banking unit of ABN AMRO in the Netherlands, Interbank and DMC Consumer Finance, plus 27.9% of the assets that were not allocated to any of the Banks of the consortium and which we intend to dispose of. The spin-off process continued in 2008.

Accordingly, on March 4, 2008, the Dutch Central Bank expressed its acceptance of the overall spin-off plan, and in July 2008, it approved the individual spin-off plan for Banco Real and the business activities in Brazil. Subsequently, the Central Bank of Brazil approved the acquisition of Banco Real by Banco Santander, whereby it became effective.

The Group’s assets in Brazil also comprise those corresponding to the asset management business of ABN AMRO in Brazil, which were initially allocated to Fortis in the process of spinning off and integrating the assets of ABN AMRO, and which were acquired therefrom by the Bank in the first half of 2008 for €209 million.

As part of the assets that were spun off, in December 2008, Banco Santander Uruguay acquired the assets and liabilities of the Montevideo branch of ABN AMRO, and subsequently proceeded to merge the businesses.

Also, on May 30, 2008, Banco Santander and Banca Monte dei Paschi di Siena announced the completion of the purchase and sale of Antonveneta (excluding Interbank, its corporate banking subsidiary) for €9 billion and executed the agreement announced on November 8, 2007, which was only subject to approval by the competent authorities.

On June 2, 2008, Banco Santander entered into a definitive agreement with General Electric whereby a General Electric Group company would acquire Interbanca, and various Grupo Santander entities would acquire the GE Money units in Germany, Finland and Austria, GE’s card units in the UK and Ireland and its car finance unit in the UK. The base price agreed for the two transactions was €1 billion each, subject to various adjustments. These transactions were completed with the acquisition of GE Germany in the fourth quarter of 2008, and the acquisition of the remaining General Electric units and the sale of Interbanca in the first quarter of 2009. The initial goodwill arising from the acquisition of the GE business amounted to €558 million at December 2009.

In the third quarter of 2008, the Group sold 45% of ABN Amro Asset Management Italy SGR S.p.A. to Banca Monte di Paschi di Siena for €35 million as Banca Monte di Paschi di Siena had already acquired the remaining 55% through the acquisition of Antonveneta.

The businesses shared by the members of the consortium included subordinated liabilities issued by ABN AMRO. The portion of these liabilities relating to Santander was transferred to RBS and Fortis at market prices, giving rise to gains for Santander amounting to €741 million, which were recognized under “Gains/losses on financial assets and liabilities (net)” in the income statement for 2008.

On September 22, 2008, RFS Holdings B.V. completed the squeeze-out of the minority shareholders of ABN AMRO through the payment of €712 million to these shareholders. From that date onwards, RFS Holdings B.V. has been the sole shareholder of ABN AMRO. Banco Santander had to pay €200 million to complete this process, on the basis of its ownership interest in RFS. The Dutch State replaced Fortis’s position as a shareholder of RFS Holding B.V. in December 2008.

Banco Real was fully consolidated in the Group’s financial statements in the fourth quarter of 2008. Previously, it had been accounted for by the equity method through the ownership interest in RFS Holding. Accordingly, the Group’s income statement includes all the results contributed to the Group by this entity since January 1, 2008. The volume of assets that Banco Real contributed to the Group amounted to approximately €44 billion, based on the exchange rate at year-end. The amount of the assets, liabilities and contingent liabilities contributed to the Group by this entity are detailed in the related notes to our consolidated financial statements.

The goodwill at the date of acquisition assigned to Banco Real following all the aforementioned transactions amounted to €8 billion (which was equivalent to €6,446 million at the exchange rate prevailing at the end of 2008).

In April 2009, ABN AMRO sold its branch in Asunción (Paraguay), after its conversion into a subsidiary, to Banco Regional (40% owned by the Rabobank group) for €42.2 million. This sale gave rise to a net gain of approximately €5 million.

On April 1, 2010, ABN AMRO was renamed The Royal Bank of Scotland Holding N.V.

On the same date, ABN AMRO Bank N.V., a newly established company with the purpose of holding most of the assets and liabilities belonging to the Dutch State became a wholly owned entity of this State. On the same date, we entered into a Restated Consortium and Shareholders Agreement, among the Royal Bank of Scotland Group plc, Banco Santander, S.A., The State of the Netherlands and RFS Holdings B.V.

At the date of this report on Form 20-F, Banco Santander still has a reduced economic interest in RFS Holdings B.V. as it owns a residual amount of the assets and liabilities shared with The Royal Bank of Scotland Group plc and the Dutch State.

Agreement between Santander and RBS’s European consumer finance unit

On April 4, 2008, Santander reached a preliminary agreement with RBS to acquire its continental European consumer finance business. The package includes activities in Germany, the Netherlands, Belgium and Austria. The acquisition was carried out by Santander Consumer Finance Germany GmbH.

The RBS European consumer finance business (RBS ECF) has 861 employees serving 2.3 million customers in Germany, the Netherlands, Belgium and Austria. Assets in 2007 averaged €2.2 billion. RBS ECF makes installment loans both directly and via partners. It has a strong presence in the credit card business both in terms of private and corporate customers, and provides consumer finance via retail chains.

The acquisition closed on July 1, 2008 for €306 million and gave rise to goodwill of €85 million.

Sale and leaseback of real estate assets

On November 14, 2007, we announced that we had sold ten real estate properties to two companies of Grupo Pontegadea for €458 million, obtaining a capital gain of €216 million. At the same time, we entered into a 40-year long lease contract in connection with these properties, with an option to repurchase those properties.

On November 23, 2007, we concluded the sale of 1,152 properties to a company belonging to the Pearl Group. Simultaneously, Grupo Santander entered into a lease agreement for these properties for a period between 45 to 47 years, with an option to repurchase those properties. The transaction amounted to €2,040 million, generating an approximate net capital gain of €860 million for Grupo Santander.

On September 12, 2008, we announced that we had completed a transaction with the consortium led by the United Kingdom property investor Propinvest for the sale of Ciudad Grupo Santander (our principal executive offices in Madrid, Spain) and its simultaneous lease-back for a period of 40 years, with a right to repurchase this property at the end of such period.

The amount of the sale transaction was €1.9 billion, as initially contemplated. The capital gains obtained by Santander from this sale were close to €600 million.

With this transaction, Banco Santander concluded the process involving the sale of its own buildings in Spain which commenced in 2007 within the framework of the ABN AMRO acquisition. The amount of assets sold was €4.4 billion, with capital gains of approximately €1.7 billion.

Sale of Porterbrook Leasing Company

In October 2008, Santander UK reached an agreement to sell 100% of Porterbrook Leasing Company to a consortium of investors including Antin Infrastructure Partners (the BNP Paribas sponsored infrastructure fund), Deutsche Bank and Lloyds TSB, which was completed on December 8, 2008. Santander UK received approximately £1.6 billion in cash. This sale gave rise to a gain of €50 million (£40 million) recognized under “Gains on disposal of assets not classified as non-current assets held for sale” in our consolidated income statement for 2008.

Other Events

Lehman Brothers, Inc. (“Lehman”)

For information about the legal proceedings related to Lehman, see “Item 8. Financial Information—A. Consolidated statements and other financial information—Legal proceedings.”

Bernard L. Madoff Investment Securities (“Madoff Securities”)

For information about legal proceedings related to Madoff Securities, see “Item 8. Financial Information—A. Consolidated statements and other financial information—Legal proceedings.”

Capital Increases

As of December 31, 2006 and 2007, our capital stock consisted of 6,254,296,579 fully subscribed and paid shares of €0.50 par value each.

As of December 31, 2008, our capital had increased by 1,739,762,824 shares, or 27.82% of our total capital as of December 31, 2007, to 7,994,059,403 shares as a result of the following transactions:

	•		Alliance & Leicester plc acquisition: There was a capital increase of 140,950,944 new shares of €0.50 par value each in accordance with the resolutions adopted by the Bank’s extraordinary shareholder general meeting held on September 22, 2008. One new Santander share was issued for every three Alliance & Leicester plc shares. These shares were issued on October 10, 2008.

	•		Banco Santander rights offering: There was a capital increase of 1,598,811,880 new shares of €0.50 par value each at an issue price of €4.50 per share, which was fully paid on December 3, 2008, in connection with a right offering conducted by Banco Santander. The total amount of the issue was €7,194,653,460.

As of December 31, 2009, our capital had increased by 234,766,732 shares, or 2.94% of our total capital as of December 31, 2008, to 8,228,826,135 shares as a result of the following transactions:

	•		Sovereign acquisition: The acquisition of Sovereign involved the issuance, on January 30, 2009, of 0.3206 ordinary shares of Banco Santander for each ordinary share of Sovereign. To this end, 161,546,320 ordinary shares were issued by Santander for a cash amount (par value plus share premium) of €1.3 billion.

	•		“Valores Santander”: Conversion of 754 “Valores Santander” was requested in the ordinary conversion period that ended on October 5, 2009. Pursuant to the terms of such securities, we issued 257,647 new shares in exchange for those “Valores Santander” which commenced trading in the Spanish Stock Exchanges on October 15, 2009.

	•		“Scrip Dividend”: On November 2, 2009 we issued 72,962,765 ordinary shares par value €0.5 in the free-of-charge capital increase, corresponding to 0.89% of our share capital. The amount of the capital increase was €36,481,382.50.

As of December 31, 2010, our capital had increased by 100,295,963 shares, or 1.22% of our total capital as of December 31, 2009, to 8,329,122,098 shares as a result of the following transactions:

	•		“Valores Santander”: On October 7, 2010, the Bank issued 11,582,632 new shares in exchange for 33,544 “Valores Santander”.

	•		“Scrip Dividend”: On November 2, 2010 we issued 88,713,331 ordinary shares par value €0.5 in the free-of-charge capital increase, corresponding to 1.08% of our share capital. The amount of the capital increase was €44,356,665.50.

Recent Events

Acquisition of the Polish institution Bank Zachodni WBK

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

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

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

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

69,912,653 BZ WBK shares were tendered, representing 95.67% of BZ WBK’s capital. Since the tender offer was made at a cash price of 226.89 PLN per share (approximately €57.05), the purchase of the shares tendered in the offer resulted in a payment of 15,862.48 million PLN (approximately €3,988.6 million).

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

Additionally, on the same date of April 1, 2011 we acquired AIB’s 50% stake in BZ WBK Asset Management for €150 million in cash.

Scrip dividend

At its meeting on January 13, 2011, the Bank’s executive committee resolved to apply the Santander Dividendo Elección program on the dates on which the third interim dividend is traditionally paid, and offered shareholders the option of receiving an amount equal to this dividend of €0.117 per share, to be paid in shares or cash.

On February 1, 2011, we announced that the trading period for the free allotment rights corresponding to the free-of-charge capital increase by means of which the Santander Dividendo Elección program was carried out ended on January 31, 2011.

During the period set for that purpose, the holders of 13.26% of the free allotment rights accepted the irrevocable undertaking to waive their free allotment rights issued by Banco Santander. Consequently, Banco Santander has acquired 1,104,183,097 rights for a total gross consideration of €129,189,422.35. Banco Santander has waived the free allotment rights so acquired.

The holders of the remaining 86.74% of the free allotment rights have chosen to receive new shares. Thus, the definitive number of ordinary shares of €0.5 of face value issued in the free-of-charge capital increase is 111,152,906, corresponding to 1.33% of the share capital, and the amount of the capital increase is €55,576,453. The value of the remuneration corresponding to the shareholders who have requested new shares amounts to €845,317,850.13.

The authorization for the admission to listing of the new shares in the Spanish Stock Exchanges and in the other stock exchanges where Banco Santander is listed was granted in February 2011.

Payment of fourth dividend for 2010

On February 3, 2011, we announced the payment of the fourth dividend for 2010 for a gross amount of €0.228766 per share, which was paid in cash on May 1, 2011. If the proposed distribution of profit that will be submitted to the shareholders at the upcoming general meeting is approved, this will be our final dividend with respect to 2010, resulting in a total remuneration of €0.60 per share and a total of €4,999 million distributed to our shareholders.

Sale of 1.9% of Banco Santander Chile

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

Agreement with Zurich Financial Services Group

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

We will create a holding company consisting of our insurance units in Latin America. Zurich will acquire 51% of the company and will manage the companies. We will retain a 49% stake and will enter into an agreement to distribute the alliance’s insurance products in each country for 25 years. According to the agreement, we will receive 100% of the revenues from commissions on the distribution of products.

The closing of this transaction is subject to final documentation and appropriate authorizations from the different regulators.

Santander Banif Inmobiliario

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

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

On March 1, 2011, we paid the full amount of the redemptions requested by the Fund’s unit holders, i.e. €2,501 million (93.01% of the Fund’s net assets), through the subscription of the related units by us at their redemption value at February 28, 2011.

Following the aforementioned acquisition, we own 96.62% of the Fund. The suspension of redemptions was lifted from said date and the Fund is operating normally.

Public offering of Banco Santander Río, S.A.

On May 26, 2011, we announced that Banco Santander Río, S.A. had initiated proceedings to obtain authorization from the National Securities Commission of the Republic of Argentina and the U.S. Securities and Exchange Commission for a public offering of its Class B shares. No shares may be offered to the public until the aforementioned regulators have granted their respective authorizations.

We have notified Banco Santander Río of our intention to sell a yet undetermined number of our Banco Santander Río shares as part of the public offering.

B. Business overview

At December 31, 2010, we had a market capitalization of €66.0 billion, stockholders’ equity of €75.0 billion and total assets of €1,217.5 billion. We had an additional €144.8 billion in mutual funds, pension funds and other assets under management at that date. As of December 31, 2010, we had 54,518 employees and 6,063 branch offices in Continental Europe, 23,649 employees and 1,416 branches in the United Kingdom, 89,526 employees and 5,882 branches in Latin America, 8,647 employees and 721 branches in the United States (Sovereign Bancorp) and 2,529 employees in other geographic regions (for a full breakdown of employees by country, see Item 6 of Part I, “Directors, Senior Management and Employees—D. Employees”).

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

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

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

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

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

•

Continental Europe. This covers all retail banking business (including Banco Banif, S.A. (“Banif”), our specialized private bank), wholesale banking and asset management and insurance conducted in Europe, with the exception of the United Kingdom. This segment includes the following units: the Santander Branch Network, Banco Español de Crédito, S.A. (“Banesto”), Santander Consumer Finance (including Santander Consumer USA) and Portugal.

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

	•		Latin America. This embraces all the financial activities conducted via our subsidiary banks and other subsidiaries in Latin America. It also includes the specialized units in Santander Private Banking, as an independent globally managed unit. Santander’s business in New York is also managed in this area.

	•		Sovereign. This includes all the financial activities of Sovereign, including retail and wholesale banking, asset management and insurance. Sovereign’s operations are conducted solely in the U.S.

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

	•		Retail Banking. This covers all customer banking businesses (except those of Corporate Banking, which are managed globally).

	•		Global Wholesale Banking. This business reflects the returns from Global Corporate Banking, Investment Banking and Markets worldwide, including all treasury activities under global management, as well as our equities business.

	•		Asset Management and Insurance. This includes our units that design and manage mutual and pension funds and insurance.

In addition to these operating units, which cover everything by geographic area and business, we continue to maintain a separate Corporate Activities area. This area incorporates the centralized activities relating to equity stakes in industrial and financial companies, financial management of the structural exchange rate position and of the Parent bank’s structural interest rate risk, as well as management of liquidity and of stockholders’ equity through issues and securitizations. As the Group’s holding entity, it manages all capital and reserves and allocations of capital and liquidity.

In 2010, Grupo Santander maintains the same primary and secondary operating segments as it had in 2009.

In addition, and in line with the criteria established by IFRS-IASB, the results of businesses discontinued in 2009 (Banco de Venezuela) which were consolidated by global integration, were eliminated from various lines of the income statement and included in “net profit from discontinued operations.”

First level (or geographic):

Continental Europe

This area covers the banking activities of the different networks and specialized units in Europe, principally with individual clients and SMEs, as well as private and public institutions. During 2010, there were four main units within this area: the Santander Branch Network, Banesto, Santander Consumer Finance and Portugal including retail banking, global wholesale banking and asset management and insurance.

Continental Europe is the largest business area of Grupo Santander. At the end of 2010, it accounted for 39.3% of total customer funds under management, 44.9% of total loans and credits and 35.0% of profit attributed to the Parent bank of the Group’s main business areas.

The area had 6,063 branches and 54,518 employees (direct and assigned) at the end of 2010.

In 2010, the Continental Europe segment’s profit attributable to the Parent bank decreased 18.9% to €3,885 million mainly due to the weak economic environment in Spain and Portugal. Return on equity (“ROE”) in 2010 was 14.1%, a 4.6% decrease from 2009.

The Santander Branch Network

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

At the end of 2010, we had 2,931 branches and a total of 18,893 employees (direct and assigned), none of which was hired on a temporary basis, dedicated to retail banking in Spain. Compared to 2009, there was a net decrease of three branches and 171 employees.

In 2010, profit attributable to the Parent bank from the Santander Branch Network was €1,243 million, 38.0% lower than 2009, while the ROE reached 17.4% (as compared to 26.6% in 2009).

In 2010, the Santander Branch Network lending decreased by approximately 3.4%, customer funds under management grew by 11.0%, deposits increased 18.3%, mutual funds fell 6.1% and pension funds decreased 1.1%. The decrease in lending in 2010 versus 2009 still reflects that demand from individuals and companies was lower than normal because of the economic environment in Spain. The ratio of non-performing loans (“NPL”) for Banco Santander, S.A. grew to 4.2% from 3.4% in 2009.

Banesto

At the end of 2010, Banesto had 1,762 branches and 9,742 employees (direct and assigned), of which 16 employees were temporary, a decrease of 11 branches and an increase of 15 employees as compared to the end of 2009.

For purposes of our financial statements and this annual report on Form 20-F, we have calculated Banesto’s results of operations using the criteria described before in this annual report on Form 20-F. As a result, the data set forth herein may not coincide with the data published independently by Banesto.

In 2010, profit attributable to the Parent bank from Banesto was €419 million, a 43.2% decrease from 2009, while the ROE reached 9.4% as compared to 11.7% in 2009.

At the end of 2010, the balance of loans was 0.2% higher than a year earlier, customer funds increased 0.5% and mutual funds and pension funds decreased 22.5% and 5.6%, respectively. NPL grew to 4.1% in 2010, up 1.1 percentage points from 2009.

Santander Consumer Finance

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

At the end of 2010, this unit had 519 branches (as compared to 311 at the end of 2009) and 13,852 employees (direct and assigned) (as compared to 9,362 employees at the end of 2009), of which 509 employees were temporary.

In 2010, this unit generated €811 million in profit attributable to the Parent bank, a 28.9% increase from 2009, while the ROE reached 10.3% (as compared to 9.0% in 2009).

In 2010, management focused on organic growth and cross-selling supported by agreements with manufacturers and penetration in the used car market in order to offset the drop in vehicle registrations in Europe following the end of the state incentives. Meanwhile, significant efforts were made in risk control and loan acceptance and recovery, which led to notable improvements in credit quality.

There was also expansion into high-potential markets. Of note was the acquisition of AIG Bank in Poland, which places Santander Consumer Poland as Poland’s leading specialized finance company, and the acquisition of assets at a discount in the US by Santander Consumer USA, which enhances the quality of its portfolio and broadens the profile of its target customers. During 2010, Santander Consumer USA increased its attributable profit 54.7% in dollars and became the second largest contributor to this unit.

At the end of 2010, total lending at this unit amounted to €63 billion (an 11.4% increase as compared to 2009) due to organic growth and the acquisition of portfolios in the US and Poland. Additionally, this area services a portfolio of approximately €6 billion retained by third parties. NPL decreased to 4.9% in 2010 from 5.4% a year earlier.

Customer deposits increased 16.1% during 2010 mainly due to the rise in customer deposits in Germany and the acquisition in Poland.

Portugal

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

At the end of 2010, Portugal operated 759 branches (as compared to 763 branches at the end of 2009) and had 6,214 employees (direct and assigned) (as compared to 6,294 employees at the end of 2009), of which 135 employees were temporary.

In 2010, profit attributable to the Parent bank was €456 million, a 14.2% decrease from 2009, while ROE was 20.3%, as compared to 25.4% in 2009.

In a very difficult economic and financial environment, which led to a slowdown in economic activity and a lack of liquidity in the markets, Santander Totta maintained its capital, efficiency and return ratios. Lending decreased 6.8% mainly due to the reduction in balances in the construction and real estate sectors and a shift in the financing plans of large companies, away from lending and towards financing via security issuances. Customer funds under management decreased 8.5% and mutual funds and pension funds decreased 19.4% and 5.9%, respectively. NPL increased in 2010 to 2.9% from 2.3% a year earlier.

Others

The rest of our businesses in the Continental Europe segment (Banif, Asset Management, Insurance and Global Wholesale Banking) generated profit attributable to the Parent bank of €957 million in 2010, 15.2% less than in 2009. Global Wholesale Banking, the main unit included here, posted a 9.0% year-on-year drop in attributable profit. Although income remained stable as compared with 2009, costs increased due to investments made to consolidate our positions attained in 2009 in target businesses and to higher provisions, as required by regulatory changes.

United Kingdom

As of December 31, 2010, the United Kingdom accounted for 30.3% of the Group’s total customer funds under management, 32.4% of total loans and credits and 17.9% of profit attributed to the Parent bank of the Group’s main business areas.

Our UK businesses include Abbey (since 2004), the deposits and branches of Bradford & Bingley (acquired in September 2008) and Alliance & Leicester (acquired in October 2008). They are referred to as Santander UK.

Santander UK is a significant financial services provider in the United Kingdom, being the country’s second largest residential mortgage lender and the second largest savings brand measured by outstanding balances. Santander UK also provides a wide range of retail savings accounts, and operates across the full range of personal financial services.

At the end of 2010, we had 1,416 branches and a total of 23,649 employees (direct and assigned) of which 430 employees were temporary, in the United Kingdom. Compared to 2009, there was a net increase of 94 branches and 700 employees.

The rebranding of Bradford & Bingley’s savings business and Abbey branches to Santander was completed in January 2010, and the rebranding of Alliance & Leicester branches was completed in December 2010. In 2010, we further expanded our network through the Santander Universities program and the acquisition of the Halifax agency network, which was rebranded as Santander and opened for business by the end of 2010.

For purposes of our financial statements and this annual report on Form 20-F, we have calculated Santander UK’s results of operations using the criteria described before in this annual report on Form 20-F. As a result, the data set forth herein may not coincide with the data published independently by Santander UK.

In 2010, Santander UK contributed €1,985 million profit attributable to the Parent bank (a 15.0% increase from 2009). Loans and advances to customers increased by 2.7% and customer funds under management increased 10.9% during the same period. ROE was 22.7% (as compared to 29.6% in 2009). NPL at the end of 2010 increased to 1.8% from 1.7% at the end of 2009.

Latin America

At December 31, 2010, we had 5,882 offices and 89,526 employees (direct and assigned) in Latin America (as compared to 5,745 offices and 85,974 employees, respectively, at December 31, 2009), of which 101 were temporary employees. At that date, Latin America accounted for 26.3% of the total customer funds under management, 17.6% of total loans and credits and 43.3% of profit attributed to the Parent bank of the Group’s main business areas.

Profit attributable to the Parent bank from Latin America was €4,804 million in 2010, a 25.3% increase from 2009, while the ROE reached 22.7% (as compared to 23.7% in 2009).

Our Latin American banking business is principally conducted by the following banking subsidiaries:


	Percentage held			Percentage held
	at December 31, 2010			at December 31, 2010
Banco Santander (Brasil), S.A.		81.38	Banco Santander, S.A. (Uruguay)		100.00
Banco Santander Chile		76.74	Banco Santander Colombia, S.A.		97.85
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander		99.86	Banco Santander Puerto Rico		100.00
Banco Santander Río, S.A. (Argentina)		99.30	Banco Santander Perú, S.A.		100.00

We engage in a full range of retail banking activities in Latin America, although the range of our activities varies from country to country. We seek to take advantage of whatever particular business opportunities local conditions present.

Our significant position in Latin America is attributable to our financial strength, high degree of diversification (by countries, businesses, products, etc.), and the breadth and depth of our franchise.

Detailed below are the performance highlights of the main Latin American countries in which we operate (1):

Brazil. Santander Brasil is the third largest private financial institution in this country as of December 31, 2010. After the integration of Banco Real into the Group, Santander Brasil had 3,702 branches, 53,900 employees and 24.7 million customers.

During 2010, lending increased 16% with significant growth across all the major segments. Particularly noteworthy was lending to individuals and SMEs, which grew by around 20%. Savings rose 6% in 2010, mainly in demand deposits, which increased by 16%. Santander Brasil obtained selective growth adapted to the interest rate rise process in the country (from 8.75% at the beginning of 2010 to 10.75% at the end of the year) (all variations in local currency).

Profit attributable to the Parent bank from Brazil in 2010 was €2,836 million, a 30.9% increase when compared with 2009 (+10.4% in local currency). This increase was obtained after deducting higher non-controlling interests (€539 million in 2010 compared with €121 million in 2009) because of the listing of Santander Brasil in the second half of 2009. For 2010, ROE was 23.11% and at the end of 2010, the NPL ratio was 4.9% and the NPL coverage ratio was 101%.

Mexico. Banco Santander (Mexico), S.A., Institución de Banca Múltiple, Grupo Financiero Santander, is one of the leading financial services companies in Mexico. It leads the third largest banking group in Mexico in terms of business volume. As of December 31, 2010, we had a network of 1,100 branches, 12,500 employees and 9.1 million customers in Mexico.


(1)		When we indicate “variations in local currency”, we calculate the variation of the balance sheet data in the currency of the country that is being described, eliminating the effect of exchange rates from the local currency to euros.

In 2010, lending rebounded from negative growth early in the year to post an increase of 15% at year-end with strong growth as a result of lending to individuals and SMEs. In addition, bank savings rose by 14% compared with 2009, with a strong performance by demand and time deposits, and investment funds (all variations in local currency).

Profit attributable to the Parent bank from Mexico in 2010 increased 37.9% to €682 million (22.7% in local currency). For 2010, ROE was 19.5% and at the end of 2010, the NPL ratio was 1.8% and the NPL coverage ratio was 215%.

Chile. Banco Santander Chile is the principal component of the largest financial group in Chile in terms of the number of customers, business and results with substantial business in loans, deposits and mutual funds and pension funds. As of December 31, 2010, we had 504 branches, 11,595 employees and 3.1 million customers.

In 2010, lending increased 14% due to higher economic growth and the positive effects of the reconstruction following the February 2010 earthquake. Bank savings increased by 2% over 2009 led by growth in demand deposits.

Profit attributable to the Parent bank from Chile increased 21.3% in 2010 to €683 million (a 5.4% increase as compared to 2009, in local currency). For 2010, ROE was 30.5% and at the end of 2010, the NPL ratio was 3.7% and the NPL coverage ratio was 89%.

Argentina. Banco Santander Río, S.A. is one of Argentina’s leading banks, with 324 branches, 6,466 employees and 2.3 million banking customers as of December 31, 2010.

Our strategy in 2010 focused on taking advantage of the strengths of its commercial franchise with greater importance attached to customer linkage and transaction banking and selective growth in lending with particular attention paid to managing the whole risk cycle and controlling costs.

In 2010, lending rose 38% and savings increased 34%. Of note was the 42% growth in demand deposits. These increases were higher than the market’s and produced gains in the market shares of these three items (all variations in local currency).

Banco Santander Río made a positive contribution to the Group’s earnings, with profit attributable to the Parent bank of €297 million in 2010, a 31.5% increase as compared to 2009 (a 31.4% increase in local currency). At the end of 2010, the NPL ratio was 1.7% and the NPL coverage ratio was 149%.

Uruguay. Santander is the largest private sector bank in the country in terms of profits (€67 million), number of branches (43) and business (market share of 17.1% in lending and 16.7% in deposits and mutual funds). The Group in Uruguay has 817 employees and 0.2 million banking customers.

Profit attributable to the Parent bank was €67 million in 2010, 30.3% higher than in 2009 (a 10.3% increase in local currency) and the NPL ratio was 0.22% as of December 31, 2010.

Colombia. As of December 31, 2010, Banco Santander Colombia, S.A. had 76 branches, 1,343 employees and 0.3 million banking customers.

We focused on credit risk management, selective growth in lending, preserving adequate levels of liquidity, strengthening transactional businesses and, in particular, containing costs.

Profit attributable to the Parent bank from Colombia was €41 million in 2010, 24.2% higher than in 2009 (a 4.2% increase in local currency). At the end of 2010, the NPL ratio was 1.6% and the NPL coverage ratio was 200%.

Puerto Rico. Banco Santander Puerto Rico is among the three largest financial institutions in Puerto Rico in terms of lending, deposits and mutual funds. As of December 31, 2010, Banco Santander Puerto Rico had 121 branches, 1,820 employees and 0.5 million customers.

Profit attributable to the Parent bank from Puerto Rico in 2010 was €38 million, a 15.2% increase as compared to 2009 (a 7.6% increase in dollars). At the end of 2010, the NPL ratio stood at 10.6% and the NPL coverage ratio was 58%.

Peru. As of December 31, 2010, Banco Santander Perú, S.A. had 1 branch, 41 employees and 0.1 million banking customers. The unit’s activity is focused on companies and on attending to the Group’s global customers.

Profit attributable to the Parent bank from Peru was €7 million in 2010, 75% higher than in 2009.

Sovereign

At December 31, 2010, Sovereign had 721 branches, 2,337 ATMs, 8,647 employees and 1.7 million clients. At that date, Sovereign accounted for 4.1% of the total customer funds under management, 5.1% of total loans and credits and 3.8% of profit attributed to the Parent bank of the Group’s main business areas.

For purposes of our financial statements and this annual report on Form 20-F, we have calculated Sovereign’s results of operations using the criteria described before in this annual report on Form 20-F. As a result, the data set forth herein may not coincide with the data published independently by Sovereign.

In 2010, Sovereign contributed €426 million profit attributable to the Parent bank as compared to a €25 million loss a year earlier. For 2010, ROE was 14.9%. Loans and advances to customers at December 31, 2010 were €36.7 billion and customer funds under management €36.8 billion. Non-performing loans at the end of 2010 were 4.6% and NPL coverage was 75%.

Despite a difficult environment with reduced demand for loans and low interest rates, Sovereign obtained profits in 2010 thanks to effective management of spreads, an improved mix of loans and deposits, control of costs and enhanced credit quality. The goal for 2011 is to further improve the franchise and commercial efficiency with new products and better segmentation.

Second or business level:

Retail Banking

Attributable profit of the Retail Banking sector was 10.5% higher than 2009 at €7,940 million. Retail Banking generated 85% of the operating areas’ total income and 72% of profit attributable to the Parent bank. Total income increased 9.9% to €38,121 million due to the 12.4% rise in net interest income as a result of management of spreads against a background of weak business growth. All these variations were positively impacted by the change in the scope of consolidation and by exchange rates. This segment had 171,964 employees as of December 31, 2010.

The performance by geographic areas reflects the varying economic environments with lower growth in developed economies and a better macroeconomic environment in emerging countries.

• Retail Banking in Continental Europe was the most affected by the economic environment. Total income declined 3.0% because of decreased lending, strong pressure on margins, low interest rates and moderating business volumes, partially offset by effective management of asset spreads and cost control. Profit attributable to the Parent bank dropped 23.1% mostly because of the provisions required by Bank of Spain’s Circular 3/2010 and the impact of the Group’s policy for capturing deposits.

• The profit of Retail Banking in the United Kingdom was 16.0% higher in sterling than in 2009. Growth in total income was spurred by an increase in net interest income and lower costs.

• Profit attributable to the Parent bank from Retail Banking in Latin America rose 41.6% (higher non-controlling interest). The increase in profit came from growth in basic revenues (net interest income and fee income), control of costs compatible with business development (benefiting from synergies in Brazil) and lower loan-loss provisions.

Global Private Banking includes institutions that specialize in financial advisory and asset management for high-income clients (mainly Banif in Spain and Santander Private Banking in the UK, Italy and Latin America), as well as the units of domestic private banking in Portugal and Latin America, jointly managed with local retail banks. Profit attributable to the Parent bank from this division was €283 million in 2010 as compared to €330 million in 2009 as a result of lower net interest income due to the evolution of interest rates.

Global Wholesale Banking

This area covers our corporate banking, treasury and investment banking activities throughout the world.

This segment, managed by Santander Global Banking & Markets, contributed 12% of the operating areas’ total income and 24% of profit attributable to the Parent bank in 2010. Profit attributable to the Parent bank in 2010 by Global Wholesale Banking amounted to €2,697 million, a 1.9% decrease from 2009. This segment had 3,037 employees as of December 31, 2010.

The area strengthened its capacities in core markets in order to consolidate the liquidity positions attained in 2009. This greater potential enhanced the Group’s capital and liquidity positions and enabled it to sustain a high level of activity in 2010 in an environment of greater competition, while also maintaining rigorous management of risk. A good example of this was Santander’s notable participation in some of 2010 largest transactions, which solidified us as a major player.

Meanwhile, adjustment of structures achieved in the past and effective management of costs and operations enabled us to assume the increased capacity while maintaining our efficiency. However, the cost control and sustained efficiency were offset in 2010, by higher non-controlling interest in Brazil, because of the listing in October 2009 and higher provisions. This caused the rise in revenues to be offset by higher costs and provisions, contributing to the decrease in attributable profit.

In order to boost client revenues, Santander Global Banking & Markets continued to develop the global focus on the customer-relation model and foster inter-relations between the product areas and specialized units. The model, which focuses on management of global corporations and institutions, increased the segments revenues 15% and lifted its share of total revenues.

The product areas also made further progress in their increasingly global business vision, adapted to the changing needs of markets and clients.

Santander is present in global transaction banking (which includes cash management, trade finance and basic financing), in corporate finance (comprising mergers and acquisitions and asset and capital structuring), in credit markets (which include origination activities, risk management, distribution of structured products and debt), in rates (comprised of structuring and trading activities in financial markets of interest rate and exchange rate instruments) and in global equities (activities relating to the equity markets).

Asset Management and Insurance

This segment comprises all of our companies whose activity is the management of mutual and pension funds and insurance. At December 31, 2010, this segment accounted for 2.4% of total income and 4.2% of profit attributable to the Parent bank. Profit attributable to the Parent bank by Asset Management and Insurance was €463 million in 2010 or 16.0% higher than in 2009. This segment had 1,338 employees at the end of 2010.

In 2010, we formed a strategic alliance with the insurer Zurich to strengthen our bancassurance business in five key markets in Latin America: Brazil, Mexico, Chile, Argentina and Uruguay. Santander will create a holding company for its insurers in Latin America, which will be 49% owned by it and 51% owned by Zurich. This agreement combines Banco Santander’s commercial and distribution capacity with the experience of Zurich in developing and managing products. In each of the five countries, Banco Santander will distribute bancassurance products for 25 years.

Asset Management

Santander Asset Management obtained profit attributable to the Parent bank of €81 million, a 50% increase as compared to 2009 reflecting the recovery in volumes, the rise in average commissions in the main markets due to the better product mix and a reduction in provisions.

Total revenues from this area, before distribution to the commercial networks, amounted to €1,278 million (an increase of 8% from 2009). Volumes were weak in developed countries because of the strong preference of financial agents for on-balance sheet funds and the impact of the markets on portfolios, and stronger in Latin America due to the continuing economic recovery, which has begun in 2009.

Total managed assets were more than €124 billion at the end of 2010 (an increase of 7% from 2009 attributable in part to the appreciation of currencies against the euro).

Insurance

The global area of Santander Insurance generated profit attributable to the Parent bank of €381 million, 9.0% more than in 2009. The main reason for this was greater activity which was partially offset by the higher non-controlling interest in Brazil.

Total revenues (the area’s total income plus fee income paid to the networks) were €2,688 million, 11% higher than in 2009 (+3.5% without the exchange rate impact) and representing 6% of the operating areas’ total gross income.

The total contribution to the Group’s results (profit before tax of the insurance companies and brokers and fees received by networks) increased 10.7% to €2,491 million (+3.3% excluding the exchange-rate impact).

Total premium income was 6% lower than in 2009 impacted by clients’ preference for liquidity and, consequently, lower demand for savings-investment products. This lower demand was partially offset, however, by premium income from protection insurance, which increased 16%.

Corporate Activities

At the end of 2010, this area had 2,529 employees (direct and assigned) (as compared to 1,820 employees at the end of 2009), of which 623 were temporary.

This area is responsible for, on the one hand, a series of centralized activities to manage the structural risks of the Group and of the Parent bank. It executes the necessary activities for managing interest rates, exposure to exchange-rate movements and the required levels of liquidity in the Group. On the other hand, it acts as the Group’s holding entity, managing the Group’s global capital as well as that of each of the business units.

The Corporate Activities area had a loss of €2,919 million in 2010 due to lower net interest income and losses on financial transactions. Net interest income was a loss of €2,678 million, a 21.2% increase as compared to 2009 due to higher financial costs of credit. Losses on financial transactions, which include those from centralized management of interest rate and currency risk of the Parent bank as well as from equities, were €141 million compared to a gain of €1,376 million in 2009. The difference was due to hedging. In 2009, the impact from hedging the results of business units was low. Moreover, there were positive returns on the ALCO portfolio of the Parent bank, which is the portfolio managed by the Assets and Liabilities Committee, and on the business of equity stakes. In 2010, the situation reversed with higher losses from the hedging of the results of subsidiaries (which were compensated in the business units with higher results in euros) and allowances for financial investments in the portfolio of equity stakes.

With respect to the area’s activities:

Interest rate management is conducted on a coordinated basis by all the units, but this business only registers the part relative to the balance sheet of the Parent bank via the ALCO portfolios (at the volume levels and duration considered optimum at each moment).

Management of the exposure to exchange-rate movements, both from investments in the shareholders’ equity of units in currencies other than the euro as well as from the results generated for the Group by each of the units, also in various currencies, is also conducted on a centralized basis. This management (dynamic) is carried out by exchange-rate derivative instruments minimizing at each moment the financial cost of hedging.

Management of structural liquidity aims to finance our recurrent activity in optimum conditions of maturity and cost. The decisions whether to go to the wholesale markets to capture funds and cover stable and permanent liquidity needs, the type of instrument used, the maturity date structure and management of the associated risks of interest rates and exchange rates of the various financing sources, are also conducted on a centralized basis.

The financial management unit uses financial derivatives to cover the interest rate and exchange rate risks from new issuances. The net impact of this hedging is recorded in the gains/loss on financial transactions in corporate activities. The financial management area also analyzes the strategies for structural management of credit risk aiming to reduce concentrations by sectors, which naturally occur as a result of commercial activity. Derivative transactions achieve an effect similar to selling some assets and acquiring others enabling us to diversify the credit portfolio as a whole.

In addition, the area of Corporate Activities acts as the Group’s holding entity. It manages all capital and reserves and allocations of capital to each of the business units as well as provides liquidity that some of the business units might need (mainly the Santander Branch Network and corporate in Spain). The price at which these operations are carried out is the market rate (euribor or swap without liquidity premium for their duration) for each of the maturities of repricing operations.

Lastly, the equity stakes that the Group takes within its policy of optimizing investments is reflected in corporate activities. Since the disposal of Cepsa in 2009, this item was significantly reduced.

Total Revenues by Activity and Geographic Location

For a breakdown of our total revenues by category of activity and geographic market, please see Note 52 to our consolidated financial statements.

Selected Statistical Information

The following tables show our selected statistical information.

Average Balance Sheets and Interest Rates

The following tables show, by domicile of customer, our average balances and interest rates for each of the past three years.

You should read the following tables and the tables included under “—Changes in Net Interest Income—Volume and Rate Analysis” and “—Assets—Earning Assets—Yield Spread” in conjunction with the following:

	•		We have included interest received on non-accruing assets in interest income only if we received such interest during the period in which it was due;

	•		We have included loan fees in interest income;

	•		We have not recalculated tax-exempt income on a tax-equivalent basis because the effect of doing so would not be significant;

	•		We have included income and expenses from interest-rate hedging transactions as a separate line item under interest income and expenses if these transactions qualify for hedge accounting under IFRS. If these transactions did not qualify for such treatment, we have included income and expenses on these transactions elsewhere in our income statement. See Note 2 to our consolidated financial statements for a discussion of our accounting policies for hedging activities;

	•		We have stated average balances on a gross basis, before netting our allowances for credit losses, except for the total average asset figures, which includes such netting; and

	•		All average data have been calculated using month-end balances, which is not significantly different from having used daily averages.

As stated above under “Presentation of Financial and Other Information”, we have prepared our financial statements for 2006, 2007, 2008, 2009 and 2010 under IFRS.

Average Balance Sheet—Assets and Interest Income


	Year ended December, 31
	2010								2009							2008
	Average					Average			Average				Average			Average				Average
ASSETS	Balance		Interest			Rate			Balance		Interest		Rate			Balance		Interest		Rate
	(in thousand of euros, except percentages)
Cash and due from central banks
Domestic		8,441,011		86,686			1.03	%		7,916,042		86,918		1.10	%		7,629,805		242,954		3.18	%
International		52,935,719		1,846,399			3.49	%		25,933,209		268,921		1.04	%		21,224,830		514,997		2.43	%

		61,376,730		1,933,085			3.15	%		33,849,251		355,839		1.05	%		28,854,635		757,951		2.63	%

Due from credit entities
Domestic		29,392,464		205,857			0.70	%		20,934,738		366,521		1.75	%		14,858,817		726,287		4.89	%
International		51,382,325		839,110			1.63	%		58,290,277		2,155,515		3.70	%		61,173,074		3,095,167		5.06	%

		80,774,789		1,044,967			1.29	%		79,225,015		2,522,036		3.18	%		76,031,891		3,821,454		5.03	%

Loans and credits
Domestic		224,641,828		7,312,206			3.26	%		230,641,779		10,297,581		4.46	%		235,002,141		13,968,547		5.94	%
International		482,406,776		34,541,844			7.16	%		436,857,260		31,784,344		7.28	%		340,938,627		27,397,524		8.04	%

		707,048,604		41,854,050			5.92	%		667,499,039		42,081,925		6.30	%		575,940,768		41,366,071		7.18	%

Debt securities
Domestic		44,783,466		1,136,082			2.54	%		40,146,418		1,157,953		2.88	%		24,948,203		951,353		3.81	%
International		107,662,252		5,095,843			4.73	%		92,776,382		4,428,624		4.77	%		73,645,946		3,555,521		4.83	%

		152,445,718		6,231,925			4.09	%		132,922,800		5,586,577		4.20	%		98,594,149		4,506,874		4.57	%

Income from hedging operations
Domestic				169,394								304,669							695,086
International				(76,312	)							586,600							2,548,537

				93,082								891,269							3,243,623

Other interest-earning assets
Domestic		27,769,273		697,464			2.51	%		29,389,475		609,652		2.07	%		23,577,214		618,246		2.62	%
International		62,756,952		1,052,180			1.68	%		60,208,919		1,125,706		1.87	%		41,486,705		729,327		1.76	%

		90,526,225		1,749,644			1.93	%		89,598,394		1,735,358		1.94	%		65,063,919		1,347,573		2.07	%

Total interest-earning assets
Domestic		335,028,042		9,607,689			2.87	%		329,028,452		12,823,294		3.90	%		306,016,180		17,202,473		5.62	%
International		757,144,024		43,299,064			5.72	%		674,066,047		40,349,710		5.99	%		538,469,182		37,841,073		7.03	%

		1,092,172,066		52,906,753			4.84	%		1,003,094,499		53,173,004		5.30	%		844,485,362		55,043,546		6.52	%

Investments in affiliated companies
Domestic		200,604		—			0.00	%		152,893		—		0.00	%		2,576,136		—		0.00	%
International		52,278		—			0.00	%		708,988		—		0.00	%		10,044,991		—		0.00	%

		252,882		—			0.00	%		861,881		—		0.00	%		12,621,127		—		0.00	%

Total earning assets
Domestic		335,228,646		9,607,689			2.87	%		329,181,345		12,823,294		3.90	%		308,592,316		17,202,473		5.57	%
International		757,196,302		43,299,064			5.72	%		674,775,035		40,349,710		5.98	%		548,514,173		37,841,073		6.90	%

		1,092,424,948		52,906,753			4.84	%		1,003,956,380		53,173,004		5.30	%		857,106,489		55,043,546		6.42	%

Other assets		97,936,085								90,198,410							75,975,026
Assets from discontinued operations		—								4,980,696							8,024,216


Total average assets		1,190,361,033		52,906,753						1,099,135,486		53,173,004					941,105,731		55,043,546

Average Balance Sheet—Liabilities and Interest Expense


	Year Ended December, 31
	2010								2009								2008
	Average					Average			Average					Average			Average				Average
LIABILITIES AND STOCKHOLDERS EQUITY	Balance		Interest			Rate			Balance		Interest			Rate			Balance		Interest		Rate
	(in thousands of euros, except percentages)
Due to credit entities
Domestic		28,586,452		389,318			1.36	%		21,713,054		424,084			1.95	%		18,468,695		830,324		4.50	%
International		105,990,880		1,283,290			1.21	%		120,217,372		2,861,280			2.38	%		95,892,266		2,858,266		2.98	%

		134,577,332		1,672,608			1.24	%		141,930,426		3,285,364			2.31	%		114,360,961		3,688,590		3.23	%

Customers deposits
Domestic		155,244,435		2,838,550			1.83	%		130,580,883		2,694,867			2.06	%		119,381,247		3,830,610		3.21	%
International		413,670,307		10,607,001			2.56	%		333,021,416		9,115,847			2.74	%		234,812,668		11,169,783		4.76	%

		568,914,742		13,445,551			2.36	%		463,602,299		11,810,714			2.55	%		354,193,915		15,000,393		4.24	%

Marketable debt securities
Domestic		105,410,789		2,876,114			2.73	%		125,931,287		3,598,181			2.86	%		145,061,770		6,487,367		4.47	%
International		103,595,017		2,082,989			2.01	%		95,298,804		2,638,566			2.77	%		92,762,877		4,330,281		4.67	%

		209,005,806		4,959,103			2.37	%		221,230,091		6,236,747			2.82	%		237,824,647		10,817,648		4.55	%

Subordinated debt
Domestic		19,701,845		1,019,055			5.17	%		21,704,442		1,028,748			4.74	%		20,532,672		1,111,241		5.41	%
International		14,393,767		1,211,225			8.41	%		17,304,105		1,325,301			7.66	%		15,724,436		1,303,801		8.29	%

		34,095,612		2,230,280			6.54	%		39,008,547		2,354,049			6.03	%		36,257,108		2,415,042		6.66	%

Other interest-bearing liabilities
Domestic		39,728,726		1,031,180			2.60	%		37,347,808		1,128,882			3.02	%		36,605,703		876,041		2.39	%
International		81,998,874		1,184,135			1.44	%		70,461,483		1,241,760			1.76	%		52,981,507		573,773		1.08	%

		121,727,600		2,215,315			1.82	%		107,809,291		2,370,642			2.20	%		89,587,210		1,449,814		1.62	%

Expenses from hedging operations
Domestic				(1,362,521	)							(622,758	)							1,402,069
International				522,040								1,439,704								2,731,528

				(840,481	)							816,946								4,133,597

Total interest-bearing liabilities
Domestic		348,672,247		6,791,696			1.95	%		337,277,474		8,252,004			2.45	%		340,050,087		14,537,652		4.28	%
International		719,648,845		16,890,680			2.35	%		636,303,180		18,622,458			2.93	%		492,173,754		22,967,432		4.67	%

		1,068,321,092		23,682,376			2.22	%		973,580,654		26,874,462			2.76	%		832,223,841		37,505,084		4.51	%

Other liabilities		45,192,441								54,382,807								44,784,845

Non-controlling interest		5,694,541								3,191,835								2,432,563

Stockholders’ Equity		71,152,959								63,393,172								54,149,565

Liabilities from discontinued operations		—								4,587,018								7,514,918


Total average Liabilities and Stockholders’ Equity		1,190,361,033		23,682,376						1,099,135,486		26,874,462						941,105,732		37,505,084

Changes in Net Interest Income — Volume and Rate Analysis

The following tables allocate, by domicile of customer, changes in our net interest income between changes in average volume and changes in average rate for 2010 compared to 2009 and 2009 compared to 2008. We have calculated volume variances based on movements in average balances over the period and rate variance based on changes in interest rates on average interest-earning assets and average interest-bearing liabilities. We have allocated variances caused by changes in both volume and rate to volume. You should read the following tables and the footnotes thereto in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.

Volume and rate analysis


	IFRS-IASB
	2010/2009
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in thousands of euros)
Interest income
Cash and due from central banks
Domestic		5,575			(5,807	)		(232	)
International		482,405			1,095,073			1,577,478

		487,980			1,089,266			1,577,246

Due from credit entities
Domestic		112,326			(272,991	)		(160,665	)
International		(230,476	)		(1,085,928	)		(1,316,404	)

		(118,150	)		(1,358,919	)		(1,477,069	)

Loans and credits
Domestic		(261,524	)		(2,723,850	)		(2,985,374	)
International		3,268,425			(510,925	)		2,757,500

		3,006,901			(3,234,775	)		(227,874	)

Debt securities
Domestic		125,861			(147,731	)		(21,870	)
International		704,873			(37,655	)		667,218

		830,734			(185,386	)		645,348

Other interest-earning assets
Domestic		(35,078	)		122,890			87,812
International		46,210			(119,736	)		(73,526	)

		11,132			3,154			14,286

Total interest-earning assets without hedging operations
Domestic		(52,840	)		(3,027,489	)		(3,080,329	)
International		4,271,437			(659,171	)		3,612,266

		4,218,597			(3,686,660	)		531,937

Income from hedging operations
Domestic		(135,275	)		—			(135,275	)
International		(662,912	)		—			(662,912	)

		(798,187	)		—			(798,187	)

Total interest-earning assets
Domestic		(188.115	)		(3,027,489	)		(3,215,604	)
International		3,608,525			(659,171	)		2,949,354

		3,420,410			(3,686,660	)		(266,250	)

Volume and rate analysis


	IFRS-IASB
	2009/2008
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in thousands of euros)
Interest income
Cash and due from central banks
Domestic		2,664			(158,700	)		(156,036	)
International		48,949			(295,025	)		(246,076	)

		51,613			(453,725	)		(402,112	)

Due from credit entities
Domestic		106,801			(466,567	)		(359,766	)
International		(107,698	)		(831,954	)		(939,652	)

		(897	)		(1,298,521	)		(1,299,418	)

Loans and credits
Domestic		(192,934	)		(3,478,032	)		(3,670,966	)
International		6,977,954			(2,591,134	)		4,386,820

		6,785,020			(6,069,166	)		715,854

Debt securities
Domestic		438,618			(232,018	)		206,600
International		917,291			(44,188	)		873,103

		1,355,909			(276,206	)		1,079,703

Other interest-earning assets
Domestic		121,081			(129,675	)		(8,594	)
International		350,744			45,635			396,379

		471,825			(84,040	)		387,785

Total interest-earning assets without hedging operations
Domestic		476,230			(4,464,992	)		(3,988,762	)
International		8,187,240			(3,716,666	)		4,470,574

		8,663,470			(8,181,658	)		481,812

Income from hedging operations
Domestic		(390,417	)		—			(390,417	)
International		(1,961,937	)		—			(1,961,937	)

		(2,352,354	)		—			(2,352,354	)

Total interest-earning assets
Domestic		85,813			(4,464,992	)		(4,379,179	)
International		6,225,303			(3,716,666	)		2,508,637

		6,311,116			(8,181,658	)		(1,870,542	)


	IFRS-IASB
	2010/2009
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in thousands of euros)
Interest charges
Due to credit entities
Domestic		113,473			(148,239	)		(34,766	)
International		(306,311	)		(1,271,679	)		(1,577,990	)

		(192,838	)		(1,419,918	)		(1,612,756	)

Customers deposits
Domestic		472,805			(329,122	)		143,683
International		2,096,869			(605,714	)		1,491,155

		2,569,674			(934,836	)		1,634,838

Marketable debt securities
Domestic		(565,623	)		(156,444	)		(722,067	)
International		214,527			(770,105	)		(555,578	)

		(351,096	)		(926,549	)		(1,277,645	)

Subordinated debt
Domestic		(99,274	)		89,581			(9,693	)
International		(236,765	)		122,689			(114,076	)

		(336,039	)		212,270			(123,769	)

Other interest-bearing liabilities
Domestic		68,805			(166,507	)		(97,702	)
International		185,866			(243,491	)		(57,625	)

		254,671			(409,998	)		(155,327	)

Total interest-bearing liabilities without hedging operations
Domestic		(9,814	)		(710,731	)		(720,545	)
International		1,954,186			(2,768,300	)		(814,114	)

		1,944,372			(3,479,031	)		(1,534,659	)

Expenses from hedging operations
Domestic		(739.763	)		—			(739,763	)
International		(917,664	)		—			(917,664	)

		(1,657,427	)		—			(1,657,427	)

Total interest-bearing liabilities
Domestic		(749,577	)		(710,731	)		(1,460,308	)
International		1,036,522			(2,768,300	)		(1,731,778	)

		286,945			(3,479,031	)		(3,192,086	)

Volume and rate analysis


	IFRS-IASB
	2009/2008
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in thousands of euros)
Interest charges
Due to credit entities
Domestic		64,712			(470,952	)		(406,240	)
International		578,368			(575,354	)		3,014

		643,080			(1,046,306	)		(403,226	)

Customers deposits
Domestic		237,141			(1,372,884	)		(1,135,743	)
International		2,689,280			(4,743,216	)		(2,053,936	)

		2,926,421			(6,116,100	)		(3,189,679	)

Marketable debt securities
Domestic		(553,692	)		(2,335,494	)		(2,889,186	)
International		70,780			(1,762,495	)		(1,691,715	)

		(482,912	)		(4,097,989	)		(4,580,901	)

Subordinated debt
Domestic		55,076			(137,569	)		(82,493	)
International		120,564			(99,064	)		21,500

		175,640			(236,633	)		(60,993	)

Other interest-bearing liabilities
Domestic		22,225			230,616			252,841
International		307,713			360,274			667,987

		329,938			590,890			920,828

Total interest-bearing liabilities without hedging operations
Domestic		(174,538	)		(4,086,283	)		(4,260,821	)
International		3,766,705			(6,819,855	)		(3,053,150	)

		3,592,167			(10,906,138	)		(7,313,971	)

Expenses from hedging operations
Domestic		(2,024,827	)		—			(2,024,827	)
International		(1,291,824	)		—			(1,291,824	)

		(3,316,651	)		—			(3,316,651	)

Total interest-bearing liabilities
Domestic		(2,199,365	)		(4,086,283	)		(6,285,648	)
International		2,474,881			(6,819,855	)		(4,344,974	)

		275,516			(10,906,138	)		(10,630,622	)

Assets

Earning Assets—Yield Spread

The following table analyzes, by domicile of customer, our average earning assets, interest income and dividends on equity securities and net interest income and shows gross yields, net yields and yield spread for each of the years indicated. You should read this table and the footnotes thereto in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.

Earning Assets — Yield Spread


	IFRS-IASB
	Year Ended December 31,
	2010			2009			2008
	(in thousands of euros, except percentages)
Average earning assets
Domestic		335,228,646			329,181,345			308,592,316
International		757,196,302			674,775,035			548,514,173

		1,092,424,948			1,003,956,380			857,106,489

Interest
Domestic		9,607,689			12,823,294			17,202,473
International		43,299,065			40,349,710			37,841,073

		52,906,754			53,173,004			55,043,546

Net interest income (1)
Domestic		2,815,995			4,571,290			2,664,821
International		26,408,384			21,727,252			14,873,641

		29,224,379			26,298,542			17,538,462

Gross yield (2)
Domestic		2.87	%		3.90	%		5.57	%
International		5.72	%		5.98	%		6.90	%

		4.84	%		5.30	%		6.42	%

Net yield (3)
Domestic		0.84	%		1.39	%		0.86	%
International		3.49	%		3.22	%		2.71	%

		2.68	%		2.62	%		2.05	%

Yield spread (4)
Domestic		0.92	%		1.45	%		1.29	%
International		3.37	%		3.05	%		2.23	%

		2.62	%		2.54	%		1.91	%


(1)		Net interest income is the net amount of interest and similar income and interest expense and similar charges. — See “Income Statement” on page 9. —

(2)		Gross yield is the quotient of interest income divided by average earning assets.

(3)		Net yield is the quotient of net interest income divided by average earning assets.

(4)		Yield spread is the difference between gross yield on earning assets and the average cost of interest-bearing liabilities. For a discussion of the changes in yield spread over the periods presented, see “Item 5. Operating and Financial Review and Prospects—A. Operating results—Results of Operations for Santander—Interest Income / (Charges)”.

Return on Equity and Assets

The following table presents our selected financial ratios for the years indicated.


	Year Ended December 31,
	2010			2009			2008
ROA: Return on average total assets		0.76	%		0.86	%		1.00	%
ROE: Return on average stockholders’ equity		11.80	%		13.90	%		17.07	%
PAY-OUT: Dividends per average share as a percentage of net attributable income per average share (*)		40.70	%		46.09	%		54.21	%
Average stockholders’ equity as a percentage of average total assets		5.82	%		5.85	%		5.55	%


(*)		The pay-out ratio does not include in the numerator the amounts paid under the Santander Dividendo Elección program (scrip dividends) which are not dividends paid on account of the net attributable income of the period. Such dividends amount to €1,668.8 million and €796.8 million for 2010 and 2009, respectively.

Interest-Earning Assets

The following table shows, by domicile of customer, the percentage mix of our average interest-earning assets for the years indicated. You should read this table in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.

Interest-earning assets


	IFRS-IASB
	Year Ended December 31,
	2010			2009			2008

Cash and due from Central Banks
Domestic		0.77	%		0.79	%		0.92	%
International		4.85	%		2.59	%		2.51	%

		5.62	%		3.38	%		3.43	%

Due from credit entities
Domestic		2.69	%		2.09	%		1.76	%
International		4.70	%		5.81	%		7.24	%

		7.39	%		7.90	%		9.00	%

Loans and credits
Domestic		20.56	%		22.99	%		27.83	%
International		44.18	%		43.55	%		40.37	%

		64.74	%		66.54	%		68.20	%

Debt securities
Domestic		4.10	%		4.00	%		2.95	%
International		9.86	%		9.25	%		8.72	%

		13.96	%		13.25	%		11.67	%

Other interest-earning assets
Domestic		2.53	%		2.93	%		2.79	%
International		5.76	%		6.00	%		4.91	%

		8.29	%		8.93	%		7.70	%

Total interest-earning assets
Domestic		30.65	%		32.80	%		36.25	%
International		69.35	%		67.20	%		63.75	%

		100.00	%		100.00	%		100.00	%

Loans and Advances to Credit Institutions

Our financial information included in this annual report on Form 20-F has been prepared since 2008 under IFRS-IASB. There are no material differences between the financial information disclosed in this section of our annual report under IFRS-IASB and the periods prior to 2008 previously presented under EU-IFRS. See “Item 3. Key information — A. Selected Financial Data” in our 2008 Form 20-F for additional information.

The following tables show our short-term funds deposited with other banks at each of the dates indicated.


	IFRS-IASB
	At December 31,
	2010			2009			2008			2007			2006
	(in thousands of euros)
Reciprocal accounts		1,264,072			712,503			663,230			417,438			503,299
Time deposits		13,548,408			21,382,542			25,455,903			13,569,362			16,842,601
Reverse repurchase agreements		36,720,631			29,489,895			18,568,747			30,276,080			37,010,008
Other accounts		28,322,240			28,251,667			34,104,397			13,379,724			15,401,148

		79,855,351			79,836,607			78,792,277			57,642,604			69,757,056
Of which Impairment allowances		(16,559	)		(25,536	)		(253,567	)		(18,487	)		(12,727	)

Investment Securities

At December 31, 2010, the book value of our investment securities was €174.3 billion (representing 14.3% of our total assets). These investment securities had a yield of 3.76% in 2010 compared with a yield of 3.94% in 2009, and a yield of 4.31% in 2008. Approximately €35.1 billion, or 20.1%, of our investment securities at December 31, 2010 consisted of Spanish Government and government agency securities. For a discussion of how we value our investment securities, see Note 2 to our consolidated financial statements.

The following tables show the book values of our investment securities by type and domicile of counterparty at each of the dates indicated.


	IFRS-IASB
	At December 31,
	2010			2009			2008
	(in thousands of euros)
Debt securities
Domestic-
Spanish Government		35,109,766			37,770,101			20,267,964
Other domestic issuer:
Public authorities		553,390			542,577			231,529
Other domestic issuer		7,915,055			8,124,835			9,076,564

Total domestic		43,578,211			46,437,513			29,576,057
International-
United States:
U.S. Treasury and other U.S. Government agencies		1,121,904			1,183,550			881,579
States and political subdivisions		1,741,307			1,714,940			1,260,494
Other securities		11,598,384			12,964,869			6,155,609

Total United States		14,461,595			15,863,359			8,297,682
Other:
Governments		60,736,942			41,108,209			20,990,003
Other securities		31,960,770			48,292,040			50,567,953

Total Other		92,697,712			89,400,249			71,557,956

Total International		107,159,307			105,263,608			79,855,638

Less- Allowance for credit losses		(144,055	)		(166,722	)		(181,178	)
Less- Price fluctuation allowance		—			—			—


Total Debt Securities		150,593,463			151,534,399			109,250,517

Equity securities
Domestic		5,458,251			6,070,228			4,447,197
International-
United States		1,931,078			1,489,681			938,265
Other		16,274,353			14,896,610			10,046,522

Total international		18,205,431			16,386,291			10,984,787

Less- Price fluctuation allowance		—			—			(9,159	)


Total Equity Securities		23,663,682			22,456,519			15,422,825


Total Investment Securities		174,257,145			173,990,918			124,673,342

The following table analyzes the aggregate book value and aggregate market value of the securities of single issuers, other than the Government of the United States, which exceeded 10% of our stockholders’ equity as of December 31, 2010 (and other debt securities with aggregate values near to 10% of our stockholders’ equity).


	Aggregate as of December 31, 2010
	Book value		Market value
	(in thousands of euros)
Debt securities:
Exceed 10% of stockholders’ equity:
Spanish Government		35,663,155		35,663,155
Near 10% of stockholders’ equity:
Telefónica		6,449,567		6,449,567
República Federal do Brasil		5,925,144		5,925,144

The following table analyzes the maturities and weighted average yields of our debt investment securities (before impairment allowances) at December 31, 2010. Yields on tax-exempt obligations have not been calculated on a tax-equivalent basis because we do not believe the effect of such a calculation would be material.


	At December 31, 2010
			Maturing		Maturing
	Maturing		Between		Between		Maturing
	Within		1 and		5 and		After
	1 Year		5 Years		10 Years		10 Years		Total
	(in thousands of euros)
DEBT SECURITIES
Domestic:
Spanish Government		7,522,658		9,391,929		14,162,508		4,032,671		35,109,766
Other domestic issuer:
Public authorities		32,272		206,117		313,476		1,525		553,390
Other domestic issuer		1,170,848		4,554,481		551,093		1,638,633		7,915,055
Total domestic		8,725,778		14,152,527		15,027,077		5,672,829		43,578,211
International:
United States:
U.S. Treasury and other U.S. Government agencies		883,202		27,875		29,426		181,401		1,121,904
States and political subdivisions		10,180		130,940		19,344		1,580,843		1,741,307
Other securities		1,019,309		3,464,639		1,885,836		5,228,600		11,598,384
Total United States		1,912,691		3,623,454		1,934,606		6,990,844		14,461,595
Other:
Governments		19,734,439		31,220,289		4,654,725		5,127,489		60,736,942
Other securities		8,918,767		14,689,885		3,474,800		4,877,318		31,960,770
Total Other		28,653,206		45,910,174		8,129,525		10,004,807		92,697,712
Total International		30,565,897		49,533,628		10,064,131		16,995,651		107,159,307

Total debt investment securities		39,291,675		63,686,155		25,091,208		22,668,480		150,737,518

Loan Portfolio

At December 31, 2010, our total loans and advances to customers equaled €743.9 billion (61.1% of our total assets). Net of allowances for credit losses, loans and advances to customers equaled €724.2 billion at December 31, 2010 (59.5% of our total assets). In addition to loans, we had outstanding at December 31, 2006, 2007, 2008, 2009 and 2010 €91.7 billion, €102.2 billion, €123.3 billion, €150.6 billion and €180.0 billion, respectively, of undrawn balances available to third parties.

Loans by Geographic Area and Type of Customer

The following tables analyze our loans and advances to customers (including securities purchased under agreement to resell), by domicile and type of customer, at each of the dates indicated.


	IFRS-IASB
	At December 31,
	2010			2009			2008			2007			2006
	(in thousands of euros)
Loans to borrowers in Spain:
Spanish Government		12,137,098			9,802,511			7,668,408			5,633,422			5,328,526
Commercial, financial, agricultural and industrial		67,940,259			70,136,946			56,289,775			45,169,824			71,412,545
Real estate and construction (*)		38,419,193			42,514,809			48,098,886			46,837,281			12,391,306
Other mortgages		74,462,191			68,865,914			59,784,116			59,268,463			81,718,186
Installment loans to individuals		15,984,557			20,070,626			21,505,725			21,533,074			20,058,666
Lease financing		6,195,295			7,533,857			9,252,949			9,643,516			8,668,599
Other		12,474,313			11,420,172			37,647,241			49,995,313			9,357,884

Total		227,612,906			230,344,835			240,247,100			238,080,893			208,935,712

Loans to borrowers outside Spain (**):
Non-Spanish Governments		3,527,188			2,860,902			3,029,373			2,295,763			4,969,713
Commercial and industrial		217,747,143			174,763,552			127,838,494			143,045,869			128,438,265
Mortgage loans		269,893,288			249,065,126			201,112,142			179,163,680			177,631,731
Other		25,070,370			43,389,607			67,127,381			17,207,512			15,223,537

Total		516,237,989			470,079,187			399,107,390			341,712,824			326,263,246

Total loans and leases, gross		743,850,895			700,424,022			639,354,490			579,793,717			535,198,958

Allowance for possible loan losses (***)		(19,696,998	)		(17,873,096	)		(12,466,055	)		(8,695,204	)		(8,163,444	)


Loans and leases, net of allowances		724,153,897			682,550,926			626,888,435			571,098,513			527,035,514


(*)		As of December 31, 2010, the portfolio of loans to construction and property development companies with real estate purposes, defined in accordance with the Bank of Spain’s purpose-based classification guidelines, amounted to €27,334 million.

(**)		Credit of any nature in the name of credit institutions is included in the “Loans and advances to credit institutions” caption of our balance sheet.

(***)		Refers to loan losses of “Loans and Advances to customers”. See “Item 3. Key information — A. Selected Financial Data”.

At December 31, 2010, our loans and advances to associated companies and jointly controlled entities amounted to €144 million (see “Item 7. Major Shareholders and Related Party Transactions—B. Related party transactions”). Excluding government-related loans and advances, the largest outstanding exposure to a single counterparty at December 31, 2010 was €3.9 billion (0.5% of total loans and advances, including government-related loans), and the five next largest exposures totaled €8.5 billion (1.1% of total loans, including government-related loans).

Maturity

The following table sets forth an analysis by maturity of our loans and advances to customers by domicile and type of customer at December 31, 2010.


	Maturity
	Less than					One to five					Over five
	one year					years					years					Total
	Balance		% of Total			Balance		% of Total			Balance		% of Total			Balance		% of Total
	(in thousands of euros, except percentages)
Loans to borrowers in Spain:
Spanish Government		3,460,176		2.02	%		2,822,277		1.54	%		5,854,645		1.50	%		12,137,098		1.63	%
Commercial, financial, agriculture and industrial		29,973,685		17.52	%		21,387,835		11.70	%		16,578,739		4.25	%		67,940,259		9.13	%
Real estate and construction		2,578,028		1.51	%		2,987,685		1.64	%		32,853,480		8.42	%		38,419,193		5.16	%
Other mortgages		5,444,769		3.18	%		7,603,566		4.16	%		61,413,856		15.75	%		74,462,191		10.02	%
Installment loans to individuals		6,822,886		3.99	%		6,460,833		3.54	%		2,700,838		0.69	%		15,984,557		2.15	%
Lease financing		1,158,186		0.68	%		3,135,190		1.72	%		1,901,919		0.49	%		6,195,295		0.83	%
Other		2,583,892		1.51	%		2,287,188		1.25	%		7,603,233		1.95	%		12,474,313		1.68	%

Total borrowers in Spain		52,021,622		30.41	%		46,684,574		25.55	%		128,906,710		33.05	%		227,612,906		30.60	%

Loans to borrowers outside Spain (*)
Non-Spanish Governments		1,378,011		0.81	%		804,835		0.44	%		1,344,342		0.34	%		3,527,188		0.47	%
Commercial and Industrial		92,985,048		54.36	%		93,619,861		51.24	%		31,142,233		7.98	%		217,747,143		29.27	%
Mortgage loans		15,709,736		9.18	%		34,527,245		18.90	%		219,656,306		56.31	%		269,893,288		36.29	%
Other		8,963,764		5.24	%		7,072,674		3.87	%		9,033,933		2.32	%		25,070,370		3.37	%

Total loans to borrowers outside Spain		119,036,559		69.59	%		136,024,615		74.45	%		261,176,814		66.95	%		516,237,989		69.40	%

Total loans and leases, gross		171,058,181		100.00	%		182,709,189		100.00	%		390,083,524		100.00	%		743,850,895		100.00	%


(*)		Credit of any nature in the name of credit institutions is included in the “Loans and advances to credit institutions” caption of our balance sheet.

Fixed and Variable Rate Loans

The following table sets forth a breakdown of our fixed and variable rate loans having a maturity of more than one year at December 31, 2010.

Fixed and variable rate loans

having a maturity of more than one year

Domestic

International

Total

(in thousands of euros)

Fixed rate

34,509,184

175,056,724

209,565,907

Variable rate

141,082,101

222,144,705

363,226,806

Total

175,591,285

397,201,429

572,792,713

Cross-Border Outstandings

The following table sets forth, as of the end of the years indicated, the aggregate amount of our cross-border outstandings (which consist of loans, interest-bearing deposits with other banks, acceptances and other monetary assets denominated in a currency other than the home-country currency of the office where the item is booked) where outstandings in the borrower’s country exceeded 0.75% of our total assets. Cross-border outstandings do not include local currency loans made by subsidiary banks in other countries to the extent that such loans are funded in the local currency or hedged. As a result, they do not include the vast majority of the loans by Santander UK or our Latin American subsidiaries.


	IFRS-IASB
	2010					2009					2008
			% of					% of					% of
			total					total					total
			assets					assets					assets
	(in thousands of euros, except percentages)
OECD (1) (2) Countries:
Total OECD Countries		13,612,706		1.12	%		14,327,184		1.29	%		12,931,735		1.24	%

Non-OECD Countries
Brazil		6,058,247		0.50	%		5,316,717		0.48	%		10,169,495		0.97	%
Other Latin American Countries (2) (3)		7,885,167		0.65	%		8,297,908		0.75	%		7,728,016		0.74	%
Other (2)		7,153,022		0.59	%		6,600,333		0.59	%		5,847,896		0.56	%
Total Non-OECD		21,096,436		1.73	%		20,214,958		1.82	%		23,745,407		2.27	%

Total		34,709,142		2.85	%		34,542,142		3.11	%		36,677,142		3.50	%


(1)		The Organization for Economic Cooperation and Development.

(2)		Aggregate outstandings in any single country in this category do not exceed 0.75% of our total assets.

(3)		With regards to these cross-border outstandings, at December 31, 2008, 2009 and 2010, we had allowances for country-risk equal to €555.5 million, €30.3 million, and €30.3 million, respectively. Such allowances for country-risk exceeded the Bank of Spain’s minimum requirements at such dates.

The following table sets forth, as of December 31, 2010, 2009 and 2008, the amounts of our cross-border outstandings by type of borrower where outstandings in the borrower’s country exceeded 0.75% of total assets.

Banks and other

Financial

Commercial and

Government

Institutions

Industrial

Total

(in thousands of euros)

2008

Brazil

193,734

3,939,252

6,036,509

10,169,495

Total

193,734

3,939,252

6,036,509

10,169,495

2009

N/A

—

2010

N/A

—

Exposure to sovereign counterparties by credit rating

Our exposure to sovereign counterparties (the exposure is included in the financial statement line items “Financial assets held for trading — Debt instruments”, “Other financial assets at fair value through profit or loss — Debt instruments”, “Available for sale financial assets — Debt instruments” and “Loans and receivables-Debt instruments”) organized by credit rating as of December 31, 2010 is as follows:


Rating of sovereign
counterparties (Fitch and	In millions of euros
S&P)	Sovereign debt

AAA		14,036
AA		35,842
A		6,067
BBB ()*		41,732
Below BBB		1,586
Unrated		—
*TOTAL*		99,263


(*)		Including mainly Brazil and Mexico.

Additionally, in note 10 to the Financial Statements we present the disclosure by credit rating of our exposure to sovereign counterparties recorded under the caption “loans and advances to customers”.

Specifically, our exposure (sovereign debt) to Ireland, Greece, Portugal and Spain as of December 31, 2010 is €0.0, €0.2, €2.8 and €35.7 billion, respectively. Other than these four countries, there are no other sovereign counterparties whose debt we hold and whose credit rating was downgraded in the past 12 months. See Note 7 to our 2010 consolidated financial statements.

As of December 31, 2010, the Group has negligible direct exposure to Greek or Irish sovereign or bank debt. However, the downgrading by Standard & Poor’s of the sovereign ratings for Spain (on April 2010 from AA+ to AA) and Portugal (on April 2010 from A+ to A- and on March 2011 to BBB-) may (i) negatively impact the value of our Spanish and Portuguese sovereign debt holdings, (ii) increase our funding costs should the spread between Spanish and Portuguese sovereign debt and German sovereign debt (the benchmark for the euro zone) increase, although this would be partially offset by the related increase in mark to market value of the Bank’s German sovereign debt holdings, and (iii) negatively impact the trading price of the Bank’s common shares as a result of the increased risk premium and the related increase in the Bank’s cost of capital.

Classified Assets

In the following pages, we describe the Bank of Spain requirements for classification of non-performing assets. The Group has established a credit loss recognition process that is independent of the process for balance sheet classification and removal of impaired loans from the balance sheet.

The description below sets forth the minimum requirements that are followed and applied by all of our subsidiaries. Nevertheless, if the regulatory authority of the country where a particular subsidiary is located imposes stricter or more conservative requirements for classification of the non-performing balances, the more strict or conservative requirements are followed for classification purposes.

The classification described below applies to all debt instruments not measured at fair value through profit or loss, and to contingent liabilities.

Bank of Spain Classification Requirements

a) Standard Assets

Standard assets include loans, fixed-income securities, guarantees and certain other extensions of credit that are not classified in any other category. Under this category, assets that require special watch must be identified, including restructured loans and standard assets with clients that have other outstanding risks classified as Non-performing Past Due. Standard assets are subdivided as follows:


		(i) Negligible risk		• All types of credits made to, or guaranteed by, any European Union country or certain other specified public entities of the countries classified in category 1 of the country-risk categories;

				• Advance payments for pensions or payrolls for the following month, when paid by any public entity and deposited at Santander;

				• Those credits guaranteed by public entities of the countries classified in category 1 of the country-risk categories whose principal activity is to provide guarantees;

				• Credits made to banks;

				• Credits personally, jointly and unconditionally guaranteed by banks or mutual guaranty companies payable on first demand;

				• Credits guaranteed under the name of the Fondo de Garantía de Depósitos if their credit risk quality is comparable with that of the European Union; or

				• All credits collateralized by cash or by money market and treasury funds or securities issued by the central administrations or credit entities of countries listed in category 1 for country-risk purposes when the outstanding exposure is 90% or less than the redemption value of the money market and treasury funds and of the market value of the securities given as collateral.

		(ii) Low risk		Assets in this category include:

				• assets qualified as collateral for monetary policy transactions in the European System of Central Banks, except those included in (i) above;

				• fully-secured mortgages and financial leases on finished residential properties when outstanding risk is less than 80% of the appraised value of such property;

				• ordinary mortgage backed securities;

				• assets from entities whose long term debt is rated “A” or better by a qualified rating agency; and

				• securities denominated in local currency and issued by government entities in countries other than those classified in category 1 of the country-risk categories, when such securities are registered in the books of the bank’s branch located in the issuer country.


		(iii) Medium-low risk		Assets in this category include financial leases and mortgages and pledges on tangible assets that are not included in other categories, provided that the estimated value of the financial leases and the collateral totally covers the outstanding risk.

		(iv) Medium risk		Assets in this category include those with Spanish residents or residents of countries classified in categories 1 or 2, provided that such assets are not included in other categories.

		(v) Medium-high risk		Assets in this category include (unless these assets qualify as “high risk” assets) loans to individuals for the acquisition of durable consumption goods, other goods or current services not for professional use, except those registered in the Registry of Sales of Movable Assets (Registro de Ventas de Bienes Muebles); and risks with residents of countries classified in categories 3 to 6, to the extent not covered by country-risk allowances.

		(vi) High risk		Assets in this category include credit card balances; current account overdrafts and excesses in credit accounts (except those included in categories (i) and (ii)).

b) Sub-standard Assets

This category includes all types of credits and off-balance sheet risks that cannot be classified as non performing or charged-off assets but that have certain weaknesses that may result in losses for the bank higher than those described in the previous category. Credits and off-balance sheet risks with insufficient documentation must also be classified under this category.

c) Non-Performing Past-Due Assets

The Bank of Spain requires Spanish banks to classify as non-performing the entire outstanding principal amount and accrued interest on any loan, fixed-income security, guarantee and certain other extensions of credit on which any payment of principal or interest or agreed cost is 90 days or more past due (“non-performing past-due assets”).

In relation to the aggregate risk exposure (including off-balance sheet risks) to a single obligor, if the amount of non-performing balances exceeds 25% of the total outstanding risks (excluding non-accrued interest on loans to such borrower), then banks must classify all outstanding risks to such borrower as non-performing.

Once any portion of a loan is classified as non-performing, the entire loan is placed on a non-accrual status. Accordingly, even the portion of any such a loan which may still be identified as performing will be recorded on non-accrual status.

d) Other Non-Performing Assets

The Bank of Spain requires Spanish banks to classify any loan, fixed-income security, guarantee and certain other extensions of credit as non-performing if they have a reasonable doubt that these extensions of credit will be collected (“other non-performing assets”), even if any past due payments have been outstanding for less than 90 days or the asset is otherwise performing. When a bank classifies an asset as non-performing on this basis, it must classify the entire principal amount of the asset as non-performing.

Once any such asset is classified as non-performing, it is placed on a non-accrual status.

e) Charged-off assets

Credit losses are generally recognized through provisions for allowances for credit losses, well before they are removed from the balance sheet. Under certain unusual circumstances (such as bankruptcy, insolvency, etc.), the loss is directly recognized through write-offs.

The Bank of Spain requires Spanish banks to charge-off immediately those non-performing assets that management believes will never be repaid. Otherwise, the Bank of Spain requires Spanish banks to charge-off non-performing assets four years after they were classified as non-performing. Accordingly, even if allowances have been established equal to 100% of a non-performing asset, Spanish banks may maintain that non-performing asset, fully provisioned, on their balance sheet for the full four-year period if management believes based on objective factors that there is some possibility of recoverability of that asset.

Because the Bank of Spain does not permit partial write-offs of impaired loans, when a loan is deemed partially uncollectible, the credit loss is charged against earnings through provisions to credit allowances instead of through partial write-offs of the loan. If a loan becomes entirely uncollectible, its allowance is increased until it reaches 100% of the loan balance. The credit loss recognition process is independent of the process for the removal of impaired loans from the balance sheet. The entire loan balance is kept on the balance sheet until any portion of it has been classified as non-performing for 4 years. Loans can be written-off earlier depending on our management’s view as to the recoverability of the loan. After that period, the loan balance and its 100% specific allowance are removed from the balance sheet and recorded in off-balance sheet accounts, with no resulting impact on net income at that time.

f) Country-Risk Outstandings

The Bank of Spain requires Spanish banks to classify as country-risk outstandings all loans, fixed-income securities and other outstandings to any countries, or residents of countries, that the Bank of Spain has identified as being subject to transfer risk or sovereign risk and the remaining risks derived from the international financial activity.

All outstandings must be assigned to the country of residence of the client except in the following cases:

•		Outstandings guaranteed by residents in other countries in a better category should be classified in the category of the guarantor.

•		Fully secured loans, when the security covers sufficiently the outstanding risk and can be enforced in Spain or in any other “category 1” country, should be classified as category 1.

•		Outstanding risks with foreign branches of a bank should be classified according to the residence of the headquarters of those branches.

The Bank of Spain has established six categories to classify such countries, as shown in the following table:


Country-Risk Categories		Description

1		European Union, Norway, Switzerland, Iceland, USA, Canada, Japan, Australia and New Zealand
2		Low risk countries not included in 1
3		Countries with transitory difficulties
4		Countries with serious difficulties
5		Doubtful countries
6		Bankrupt countries

The Bank of Spain allows each bank to decide how to classify the listed countries within this classification scheme, subject to the Bank of Spain’s oversight. The classification is made based on criteria such as the payment record (in particular, compliance with renegotiation agreements), the level of the outstanding debt and of the charges for debt services, the debt quotations in the international secondary markets and other indicators and factors of each country as well as all the criteria indicated by the Bank of Spain. All credit extensions and off-balance sheet risks included in country-risk categories 3 to 6, except the excluded cases described below, will be classified as follows:

–		Sub-standard assets: All outstandings in categories 3 and 4 except when they should be classified as non-performing or charged-off assets due to credit risk attributable to the client.

–		Non-performing assets: All outstandings in category 5 and off-balance sheet risks classified in category 6, except when they should be classified as non-performing or charged-off assets due to credit risk attributable to the client.

–		Charged-off assets: All other outstandings in category 6 except when they should be classified as charged-off assets due to credit risk attributable to the client.

Among others, the Bank of Spain excludes from country-risk outstandings:

– regardless of the currency of denomination of the asset, risks with residents in a country registered in subsidiary companies or multigroup companies in the country of residence of the holder;

– any trade credits established by letter of credit or documentary credit with a due date of one year or less after the drawdown date;

– any interbank obligations of branches of foreign banks in the European Union and of the Spanish branches of foreign banks;

– private sector risks in countries included in the monetary zone of a currency issued by a country classified in category 1; and

– any negotiable financial assets purchased at market prices for placement with third parties within the framework of a portfolio separately managed for that purpose, held for less than six months by the company.

Non-Accrual of Interest Requirements

We stop accruing interest on the basis of contractual terms on the principal amount of any asset that is classified as an impaired asset and on category 5 (doubtful) and category 6 (bankrupt) country-risk outstandings. Thereafter, we recognize the passage of time (financial effect) releasing provisions for loan losses by calculating the present value of the estimated future cash flows using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. On the other hand, any collected interest for any assets classified as impaired are accounted for on a cash basis.

The following table shows the amount of non accrued interest owed on impaired assets and the amount of such interest that was received:


	IFRS-IASB
	At December 31,
	2010		2009		2008
	(in thousands of euros)
Non accrued interest on the basis of contractual terms owed on impaired assets
Domestic		717,338		765,101		231,486
International		2,235,336		1,829,676		489,241

Total		2,952,674		2,594,777		720,727
Non accrued interest on the basis of contractual terms received on impaired assets
Domestic		165,498		151,459		95,428
International		179,668		157,724		125,386

Total		345,166		309,183		220,814

The balances of impaired loans as of December 31, 2010, 2009 and 2008 are as follows:


	Thousands of Euros
	2010		2009		2008
Other impaired loans (*)		4,872,163		3,283,860		2,417,529
Impaired loans more than ninety days past due		23,650,203		21,269,764		11,773,284

Total impaired loans		28,522,366		24,553,624		14,190,813


(*)		See above “Bank of Spain Classification Requirements- d) Other Non-Performing Assets” for a detailed explanation of assets included under this category.

The roll-forward of allowances (under IFRS-IASB) is shown in Note 10 to our consolidated financial statements.

Guarantees

The Bank of Spain requires some guarantees to be classified as non-performing in the following amounts:

• in cases involving past-due guaranteed debt: (i) for non-financial guarantees, the amount demanded by the beneficiary and outstanding under the guarantee; and (ii) for financial guarantees, at least the amount classified as non-performing of the guaranteed risk; and

• in all other cases, the entire amount of the guaranteed debt when the debtor has declared bankruptcy or has demonstrated serious solvency problems, even if the guaranteed beneficiary has not reclaimed payment.

Allowances for Credit Losses and Country-Risk Requirements

We calculate simultaneously the allowances required due to credit risk attributable to the client and to country-risk and apply the ones that are more demanding.

The Bank of Spain requires that we develop internal models to calculate the allowances for both credit risk and country-risk based on historical experience. As of July 2008, the Bank of Spain had approved for regulatory capital calculation purposes the Group’s internal models affecting the vast majority of the Group’s credit risk net exposure. The Bank of Spain will continue to review the models for the purpose of calculating allowances for loan losses. The calculation obtained based on the output parameters of internal models is consistent with the best estimate of the Group as to the probable losses using possible scenarios which rely on the approved internally developed models, and which constitute an appropriate basis for determining loan loss allowances. While these models are not yet approved by the Bank of Spain for loan loss allowance calculation, we are required to calculate the allowances according to the instructions described below. The difference between loan loss provisions calculated using internal models and those calculated under Bank of Spain Guidance, was not material for any of the three years ending December 31, 2010.

The global allowances will be the sum of those corresponding to losses in specific transactions (Specific Allowances) and those not specifically assigned (Collectively Assessed Allowance) due to credit risk, plus the Allowances for Country-Risk.

Specific and Collectively Assessed Allowances for Credit Losses

Our methodology for calculation of loan loss allowances is summarized as follows:

	•		Assets classified as doubtful due to counterparty arrears: debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually, taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors. The allowance percentages applied, based on the age of the past-due amounts, are described in Note 2.g) to our consolidated financial statements.

	•		Assets classified as doubtful for reasons other than counterparty arrears: Debt instruments which are not classifiable as doubtful due to arrears but for which there are reasonable doubts as to their repayment under the contractual terms are assessed individually, and their allowance is the difference between the amount recognized in assets and the present value of the cash flows expected to be received.

	•		Collectively assessed allowance for inherent losses: We cover our losses inherent in debt instruments not measured at fair value through profit or loss and in contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, inherent losses are losses incurred at the reporting date, calculated using statistical methods that have not yet been allocated to specific transactions.

			Our methodology for determining the collectively assessed allowance for incurred loan losses, intends to identify the amount of incurred losses as of the balance sheet date of loans that have not yet been identified as impaired, but that we estimate based on our past history and specific facts that will manifest within a one year lead time period from the balance sheet date. The above demonstrates those loans were having problems as of the balance sheet date. That is what we call inherent losses in the context of our internal models in which loan loss allowances are calculated.

Since 1993 we have used our internal models for assigning solvency and internal ratings, which measure the degree of risk of a client or transaction. Each rating corresponds to a certain probability of default or non-payment, the result of the Group’s past experience, except for some designated low default portfolios. We have approximately 300 internal rating models for risk admission and monitoring (models for corporate, sovereign, financial institutions; medium and small companies, retail, etc).

The ratings accorded to customers are regularly reviewed, incorporating new financial information and the experience in the development of the banking relationship with the customer. The regularity of the reviews increases in the case of clients who reach certain levels in the automatic warning systems and for those classified as special watch. The rating tools are also reviewed so that Group’s accuracy can be fine-tuned.

In order to make the internal ratings of the various models comparable and to be able to make comparisons with the ratings of external rating agencies, the Group has a master ratings scale. The comparisons are established via the probability of default associated with each rating.

The process: credit rating and parameter estimation

The credit risk associated to each transaction is quantified by means of its incurred loss. Risk measurement quantification requires following two steps; the first one is the estimation, and the second one is the assignment of the parameters that define the credit risk: Probability of Default, Loss Given Default and Exposure at Default.

We cover our losses inherent in debt instruments not measured at fair value through profit or loss and in contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, inherent losses are losses incurred at the reporting date, calculated using statistical methods that have not yet been allocated to specific transactions.

We use the concept of incurred loss to quantify the cost of the credit risk and include it in the calculation of the risk-adjusted return of its transactions. The parameters necessary for its calculation are also used to calculate economic capital and to calculate BIS II regulatory capital under internal models.

Incurred loss is the cost of the credit risk of a transaction that will manifest within a one year lead time from the balance sheet date considering the characteristics of the counterparty and the guarantees and collateral associated with the transaction.

The loss is calculated using statistical models that consider the following three factors: “exposure at default”, “probability of default” and “loss given default”.

	-		Exposure at default (EaD) is the amount of risk exposure at the date of default by the counterparty.

	-		Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The probability of default is associated with the rating/scoring of each counterparty/transaction.

			PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year. The definition of default used includes past-dues by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective doubtful assets).

	-		Loss given default (LGD) is the loss arising in the event of default. It depends mainly on the guarantees associated with the transaction.

Estimation is based on the Group’s own internal experience, i.e. the historical records of default for each rating as well as the recoveries experience regarding non performing loans:

	-		In portfolios where the internal experience of defaults is scant, such as banks, sovereigns or global wholesale banking, estimates of the parameters come from alternative sources: market prices or studies of outside agencies which draw on the shared experience of a sufficient number of institutions. These portfolios are called low default portfolios.

	-		For the rest of portfolios, estimates are based on the institution’s internal experience.

The LGD calculation is based on the analysis of recoveries of past due transactions, considering not only revenues and costs associated with the collection process, but also the moment when these revenues and costs take place and all indirect costs linked to the collecting activity.

The estimation of the EaD comes from comparing the use of the lines committed at the moment of default and a normal situation, in order to identify the real consumption of the lines at the time of default.

Once estimated, the credit risk parameters are assigned to assets that are not past due and play an essential role in the risk management and decision taking processes. These parameters are used by several management tools such as (1) pre-classifications, (2) economic capital, (3) return on risk adjusted capital (RORAC) or (4) stress scenarios.

Control of the process

Internal validation is a prerequisite for supervisory validation and consists of a specialized and sufficiently independent unit obtaining a technical opinion on whether the internal model is appropriate for the purposes used (internal and regulatory) and concluding on its usefulness and effectiveness. Moreover, it must evaluate whether the risk management and control procedures are appropriate for the entity’s strategy and risk profile.

Grupo Santander’s corporate framework of internal validation is fully aligned with the criteria for internal validation of advanced models issued by the Bank of Spain. The criterion of separation of functions is maintained between Internal Validation and Internal Auditing which, as the last element of control in the Group, is responsible for reviewing the methodology, tools and work done by Internal Validation and to give its opinion on its degree of effective independence.

Other Non-Performing Assets. If a non-performing asset is an “other non-performing asset”, see “—Bank of Spain Classification Requirements—Other Non-Performing Assets”, the amount of the required allowance will be the difference between the amount outstanding and the current value of the expected collectable cash flows. The minimum allowance will be 25% and up to 100% of the amounts treated as non-performing, depending on management’s opinion of the loan recovery expectations. When the treatment of such asset as a non-performing asset is due to, in management’s opinion, an inadequate financial or economical condition of the borrower, and the amount estimated as non-collectible is less than 25% of the outstanding debt, the amount of the required allowance will be at least 10% of the outstanding debt.

Sub-standard Assets. The necessary allowance for assets classified in this category is determined as the difference between its outstanding balance and the current value of the expected collectable cash flows. In every case, the amount of the required allowance must be higher than the collectively assessed allowance that would correspond in case of being classified as standard asset and lower than would correspond if classified as non-performing asset. When assets are classified as sub-standard due to insufficient documentation and have an outstanding balance higher than €25,000, the applicable allowance is 10%.

Allowances for Country-Risk

Guarantees

Allowances for non-performing guarantees will be equal to the amount that, using prudent criteria, is considered irrecoverable.

Bank of Spain Foreclosed Assets Requirements

If a Spanish bank eventually acquires the properties (residential or not) which secure loans or credits, the Bank of Spain requires that the value of the foreclosed assets should be the lesser of the amount of the debt (net of allowances) and the fair value of the foreclosed assets less the estimated selling costs (which shall be at least 10% of such value).

Bank of Spain Charge-off Requirements

The Bank of Spain does not permit non-performing assets to be partially charged-off.

The Bank of Spain requires Spanish banks to charge-off immediately those non-performing assets that management believes will never be repaid or that were made to category 6 (“bankrupt”) countries or residents of such category 6 countries. See the above sub-section entitled “—Bank of Spain Classification Requirements—Country-Risk Outstandings”. Otherwise, the Bank of Spain requires Spanish banks to charge-off non-performing assets four years after they were classified as non-performing. Accordingly, even if allowances have been established equal to 100% of a non-performing asset (in accordance with the Bank of Spain criteria discussed above), the Spanish bank may maintain that non-performing asset, fully provisioned, on its balance sheet for the full four year period if management believes based on objective factors that there is some possibility of recoverability of that asset.

Movements in Allowances for Credit Losses

The following table analyzes movements in our allowances for credit losses and movements, by domicile of customer, for the years indicated. See “Presentation of Financial and Other Information”. For further discussion of movements in the allowances for credit losses, see “Item 5. Operating and Financial Review and Prospects—A. Operating results—Results of Operations for Santander—Impairment Losses (net)”.


	IFRS-IASB
	Year Ended December 31,
	2010			2009			2008			2007			2006
	(in thousands of euros)
Allowance for credit losses at beginning of year
Borrowers in Spain		6,992,818			5,948,950			4,512,000			4,318,320			2,809,599
Borrowers outside Spain		10,905,814			6,770,673			4,284,371			3,969,808			4,092,326

Total		17,898,632			12,719,623			8,796,371			8,288,128			6,901,925

Addition of acquired companies’ credit loss allowances (1)
Borrowers in Spain		—			—			—			—			—
Borrowers outside Spain		—			1,426,104			2,310,095			7,356			164,530

Total		—			1,426,104			2,310,095			7,356			164,530

Recoveries of loans previously charged off (2)
Borrowers in Spain		201,545			115,069			129,660			148,849			123,566
Borrowers outside Spain		999,772			799,652			570,087			463,602			418,402

Total		1,201,317			914,721			699,747			612,451			541,968

Net provisions for credit losses (2)
Borrowers in Spain		2,124,521			2,499,843			928,236			658,990			793,898
Borrowers outside Spain		8,142,378			8,588,153			4,968,652			2,761,606			1,669,466

Total		10,266,899			11,087,996			5,896,888			3,420,596			2,463,364

Charge offs against credit loss allowance
Borrowers in Spain		(2,173,734	)		(1,236,859	)		(731,588	)		(573,787	)		(269,559	)
Borrowers outside Spain		(8,739,438	)		(8,557,769	)		(3,820,805	)		(2,746,375	)		(2,100,306	)

Total		(10,913,172	)		(9,794,628	)		(4,552,393	)		(3,320,162	)		(2,369,865	)

Other movements (3)		1,285,299			1,544,817			(431,084	)		(211,998	)		586,206

*Allowance for credit losses at end of year ()**
Borrowers in Spain		6,810,296			6,992,818			5,948,950			4,512,000			4,318,320
Borrowers outside Spain		12,928,679			10,905,814			6,770,673			4,284,371			3,969,808

Total		19,738,975			17,898,632			12,719,623			8,796,371			8,288,128

Average loans outstanding
Borrowers in Spain		224,641,828			230,641,779			235,002,141			215,521,349			177,426,121
Borrowers outside Spain		482,406,776			436,857,260			340,938,627			330,253,241			297,802,187

Total		707,048,604			667,499,039			575,940,768			545,774,590			475,228,308
Net charge-offs against loan loss allowance to average loans ratio
Borrowers in Spain		0.88	%		0.49	%		0.26	%		0.20	%		0.08	%
Borrowers outside Spain		1.60	%		1.78	%		0.95	%		0.69	%		0.56	%

Total		2.48	%		2.26	%		1.21	%		0.89	%		0.65	%

The table below shows a breakdown of recoveries, net provisions and charge-offs against credit loss allowance by type and domicile of borrower for the years indicated.


	Year Ended December 31,
	2010			2009			2008			2007			2006
	(in thousands of euros)
Recoveries of loans previously charged off-
Domestic:
Commercial, financial, agricultural, industrial		40,605			31,969			30,136			32,045			37,879
Real estate and construction		31,690			15,162			4,860			10,718			5,646
Other mortgages		32,143			24,340			11,480			17,644			11,249
Installment loans to individuals		89,285			42,946			74,974			70,082			59,726
Lease finance		1,386			621			6,198			4,517			5,023
Other		6,436			31			2,012			13,843			4,043

Total Borrowers in Spain		201,545			115,069			129,660			148,849			123,566
Borrowers outside Spain
Government and official institutions		4,261			34			—			8			1,126
Commercial and industrial		876,956			731,641			483,589			397,126			299,302
Mortgage loans		72,051			35,047			28,494			30,360			7,751
Other		46,504			32,930			58,004			36,108			110,223

Borrowers outside Spain		999,772			799,652			570,087			463,602			418,402

Total		1,201,317			914,721			699,747			612,451			541,968
Net provisions for credit losses-
Domestic:
Commercial, financial, agricultural, industrial		647,088			752,961			265,121			(278,355	)		405,914
Real estate and construction		674,447			528,124			(76,668	)		240,462			20,430
Other mortgages		131,361			263,700			276,578			298,645			96,209
Installment loans to individuals		573,827			848,450			399,651			383,582			278,223
Lease finance		82,103			73,055			26,619			16,038			55,894
Other		15,695			33,553			36,935			(1,382	)		(62,772	)

Total Borrowers in Spain		2,124,521			2,499,843			928,236			658,990			793,898
Borrowers outside Spain
Government and official institutions		44,057			14,218			(8,344	)		(1,797	)		2,035
Commercial and industrial		7,257,093			7,667,916			2,709,732			2,016,115			1,128,005
Mortgage loans		452,650			532,539			242,965			237,553			11,612
Other		388,578			373,480			2,024,299			509,735			527,814

Borrowers outside Spain		8,142,378			8,588,153			4,968,652			2,761,606			1,669,466

Total		10,266,899			11,087,996			5,896,888			3,420,596			2,463,364
Charge offs against credit loss allowance
Domestic:
Commercial, financial, agricultural, industrial		(704,422	)		(355,554	)		(121,751	)		(140,715	)		(55,982	)
Real estate and construction		(191,194	)		(137,183	)		(34,429	)		(29,466	)		(18,911	)
Other mortgages		(369,433	)		(235,659	)		(61,618	)		(11,807	)		(7,284	)
Installment loans to individuals		(840,733	)		(481,164	)		(503,166	)		(356,532	)		(184,218	)
Lease finance		(60,960	)		(25,681	)		(2,693	)		(1,344	)		(1,775	)
Other		(6,992	)		(1,618	)		(7,931	)		(33,923	)		(1,389	)

Total Borrowers in Spain		(2,173,734	)		(1,236,859	)		(731,588	)		(573,787	)		(269,559	)
Borrowers outside Spain
Government and official institutions		(43,254	)		(213	)		—			—			(174	)
Commercial and industrial		(7,993,694	)		(7,826,967	)		(2,807,232	)		(1,969,576	)		(1,333,617	)
Mortgage loans		(444,849	)		(393,104	)		(1,736	)		(6,693	)		(46,603	)
Other		(257,641	)		(337,485	)		(1,011,837	)		(770,106	)		(719,912	)

Borrowers outside Spain		(8,739,438	)		(8,557,769	)		(3,820,805	)		(2,746,375	)		(2,100,306	)

Total		(10,913,172	)		(9,794,628	)		(4,552,393	)		(3,320,162	)		(2,369,865	)

Allowances for Credit Losses

The table below shows a breakdown of allowances for credit losses by type and domicile of borrower for the years indicated.


	IFRS-IASB
	Year Ended December 31,
	2010		%		2009		%		2008		%		2007		%		2006		%
	(in thousands of euros, except percentages)
Borrowers in Spain:
Commercial, financial, agricultural, industrial		1,498,686		7.59		1,742,508		9.74		1,690,171		13.29		1,121,382		12.75		2,054,720		24.79
Real estate and construction (*)		2,723,155		13.80		1,896,177		10.59		1,490,138		11.72		1,412,652		16.06		515,597		6.22
Other mortgages		1,329,421		6.73		1,375,447		7.68		1,271,684		10.00		805,437		9.16		457,132		5.52
Installment loans to individuals		1,065,189		5.40		1,673,557		9.35		1,182,274		9.29		926,917		10.53		889,283		10.73
Lease finance		169,148		0.85		215,785		1.21		112,874		0.89		162,405		1.85		166,542		2.01
Other		24,697		0.13		89,344		0.50		201,809		1.59		83,207		0.95		235,046		2.84

Total Borrowers in Spain		6,810,296		34.50		6,992,818		39.07		5,948,950		46.77		4,512,000		51.30		4,318,320		52.10
Borrowers outside Spain:
Government and official institutions		31,190		0.16		19,149		0.11		13,653		0.11		25,650		0.29		30,054		0.36
Commercial and industrial		9,810,664		49,70		8,529,010		47.65		4,517,625		35.52		2,762,325		31.40		2,670,075		32.22
Mortgage loans		1,875,810		9.50		1,555,212		8.69		1,615,112		12.70		1,354,866		15.40		831,972		10.04
Other		1,211,015		6.14		802,443		4.48		624,283		4.91		141,530		1.61		437,707		5.28

Total Borrowers outside Spain		12,928,679		65.50		10,905,814		60.93		6,770,673		53.23		4,284,371		48.70		3,969,808		47.90

Total		19,738,975		100.00		17,898,632		100.00		12,719,623		100.00		8,796,371		100.00		8,288,128		100.00


(*)		As of December 31, 2010, the allowances of the portfolio of loans to construction and property development companies with real estate purposes, defined in accordance with the Bank of Spain’s purpose-based classification guidelines, amounted to €1,890 million.

Impaired Balances

The following tables show our impaired assets (loans, securities and other assets to collect) and contingent liabilities, excluding country-risk. We do not keep records classifying balances as non-accrual, past due, restructured or potential problem loans, as those terms are defined by the SEC. However, we have estimated the amount of our balances that would have been so classified, to the extent possible, below.

IFRS

At December 31,

Non-performing balances

2010

2009

2008

2007

2006

(in thousands of euros)

Past-due and other non-performing balances (1) (2) (3):

Domestic

12,474,076

10,405,450

6,405,803

1,887,167

1,288,857

International

16,048,290

14,148,174

7,785,010

4,291,488

3,318,690

Total

28,522,366

24,553,624

14,190,813

6,178,655

4,607,547


(1)		We estimate that the total amount of our non-performing balances fully provisioned under IFRS and which under U.S. GAAP would have been charged-off from the balance sheet was €1,206.5 million, €1,582.0 million, €2,877.6 million, €2,996.6 million and €4,843.1 million at December 31, 2006, 2007, 2008, 2009 and 2010, respectively.

(2)		Non-performing balances due to country risk were €83.0 million, €6.7 million, €2.6 million, €7.8 million and €7.9 million at December 31, 2006, 2007, 2008, 2009 and 2010, respectively.

(3)		We estimate that at December 31, 2006, 2007, 2008, 2009 and 2010 (i) the total amount of our non-performing past-due balances was €3,841.2 million, 4,918.2 million, €11,773.3 million, €21,269.8 million and €23,650.2 million respectively, and (ii) the total amount of our other non-performing balances was €766.3 million, €1,260.5 million, €2,417.5 million, €3,283.9 million and €4,872.2 million, respectively.

We do not believe that there is a material amount of assets not included in the foregoing table where known information about credit risk at December 31, 2010 (not related to transfer risk inherent in cross-border lending activities) gave rise to serious doubts as to the ability of the borrowers to comply with the loan repayment terms at such date.

The following table shows our financial assets classified as loans and receivables which are considered to be impaired due to credit risk at December 31, 2010, classified by geographical location of risk and by age of the oldest past-due amount (see Note 10.d to our consolidated financial statements):


	Millions of euros
	With no past-due
	balances or
	less than 3		With balances past due by
	months past due		3 to 6 months		6 to 9 months		9 to 12 months		More than 12 months		Total
Spain		2,726		1,835		1,511		1,001		5,240		12,313
European Union (excluding Spain)		308		2,782		1,192		759		2,190		7,231
United States and Puerto Rico		898		567		231		139		817		2,652
Other OECD countries		18		35		37		34		—		124
Latin America		768		2,310		894		791		822		5,585
Rest of the world		—		3		—		—		—		3

		4,718		7,532		3,865		2,724		9,069		27,908

The financial assets classified under the caption “loans and receivables” of our balance sheet as of December 31, 2010 that are considered to be impaired due to credit risk and bear past-due amounts of more than 12 months amounted to €9,069 million (32.5% of total impaired loans). From this balance, 81% are between 12 and 24 months past due, 18% between 24 and 36 months past due and 1% between 36 and 48 months past due.

Evolution of Impaired Balances

The following tables show the movement in our impaired assets and contingent liabilities (excluding country-risk, see “—Country-Risk Outstandings”).


	IFRS
													Year ended			Year ended			Year ended			Year ended			Year ended
	Quarter ended												Dec. 31,			Dec. 31,			Dec. 31,			Dec. 31,			Dec. 31,
(in thousands of euros)	Mar. 31, 2010			Jun. 30, 2010			Sep. 30, 2010			Dec. 31, 2010			2010			2009			2008			2007			2006
Opening balance		24,553,624			25,511,694			27,324,576			27,194,565			24,553,624			14,190,813			6,178,655			4,607,547			4,341,500
Net additions		3,423,414			3,388,930			2,894,984			3,771,040			13,478,368			18,234,330			11,346,183			5,014,270			2,567,912
Increase in scope of consolidation		—			—			253,868			3,008			256,876			1,033,001			2,088,943			1,000			164,000
Exchange differences		419,574			1,307,477			(1,060,011	)		479,629			1,146,669			890,109			(870,575	)		(124,000	)		(96,000	)
Writeoffs		(2,884,918	)		(2,883,525	)		(2,218,852	)		(2,925,876	)		(10,913,171	)		(9,794,629	)		(4,552,393	)		(3,320,162	)		(2,369,865	)

Closing balance		25,511,694			27,324,576			27,194,565			28,522,366			28,522,366			24,553,624			14,190,813			6,178,655			4,607,547

Non-performing loan (NPL) balances increased in 2010 by €3,969 million to €28,522 million (an increase of 16% as compared to the increase of 73% in 2009 and to the increase of 130% in 2008). This variation reflects the impact of continued weak economic environments in some markets, mitigated in part by risk management activities. The pace of growth in non-performing balances decelerated, as active management produced a positive evolution of net additions to NPL and of the risk premium for the whole Group and the main business units. In 2010, net additions to non-performing balances decreased by a total amount of €4,756 million as compared to 2009, consistent with the gradual recovery of the economic environment.

Charge-offs increased from 2009 to 2010 by €1,119 million as compared to a €5,243 million increase from 2008 to 2009. The increase during 2010 was more significant in Spain (+€936.9 million) while charge-offs outside Spain increased to a significantly lesser degree (+€181.7 million). This was due to the still weak Spanish economy which ended 2010 with a negative growth of -0.1% while the main foreign economies either grew strongly or were showing signs of recovery. We estimate that this trend will continue during 2011 due to the expected evolution of the macroeconomic environment and the increase in non-performing loan balances in 2010.

During 2009 the increase in charge-offs in Spain was of €506 million, while outside Spain it amounted to €4,737 million. The increase outside Spain was explained by changes in the scope of consolidated entities (€2,390 million), the weak macroeconomic environment (€1,453 million) and the impact of exchange rates (€894 million).

The increase in “Changes in the scope of consolidated entities” in 2009 compared to 2008 was mainly due to the following as explained in Note 1.h to our 2009 consolidated financial statements: Banco Real was fully consolidated in the Group’s consolidated financial statements since the fourth quarter of 2008; prior to then, it was accounted for using the equity method. Accordingly, 2008 charge-offs correspond to only three months, while the 2009 figure included a complete year. In addition, other significant acquisitions were carried out in the last months of 2008 (Alliance & Leicester) and in January of 2009 (Sovereign Bancorp).

Additionally, the deterioration of the macroeconomic environment during 2009 and the preceding two years caused an increase of impaired assets and, consequently, an increase of charge-offs. Market turmoil, economic recession and increasing unemployment coupled with declining consumer spending and declining values of asset collateral, especially in the United Kingdom, the United States and certain Latin American countries (as well as Spain) affected the financial conditions of our borrowers. That has, in turn, caused an increase in our non-performing ratios and, consequently, in an increase in charge-offs.

Impaired Balances Ratios

The following table shows the total amount of our computable credit risk, our non-performing assets and contingent liabilities by category, our allowances for credit losses, the ratio of our impaired balances to total computable credit risk and our coverage ratio at the dates indicated.


	IFRS
	At December 31,
	2010			2009			2008			2007			2006
	(in thousands of euros, except percentages)
Computable credit risk (1)		804,035,990			758,346,873			697,199,713			649,342,484			588,372,837

Non-performing balances by segments:
Individuals		15,605,820			14,589,806			10,113,539			4,774,589			3,707,554
Mortgages		6,303,854			6,110,013			3,238,670			1,584,517			1,230,406
Consumer loans		6,486,893			6,164,477			5,711,326			2,695,997			2,093,490
Credit cards and others		2,815,073			2,315,316			1,163,543			494,075			383,658
Enterprises		11,320,871			7,811,870			2,860,333			1,309,738			843,807
Corporate Banking		1,549,980			2,127,493			1,130,459			62,224			38,300
Public sector		45,695			24,455			86,481			32,105			17,886

Total non performing balances		28,522,366			24,553,624			14,190,812			6,178,656			4,607,547

Allowances for non-performing balances		20,747,651			18,497,070			12,862,981			9,302,230			8,626,937

Ratios
Non-performing balances to computable credit risk		3.55	%		3.24	%		2.04	%		0.95	%		0.78	%
Coverage ratio (2)		72.74	%		75.33	%		90.64	%		150.55	%		187.23	%
Balances charged-off to total loans and contingent liabilities		1.21	%		1.17	%		0.55	%		0.41	%		0.31	%


(1)		Computable credit risk is the sum of the face amounts of loans and leases (including non-performing assets but excluding country risk loans), guarantees and documentary credits.

(2)		Allowances for non-performing balances as a percentage of non-performing balances.

The ratio of non-performing balances to computable credit risk was 0.78%, 0.95%, 2.04%, 3.24% and 3.55% for the Group as a whole as of December 31, 2006, 2007, 2008, 2009 and 2010, respectively. The increase in 2010 was mainly due to the weak economic environment. We expect it will stabilize as highlighted by the recent quarterly trend of diminishing net additions to non-performing balances discussed above.

The non-performing balances ratio stood at 3.55% in December 2010, up 31 basis points in the year, reflecting a slowdown in the growth experienced by this ratio in recent years. Non-performing balances fell at Santander Consumer Finance, Santander Brazil and Sovereign, but increased in our businesses in Spain. In Spain, more than 80% of the portfolio (including mortgages and companies) had non-performing balance ratios of 3% or lower. Of note were home purchase mortgages -with a gross amount of €62 billion accounting for 26% of total lending in Spain- whose NPL ratio was 2.2% as compared to 2.5% in 2009. With respect to loans to the construction and real estate development sectors, the NPL ratio for loans not related to real estate was 4.4%, while that for loans with a real estate purpose (with a gross amount of €27 billion) was 17.0% confirming that the downturn experienced by this sector continued to persist in 2010. For more detailed information on credit risk, particularly real estate risk in Spain, please see Item 11. Quantitative And Qualitative Disclosures About Market Risk. Part 4. Credit Risk.

The increase in non-performing balances is also aggravated through the classification as non-performing of the entire outstanding principal amount and accrued interest on any loan on which any payment of principal, interest or agreed cost is 90 days or more past due. We refer to this effect as the “individual loan drag effect”. An additional impact occurs by the so-called “client drag effect”, through which Spanish banking groups classify as non-performing the aggregate risk exposure (including off-balance sheet risks) to a single obligor, whenever the amount of non-performing balances of such obligor exceeds 25% of its total outstanding risks (excluding non-accrued interest on loans to such borrower). Both drag effects have a larger impact in the case of mortgages and corporate loans due to the greater average amount of these loans.

The Group’s coverage ratio fell to 75% in December 2009, and further to 73% in December 2010. That decrease was lower than the fall from 2008 to 2009 (from 91% to 75%). This ratio is calculated as allowances for non-performing balances as a percentage of non-performing balances.

In 2009, the Group’s non-performing balances increased mainly due to (1) the rapid deterioration of the global macroeconomic environment and (2) the increase in the Bank’s scope of consolidation (due to the acquisitions of Alliance & Leicester, Sovereign, Banco Real, GE Money and RBS Europe). Other factors leading to the increase in the Group’s non-performing balances were the higher volumes of lending in recent years and the change of mix (principally in Latin America) toward more profitable but higher risk products. The principal geographic drivers of the increase in non-performing balances, other than through acquisitions, were Spain, the United Kingdom and Brazil.

We establish our expectations of credit loss (and our corresponding allowances) for our entire loan portfolio, not just for our non-performing balances. Our expectations of credit loss for our entire portfolio typically increase at a slower rate than the rate at which our non-performing balances increase, particularly during an economic downturn, when non-performing loans grow quickly but the performing loan portfolio grows at a slower pace and with lower-risk loans, reflecting caution due to macroeconomic conditions. As a result, the ratio of our non-performing balances to computable credit risk typically increases since the numerator (non-performing balances) increases faster than the denominator (computable credit risk). Similarly, our coverage ratio typically decreases since, for the reasons discussed above, the numerator (allowances for credit losses) does not increase as fast as the denominator (non-performing balances).

We are currently highly exposed to real estate markets, especially in Spain and the United Kingdom. Mortgage loans are one of our principal assets, comprising 51% of our loan portfolio as of December 31, 2010, and we are focused on first home mortgages. From 2002 to 2007, demand for housing and mortgage financing in Spain increased significantly driven by, among other things, economic growth, declining unemployment rates, demographic and social trends, and historically low interest rates in the Eurozone. The United Kingdom experienced a similar increase in housing and mortgage demand, driven by, among other things, economic growth, declining unemployment rates, demographic trends and the increasing prominence of London as an international financial center. In this favorable environment, we maintained prudent risk management with a mortgage portfolio focused on first homes with average loan to values in Spain and the United Kingdom of 50% and 51%, respectively, as of December 31, 2010. As a result of the general macroeconomic deterioration in the second half of 2008, a percentage of these assets became non-performing and, as a result of the quality of the collateral, the inexistence of both option adjustable rate mortgage (ARM) loans and of monthly payments below accrued interest, the requirements of allowances for these non-performing assets have remained low.

Our net impairment for credit losses was €10,266.9 million for 2010, a 7.4% or €821.1 million decrease from €11,088.0 million for 2009. This reduction was due to lower provisions in Latin America, which is beginning to benefit from the improvement in the economic cycle and the change in mix of products, and the good trend in the UK and Sovereign. Spain and Portugal, on the other hand, still required higher provisions in 2010 because of the increase in bad loans and the review carried out by the Bank of Spain of the references established in the Circular 4/2004 to determine the provisions for credit risk after taking into account the experience from recent years and the current economic situation.

Other Non-Accruing Balances

As described above under “—Bank of Spain Classification Requirements”, we do not classify our loans and contingent liabilities to borrowers in countries with transitory difficulties (category 3) and countries in serious difficulties (category 4) as impaired balances. Loans and contingent liabilities in these categories do not stop accruing interests. However, we treat category 5 (doubtful countries) country-risk outstandings as both a non-accruing and impaired balance.

IFRS-IASB

Year Ended December 31,

Summary of non-accrual balances

2010

2009

2008

2007

2006

(in millions of euros)

Balances classified as Non-Performing Balances

28,522.4

24,553.6

14,190.8

6,178.7

4,607.5

Non-Performing Balances due to country risk

7.9

7.8

2.6

6.7

83.0

Total non-accruing balances

28,530.3

24,561.4

14,193.4

6,185.4

4,690.5

As of December 31, 2006, 2007, 2008, 2009 and 2010, the amounts of refinanced loans were €403 million, €465.2 million, €648.7 million, €3,829 million, and €5,956 million, respectively. A definition of refinanced loans and a detailed explanation of the corporate policy of restructurings can be found under “Item 11. Quantitative and Qualitative Disclosures About Market Risk — Part 4. Credit risk — Credit exposure in Spain — Restructuring and Payment Agreements”. The strong increase in 2009 and 2010 was directly related to the increase in non-performing loans explained above.

Foreclosed Assets

The tables below set forth the movements in our foreclosed assets for the periods shown.


	IFRS-IASB
	Quarterly movements												Year Ended
	Mar. 31,			Jun. 30,			Sep. 30,			Dec. 31,			December 31,
	2010			2010			2010			2010			2010			2009			2008
	(in thousands of euros, except percentages)
Opening balance		2,715,874			3,043,490			3,395,469			3,780,483			2,715,874			1,309,989			494,567
Foreclosures		702,325			823,206			807,868			831,087			3,164,487			3,383,892			1,712,821
Sales		(374,709	)		(471,227	)		(422,853	)		(565,547	)		(1,834,338	)		(1,978,007	)		(897,399	)

Gross foreclosed assets		3,043,490			3,395,469			3,780,484			4,046,023			4,046,023			2,715,874			1,309,989
Allowances established		(832,299	)		(894,543	)		(991,686	)		(1,138,454	)		(1,138,454	)		(713,373	)		(169,030	)

Closing balance (net)		2,211,191			2,500,926			2,788,798			2,907,569			2,907,569			2,002,501			1,140,959
Allowance as a percentage of foreclosed assets		27.35	%		26.35	%		26.23	%		28.14	%		28.14	%		26.27	%		12.90	%

Additionally, the measures adopted in Spain to achieve more efficient risk management included the acquisition of real estate assets in payment of customer’s debts. At December 31, 2010, the net amount of properties acquired in Spain was €2,956 million (as compared to €2,936 million at 2009 year end). The allowance covering the value of these assets was approximately 31%.

Liabilities

Deposits

The principal components of our deposits are customer demand, time and notice deposits, and international and domestic interbank deposits. Our retail customers are the principal source of our demand, time and notice deposits. For an analysis, by domicile of customer, of average domestic and international deposits by type for 2007, 2008, 2009 and 2010 see “—Average Balance Sheets and Interest Rates—Liabilities and Interest Expense”.

We compete actively with other commercial banks and with savings banks for domestic deposits. Our share of customer deposits in the Spanish banking system (including Cajas de Ahorros) was 19.9% at December 31, 2010, according to figures published by the Spanish Banking Association (AEB) and the Confederación Española de Cajas de Ahorros (“CECA”). See “—Competition”.

The following tables analyze our year-end deposits.

Deposits (from central banks and credit institutions and customers) by type of deposit


	IFRS-IASB
	At December 31,
Deposits from central banks and credit institutions-	2010		2009		2008
	(in thousands of euros)
Reciprocal accounts		423,304		948,049		509,282
Time deposits		57,233,213		78,325,126		82,559,946
Other demand accounts		2,677,990		3,340,932		2,527,834
Repurchase agreements		78,196,555		56,818,092		41,651,446
Central bank credit account drawdowns		1,579,723		2,658,925		2,626,262
Other financial liabilities associated with transferred financial assets		—		—		—
Hybrid financial liabilities		1,400		463		2,600

Total		140,112,185		142,091,587		129,877,370
Customer deposits-
Demand deposits-
Current accounts		148,066,306		135,895,002		94,773,159
Savings accounts		136,693,907		127,940,647		115,673,794
Other demand deposits		3,430,804		3,570,326		3,035,757
Time deposits-
Fixed-term deposits		275,628,965		192,244,789		143,130,514
Home-purchase savings accounts		230,791		315,867		295,458
Discount deposits		448,432		448,432		11,625,840
Funds received under financial asset transfers		—		2		2
Hybrid financial liabilities		4,754,258		5,447,496		8,159,893
Other financial liabilities associated with transferred financial assets		—		—		—
Other time deposits		153,812		212,111		290,053
Notice deposits		1,316,203		2,208,116		1,764,954
Repurchase agreements		45,652,341		38,693,449		41,480,026

Total		616,375,819		506,976,237		420,229,450

Total deposits		756,488,004		649,067,824		550,106,820

Deposits (from central banks and credit institutions and customers) by location of office


	IFRS-IASB
	At December 31,
Deposits from central banks and credit institutions-	2010		2009		2008
	(in thousands of euros)
Due to credit institutions
Offices in Spain		43,998,347		68,500,717		61,175,697
Offices outside Spain:
Other EU countries		60,145,164		56,157,152		55,594,532
United States		11,529,173		1,002,056		722,833
Other OECD countries (1)		25,421		38,669		38,067
Central and South America (1)		24,414,050		16,371,115		12,291,897
Other		30		21,878		54,344
Total offices outside Spain		96,113,838		73,590,870		68,701,673

Total		140,112,185		142,091,587		129,877,370

Customer deposits
Offices in Spain		218,788,099		170,760,231		142,376,596
Offices outside Spain:
Other EU countries		230,929,334		199,169,106		170,778,310
United States		40,854,747		37,851,345		8,440,893
Other OECD countries (1)		997,944		1,101,108		470,721
Central and South America (1)		124,333,911		96,804,592		96,103,045
Other		471,784		1,289,855		2,059,885
Total offices outside Spain		397,587,720		336,216,006		277,852,854

Total		616,375,819		506,976,237		420,229,450


Total deposits		756,488,004		649,067,824		550,106,820


(1)		In this schedule Mexico is classified under “Central and South America”.

The following table shows the maturity of time deposits (excluding inter-bank deposits) in denominations of $100,000 or more for the year ended December 31, 2010. Large denomination customer deposits may be a less stable source of funds than demand and savings deposits.


			December 31, 2010
	Domestic		International		Total
	(in thousands of euros)

Under 3 months		20,769,469		23,479,730		44,249,199
3 to 6 months		12,676,183		17,929,400		30,605,583
6 to 12 months		3,966,096		24,089,811		28,055,907
Over 12 months		15,705,549		36,575,365		52,280,914

Total		53,117,297		102,074,306		155,191,603

The aggregate amount of deposits held by non-resident depositors (banks and customers) in our domestic branch network was €52.8 million, €87.1 million and €64.0 million, at December 31, 2008, 2009 and 2010, respectively.

Short-Term Borrowings


	IFRS-IASB
	At December 31,
	2010					2009					2008
			Average					Average					Average
Short-Term Borrowings	Amount		Rate			Amount		Rate			Amount		Rate
	(in thousands of euros, except percentages)
Securities sold under agreements to repurchase (principally Spanish
Treasury notes and bills):
At December 31		123,858,677		2.38	%		95,511,541		1.85	%		83,531,515		4.12	%
Average during year		98,170,699		3.01	%		90,542,348		2.24	%		84,194,507		3.78	%
Maximum month-end balance		123,858,677					101,311,947					99,067,534
Other short-term borrowings:
At December 31		6,871,187		4.48	%		28,678,183		3.75	%		41,759,661		4.89	%
Average during year		20,384,244		1.51	%		34,032,816		2.65	%		45,106,644		5.13	%
Maximum month-end balance		29,273,424					41,759,661					49,522,970

Total short-term borrowings at year-end		130,729,864		2.49	%		124,189,724		2.29	%		125,291,176		4.37	%

Competition

We face strong competition in all of our principal areas of operation from other banks, savings banks, credit co-operatives, brokerage services, on-line banks, insurance companies and other financial services firms.

Banks

Two Spanish banking groups dominate the retail banking sector in Spain. These two groups are headed by Banco Bilbao Vizcaya Argentaria, S.A. and Santander.

At the end of December 2010, these two Spanish banking groups accounted for approximately 59.7% of loans and 64.4% of deposits of all Spanish banks, which in turn represented 29.8% of loans and 30.9% of deposits of the financial system, according to figures published by the Spanish Banking Association (AEB) and the Confederación Española de Cajas de Ahorro (“CECA”).

Foreign banks also have a presence in the Spanish banking system as a result of liberalization measures adopted by the Bank of Spain in 1978. At December 31, 2010, there were 89 foreign banks (of which 81 were from European Union countries) with branches in Spain. In addition, there were 18 Spanish subsidiary banks of foreign banks (of which 15 were from European Union countries).

Spanish law provides that any financial institution organized and licensed in another Member State of the European Union may conduct business in Spain from an office outside Spain. They do not need prior authorization from the Spanish authorities to do so. Once the Bank of Spain receives notice from the institution’s home country supervisory authority about the institution’s proposed activities in Spain, the institution is automatically registered and the proposed activities are automatically authorized.

The opening of a branch of any financial institution authorized in another Member State of the European Union does not need prior authorization or specific allocation of resources. The opening is subject to the reception by the Bank of Spain of a notice from the institution’s home country supervisory authority containing, at least, the following information:

	•		Program of activities detailing the transactions to be made and the corporate structure of the branch;

	•		Address in Spain of the branch;

	•		Name and curriculum vitae of the branch’s managers;

	•		Shareholders’ equity and solvency ratio of the financial institution and its consolidated group; and

	•		Detailed information about any deposit guarantee scheme that assures the protection of the branch’s depositors.

Once the Bank of Spain receives the notice, it notifies the financial institution, thereby permitting the branch to be registered in the Mercantile Register and, then, in the Special Register of the Bank of Spain.

Spanish law requires prior approval by the Bank of Spain for a Spanish bank to acquire a significant interest in a bank organized outside the European Union, create a new bank outside the European Union or open a branch outside the European Union. Spanish banks must provide prior notice to the Bank of Spain to conduct any other business outside of Spain.

When a new bank is created by a Spanish bank outside of Spain, the following information has to be provided to the Bank of Spain:

	•		amount of the investment;

	•		percentage of the share capital and of the total voting rights;

	•		name of the companies through which the investment will be made;

	•		draft of the by-laws;

	•		program of activities, setting out the types of business envisaged, the administrative and accounting organization and the internal control procedures, including those established to prevent money laundering transactions;

	•		list of the persons who will be members of the first board of directors and of the senior management;

	•		list of partners with significant holdings, and

	•		detailed description of the banking, tax and anti-money laundering regulations of the country where it will be located.

The opening of branches outside Spain requires prior application to the Bank of Spain, including information about the country where the branch will be located, the address, program of activities and names and résumés of the branch’s managers. The opening of representative offices requires prior notice to the Bank of Spain detailing the activities to be performed.

In addition, we face strong competition outside Spain, particularly in Argentina, Brazil, Chile, Mexico, Portugal, the United Kingdom, Germany and the United States. In these corporate and institutional banking markets, we compete with the large domestic banks active in these markets and with the major international banks.

The global banking crisis has reduced the capacity of many institutions to lend and has resulted in the withdrawal or disappearance of a number of market participants and significant consolidation of competitors, particularly in the US and UK. Competition for retail deposits has intensified significantly reflecting the difficulties in the wholesale money markets.

In a number of these markets there are regulatory barriers to entry or expansion, and the state ownership of banks. Competition is generally intensifying as more players enter markets that are perceived to be de-regulating and offer significant growth potential.

Competition for corporate and institutional customers in the UK is from UK banks and from large foreign financial institutions that are also active and offer combined investment and commercial banking capabilities. Santander UK’s main competitors are established UK banks, building societies and insurance companies and other financial services providers (such as supermarket chains and large retailers).

In the UK credit card market large retailers and specialist card issuers, including major US operators, are active in addition to the UK banks. In addition to physical distribution channels, providers compete through direct marketing activity and the Internet.

In the United States, Sovereign competes in the Northeastern, New England and New York retail and mid-corporate banking markets with local and regional banks and other financial institutions. Sovereign also competes in the US in large corporate lending and specialized finance markets, and in fixed-income trading and sales. Competition is principally with the large US commercial and investment banks and international banks active in the US.

Savings Banks

Spanish savings banks (“Cajas de Ahorros”) are mutual organizations which engage in the same activities as banks, but primarily take deposits and make loans, principally to individual customers and small to medium-sized companies. The Spanish savings banks provide strong competition for the demand and savings deposits which form an important part of our deposit base. Spanish savings banks, which traditionally were regional institutions, are permitted to open branches and offices throughout Spain. In the last few years, mergers among savings banks increased. The Spanish savings banks’ share of domestic loans and deposits were 51.4% and 55.8%, at December 31, 2010.

The entry into force of Royal Decree-Law 2/2011, of February 18, designed to reinforce the Spanish financial system has opened up a new stage in the process of restructuring and strengthening the Spanish savings banks. The current focus is on recapitalizing institutions that need more capital and encouraging the savings banks to transfer their financial activity to a bank to ease their access to capital markets and wholesale funding. Within this framework of restructuring, since the middle of 2010 Spanish savings banks have been involved in 12 integration processes (7 mergers or takeovers and 5 institutional protection schemes), which have reduced the total number of savings banks from 45 to 17. As a result, the share of loans and deposits of savings banks is expected to decrease significantly during 2011.

Credit Co-operatives

Credit co-operatives are active principally in rural areas. They provide savings and loan services including financing of agricultural machinery and supplies. They are also a source of competition.

Brokerage Services

We face competition in our brokerage activities in Spain from brokerage houses of other financial institutions.

Spanish law provides that any investment services company authorized to operate in another Member State of the European Union may conduct business in Spain from an office outside Spain, once the National Securities Market Commission (Comisión Nacional del Mercado de Valores—“CNMV”) receives notice from the institution’s home country supervisory authority about the institution’s proposed activities in Spain.

Spanish law provides that credit entities have access, as members, to the Spanish stock exchanges, in accordance with the provisions established by the Investment Services Directive.

We also face strong competition in our mutual funds, pension funds and insurance activities from other banks, savings banks, insurance companies and other financial services firms.

On-line Banks and Insurance Companies

The entry of on-line banks into the Spanish banking system has increased competition, mainly in customer funds businesses such as deposits. Insurance companies and other financial service firms also compete for customer funds.

SUPERVISION AND REGULATION

Bank of Spain and the European Central Bank

The Bank of Spain, which operates as Spain’s autonomous central bank, supervises all Spanish financial institutions, including us. Until January 1, 1999, the Bank of Spain was also the entity responsible for implementing Spanish monetary policy. As of that date, the start of Stage III of the European Monetary Union, the European System of Central Banks and the European Central Bank became jointly responsible for Spain’s monetary policy. The European System of Central Banks consists of the national central banks of the twenty seven Member States belonging to the European Union, whether they have adopted the euro or not, and the European Central Bank. The “Eurosystem” is the term used to refer to the European Central Bank and the national central banks of the Member States which have adopted the euro. The European Central Bank is responsible for the monetary policy of the European Union. The Bank of Spain, as a member of the European System of Central Banks, takes part in the development of the European System of Central Banks’ powers including the design of the European Union’s monetary policy.

The European System of Central Banks is made up of three decision-making bodies:

• the Governing Council, comprised of the members of the Executive Board of the European Central Bank and the governors of the national central banks of the 17 Member States which have adopted the euro;

• the Executive Board, comprised of the president, vice-president and four other members; and

• the General Council of the European Central Bank, comprised of the president and vice-president of the European Central Bank and the governors of the national central banks of the 27 European Union Member States.

The Governing Council is the body in charge of formulating monetary policy for the euro area and adopting the guidelines and decisions necessary to perform the Euro system’s tasks. The Executive Board is the body in charge of implementing the monetary policy for the euro area laid out by the Governing Council and providing the instructions necessary to carry out monetary policy to the euro area’s national central banks.

The European Central Bank has delegated the authority to issue the euro to the central banks of each country participating in Stage III. These central banks are also in charge of executing the European Union’s monetary policy in their respective countries. The countries that have not adopted the euro will have a seat in the European System of Central Banks, but will not have a say in the monetary policy or instructions laid out by the governing council to the national central banks.

Since January 1, 1999, the Bank of Spain has performed the following basic functions attributed to the European System of Central Banks:

• executing the European Union monetary policy;

• conducting currency exchange operations consistent with the provisions of Article 109 of the Treaty on European Union, and holding and managing the States’ official currency reserves;

• promoting the sound working of payment systems in the euro area; and

• issuing legal tender bank notes.

Notwithstanding the European Monetary Union, the Bank of Spain continues to be responsible for:

• maintaining, administering and managing the foreign exchange and precious metal reserves;

• promoting the sound working and stability of the financial system and, without prejudice to the functions of the European System of Central Banks, of national payment systems;

• placing coins in circulation and the performance, on behalf of the State, of all such other functions entrusted to it in this connection;

• preparing and publishing statistics relating to its functions, and assisting the European Central Bank in the compilation of the necessary statistical information;

• rendering treasury services to the Spanish Treasury and to the regional governments, although the granting of loans or overdrafts in favor of the State, the regional governments or other bodies referred to in Article 104 of the European Union Treaty, is generally prohibited;

• rendering services related to public debt to the State and regional governments; and

• advising the Spanish Government and preparing the appropriate reports and studies.

The Bank of Spain has the following supervisory powers over Spanish banks, subject to applicable laws, rules and regulations issued by the Spanish Government and its Ministry of Economy and Finance:

• to conduct periodic inspections of Spanish banks to test compliance with current regulations concerning, among other matters, preparation of financial statements, account structure, credit policies and provisions and capital adequacy;

• to advise a bank’s board of directors and management when its dividend policy is deemed inconsistent with the bank’s financial results;

• to undertake extraordinary inspections of banks concerning any matters relating to their banking activities;

• to participate with, as the case may be, other authorities in appropriate cases in the imposition of penalties to banks for infringement or violation of applicable regulations; and

• to take control of credit entities and to replace directors of credit entities when a Spanish credit entity faces an exceptional situation that poses a risk to the financial status of the relevant entity.

Liquidity Ratio

European Central Bank regulations require credit institutions in each Member State that participates in the European Monetary Union, including us, to place a specific percentage of their “Qualifying Liabilities” with their respective central banks in the form of interest bearing deposits as specified below (the “Liquidity Ratio”).

The European Central Bank requires the maintenance of a minimum liquidity ratio by all credit institutions established in the Member States of the European Monetary Union. Branches located in the Eurozone of institutions not registered in this area are also subject to this ratio, while the branches located outside the Eurozone of institutions registered in the Eurozone are not subject to this ratio.

“Qualifying Liabilities” are broadly defined as deposits and debt securities issued. The Liquidity Ratio is 2% over Qualifying Liabilities except in relation to deposits with stated maturity greater than two years, deposits redeemable at notice after two years, repos and debt securities with a stated maturity greater than two years, for which the ratio is 0%.

Liabilities of institutions subject to the Liquidity Ratio and liabilities of the European Central Bank and national central banks of a participating Member State of the European Monetary Union are not included in the base of “Qualifying Liabilities”.

Investment Ratio

The Spanish Government has the power to require credit institutions to invest a portion of certain “Qualifying Liabilities” in certain kinds of public sector debt or public-interest financing (the “investment ratio”), and has exercised this power in the past. Although the investment ratio has been 0% since December 31, 1992, the law which authorizes it has not been abolished, and the Spanish Government could reimpose the ratio, subject to EU requirements.

Capital Adequacy Requirements

Spain forms part of the Basel Committee on Banking Regulations and Supervisory Practices. We calculate our capital requirements under this committee’s criteria. In June 2006 the European Union adopted a new regulatory framework (recast of Directives 2006/48/EC and 2006/49/EC) that promotes more risk sensitive approaches to the determination of minimum regulatory capital requirements in accordance with the New Basel Accord (“Basel II” or “BIS II”). The Royal Decree 216/2008 published on February 16, 2008, the Law 36/2007 amending Law 13/1985, and Bank of Spain Circular 3/2008 published on June 10, 2008, partially amended by Circular 9/2010, introduced these European Directives into the Spanish regulatory framework, and BIS II was incorporated into the Spanish regulations, following its adoption by the European Union.

The Spanish capital adequacy requirements distinguish between “basic” and “complementary” capital and require certain ratios of basic and total capital to risk-weighted assets. Basic capital generally includes ordinary shares, non-cumulative preferred securities and most reserves, less interim dividends, goodwill and intangible assets, treasury stock and financing for the acquisition (by persons other than the issuer’s employees) of the issuer’s shares. Complementary capital generally includes cumulative preferred securities, revaluation and similar reserves, dated and perpetual subordinated debt, general credit allowances and capital gains. The Group’s total capital is reduced by certain deductions that need to be made with respect to its investments in other financial institutions.

The computation of both basic and complementary capital is subject to provisions limiting the type of stockholding and the level of control which these stockholdings grant to a banking group. The level of dated subordinated debt taken into account for the calculation of complementary capital may not exceed 50% of basic capital, the level of non-cumulative preferred securities may not exceed 30% of basic capital, the level of step-up preferred securities may not exceed 15% of basic capital and the total amount of complementary capital admissible for computing total capital may not exceed the total amount of basic capital.

The consolidated total capital of a banking group calculated in the manner described above may not be less than 8% of the group’s risk-weighted assets net of specified provisions and amortizations.

As a result of the Basel capital accord issued by the Basel Committee (Basel II), we calculate our capital requirements based on the exposure to credit and counterparty risk, market risk and operational risk. Basel II allows two main methods to perform these calculations: standardized or advanced internal models.

The credit risk requirements calculated with standardized models are based on the risk weighted assets calculated on the basis of the quality of the Group’s assets, which mainly depend on their counterparties and guarantees, and the available external agency ratings for those counterparties. Moreover, we have been using, from the outset, advanced internal models to calculate the capital requirements for credit risk of the units with the largest credit risk exposure (the Parent bank and Banesto in Spain, Santander UK and Alliance & Leicester in the United Kingdom, and Santander Totta in Portugal), and plan to extend these models to our other main units in the next few years. The use of advanced internal models is subject to stringent internal validation and supervisory approval requirements. Internal validation and supervisory review and approval of the models are not confined to the quantitative model, but also encompass qualitative requirements relating to the technological environment and the integration of the models into management. In the case of the Group, this has entailed review and approval by the Bank of Spain, the FSA and the Bank of Portugal of several credit risk models applicable to the various business segments. In June 2008, Bank of Spain authorized the use of internal models to determine the regulatory capital requirements of the above mentioned Group’s main units beginning as of June 30, 2008, except for Santander Totta which was authorized in June 2009.

With regards to market risk, the use of internal models has been authorized by Bank of Spain for Madrid treasury trading and, in 2010, for our subsidiaries in Chile and Portugal, continuing with the progressive rollout of internal models within the Group.

Capital requirements for operational risk are currently calculated with standardized models, but with the intention to implement the Advanced Measurement Approach.

At December 31, 2010, our eligible capital exceeded the minimum required by the Bank of Spain by over €21.9 billion. Our Spanish subsidiary banks were, at December 31, 2010, each in compliance with these capital adequacy requirements, and all our foreign subsidiary banks were in compliance with their local regulations.

The calculation of the minimum capital requirements under the new regulations, referred to as Pillar I, is supplemented by an internal capital adequacy assessment process (“ICAAP”) and supervisory review, referred to as Pillar II. In the case of the Group, the ICAAP is based on an internal model which is used to quantify the economic capital required, given the Group’s global risk profile, to maintain a target AA rating. Lastly, Basel II regulations establish, through Pillar III, strict standards of transparency in the disclosure of risk information to the market.

Concentration of Risk

Spanish banks may not have exposure to a single person or group in excess of 25% (20% in the case of an affiliate) of the bank’s equity. Any exposure to a person or group exceeding 10% of a bank’s capital is deemed a concentration and the total amount of exposure represented by all of such concentrations must not exceed 800% of such capital (excluding exposures to the Spanish government, the Bank of Spain, the European Union and certain other exceptions).

Legal Reserve and Other Reserves

Spanish banks are subject to legal and other restricted reserves requirements. In addition, we must allocate profits to certain other reserves as described in Note 33 to our consolidated financial statements.

Allowances for Credit Losses and Country-Risk

For a discussion relating to allowances for credit losses and country-risk, see “—Classified Assets—Bank of Spain Classification Requirements”.

Employee Pension Plans

At December 31, 2010, our pension plans were all funded according to the criteria disclosed in Note 25 to our consolidated financial statements.

Restrictions on Dividends

We may only pay dividends (including interim dividends) if such payment is in compliance with the Bank of Spain’s minimum capital requirement (described under “—Capital Adequacy Requirements”) and other requirements or, as described below, under certain circumstances when we have capital that is 20% or less below the Bank of Spain’s minimum capital requirements.

If a banking group meets this capital requirement, it may dedicate all of its net profits to the payment of dividends, although in practice Spanish banks normally consult with the Bank of Spain before declaring a dividend. Even if a banking group meets the capital requirement as a group, any consolidated Spanish credit entity that is a subsidiary that does not meet the capital requirement on its own will be subject to the limitations on dividends described below. If a banking group or any Spanish credit entity subsidiary of the group has capital that is 20% or less below the Bank of Spain’s minimum capital requirement, it must devote an amount of net profits determined by the Bank of Spain to reserves, and dividends may be paid out of the remainder only with the prior approval of the Bank of Spain. If the capital is 20% or more, or its basic capital is 50% or more, below the minimum requirement, it may not pay any dividends and must allocate all profits to reserves unless otherwise authorized by the Bank of Spain. In the case of a banking group failing to meet the capital requirement, however, the Bank of Spain can authorize that the consolidated subsidiaries in the group pay dividends without restriction, so long as they are at least 50% owned by group companies and, if they are credit entities, independently comply with the capital requirement.

If a bank has no net profits, its board of directors may propose at the general meeting of shareholders that a dividend be declared out of retained earnings. However, once the board of directors has proposed the dividend to be paid, it must submit the proposal to the Minister of Economy and Finance who, in consultation with the Bank of Spain, may in his discretion authorize or reject the proposal of the board.

Compliance with such requirements notwithstanding, the Bank of Spain is empowered to advise a bank against the payment of dividends on solvency and soundness grounds. If such advice is not followed, the Bank of Spain may require that notice of such advice be included in the bank’s annual report registered before the Mercantile Register. In no event may dividends be paid from certain legal reserves.

Interim dividends of any given year may not exceed the net profits for the period from the closing of the previous fiscal year to the date on which interim dividends are declared. In addition, the Bank of Spain recommends that interim dividends not exceed an amount equal to one-half of all net income from the beginning of the corresponding fiscal year. Although banks are not legally required to seek prior approval from the Bank of Spain before declaring interim dividends, the Bank of Spain has asked that banks consult with it on a voluntary basis before declaring interim dividends.

Limitations On Types Of Business

Spanish banks generally are not subject to any prohibitions on the types of businesses that they may conduct, although they are subject to certain limitations on the types of businesses they may conduct directly.

The activities that credit institutions authorized in another Member State of the European Union may conduct and which benefit from the mutual recognition within the European Union are detailed in article 52 of Law 26/1988 (July 29, 1988).

Deposit Guarantee Fund

The Deposit Guarantee Fund on Credit Institutions (“Fondo de Garantía de Depósitos”, or the “FGD”), which operates under the guidance of the Bank of Spain, guarantees in the case of the Bank and our Spanish banking subsidiaries: (i) bank deposits up to €100,000 per depositor; and (ii) securities and financial instruments which have been assigned to a credit institution for its deposit, register or for other such services, up to €100,000 per investor. Pursuant to regulations affecting the FGD, the FGD may purchase non- performing loans or may acquire, recapitalize and sell banks which experience difficulties.

The FGD is funded by annual contributions from member banks. The amount of such bank’s contributions is currently 0.6 per thousand (0.4 per thousand for savings banks and 0.8 per thousand for credit cooperatives) of the year-end amount of deposits to which the guarantee extends. For that purpose, the calculation basis will take into consideration the bank deposits, plus 5% of the market quotation (or nominal value or redemption value in case the securities are not traded in any secondary market) of the guaranteed securities at the end of the financial year. Nevertheless, the Minister of Economy and Finance may reduce the member bank contributions once the capital of the FGD resources exceeds its requirements, and suspend further contributions when the FGD’s funds exceed the requirement by 1% or more of the calculation basis.

As of December 31, 2010, the Bank and its domestic bank subsidiaries were members of the FGD and thus were obligated to make annual contributions to it.

Data Protection

Law 15/1999, dated December 13, 1999, establishes the requirements relating to the treatment of customers’ personal data by credit entities. This law requires credit entities to notify the Spanish Data Protection Agency prior to creating files with a customer’s personal information. Furthermore, this law requires the credit entity to identify the persons who will be responsible for the files and the measures that will be taken to preserve the security of those files. The files must then be recorded in the Data Protection General Registry, once compliance with the relevant requirements has been confirmed. Credit entities that breach this law may be subject to claims by the interested parties before the Data Protection Agency. The Data Protection Agency, which has investigatory and sanctioning capabilities, is the Spanish Authority responsible for the control and supervision of the enforcement of this law.

Recent Legislation

Law 3/2009 of April 3 on structural modifications of commercial companies (Ley sobre modificaciones estructurales de las sociedades mercantiles), entails a profound reform of our legal system in various areas of corporate Law:

(i) cross-border mergers and international transfers of a corporation’s registered office are regulated;

(ii) rules applicable to corporate restructuring transactions of the different types of commercial companies are unified;

(iii) the quantitative limitations for the acquisition of treasury stock by public limited companies are extended (10% for listed companies and 20% for unlisted companies);

(iv) preemptive rights are abolished in the case of non-monetary contributions, preemptive rights of the holders of convertible debentures are eliminated, and the ability to exclude preemptive rights of the shareholders for the issuance of convertible debentures is expressly provided.

This law will enter into force within three months of the publication thereof in the Spanish Official Gazette, except for the provisions relating to intra-European Union cross-border mergers, which entered into force on the day following publication thereof.

Law 5/2009 of June 29 amending Securities Market Law 24/1988, of July 28, Law 26/1988 of July 26 on Discipline and Control of the Credit Institutions, and the Revised Private Insurance Regulation and Supervision Law, approved by Legislative Royal Decree 6/2004, of October 29, for the reform of the Regime on Significant Holdings in Investment Firms, Credit Institutions and Insurance Companies, which implements Directive 2007/44/EC of the European Parliament and of the Council, sets up the criteria and procedures used to assess the suitability of potential acquirers of qualifying holdings of credit institutions, investment firms and insurance companies.

Final provisions of the Law 5/2009 amend a wide and important range of Spanish laws which includes among others Law 35/2003 of November 4, on Collective Investment Schemes, Law 19/1992, of July 7, on the regime governing real estate investment companies and funds, mortgage securitization funds and the Spanish Corporations Law granting shareholders of listed companies, through a vote at the Annual Shareholder’s Meeting, the option of delegating to the Board of Directors the power of excluding the right of preemptive subscription in relation to convertible debenture issuances.

Law 11/2009 of October 26 regulating listed corporations investing in real estate (the so-called SOCIMIs), encourages investment in Spanish real estate during the economic recession by providing for specific tax advantages to companies meeting specific corporate, regulatory and tax requisites. Law 11/2009 also regulates income deriving from loans between related parties and clarifies the regime applicable for the offsetting of losses generated by companies within the same group at the level of the tax group when there are more than two levels of subsidiaries.

Law 16/2009 of November 13 on Payment Services, which transposes into Spanish law Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007, regulates the manner in which payment services are rendered in Spain, entities authorized to provide the aforementioned services, and the duties of users and providers of these services, focusing on the following areas:

(i) Definition of the payment services, within a both positive and negative scope, and the restricted entities authorized to render such services;

(ii) Regulation of Payment Institutions, which shall be subject to the supervision of the Bank of Spain;

(iii) Transparency and information requirements of the payment services providers; and

(iv) Rights and obligations in relation to the provision and use of the payment services of both the payments services providers and the payment services users.

Law 16/2009 also regulates the penalties to which the Payment Institutions shall be subject, which also can be extended to those legal or individuals who have a significant holding in these entities, as well as transitional provisions regarding certain contracts entered into by credit institutions and their customers and those contracts entered into by currency exchange institutions and their clients, both for the rendering of payment services.

Law 26/2009 of December 23 on the 2010 General State Budgets, which was published in the State’s Official Newsletter on December 24, 2009, introduces in a series of measures dealing with main aspects of the tax systems. The most significant of these are:

a) Individual Income Tax rates applicable to “savings income” (dividends, interest, net worth gains) are increased to 19% or 21%;

b) Corporate Income Tax rates of withholding and on account payment of Corporate Tax is increased to 19%, and for small- and medium-sized businesses that create or maintain employment, two levels of reduced rates (20% or25%) have been established;

c) starting on July 1, 2010, general and reduced rates of Value Added Tax (VAT) are respectively increased from 16% and 7% to 18% and 8%; and

d) with respect to the Non-Resident Income Tax, the rate applicable to savings income is currently 19%.

Law 2/2010 of March 1 transposes certain European Union Directives in the field of indirect taxation and amends the Non-residents Income Tax Law, mainly with respect to taxation of residents in the European Union.

Law 39/2010 of December 22 on the 2011 General State Budget has introduced some reforms in the tax system. The most significant changes are an increase in the maximum marginal rate from 43% to 45% in the Personal Income Tax and the establishment of additional limitations on the deduction for investment in housing, the elimination in the Corporate Income Tax of the deductibility of goodwill amortization in the acquisition of shares in companies resident in the European Union with effect from December 21, 2007, and the amendment of the applicable tax regime to capital reductions made by SICAVs.

Law 10/2010 of April 28 on prevention of money laundering and financing of terrorism, which transposes into Spanish Law Directive 2005/60/EC of the European Parliament and of the Council of October 26, 2005, repeals Law 19/1993 of December 28 on certain measures to prevent money laundering and amends Law 12/2003 of May 21 on prevention of financing of terrorism and Law 19/2003 of July 4 on the legal regime governing capital movements and cross-border transactions and on certain measures to prevent money laundering.

Royal Decree 712/2010 of May 28, 2010, on the legal regime governing payment services and payment institutions implements Law 16/2009 of November 13, 2009 on payment services and the general obligations in this area and Ministerial Order EHA/1608/2010 of June 14, 2010 on transparency in the terms of transactions and other information requirements applicable to payment services.

Royal Decree 749/2010 of June 7, which came into force on June 9, 2010, amended the implementation of Law 35/2003 of November 4, 2003, on Collective Investment Schemes approved by Royal Decree 1309/2005 of November 4, 2005, and other regulations in the tax field. The Royal Decree 749/2010 makes more flexible the legal regime governing exchange-traded funds and real estate collective investment schemes, introduces the concept of special-purpose collective investment schemes and implements amended regulations on non-resident income tax, corporate income tax and personal income tax, including an exemption from the obligation to made withholdings from or prepayments on account of income derived from the transfer or redemption of shares or equity holdings in exchange-traded funds or exchange-traded index open-end investment companies.

Law 12/2010 of June 30, amends Law 19/1988 of July 12 on auditing, Law 24/1988 of July 28 on the securities market and Royal Decree 1564/1989 of December 22 and revises the Corporations Act to adapt it to the European Directive 2006/43 EC. This law is aimed to modify certain aspects of previous regulations in order to adapt it to changes in business law and to include technical improvements recommended by the recent auditing experience and practice.

Legislative Royal Decree 1/2010 of July 2 enacted the consolidated text of the Capital Companies Law and came into force on September 1, 2010. The Capital Companies Law replaces Private Limited Companies Law 2/1995 of March 23, Legislative Royal Decree 1564/1989 of December 22 enacting the consolidated text of the Public Limited Companies Law, Title X of Securities Markets Law 24/1988 of July 28 on listed companies and Book II, Title I, Section 4 of the Commercial Code enacted by decree of August 22, 1985. This consolidated text contains the whole legislation which has been recast and came into force on September 1, 2010, except for its article 515 on clauses limiting voting rights which will apply from July 1, 2011.

Law 15/2010 of July 5 amending Law 3/2004 of December 29 on measures to avoid late payment in commercial transactions and Law 30/2007 of October 30 on public sector contracts, aims to foster competitiveness and achieve balanced growth of the Spanish economy, in line with a strategic view of a sustainable economy.

Royal Decree 1282/2010 of October 15 on the regulation of official secondary markets in futures, options and other financial derivatives, aims to improve competitiveness, and to reduce the systemic risk associated with the settlement and clearance of financial derivative contracts, and repeals the prior regulation seeking an increase in the number of products that can be traded and registered on these markets. This new regime also allows the governing company of the respective market to offer central counterparty services and establishes a new system for the contribution of guarantees by market members.

Organic Act 5/2010 of June 22 on reform of the Penal Code entered into force on December 23, 2010. The main reform introduced is that a legal entity is criminally liable: i) for crimes committed in the name or on behalf of the legal entity, and for the benefit thereof, by its legal and administrative representatives in fact or under law; and ii) for crimes committed in the conduct of corporate activities and on behalf and for the benefit thereof by those who, while subject to the authority of the legal and administrative representatives in fact or under law, have been able to perform such acts due to a failure to exercise due control over them, taking into account the specific circumstances of the case.

Law 6/2011 of April 11, modifying existing Law 13/1985 on preferred shares and debt instruments issued by credit entities and listed companies, introduces a number of changes to the requirements to be met by preferred shares in order to qualify as core capital of Spanish credit entities so as to meet the international standards for this type of hybrid instruments and enable them to secure the fulfillment of solvency requirements. This law mainly provides that no guarantee from the parent credit entity is required, that the preferred shares must be directly linked to the risk and financial situation of the parent company and that the existence of distributable reserves is now expressly stated as a condition for the payment of remuneration.

* * * * * *

In an attempt to deal with the international financial crisis, due to the exceptional circumstances notably beginning in the second half of 2008, the following laws were approved in Spain:

• Royal Decree 1642/2008 of December 10 increased consumer deposit and investment guarantees up to €100,000 for each depositor or investor and Spanish entity.

• Royal Decree-Law 6/2008 of October 10 creates the Spanish Financial Asset Acquisition Fund, and Order EHA/3118/2008, dated October 31, enacts this Royal Decree. The purpose of the fund, which is managed by Spain’s Ministry of Economy and Finance and has an initial endowment of €30 billion that can be increased to €50 billion, is to acquire, with public financing and based on market criteria via auctions, financial instruments issued by credit institutions and securitization funds (which are backed by loans granted to individuals, companies and non-financial entities) as a measure to increase liquidity.

• Royal Decree-Law 7/2008 of October 13 on Emergency Economic Measures in connection with the Concerted Euro Area Action Plan (“RD 7/2008”), and Order EHA/3364/2008, dated November 21, as amended by Order EHA/3748/2008 of December 23, enacting article 1 of the aforementioned Royal Decree, include the following measures:

• Article 1 of RD 7/2008, authorizes the granting of state guarantees for certain new financing transactions carried out by credit entities resident in Spain up to a maximum amount of €100 billion. The purpose of Order EHA/3364/2008, as amended by Order EHA/3748/2008 is to implement the provisions of RD 7/2008 and to specify certain essential aspects of the system for granting guarantees to credit entities, such as: (i) the characteristics of the guarantees to be granted; (ii) the requirements that the beneficiary entities and the transactions must fulfill; and (iii) the process to be followed in order to grant the guarantees. Debt issued under this state guarantee must form part of individual operations or issuance programs; not be subordinated or secured by any other class of guarantee; be traded on official Spanish secondary markets; mature within three months and three years (although this maturity can be extended to five years subject to prior notification to the Bank of Spain); be fixed or floating rate (subject to special conditions for floating-rate debt); be repaid in a single installment at maturity; not have any options or other derivatives attached to it; and, not be less than €10 million per issue. The deadline for issuing debt eligible for state guarantees was December 31, 2009 and the total amount of guarantees is €100 billion.

• Authorization, on an exceptional basis, until December 31, 2009, for the Spanish Ministry of Economy and Finance to acquire regulatory capital (including preferred securities and quotas) issued by credit entities resident in Spain that need to reinforce their capital and request such action. These acquisitions will require a report from the Bank of Spain.

• Royal Decree-law 3/2009, of March 27 on urgent measures for tax, financial and insolvency matters, amends the Spanish Insolvency Law (in force since 2004), and aims: (i) to facilitate restructuring outside insolvency proceedings for companies undergoing financial difficulties; (ii) to expedite insolvency proceedings for companies which either decide or are bound to restructure in an insolvency situation; and (iii) to settle certain discrepancies concerning credit subordinations. Additionally, it authorizes the Consorcio de Compensación de Seguros to participate in the reassurance of credit insurance transactions.

• Royal Decree- Law 9/2009 of June 26 on bank restructuring and credit institutions equity reinforcement, which also aims at maintaining confidence in the financial system and enhancing its strength and solvency so that the surviving institutions are sound and able to provide credit normally, proposes a bank restructuring model based on the three Credit Institution Deposit Guarantee Funds and the use of the “Fund for the Orderly Bank Restructuring”, which has three different stages: (i) the search of a private solution by the credit institution itself; (ii) the adoption of measures aimed at dealing with any weakness that affect the viability of credit institutions, with the participation of the Credit Institution Deposit Guarantee Funds and (iii) restructuring processes with the intervention of the Fund for Orderly Bank Restructuring.

This recapitalization scheme for credit institutions was approved by the European Commission until December 31, 2010, concluding the scheme is compatible with article 107.3.b of the Treaty on the Functioning of the European Union (TFEU).

• Royal Decree Law 6/2010 of April 9 and Royal Decree-Law 13/2010, of December 3, have introduced different measures with the aim of promoting economic recovery and employment. Among the tax measures included, the most significant ones are the expansion and extension of the accelerated depreciation of new assets, the expansion of the small-and medium-sized businesses tax regime, which includes a reduction of taxation for those companies, and the exemption from stamp tax of the incorporation of companies or contributions to them.

• Royal Decree 628/2010 of May 14, 2010, amending Royal Decree 2606/1996 of December 20, 1996 on credit institution deposit guarantee funds and Royal Decree 948/2001 of August 3, 2001, on investor compensation schemes. The Royal Decree 628/2010, which was enacted in order to complete the transposition of Directive 2009/14/EC of the European Parliament and of the Council of March 11, 2009, came into force on June 4, 2010, and introduces a series of reforms in the regulation of deposit guarantee schemes, such as the obligation of credit institutions to inform depositors of the coverage of their deposits by foreign or domestic schemes and the reduction to five days of the time period for the Bank of Spain to check that a credit institution is unable to repay deposits which are due and payable.

• Royal Decree-Law 11/2010 of July 9 on governing bodies and other aspects of the legal regime of savings banks amending Law 13/1985 of May 25 on the investment ratios, ownership of funds and reporting obligations of financial intermediaries in respect of equity units and Law 31/1985 of August 2 on regulation of the basic rules on governing bodies of savings banks, is intended to improve savings banks’ possibilities of raising capital by reforming the legal regime for equity units, to promote the professionalization of their governing bodies, adapt certain aspects of institutional protection schemes formed by savings banks and design a new organizational model of savings banks financial activity. This Royal Decree also modifies some aspects of the Royal Decree-Law 9/2009 on bank restructuring and credit institution equity strengthening.

• On February 15, 2011, the Spanish Parliament approved the Law 2/2011 on sustainable economy, which is aimed to promote the sustainability of the Spanish economy and to improve the competitiveness of the Spanish economic model by eliminating administrative and tributary burdens through a series of reforms that affect the central areas of the model.

• Royal Decree-Law 2/2011 of February 18 on the strengthening of the banking system, which came into force on February 20, 2011, is aimed to dissipate the fears that have arisen regarding the capacity of the Spanish banking system to absorb the potential losses associated with the deterioration of assets and proposes to strengthen the solvency of Spanish banking entities and to accelerate the restructuring process of the Spanish savings banks. The Royal Decree provides incentives for institutions to raise private capital to boost their solvency, which can be done through direct funds from third parties, public issuances or a combination of both.

United Kingdom Regulation

FSA

Both Santander UK and our London branch are regulated by the Financial Services Authority (“FSA”). The FSA is the single statutory regulator responsible for regulating deposit taking, mortgages, insurance and investment business pursuant to the Financial Services and Markets Act 2000 (“FSMA”). It is a criminal offense for any person to carry on any of the activities regulated under the FSMA in the United Kingdom by way of business unless that person is authorized by the FSA or falls under an exemption.

The FSA has authorized Santander UK, as well as some of its subsidiaries, to carry on certain regulated activities. The regulated activities they are authorized to engage in depend upon permissions granted by the FSA. The main permitted activities of Santander UK and its authorized subsidiaries are described below.

Mortgages

Lending secured on land, at least 40% of which is used as a dwelling by an individual borrower or relative, has been regulated by the FSA since October 31, 2004. Santander UK is authorized to enter into, advise and arrange regulated mortgage contracts.

Banking

Deposit taking is a regulated activity that requires a firm to be authorized and supervised by the FSA. Santander UK has permission to carry on deposit taking as do several of its subsidiaries, including Abbey National Treasury Services plc and Cater Allen Limited.

Insurance

United Kingdom banking groups may provide insurance services through other group companies. Insurance business in the United Kingdom is divided between two main categories: Long-term Assurance (such as whole of life, endowments, life insurance investment bonds) and General Insurance (such as buildings and contents coverage, annually renewable life, health and travel protection coverage and motor insurance).

Under the FSMA, effecting or carrying out any contract of insurance, whether general or long-term, is a regulated activity requiring authorization. Life insurance mediation has been subject to regulation for many years. General insurance mediation has been subject to regulation by the FSA since January 14, 2005.

Santander UK is authorized by the FSA to sell both Long-term Assurance and General Insurance and receives commissions for the policies arranged.

Investment business

Investment business such as dealing in, arranging deals in, managing and giving investment advice in respect of most types of securities and other investments, including options, futures and contracts for differences (which would include interest rate and currency swaps) and long-term assurance contracts are all regulated activities under the FSMA and require authorization by the FSA.

Santander UK and some of its subsidiaries have permission to engage in a wide range of wholesale and retail investment businesses including selling investment-backed life assurance and pension products, unit trust products and individual savings accounts (tax exempt saving products) and providing certain retail equity products and services.

New regulatory structure

The UK Government has announced a new regulatory framework which will take effect in 2012. The UK Financial Services Authority will be replaced by two regulatory bodies, the Prudential Regulatory Authority, which will have responsibility for the capital and liquidity of banks and insurance companies, and the Financial Conduct Authority, which will supervise conduct of business and maintain orderly financial markets. The UK Financial Services Authority has commenced transition to the new structure on April 4, 2011.

United States Supervision and Regulation

Our operations are subject to extensive federal and state banking and securities regulation and supervision in the United States. We engage in U.S. banking activities directly through our New York branch and indirectly through Banesto’s branch in New York, Santander UK’s branch in Connecticut, our subsidiary Edge Act corporation, Banco Santander International, in Miami, Banco Santander Puerto Rico (“Santander Puerto Rico”) in Puerto Rico, Sovereign Bank, a federally-chartered savings bank that is headquartered in Pennsylvania and has branches in various states and Santander Consumer USA, one of the leading auto financing companies in the subprime customer segment in the U.S.

Regulatory Authorities

We are a bank holding company under the U.S. Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), by virtue of our ownership of Santander Puerto Rico. As a result, we and our U.S. operations are subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

Santander Puerto Rico is a Puerto Rico-chartered bank, and its deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”). As such, Santander Puerto Rico is subject to regulation, supervision and examination by the Puerto Rico Bureau of Financial Institutions and the FDIC. Sovereign Bank is a federally-chartered savings bank, the deposits of which are also insured by the FDIC. Sovereign Bank is subject to regulation, supervision and examination by the Office of Thrift Supervision and the FDIC. Our New York branch is supervised by the Federal Reserve Board and the New York State Banking Department, but its deposits are not insured (or eligible to be insured) by the FDIC. Banesto’s branch in New York is supervised by the Federal Reserve Board and the New York State Banking Department. Santander UK’s branch in Connecticut is supervised by the Federal Reserve Board and the Connecticut Department of Banking. Banco Santander International is supervised by the Federal Reserve Board.

Restrictions on Activities

As described below, federal and state banking laws and regulations restrict our ability to engage, directly or indirectly through subsidiaries, in activities in the United States.

We are required to obtain the prior approval of the Federal Reserve Board before directly or indirectly acquiring the ownership or control of more than 5% of any class of voting shares of U.S. banks, certain other depository institutions, and bank or depository institution holding companies. Under the Bank Holding Company Act Federal Reserve Board regulations and the Home Owner’s Loan Act, our U.S. banking operations (including our New York branch and Santander Puerto Rico) are also restricted from engaging in certain “tying” arrangements involving products and services.

Santander Puerto Rico and Sovereign Bank are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be made and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of these subsidiaries.

The Gramm-Leach Bliley Act of 1999 (the “GLB Act”) and Federal Reserve Board regulations contain provisions that could affect our operations and the operations of all financial institutions. One of these provisions requires our depository institution subsidiaries to disclose our privacy policy to consumers and to offer them the ability to opt out of having their non-public information disclosed to third parties. In addition, individual states are permitted to adopt more extensive privacy protections through legislation or regulation. In addition, the so-called “push-out” provisions of the GLB Act narrow the exclusion of banks (including U.S. branches of foreign banks, such as our New York branch) from the definitions of “broker” and “dealer” under the Securities Exchange Act of 1934.

In addition, under U.S. federal banking laws, state-chartered banks (such as Santander Puerto Rico) and state-licensed branches and agencies of foreign banks (such as our New York branch) may not, as a general matter, engage as a principal in any type of activity not permissible for their federally chartered or licensed counterparts, unless (i) in the case of state-chartered banks (such as Santander Puerto Rico), the FDIC determines that the additional activity would pose no significant risk to the FDIC’s Deposit Insurance Fund and is consistent with sound banking practices, and (ii) in the case of state licensed branches and agencies (such as our New York branch), the Federal Reserve Board determines that the additional activity is consistent with sound banking practices. United States federal banking laws also subject state branches and agencies to the same single-borrower lending limits that apply to federal branches or agencies, which are substantially similar to the lending limits applicable to national banks. These single-borrower lending limits are based on the worldwide capital of the entire foreign bank (i.e., Banco Santander, S.A. in the case of our New York branch).

Under the International Banking Act of 1978, as amended, the Federal Reserve Board may terminate the activities of any U.S. office of a foreign bank if it determines that the foreign bank is not subject to comprehensive supervision on a consolidated basis in its home country (unless the home country is making demonstrable progress toward establishing such supervision), or that there is reasonable cause to believe that such foreign bank or its affiliate has violated the law or engaged in an unsafe or unsound banking practice in the United States and, as a result of such violation or practice, the continued operation of the U.S. office would be inconsistent with the public interest or with the purposes of federal banking laws.

There are various legal restrictions on the extent to which we and our nonbank subsidiaries can borrow or otherwise obtain credit from our U.S. banking subsidiaries or engage in certain other transactions involving those subsidiaries. In general, these transactions must be on terms that would ordinarily be offered to unaffiliated entities and must be secured by designated amounts of specified collateral. In addition, certain transactions, such as certain extensions of credit by a U.S. bank subsidiary to, or purchases of assets by such a subsidiary from, us or our nonbank subsidiaries are subject to volume limitations. These restrictions also apply to certain transactions of our New York Branch with certain of our U.S. affiliates.

Our New York Branch

Our New York branch is licensed by the New York Superintendent of Banks to conduct a commercial banking business. Its activity is mainly focused on wholesale and investment banking, providing a full range of lending, investment banking, transactional banking and brokerage services to corporate and institutional investors. Under the New York State Banking Law and regulations, our New York branch is required to maintain eligible high-quality assets with banks in the State of New York, as security for the protection of depositors and certain other creditors.

The New York State Banking Law also empowers the Superintendent of Banks to establish asset maintenance requirements for branches of foreign banks, expressed as a percentage of each branch’s liabilities. The presently designated percentage is 0%, although the Superintendent may impose additional asset maintenance requirements upon individual branches on a case-by-case basis. No such requirement has been imposed upon our New York branch.

The New York State Banking Law authorizes the Superintendent of Banks to take possession of the business and property of a New York branch of a foreign bank under circumstances involving violation of law, conduct of business in an unsafe manner, impairment of capital, suspension of payment of obligations, or initiation of liquidation proceedings against the foreign bank at its domicile or elsewhere. In liquidating or dealing with a branch’s business after taking possession of a branch, only the claims of creditors which arose out of transactions with a branch are to be accepted by the Superintendent of Banks for payment out of the business and property of the foreign bank in the State of New York, without prejudice to the rights of the holders of such claims to be satisfied out of other assets of the foreign bank. After such claims are paid, the Superintendent of Banks will turn over the remaining assets, if any, to the foreign bank or its duly appointed liquidator or receiver.

Under the New York State Banking Law, our New York branch is generally subject to the same limits on lending to a single borrower, expressed as a ratio of capital, that apply to a New York state-chartered bank, except that for our New York branch such limits are based on our worldwide capital. The address and telephone number of our contact person at our New York branch is Banco Santander, S.A., New York Branch, 45 E. 53rd Street, New York, New York 10022, (212) 350-3500, attention: James H. Bathon, Chief Legal Officer.

Our U.S. Depository Institution Subsidiaries

The Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”) provides for extensive regulation of depository institutions (such as Santander Puerto Rico and Sovereign Bank), including requiring federal banking regulators to take “prompt corrective action” with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. For this purpose, FDICIA establishes five tiers of institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” As an insured depository institution’s capital level declines and the depository institution falls into lower categories (or if it is placed in a lower category by the discretionary action of its supervisor), greater limits are placed on its activities and federal banking regulators are authorized (and, in many cases, required) to take increasingly more stringent supervisory actions, which could ultimately include the appointment of a conservator or receiver for the depository institution (even if it is solvent). In addition, FDICIA generally prohibits an FDIC-insured bank from making any capital distribution (including payment of a dividend) or payment of a management fee to its holding company if the bank would thereafter be undercapitalized. If an insured depository institution becomes “undercapitalized,” it is required to submit to federal regulators a capital restoration plan guaranteed by the depository institution’s holding company. The guarantee is limited to 5% of the depository institution’s assets at the time it becomes undercapitalized or, should the undercapitalized depository institution fail to comply with the plan, the amount of the capital deficiency at the time of failure, whichever is less. If an undercapitalized depository institution fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.” Significantly undercapitalized depository institutions may be subject to a number of restrictions, including requirements to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and restrictions on accepting deposits from correspondent banks. “Critically undercapitalized” depository institutions are subject to appointment of a receiver or conservator.

Monetary Policy and Exchange Controls

The decisions of the European System of Central Banks influence conditions in the money and credit markets, thereby affecting interest rates, the growth in lending, the distribution of lending among various industry sectors and the growth of deposits. Monetary policy has had a significant effect on the operations and profitability of Spanish banks in the past and this effect is expected to continue in the future. Similarly, the monetary policies of governments in other countries in which we have operations, particularly in Latin America, the United States and the United Kingdom, affect our operations and profitability in those countries. We cannot predict the effect which any changes in such policies may have upon our operations in the future, but we do not expect it to be material.

The European Monetary Union has had a significant effect upon foreign exchange and bond markets and has involved modification of the internal operations and systems of banks and of inter-bank payments systems. Since January 1, 1999, the start of Stage III, see “—Supervision and Regulation—Bank of Spain and the European Central Bank,” Spanish monetary policy has been affected in several ways. The euro has become the national currency of the fifteen participating countries and the exchange rates between the currencies of these countries were fixed to the euro. Additionally, the European System of Central Banks became the entity in charge of the European Union’s monetary policy.

C. Organizational structure.

Banco Santander, S.A. is the parent company of the Group which was comprised at December 31, 2010 of 780 companies that consolidate by the global integration method. In addition, there are 139 companies that are accounted for by the equity method.

See Exhibits I, II and III to our consolidated financial statements included in this Form 20-F for details of our consolidated and non-consolidated companies.

D. Property, plant and equipment.

During 2010, the Bank and its banking subsidiaries either leased or owned premises in Spain and abroad, which at December 31, 2010 included 4,848 branch offices in Spain and 9,234 abroad. These figures include traditional branches and banking services points but do not include electronic service points. See Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations and Recent events” and Note 16 to our consolidated financial statements.

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

Critical Accounting Policies

The preparation of the Group’s consolidated financial statements requires a significant amount of judgment involving estimates and assumptions which can be inherently uncertain at the time they are made (see Note 1-c to our consolidated financial statements). Changes in assumptions may have a significant impact on the financial statements in the periods in which they are changed. Judgments or changes in assumptions are submitted to the audit and compliance committee of the board of directors and/or to our regulatory authorities and are disclosed in the notes to our consolidated financial statements.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates if assumptions and conditions change.

We believe that of our significant accounting policies, the following may involve a high degree of judgment:

Fair value of financial instruments

Trading assets or liabilities, financial instruments that are classified at fair value through profit or loss, available for sale securities, and all derivatives are recorded at fair value on the balance sheet. The fair value of a financial instrument is the value at which it could be bought or sold in a current transaction between willing parties. If a quoted price in an active market is available for an instrument, the fair value is calculated based on that price.

If there is no market price available for a financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving the same or similar instruments and, in the absence thereof, on the basis of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.

We use derivative financial instruments for both trading and non-trading activities. The principal types of derivatives used are interest rate swaps, future rate agreements, interest rate options and futures, foreign exchange forwards, foreign exchange futures, foreign exchange options, foreign exchange swaps, cross currency swaps, equity index futures and equity options. The fair value of standard derivatives is calculated based on published price quotations. The fair value of over-the-counter (“OTC”) derivatives is taken to be the sum of the expected future cash flows arising from the instrument, discounted to present value at the date of measurement (“present value” or “theoretical close”) using valuation techniques commonly used by the financial markets as follows:

•

In the valuation of financial instruments permitting static hedging (basically forwards and swaps) and in the valuation of loans and advances to customers classified as Other financial assets at fair value through profit or loss, the present value method is used. Estimated future cash flows are discounted using the yield curves of the related currencies. The yield curves are generally observable market data.

•

In the valuation of financial instruments requiring dynamic hedging (basically structured options and other structured instruments), the Black-Scholes model is normally used; for more complex instruments, the Dupire (local volatility) and Heston (stochastic volatility) models are used. Where appropriate, observable market inputs are used to obtain factors such as the bid-offer spread, exchange rates, volatility, correlation between indices and market liquidity. In certain very specific cases, unobservable market inputs can be used, such as the volatility of the UK Halifax House Price Index (HPI), the estimated future HPI growth, the HPI spot rate, and mortality.

•

In the valuation of certain financial instruments exposed to interest rate risk, such as interest rate futures, caps and floors, the present value method (futures) and the Black-Scholes model (plain vanilla options) are used; in the case of more structured instruments requiring dynamic hedging, the Heath-Jarrow-Morton and Hull-White models, and the Markov Functional Model are used. The main inputs used in these models are basically observable market data, including the related yield curves, volatilities, correlations and exchange rates. In certain very specific cases, unobservable market inputs can be used, such as the volatility of the UK Halifax House Price Index (HPI), the estimated future HPI growth, the HPI spot rate, mortality, and the credit spread for the specific financial Instrument.

•

In the case of linear instruments (e.g. credit risk and fixed-income derivatives), credit risk is measured using dynamic models similar to those used in the measurement of interest rate risk. In the case of non-linear instruments, if the portfolio is exposed to credit risk (e.g. credit derivatives), the joint probability of default is determined using the Standard Gaussian Copula model. The main inputs used to determine the underlying cost of credit of credit derivatives are quoted credit risk premiums and the correlation between the quoted credit derivatives of various issuers.

The determination of fair value requires the use of estimates and certain assumptions. If quoted market prices are not available, fair value is calculated using widely accepted pricing models that consider contractual prices of the underlying financial instruments, yield curves, contract terms, observable market data, and other relevant factors. The use of different estimates or assumptions in these pricing models could lead to a different valuation being recorded in our consolidated financial statements.

In Note 2. d) iii. to our consolidated financial statements additional information can be found regarding valuation techniques used by the Group, along with details of the principal assumptions and estimates used in these models and the sensitivity of the valuation of financial instruments to changes in the principal assumptions used.

Allowance for credit losses

Financial assets accounted for at amortized cost and contingent liabilities are assessed for objective evidence of impairment and any resulting allowances for credit losses are recognized and measured in accordance with IAS 39. Credit losses exist if the carrying amount of an asset or claim or a portfolio of assets or claims exceeds the present value of the estimated future cash flows.

Credit losses on these impaired assets and contingent liabilities are assessed as follows:

•

Individually, for all significant debt instruments and for instruments which, although not material, are not susceptible to being classified in homogeneous groups of instruments with similar risk characteristics: instrument type, debtor’s industry and geographical location, type of guarantee or collateral, and age of past-due amounts, taking into account: (i) the present value of future cash flows, discounted at an appropriate discount rate; (ii) the debtor’s financial situation; and (iii) any guarantees in place.

•

Collectively, in all other cases, we group transactions on the basis of the nature of the obligors, the conditions of the countries in which they reside, transaction status, type of collateral or guarantee, and age of past-due amounts. For each group, we establish the appropriate impairment losses (“identified losses”) that must be recognized.

Additionally, we recognize an impairment allowance for credit losses when it is probable that a loss has been incurred, taking into account the historical loss experience and other circumstances known at the time of assessment. For this type of allowance, credit losses are losses incurred at the reporting date, calculated using statistical methods, that have not yet been allocated to specific transactions.

We have implemented a methodology which complies with IFRS-IASB and is consistent with the Bank of Spain requirements for the determination of the level of provisions required to cover inherent losses. This methodology initially classifies portfolios considered normal risk (debt instruments not classified at fair value through profit or loss, contingent risks and contingent commitments) into the following groups, according to the associated level of risk:

	(i)		No appreciable risk.

	(ii)		Low risk.

	(iii)		Medium-low risk.

	(iv)		Medium risk.

	(v)		Medium-high risk.

	(vi)		High risk.

Once these portfolios have been classified, the Bank of Spain, based on experience and information available to it with respect to the Spanish banking sector, has determined the methodology and parameters that entities should apply in the calculation of the provisions for inherent losses in debt instruments and contingent risks and commitments classified as normal risk.

The calculation establishes that the charge for inherent losses to be made in each period will be equal to: (i) the sum of multiplying the value, positive or negative, of the variation in the period of the balance of each class of risk by the constant α corresponding to that class, plus (ii) the sum of multiplying the total amount of the operations included in each class at the end of the period by the relevant β, minus (iii) the amount of the net charge for the specific allowance made in the period.

The parameters α and β as determined by the Bank of Spain’s guidance take into account historic inherent losses and adjustments to reflect the current economic circumstances.

The allowances for impaired balances recorded by Grupo Santander as at December 31, 2010, using the methodology outlined above, was €20,748 million.

Additionally, with the objective of ensuring that the provisions resulting from the application of the criteria required by the Bank of Spain are reasonable, we estimate the allowances for credit losses using models based on its own credit loss experience and management’s estimate of future credit losses. We have developed internal risk models, based on historical information available for each country and type of risk (homogenous portfolios); a full description of our credit risk management system is included in Item 11. Quantitative and Qualitative Disclosures about Market Risk Part 4. Credit Risk. These models produce a result that is substantially the same as the level of provisions at which we arrive using the model established by the Bank of Spain, as explained below. These internal models may be applied in future periods, and although approved for regulatory capital calculations, they are currently subject to local regulatory approval by the Bank of Spain for purposes of loan loss provisions. In order for each internal model to be considered valid by the local regulator for use, the calculation should be methodologically correct, and be supported by historical information which covers at least one complete economic cycle and is stored in databases which are consistent with information that has been audited by both the group internal auditing function and external auditors.

Since 1993, we have employed our own models for assigning solvency and internal ratings, which aim to measure the degree of risk associated with a client or transaction. Each rating corresponds to a certain probability of default or non-payment, based on the Group’s past experience. The development of the internal models has led to the introduction of databases that can be used to estimate the risk parameters required in the calculation of capital and expected loss, following market best practices and the guidelines of the New Capital Accord (Basel II).

There is no substantial difference in the calculation of loan allowances between the EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and IFRS-IASB.

The estimates of a portfolio’s inherent risks and overall recovery vary with changes in the economy, individual industries, countries and individual borrowers’ or counterparties’ ability and willingness to repay their obligations. The degree to which any particular assumption affects the allowance for credit losses depends on the severity of the change and its relationship to the other assumptions.

Key judgments used in determining the allowance for loan losses include: (i) risk ratings for pools of commercial loans and leases, (ii) market and collateral values and discount rates for individually evaluated loans, (iii) product type classifications for consumer and commercial loans and leases, (iv) loss rates used for consumer and commercial loans and leases, (v) adjustments made for current events and conditions, (vi) domestic, global and individual countries economic uncertainty, and (vii) overall credit conditions.

Credit losses are generally recognized through allowances for credit losses. As a result of certain unusual circumstances (for example, bankruptcy or insolvency), the loss can be directly recognized through write-offs.

Specific allowances for credit losses come from the impairment process. Loans are identified as impaired and income no longer accrued when it is determined that collection of interest or principal is doubtful or when the interest or principal has been past due for 90 days or more, unless the loan is well secured and in the process of collection.

Globally managed clients, corporate, sovereign and other loans with significant balances are individually assessed based on the borrower’s overall financial condition, resources, guarantees and payment record. An impairment loss is recognized when there are doubts about collection, or when interest or principal is past due for 90 days or more.

Consumer mortgage, installment, revolving credit and other consumer loans are evaluated collectively, and an impairment loss is recognized when interest or principal is past due for 90 days or more.

According to Bank of Spain’s requirements, non-performing loans must be fully provisioned (hence all the credit loss recognized) when they are more than 12 months overdue.

When a loan is deemed partially uncollectible, a provision is recorded (charged against earnings) as opposed to a partial write-off (removal from the balance sheet), since a partial write-off of the loan is not permitted by the Bank of Spain. If a loan becomes entirely uncollectible, the provision is increased to 100% of the loan balance. Accordingly, we recognize a credit loss on any loan at the time it is deemed to be impaired.

The credit loss recognition process is independent of the process for the removal of impaired loans from the balance sheet. The entire loan balance is kept on the balance sheet until any portion of it has been classified as non-performing for 4 years, (the maximum period established in the Bank of Spain regulations), depending on management’s view as to the recoverability of the loan. After that period the loan balance and its specific allowance are removed from the balance sheet and recorded in off-balance sheet accounts, with no resulting impact on net income attributable to the Group.

An additional allowance for credit losses attributed to the remaining portfolio is established via a process that considers the potential loss inherent in the portfolio. Also, an allowance is recorded for those exposures where the sovereign risk, transfer risk and risks arising from international financial activity add some doubts as to the collection of debts (the country-risk allowance).

Impairment

Certain assets, including goodwill, other intangible assets, equity method investments, financial assets not carried at fair value through profit or loss and other assets are subject to impairment review. We record impairment charges when we believe there is objective evidence of impairment, or that the cost of the assets may not be recoverable. Assessment of what constitutes impairment is a matter of significant judgment.

Goodwill and other intangible assets are tested for impairment on an annual basis, or more frequently if events or changes in circumstances, such as an adverse change in business climate or observable market data, indicate that these assets may be impaired. An impairment loss recognized for goodwill may not be reversed in a subsequent period. The fair value determination used in the impairment assessment requires estimates based on quoted market prices, prices of comparable businesses, present value or other valuation techniques, or a combination thereof, requiring management to make subjective judgments and assumptions. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions.

In relation to goodwill, the first step of the impairment review process requires the identification of cash-generating units (“CGU”). These are the smallest identifiable group of assets that, as a result of continuing operations, generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill is then allocated to these CGUs; this allocation is reviewed following a business reorganization. The carrying value of the CGU, including the allocated goodwill, is compared to its fair value to determine whether an impairment exists. To calculate these fair values, management may use quoted prices, if available, appraisals made by independent external experts or internal estimations. Assumptions about expected future cash flows require management to make estimations and judgments. For this purpose, management analyzes the following: (i) certain macroeconomic variables that might affect its investments (including population data, the political and economic environment, as well as the banking system’s penetration level); (ii) various microeconomic variables comparing our investments with the financial industry of the country in which we carry on most of our business activities (breakdown of the balance sheet, total funds under management, results, efficiency ratio, capital ratio and return on equity, among others); and (iii) the price earnings (“P/E”) ratio of the investments as compared with the P/E ratio of the stock market in the country in which the investments are located and those of comparable local financial institutions.

To supplement this, the Group performs estimates of the recoverable amounts of certain cash generating units using discounted cash flow projections. In order to perform this calculation, the Group uses projections based on the five-year financial budgets approved by the directors and discounts them using rates in line with the market and the business in which the units operate. The cash flows bayond the time horizon are extrapolated using a constant growth rate. This growth rate does not exceed the average long-term growth rate for the market in which the cash-generating unit in question operates. The directors consider that any reasonably possible change in the key assumptions on which the recoverable amounts of the cash-generating units are based would not cause the carrying amounts thereof to exceed their recoverable amounts.

As of December 31, 2010 and 2009, none of our cash-generating units with significant goodwill was at risk of impairment. In 2008, our impairment reviews resulted in impairment charges of €984 million related to goodwill and other intangible assets, mainly due to the write-down of the intangible assets arising from acquisitions of Abbey in 2004.

Equity method investments are evaluated for impairment on an annual basis or more frequently if events or changes in circumstances indicate that these assets are impaired. An equity method investment is impaired if its fair value is deemed to be less than its cost. Accordingly, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment.

At the end of each year, we make an assessment of whether there is any objective evidence that any of our available for sale securities (debt and equity securities) is impaired. The analysis includes, but is not limited to, the changes in the fair value of each asset, information about the issuer’s solvency and business, the near-term prospects of the issuer, the existence of any default or material adverse change in the issuer, the trend in both net income and the dividend pay-out policy of the issuer, information about significant changes with an adverse effect that have taken place in the environment in which the issuer operates, changes in general economic conditions, whether a security’s fair value is a consequence of factors intrinsic to such investment or, rather are consequence of uncertainties about the country’s or the overall economy, independent analyst reports and forecasts and other independent market data. We also analyze on a security-by-security basis the effect on the recoverable amount of each equity security of the significance and length of the decline in the fair value below cost. Unless extenuating circumstances exist, we consider reaching a 40% decline after 18 months below cost as indicators of objective evidence of impairment of equity securities, nevertheless impairment is recorded as soon as we consider that recoverable amount could be affected although this percentage and length of decline have not been reached.

If after completing the abovementioned analysis we consider that the presence of one or several of these factors could impact the recoverable amount, an impairment loss is recognized in the profit and loss account. Additionally, in all circumstances, if we do not have the intent and ability to retain our investment in a debt or equity instrument for a period of time sufficient to allow for the anticipated recovery of its costs, the instrument is written down to fair value.

Upon impairment, the full difference between amortized cost and fair value is removed from equity and recognized in net profit or loss. Impairments on debt securities may be reversed if there is a decrease in the amount of the impairment which can be objectively related to an observable event. Impairments on equity securities may not be reversed.

At December 31, 2010, our consolidated financial statements included the impairment recorded amounting €14million (€43 million in 2009 and €35 million in 2008) as a consequence of the above assessments on debt instruments.

At 2010, 2009 and 2008 year-end, we analyzed the unrealized revaluation losses related to debt instruments. We concluded that they were temporary and, therefore, there was no evidence of impairment since the interest payment schedules for all the securities had been complied with and there was no evidence that the issuers would not continue to meet their payment obligations or that the future payments (both principal and interest) would not be sufficient to recover the cost.

During 2010, 2009 and 2008 we completed the analysis described above for equity securities and we recognized impairments amounting to €319 million, €494 million and €2,404 million, of which €2,042 million corresponded to the impairment of the ownership interests held in the Royal Bank of Scotland and Fortis in 2008, see Note 8.b, respectively. No additional significant impairments were recorded in 2010 for the remainder of the equity securities that showed unrealized losses as of December 31, 2010 because, after carrying out the abovementioned analysis, we concluded that their carrying value was still recoverable.

Retirement Benefit Obligations

We provide pension plans in most parts of the world. For defined contribution plans, the pension cost recognized in the consolidated income statement represents the contribution payable to the scheme. For defined benefit plans, the pension cost is assessed in accordance with the advice of a qualified external actuary using the projected unit credit method. This cost is annually charged to the consolidated income statement.

The actuarial valuation is dependent upon a series of assumptions; the principal ones are set forth below:

•

assumed interest rates;

•

mortality tables;

•

annual social security pension revision rate;

•

price inflation;

•

annual salary growth rate, and

•

the method used to calculate vested commitments to current employees.

The difference between the fair value of the plan assets and the present value of the defined benefit obligation at the balance sheet date, adjusted for any historic unrecognized actuarial gains or losses and past service cost, is recognized as a liability in the balance sheet.

Further information on retirement benefit obligations is set out in Notes 2 and 25 to our consolidated financial statements.

Business combinations and goodwill

Goodwill and intangible assets include the cost of acquired subsidiaries in excess of the fair value of the tangible net assets recorded in connection with acquisitions as well as acquired intangible assets which include core deposits, customer lists, brands and assets under management. Accounting for goodwill and acquired intangible assets requires management’s estimates regarding: (1) the fair value of the acquired intangible assets and the initial amount of goodwill to be recorded, (2) the amortization period (for identified intangible assets other than goodwill) and (3) the recoverability of the carrying value of acquired intangible assets.

To determine the initial amount of goodwill to be recognized on an acquisition, we have to determine the fair value of the consideration and the fair value of the net assets acquired. We use independent appraisers and our internal analysis, generally based on discounted cash flow techniques, to determine the fair value of the net assets acquired and non-cash components of the consideration paid. The actual fair value of net assets acquired could differ from the fair value determined, resulting in an under- or over-statement of goodwill.

We test goodwill for impairment at the reporting unit level. We identify our reporting units as one level below our business segments, based on our management structure. We keep those reporting units unchanged unless business segment reorganization occurs.

The useful lives of acquired intangible assets are estimated based on the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the acquired entity.

100

For acquired intangible assets, the amortization period is reviewed annually. In making these assumptions, we consider historical results, adjusted to reflect current and anticipated operating conditions. Because a change in these assumptions can result in a significant change in the recorded amount of acquired intangible assets, we believe the accounting for business combinations is one of our critical accounting estimates.

As a result of the first consolidation of the acquired subsidiaries Santander Consumer USA (2006), Banco Real (2008), Sovereign (2009) and Santander Cards UK (2009), a significant amount of goodwill was recorded (see Note 17 to our consolidated financial statements). Management made this determination, based in part upon independent appraisals of intangible assets, which is initially estimated and subsequently revised within the one year time period allowed by IFRS-IASB.

Recent Accounting Pronouncements

See Note 1.b to our consolidated financial statements for the detail of standards and interpretations that were adopted by the European Union and came into force in 2010 and those with effective dates subsequent to December 31, 2010 that had not yet been adopted by the European Union.

A. Operating results

We have based the following discussion on our consolidated financial statements. You should read it along with these financial statements, and it is qualified in its entirety by reference to them.

In a number of places in this report, in order to analyze changes in our business from period to period, we have isolated the effects of foreign exchange rates on our results of operations and financial position. In particular, we have isolated the effects of depreciation of local currencies against the euro because we believe that doing so is useful in understanding the development of our business. For these purposes, we calculate the effect of movements in the exchange rates by multiplying the previous period balances in local currencies by the difference between the exchange rate to the euro of the current and the previous period.

General

We are a financial group whose main business focus is retail banking, complemented by global wholesale banking, asset management and insurance businesses.

Our main source of income is the interest that we earn from our lending activities, by borrowing funds from customers and money markets at certain rates and lending them to other customers at different rates. We also derive income from the interest and dividends that we receive from our investments in fixed/variable income and equity securities and from our trading activities in such securities and derivatives, by buying and selling them to take advantage of current and/or expected differences between purchase and sale prices.

Another source of income are the commissions that we earn from the different banking and other financial services that we provide (credit and debit cards, insurance, account management, bill discounting, guarantees and other contingent liabilities, advisory and custody services, etc.) and from our mutual and pension funds management services.

In addition, from time to time, we derive income from the capital gains we make from the sale of our holdings in Group companies.

2010 Overview

We believe that the following factors had a significant impact on our results of operations and financial condition as of and for the year ended December 31, 2010.

The global economy recovered strongly in 2010 from the recession in 2009 (-0.6%) and grew by approximately 4.0%, higher than the average for the decade before the financial crisis. This recovery, which was firmer in the first half of the year, was fueled, on the one hand, by the monetary and fiscal stimulus measures adopted in the large developed economies to offset weak domestic demand and, on the other hand, by the greater growth capacity of emerging economies, particularly in Asia and Latin America, which were less leveraged and were less affected by the downturn and had fewer growth restrictions.

101

These differences led to a two-tier recovery with a faster pace of growth in emerging markets, when compared to developed economies. This trend held until early 2011. However, the positive developments in growth in the U.S. and Germany in 2010 attest to a solid recovery that is more balanced among regions in 2011, although with uncertainties.

• The US economy ended 2010 with signs of more buoyant domestic demand (consumption and investment). In Germany, growth in the manufacturing sector, spurred by external demand, is also spurring domestic demand via job creation and projection of confidence. Meanwhile, the uncertainty over the fiscal situation in countries on the periphery of the euro zone (such as Greece) and the bail-out of the Irish banking system added risk to the euro zone in the second half of 2010.

• Emerging economies continue to grow strongly driven by greater international trade, capital inflows, higher oil prices and stronger domestic demand.

There are, however, at least two challenges to the sustainability of such growth. On the one hand, inflation in many countries has already grown beyond its optimal point and, on the other hand, the large capital inflows have strengthened currencies of emerging economies more than desired, particularly in Latin America. These countries are faced with a complicated challenge of controlling inflation without appreciating their currencies.

Analyzing in detail the main economies where we operate, the US economy grew 2.8% in 2010, following accelerated annualized growth in the fourth quarter of 3.1%, spurred by private consumption and the external sector (higher exports and lower imports). Despite some weaknesses related to the property sector and medium-sized banks, the extension of tax advantages, the incipient improvement in the labor market and the better financial position of companies point to continued economic expansion. Core inflation of less than 1% (0.8%) and a high output gap (around 6% of GDP) enabled the Federal Reserve to launch a new program of quantitative easing (purchase of $600 billion of debt in eight months) and hold its key interest rate. These trends are not expected to change in the short term.

Latin America benefited from a favorable external environment (higher raw material prices and capital inflows) and from stronger domestic demand. The region grew by around 6% in 2010 with record growth in the second quarter of 7.8%, largely due to the big economies.

Brazil’s growth slowed in the second half of 2010 and ended the year at 7.5% (-0.7% in 2009). This strong expansion put pressure on inflation, which reached 5.6% in the fourth quarter, well above the Bank of Brazil’s central objective of 4.5%. Although the central bank held its Selic rate in the second half of the year in order to avoid greater appreciation of the real (the rate had risen by 2 percentage points to 10.75%), the evolution of inflation and expectations led the bank to lift the Selic rate at the beginning of 2011 (to 11.75% in mid-March). This trend is likely to continue in the coming months. The real appreciated during 2010 to BRL 1.66/$1.

Mexico, which grew a surprisingly high 4.6% in the fourth quarter, expanded by around 5.5% in 2010, due to greater demand for its exports to the US and the increase in domestic demand. Inflation rose a little (4.4% in December), but is not threatening growth enabling the Bank of Mexico to hold its rate at 4.5% since the end of 2009. As a result of these trends, the peso appreciated to MXN 12.4/$1.

Chile’s growth was also surprisingly strong (5.8% year-on-year in the fourth quarter) and around 5.1% for the whole of 2010. Inflation rose because of higher oil and some food prices (3% in December). After raising its interest rates to 3.25% in November (0.5% at the beginning of the year), the Bank of Chile called a temporary halt to rises, which returned in 2011 with a rise to 4.0% in mid-March. The peso’s appreciation (CLP 468/$1) led to the launch of a program to buy dollars in the currency markets in order to try to moderate the strength of the peso.

The euro zone grew by 1.7% in 2010, following a fourth quarter (1.1% annualized) that maintained the tone and pointed to stronger growth in early 2011. Inflation, which rose because of higher oil prices, ended the year at 2.2%, above the European Central Bank’s target (ECB). The ECB, nonetheless, held its repo rate at 1% in 2010.

Rising oil prices at the beginning of 2011 are putting pressure on inflation, leading the ECB to tighten its anti-inflation stance. All of this increases the probability of a preventive rise in interest rates in the first half of 2011 in order to anchor inflation expectations. The euro increased in the last months of 2010 to €/$1.34 and has continued to do so in 2011 because of the new interest rate expectations.

102

European activity continues to be largely backed by Germany (3.5% GDP growth in 2010). Of note is the better performance in manufacturing, exports and investment which, according to the latest data on confidence and the level of job creation, is already feeding through to domestic demand.

The Spanish economy did better than expected in 2010 with zero growth in the third quarter and 0.2% in the fourth. Growth for the whole year was negative 0.1%. Consumption declined in the second half of the year (purchases were brought forward in the first half because of the rise in VAT as of July), while the external sector was the main contributor to growth.

The slightly better growth figure, however, was not sufficient to create jobs and the unemployment rate topped 20%. Higher oil prices and taxes on tobacco pushed up inflation to 3% in December — a trend that intensified in early 2011.

The UK ended 2010 with a sharp deceleration in growth (-2.1% annualized in the fourth quarter), largely due to severe weather conditions, after a good third quarter (+2.9%). Growth for the whole year was 1.3%, a trend which is likely to be maintained. Inflation continued to be high (3.7%), partly due to the rise in indirect taxes and sterling’s slide.

In this context, the Bank of England held its base rate at 0.5% throughout the year, although inflationary pressures make a rise in the rate more probable in the first half of 2011. Sterling strengthened a little against the euro (€1/£0.86).

Results of Operations for Santander

Summary

Profit attributable to the Parent bank as reported in our consolidated financial statements for the year ended December 31, 2010 was €8,180.9 million, a 8.5% or €761.6 million decrease from €8,942.5 million in 2009, which represented a 0.7% or €66.1 million increase from €8,876.4 million in 2008. The 2010 decrease was mainly due to an increase in interest income/ (charges) and a decrease in impairment losses offset by a decrease in gains/losses on financial assets and liabilities (net), an increase in the income tax and an increase in the profit attributable to non-controlling interest.

The following aspects had an impact on the Group’s results:

• There is a small positive perimeter impact from the 11 months consolidation of Sovereign by global integration in 2009 and the consolidation in Santander Consumer Finance of Triad, HSBC and AIG portfolios. There is a small negative impact of around one percentage point from the sale of Banco de Venezuela in 2009. The profit attributable to the Parent bank for 2009 included 6 months results from Banco de Venezuela.

• There was also a negative effect of approximately five percentage points from higher non-controlling interest, the net effect between the placement of Banco Santander Brazil shares, mainly in October 2009, and the acquisition of the non-controlling interest of Santander Mexico from Bank of America in September 2010.

• The review carried out by the Bank of Spain of the references established in the Circular 4/2004 to determine the provisions for credit risk after taking into account the experience from recent years and the current economic situation.

• Lastly, the comparison of gross income and expenses is affected by the evolution of the average exchange rates of sterling, the dollar and the main Latin American currencies against the euro. The impact with regard to the euro was around +8 percentage points for the whole Group, +4 percentage points in the United Kingdom, +16 percentage points in Latin America and +5/6 percentage points in Sovereign.

Interest Income / (Charges)

Interest income was €29,224.4 million in 2010, a 11.1% or €2,925.9 million increase from €26,298.5 million in 2009, which represented a 49.9% or €8,760.1 million increase from €17,538.5 million in 2008.

103

2010 compared to 2009

The €2,925.9 million increase in interest income in 2010 was due to an increase of €3,133.4 million in business volumes partially offset by a decrease of customer rates by €207.6 million. International net interest income grew by €4,681.1 million while domestic net interest income decreased by €1,755.3 million. The spreads on loans for the Group as a whole increased from 3.1% to 3.4% mainly due to the UK and Sovereign units as well as consumer businesses and wholesale banking. Spreads on deposits were affected by the lower interest rates in the commercial units and the Group’s policy of giving priority to capturing deposits and liquidity, particularly in the European units, and the higher cost of wholesale financing. Spreads in Latin America were much more stable.

Our overall net yield spread increased from 2.54% in 2009 to 2.62% in 2010. Domestic net yield spread decreased from 1.45% in 2009 to 0.92% in 2010. International net yield spreads increased from 3.05% in 2009 to 3.37% in 2010.

Average total earning assets were €1,092,424.9 million for the year ended December 31, 2010, a 8.8% or €88,468.6 million increase from €1,003,956.4 million for the same period in 2009. This was due to an increase of €6,047.3 million in the average balances of our domestic total earning assets (mainly due to an increase of €4,637.0 million in the average balances of debt securities and an increase of €8,457.7 million in the average balances due from credit entities partially offset by a decrease of €6.0 billion in the average balances of our domestic loan and credit portfolio) and an increase of €82,421.3 million in the average balance of our international total earning assets (mainly due to an increase of €45,549.5 million in the average balances of our international loan and credit portfolio, an increase of €27,002.5 million in the average balances of cash and due from central banks and an increase of €14,885.9 million in the average balances of our debt securities portfolio partially offset by a decrease of €6,908.0 million in the average balances due from credit entities).

Our net lending amounted to €724,154 million, 6% higher than in 2009. In local currencies and excluding the perimeter effects there was an increase in net lending of 1%. Lending to the public sector increased 24% in 2010 and lending to other resident sectors dropped 2%. Secured loans, which represent the lowest risk portion of the portfolio and constitute its largest share (59%), increased 2%, the commercial portfolio was similar to 2009, and other loans declined 8%. Lending to the non-resident sector grew 10% due to the favorable impact of the increase in the scope of consolidation and foreign exchange effects.

Spain and Portugal’s lending fell by 4% and 7%, respectively, due to deleveraging and the selective growth policy followed by the Group in these countries. Santander Consumer Finance’s lending increased 11%.

Gross lending in Spain amounted to €236 billion, of which €61,387 million were household mortgages. Loans to SMEs and companies not related to the construction and real estate sectors amounted to €94,406 million, virtually the same as in 2009.

In Portugal, the fall in lending was mainly due to lower lending to large companies, where there was a shift from loans to capital markets. In addition, balances in construction and real estate, which represent only 3% of lending, declined 10% in 2010.

Santander Consumer Finance’s balance increased 11% due to organic growth and the integration of the portfolios acquired in the US and Poland. New loans increased 9%, a significant positive trend.

In the United Kingdom, the balance of lending was very similar to 2009. Locally, residential mortgages in a still-depressed market grew 3% and loans to SMEs decreased by 26%, while personal loans dropped 24%, which is consistent with the policy of reducing this type of loans.

Lending in Latin America gradually accelerated through the year and ended 2010 with growth of 15%, excluding the exchange rate effect. Specifically, growth rates in Brazil, Mexico and Chile were 16%, 15% and 14%, respectively (versus negative rates in 2009).

Sovereign’s loans declined 2% in dollars, affected by the reduction of the portfolio in run-off (-32% in 2010 and -62% since Sovereign joined the Group). This resulted in a reduction from $9.7 billion to $4 billion. In addition, the focus during 2010 was on new loans and renewals, concentrating on the most attractive mortgage segments (residential and multifamily), which grew 17%.

104

These changes are reflected in the lesser share of lending in Europe and the increase in Latin America. At the end of 2010, Continental Europe accounted for 45% of the Group’s total lending (32% for Spain), the UK 32%, Latin America 18% (10% for Brazil) and Sovereign 5%. The respective figures a year earlier were 47% for Continental Europe, 33% for the UK, 15% for Latin America and 5% for Sovereign.

2009 compared to 2008

The €8,760.1 million increase in interest income in 2009 was due to an improvement of customer spreads (which rose by €2,724.4 million) together with a increase of €6,035.6 million in business volumes. International net interest income grew by €6,853.6 million while domestic net interest income grew by €1,906.5 million. Spreads on loans were notably better (for the whole Group they increased from 265 basis points to 329 basis points), although they began to ease in the second quarter, while spreads on deposits were negatively affected by lower interest rates. Volumes benefited from the acquisitions, basically Sovereign, Alliance & Leicester and specialized consumer credit companies. On the other hand, exchange rate movements reduced growth by 4 percentage points.

Average total earning assets were €1,003,956.4 million for the year ended December 31, 2009, a 17.1% or €146,849.9 million increase from €857,106.5 million for the same period in 2008. This was due to an increase of €20,589.0 million in the average balances of our domestic total earning assets (mainly due to an increase of €15,198.2 million in the average balances of debt securities and an increase of €6,075.9 million in the average balances due from credit entities partially offset by a decrease of €4,360.4 million in the average balances of our domestic loan and credit portfolio) and an increase of €126,260.9 million in the average balance of our international total earning assets (mainly due to an increase of €95,918.6 million in the average balances of our international loan and credit portfolio, an increase of €18,722.2 million in the average balances of other interest earning assets (mainly derivatives) and an increase of €19,130.4 million in the average balances of our debt securities portfolio).

The Group’s net lending amounted to €682,551 million, 9% higher than in 2008. Excluding the perimeter effects and in local currencies, there was a decrease in net lending of 2%. Lending to the public sector increased 28% and loans to other resident sectors dropped 4%, in line with the deceleration in the market. Secured loans, the main component, increased by 1%, while the commercial portfolio dropped 25%, as a result of shorter maturities and more direct impact from reduced business activity. Other loans declined 7%. Loans to the non-resident sector rose 17%, affected by perimeter changes and exchange rates.

Continental Europe’s balance of total lending decreased 1%. In Spain, the combined lending of the Santander Branch Network and Banesto dropped 4%, following the pattern in the resident sector.

Santander Consumer Finance increased its lending 6% because of the integration of the assets acquired from Royal Bank of Scotland and GE, while lending in Portugal was 1% lower due to the 8% decrease in loans to companies as credit to individuals and SMEs grew 2% and 9%, respectively.

In the United Kingdom, lending grew 5% on a local currency basis. Mortgage loans rose 5% lifting their share of new gross lending to 19% (+5 percentage points in 2009), credit to companies increased 3% and personal loans, with a small relative share in total lending, dropped 24%, in line with the Group’s strategy.

Lending in Latin America declined 8%, excluding the impact of exchange rates and the sale of Banco de Venezuela. Of note was the decline of 5% in Brazil (driven primarily by corporate lending), while lending in Chile and Mexico decreased 6% and 11%, respectively, the latter negatively affected by the reduction in the credit card business.

Sovereign recorded total loans of €34,605 million, with a downward trend in the balances of non-strategic segments and already showing in the fourth quarter the first increases in attractive segments (multifamily and residential mortgages).

105

At the end of 2009, Continental Europe accounted for 47% of total lending (35% for Spain), the UK-33%, Latin America-15% (8% for Brazil) and Sovereign-5%. The respective figures a year earlier were 52% for Continental Europe, 33% for the UK and 15% for Latin America.

Our overall net yield spread increased from 1.91% in 2008 to 2.54% in 2009. Domestic net yield spread increased from 1.29% in 2008 to 1.45% in 2009. International net yield spreads increased from 2.23% in 2008 to 3.05% in 2009. In general, spreads improved during the period in most areas due to the focus on profitability rather than volume.

Income from Equity Instruments

Income from equity instruments was €362.1 million in 2010, a 17% or €74.4 million decrease from €436.5 million in 2009, which was a 21.0% or €116.3 million decrease from €552.8 million in 2008.

The €74.4 million decrease is mainly explained by the reduction in our share capital in Iberdrola and Repsol-YPF and the sale of Unicredit Capitalia SPA and Cielo, S.A.

Income from Companies Accounted for using the Equity Method

Income from companies accounted for by the equity method increased €17.4 million during 2010 to €16.9 million. There are no entities in 2010 that contributed a significant amount of income. During 2009 income from these entities decreased by €792.3 million to €-0.5 million as a result of the full consolidation or disposition of its primary contributors.

Fee and Commission Income (net)

Fee and commission income was €9,734.1 million in 2010, a 7.2% or €654.0 million increase from €9,080.1 million in 2009. During 2009, fee and commission income increased by 9.8% as compared to €8,266.3 million obtained in 2008.

2010 compared to 2009

Fee and commission income for 2010 and 2009 was as follows:


					Amount			%
	2010		2009		Change			Change
	(in thousands of euros, except percentages)
Mutual and pension funds		1,266,730		1,177,934		88,796			7.5	%
Insurance		2,050,990		1,861,169		189,821			10.2	%
Securities services		784,129		774,296		9,833			1.3	%
Commissions for services		5,632,301		5,266,735		365,566			6.9	%
Credit and debit cards		1,138,079		1,033,383		104,696			10.1	%
Account management		995,078		858,696		136,382			15.9	%
Bill discounting		301,251		318,750		(17,499	)		(5.5	%)
Contingent liabilities		438,601		422,065		16,536			3.9	%
Other operations		2,759,292		2,633,841		125,451			4.8	%

Total fee and commission income (net)		9,734,150		9,080,134		654,016			7.2	%

Fee and commission income rose 7.2% to €9,734.1 million in 2010 compared to 2009. The increase is mainly due to higher revenues from fee income from insurance, credit cards, account management and pension funds.

Average balances of mutual funds under management in Spain decreased 10.3% from €36.5 billion in 2009 to €32.7 billion in 2010. This decrease was due to the Bank’s strategy of promoting growth in deposits and the customer preference for this type of product to the detriment of mutual funds. However, average balances of mutual funds abroad increased by 29.8% from €60.0 billion in 2009 to €77.9 billion in 2010, mainly due to increased activity in Brazil, the United Kingdom, Mexico and Chile, which offset the decrease in Spain.

106

Average balances of pension funds in Spain increased by 0.4% from €9.58 billion in 2009 to €9.62 billion in 2010. Since we sold our pension funds businesses in Latin America, our only remaining pension business abroad is in Portugal. Average balances of pension funds in Portugal decreased 0.4% from €1.33 billion in 2009 to €1.32 billion in 2010.

2009 compared to 2008

Fee and commission income for 2009 and 2008 was as follows:


					Amount			%
	2009		2008		Change			Change
	(in thousands of euros, except percentages)
Mutual and pension funds		1,177,934		1,542,470		(364,536	)		(23.63	)
Insurance		1,861,169		1,755,336		105,833			6.03
Securities services		774,296		704,525		69,771			9.90
Commissions for services		5,266,735		4,263,964		1,002,771			23.52
Credit and debit cards		1,033,383		856,642		176,741			20.63
Account management		858,696		570,446		288,250			50.53
Bill discounting		318,750		300,042		18,708			6.24
Contingent liabilities		422,065		384,254		37,811			9.84
Other operations		2,633,841		2,152,580		481,261			22.36

Total fee and commission income		9,080,134		8,266,295		813,839			9.85

Fee and commission income rose 9.8% to €9,080.1 million in 2009 compared to 2008. The increase is explained by the full consolidation of Banco Real in 2009 while in 2008 this entity was accounted for by the equity method for all but three months. Eliminating this effect, fee income was flat mainly due to higher revenues from fee income from services, which were partially offset by lower revenues from mutual and pension funds.

Average balances of mutual funds in Spain decreased 26.3% from €49.5 billion in 2008 to €36.5 billion in 2009. This decrease was due to customer preference for time deposits and the deterioration in market conditions during 2009. Average balances of mutual funds abroad increased by 5.0% from €57.1 billion in 2008 to €60.0 billion in 2009, mainly due to increased activity in Brazil, Chile and the United Kingdom, partially offset by a decrease in Mexico, Switzerland and Portugal.

Average balances of pension funds in Spain decreased by 4.2% from €10.0 billion in 2008 to €9.6 billion in 2009. Since we sold our pension funds businesses in Latin America, our only remaining pension business abroad is in Portugal. Average balances of pension funds in Portugal decreased 5.1% from €1.4 billion in 2008 to €1.3 billion in 2009.

Gains (Losses) on Financial Assets and Liabilities (net)

Net gains on financial assets and liabilities in 2010 were €2,164.4 million, a 43.1% or €1,637.2 million decrease as compared to €3,801.6 million in 2009, which represented a 31.4% growth from €2,892.2 million in 2008. Gains (losses) on financial assets and liabilities include gains and losses arising from the following: marking to market our trading portfolio and derivative instruments, including spot market foreign exchange transactions, sales of investment securities and liquidation of our corresponding hedge or other derivative positions. For further details, see Note 44 to our consolidated financial statements.

107

2010 compared to 2009

Net gains on financial assets and liabilities decreased 43.1% in 2010 mainly due to Corporate Activities, where the cost of hedging exchange rates is recorded, and to lower results in some Latin American countries (due to the sale of portfolios in 2009). These negative effects were partially offset by revenues from wholesale businesses in Europe derived mainly from customer operations.

2009 compared to 2008

Net gains on financial assets and liabilities rose 31.4% to €3,801.6 million largely due to the improved performance of revenues from wholesale businesses originating mostly in customer operations.

Other operating income / expenses (net)

Net other operating income in 2010 was €106.2 million, a €37.7 million or 26.2% decrease from €143.9 million in 2009, which was a 47.1% decrease from €271.8 million in 2008. Under this line item we include income and expenses from insurance activity, from non-financial services, other commissions and charges to the Fondo de Garantía de Depósitos.

In 2010, an 11.5% increase in insurance activity was offset by an increase of other charges. Income from non-financial services remained flat.

In 2009, the increase in insurance activity and in income from non-financial services was offset by higher charges to the Fondo de Garantía de Depósitos that increased to €317.7 million from €179.0 million a year earlier.

Administrative Expenses

Administrative expenses were €16,256.0 million in 2010, a 9.7% or €1,431.4 million increase from €14,824.6 million in 2009, which was a 27.1% or €3,158.7 million increase from €11,665.9 million in 2008.

2010 compared to 2009

Administrative expenses for 2010 and 2009 were as follows:


					Amount		%
	2010		2009		Change		Change
	(in thousands of euros, except percentages)
Personnel expenses		9,329,556		8,450,283		879,274		10.4	%
Other general administrative expenses		6,926,432		6,374,322		552,109		8.7	%
Building and premises		1,731,165		1,613,675		117,490		7.3	%
Other expenses		1,554,732		1,435,743		118,989		8.3	%
Information technology		797,701		785,504		12,197		1.6	%
Advertising		633,511		594,432		39,079		6.6	%
Communications		670,307		631,806		38,501		6.1	%
Technical reports		428,470		359,753		68,717		19.1	%
Per diems and travel expenses		276,397		262,097		14,300		5.5	%
Taxes (other than income tax)		376,115		312,994		63,121		20.2	%
Guard and cash courier services		401,367		331,220		70,147		21.2	%
Insurance premiums		56,666		47,098		9,568		20.3	%

Total administrative expenses		16,255,988		14,824,605		1,431,383		9.7	%

108

The 9.7% increase in administrative expenses in 2010 reflected a 10.4% increase in personnel expenses and a 8.7% increase in Other general administrative expenses.

All units in continental Europe and the UK slightly reduced their costs. Sovereign experienced a more significant reduction because of synergies, while Brazil’s and Mexico’s costs increased at a slower pace than the inflation rate. The only noteworthy rises were in Chile because of the impact of the earthquake, the signing of a collective bargaining agreement and business dynamics, Argentina with costs at 23% because of a collective bargaining agreement and Global Banking and Markets because of investments made in 2010 to consolidate positions reached in 2009 in its main markets.

2009 compared to 2008

Administrative expenses for 2009 and 2008 were as follows:


					Amount		%
	2009		2008		Change		Change
	(in thousands of euros, except percentages)
Personnel expenses		8,450,283		6,813,351		1,636,932		24.03
Other general administrative expenses		6,374,322		4,852,506		1,521,816		31.36
Building and premises		1,613,675		1,206,895		406,780		33.70
Other expenses		1,435,743		1,048,392		387,351		36.95
Information technology		785,504		504,196		281,308		55.79
Advertising		594,432		534,876		59,556		11.13
Communications		631,806		452,900		178,906		39.50
Technical reports		359,753		298,037		61,716		20.71
Per diems and travel expenses		262,097		257,079		5,018		1.95
Taxes (other than income tax)		312,994		279,250		33,744		12.08
Guard and cash courier services		331,220		235,207		96,013		40.82
Insurance premiums		47,098		35,674		11,424		32.02

Total administrative expenses		14,824,605		11,665,857		3,158,748		27.08

The 27.1% increase in administrative expenses in 2009 reflected a 24.0% increase in personnel expenses and a 31.4% increase in Other general administrative expenses.

The full consolidation of Banco Real for the whole of 2009 as compared to only three months in 2008 together with the consolidation of Sovereign and the acquisitions of Alliance & Leicester and Bradford & Bingley in UK and General Electric Money in Continental Europe, account for the vast majority of the increase. Excluding these acquisitions and the effects of exchange rate fluctuations, administrative expenses were flat or reflect very moderate changes consistent with the objective of expense control. Of note were Brazil and Mexico with reductions of 3.7% and 3.4%, respectively.

Depreciation and Amortization

Depreciation and amortization was €1,940.0 million in 2010, a 21.5% or €343.5 million increase from €1,596.4 million in 2009, which represented a 28.8% or €356.9 million increase from €1,239.6 million in 2008. In 2010, the depreciation and amortization of intangible assets in Latin America, mainly Brazil, explain most of the increase. In 2009, the full consolidation of Banco Real and Sovereign and the acquisitions of Alliance & Leicester and Bradford & Bingley account for the majority of the increase.

109

Provisions (net)

Net provisions were €1,132.6 million in 2010, a 36.8% or €659.5 million decrease from €1,792.1 million in 2009, which represented a 9.2% or €151.6 million increase from €1,640.6 million in 2008. This item includes additions charged to the income statement in relation to provisions for pensions and similar obligations, provisions for contingent liabilities and commitments and other provisions (mainly provisions for restructuring costs and tax and legal litigation). The variation in 2010 is due to a €151 million decrease in provisions for pensions together with a €531 million decrease in other provisions partially offset by a €23 million increase in contingent liabilities and commitments provisions. The 9.2% increase in 2009 was mainly due to an increase in tax and legal litigation provisions partially offset by a decrease in provisions for pensions. See Note 25 to our consolidated financial statements.

Impairment Losses (net)

Impairment losses (net) were €10,729.0 million in 2010, a 8.6% or €1,014 million decrease from €11,743.0 million in 2009, which was a 60.2% or €4,410.7 million increase from €7,332.3 million in 2008.

Impairment losses are divided in the income statement as follows:

2010

2009

2008

(in thousands of euros)

Impairment losses on financial assets (net):

10,443,149

11,578,322

6,283,053

Loans and receivables

10,266,899

11,087,996

5,896,888

Other financial assets not measured at fair value through profit and loss

176,250

490,326

386,165

Impairment losses on other assets (net):

285,864

164,630

1,049,226

Goodwill and other intangible assets

69,399

31,249

983,929

Other assets

216,465

133,381

65,297

Total impairment losses (net)

10,729,013

11,742,952

7,332,279

2010 compared to 2009

The €821.1 million or 7.4% decrease in net impairment losses for loans and receivables in 2010 compared to 2009 reflected a €460.4 million net decrease in allowances, a €286.6 million increase in recoveries of loans previously charged-off and a €74.1 million decrease in impairment losses of other assets.

This reduction was due to improved trends in the UK and for Sovereign, and lower provisions in Latin America, which is beginning to benefit from the improvement in the economic cycle and a change in the mix of products.

Spain and Portugal, on the other hand, required higher provisions in 2010 because of the increase in bad loans and the review carried out by the Bank of Spain of the references established in the Circular 4/2004 to determine the provisions for credit risk after taking into account the experience from recent years and the current economic situation.

Our total allowances for credit losses (excluding country-risk) increased by €2,250.6 million to €20,747.7 million at December 31, 2010, from €18,497.1 million at December 31, 2009.

Non-performing balances (excluding country-risk) increased by €3,968.8 million to €28,522.4 million at December 31, 2010, compared to €24,553.6 million at December 31, 2009. Our coverage ratio was 72.7% at December 31, 2010, and 75.3% at December 31, 2009. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Impaired Balances Ratios”.

2009 compared to 2008

The €5,191.1 million increase in net impairment losses for loans and receivables in 2009 compared to 2008 (which amounted to an increase of 88.0%) reflected a €5,341.5 million net increase in allowances (€11,928.6 million in 2009 compared to €6,587.1 million in 2008), a €215.9 million increase in recoveries of loans previously charged-off (€914.7 million in 2009 compared to €698.8 million in 2008) and a €65.5 million increase in impairment losses of other assets.

110

These sharp year-on-year increases reflect the impact of the consolidation of new units and the organic increase in most of the business units. The primary cause of the increase was the macroeconomic environment that deteriorated significantly. A secondary cause was the change of mix of the portfolio in previous years toward more profitable products but with a higher risk premium.

Our total allowances for credit losses (excluding country-risk) increased by €5,634.1 million to €18,497.1 million at December 31, 2009, from €12,863.0 million at December 31, 2008.

Non-performing balances (excluding country-risk) increased by €10,362.8 million to €24,553.6 million at December 31, 2009, compared to €14,190.8 million at December 31, 2008. Our coverage ratio was 75.3% at December 31, 2009, and 90.6% at December 31, 2008. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Impaired Balances Ratios”.

The €952.7 million decrease in impairment losses on other assets, goodwill and other intangible assets was due to the impairment of the brand and other intangible assets of Santander UK in 2008 that did not recur in 2009.

Net gains / (losses) on other assets

Net gains on other assets were €60.2 million in 2010, a €279.5 million decrease from €339.6 million in 2009, which represented a 81.5% or €1,492.5 million decrease from €1,832.1 million in 2008.

2010 compared to 2009

Amount

2010

2009

Change

(in thousands of euros, except percentages)

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

350,323

1,565,013

(1,214,691

)

(77.6

)

Of which:

Disposal of investments

153,265

1,527,734

(1,374,469

)

(90.0

)

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

(290,170

)

(1,225,407

)

935,236

(76.3

)

Of which:

Sale of Attijariwafa Bank

—

218,223

(218,223

)

—

Losses on impairment of tangible assets

(298,337

)

(1,350,592

)

1,052,255

(-77.9

)

111

2009 compared to 2008

Amount

2009

2008

Change

(in thousands of euros, except percentages)

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

1,565,013

101,156

1,463,857

1,447.1

Of which:

Disposal of investments (1)

1,527,734

49,967

1,477,767

2,957.5

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

(1,225,407

)

1,730,902

(2,956,309

)

(170.8

)

Of which:

Sale of Grupo Santander City

—

836,742

(836,742

)

—

Antonveneta

—

3,045,647

(3,045,647

)

—

Impairment and sale of RBS and Fortis

—

(2,042,695

)

2,042,695

—

Sale of Attijariwafa Bank

218,223

—

218,223

—

Losses on impairment of tangible assets (2)

(1,350,592

)

(70,027

)

(1,280,565

)

1,828.7


(1)		€1,498.9 million refer to the sale of shares of Santander Brasil as part of the initial public offering (see Item 4 “Information on the Company—A. History and Development of the Company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—Initial Public Offering of Banco Santander (Brasil), S.A.”).

(2)		In 2009 includes impairment due to assets acquired for a gross amount of €814 million (€554 million net of taxes). For additional information, see Note 50 to our consolidated financial statements.

Income Tax

The provision for corporate income tax was €2,923.2 million in 2010, a 142.3% or €1,716.6 million increase from €1,206.6 million in 2009, which represented a 34.3% or €629.4 million decrease from €1,836.1 million in 2008. The effective tax rate was 24.3% in 2010, 11.5% in 2009 and 16.8% in 2008. For information about factors affecting effective tax rates, see Note 27 to our consolidated financial statements.

Profit / (losses) from discontinued operations

Losses from discontinued operations were €26.9 million in 2010, a €57.8 million decrease from €30.9 million profits in 2009, which represented a 90.3% or €288.3 million decrease from profits of €319.1 million in 2008.

During 2010, we did not discontinue any significant operation.

The 2009 divestment relates to the sale of our subsidiary in Venezuela to the Bank of Economic and Social Development of Venezuela (see Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—Banco de Venezuela”).

Profit attributable to non-controlling interest

Profit attributable to non-controlling interest was €920.9 million in 2010, a 96.1% or €451.3 million increase from €469.5 million in 2009, which represented a 3.0% or €13.5 million increase from €456.0 million in 2008. For further details, see Note 28 to our consolidated financial statements.

112

2010 compared to 2009

The €451.3 million increase in profit attributable to minority shareholders in 2010 was principally due to Grupo Santander Brazil. Non-controlling interest in Banco Santander (Brasil) S.A. was in 2010 €539.1 million, a €424.9 million increase from €114.2 million in 2009 due to the global offering of Banco Santander (Brasil), which closed in October 2009. This effect was partially offset by the purchase of 25% of Santander Mexico in 2010.

2009 compared to 2008

The €13.5 million increase in profit attributable to minority shareholders in 2009 was principally due to the increase in net income of Grupo Santander Brazil partially offset by a decrease of Grupo Financiero Santander, S.A. de C.V. and Banesto.

Results of Operations by Business Areas

Our results of operations by business areas can be summarized as follows (see Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”):

First level (geographic):

Continental Europe


										Variations
	2010			2009			2008			2010/2009			2009/2008
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		10,957			11,456			9,259			(4.4	%)		23.7	%
Income from equity instruments		217			218			266			(0.5	%)		(18.0	%)
Income from companies accounted for using the equity method		9			7			15			28.6	%		(53.3	%)
Net fees and commissions		3,748			3,787			4,074			(1.0	%)		(7.0	%)
Gains/losses on financial assets and liabilities (net)		843			687			764			22.7	%		(10.1	%)
Other operating income/(expenses) (net)		171			139			181			23.0	%		(23.2	%)
TOTAL INCOME		15,945			16,294			14,559			(2.1	%)		11.9	%
Administrative expenses		(5,513	)		(5,334	)		(4,956	)		3.4	%		7.6	%
Personnel expenses		(3,429	)		(3,306	)		(3,123	)		3.7	%		5.9	%
Other general administrative expenses		(2,084	)		(2,028	)		(1,833	)		2.8	%		10.6	%
Depreciation and amortization		(639	)		(570	)		(500	)		12.1	%		14.0	%
Impairment losses on financial assets (net)		(4,218	)		(3,286	)		(2,476	)		28.4	%		32.7	%
Provisions (net)		(60	)		(311	)		(89	)		(80.7	%)		249.4	%
Impairment losses on other assets (net)		(48	)		(41	)		(16	)		17.1	%		156.3	%
Gains/(losses) on other assets (net)		(55	)		(81	)		(38	)		(32.1	%)		113.2	%
OPERATING PROFIT/(LOSS) BEFORE TAX		5,412			6,671			6,484			(18.9	%)		2.9	%
Income tax		(1,417	)		(1,768	)		(1,686	)		-19.9	%		4.9	%
PROFIT FROM CONTINUING OPERATIONS		3,995			4,903			4,798			(18.5	%)		2.2	%
Profit/(loss) from discontinued operations (net)		(14	)		(45	)		(21	)		(68.9	%)		114.3	%
CONSOLIDATED PROFIT FOR THE YEAR		3,981			4,858			4,777			(18.1	%)		1.7	%
Profit attributable to non-controlling interest		96			65			109			47.7	%		(40.4	%)
Profit attributable to the Parent		3,885			4,793			4,668			(18.9	%)		2.7	%

113

2010 compared to 2009

In 2010, Continental Europe contributed 35.0% of the profit attributable to the Group’s operating areas. The contribution decreased from 46.4% in 2009 due to both the reduction in profits in Continental Europe and the strong growth in emerging markets, primarily in Brazil and the rest of Latin America.

Interest income was €10,957 million in 2010, which is a 4.4% or €499 million decrease from the €11,456 million obtained in 2009. Effective management of spreads and of the balance sheet was largely offset by the impact of slower business growth due to lower demand for loans, the repricing of mortgages and the higher cost of funds resulting from the strong competition for deposits.

Net fees and commissions were €3,748 million in 2010, a 1.0% decrease from €3,787 million in 2009 because of lower activity and lower demand for some products, especially mutual funds.

Gains/(losses) on financial assets and liabilities were €843 million in 2010, a 22.7% increase from €687 million in 2009. The impact of lower activity due to the weak economic environment was offset by the improvement in gains from the distribution of treasury products to customers, especially in Banesto.

Total income decreased 2.1% due to the negative performance of most areas. Only Santander Consumer Finance increased by 13.3%, backed by the most basic revenues: interest income (+13.4%) due to a rise in the average portfolio and management of spreads and fee income (+11.8%) due to greater activity and servicing in the US.

Administrative expenses were €5,513 million in 2010, a 3.4% increase from €5,334 million in 2009. This growth was mainly due to the increase in the scope of consolidation in Santander Consumer Finance and the increase in costs at Global Banking & Markets, as the Santander Branch Network, Banesto and Portugal reduced their costs.

Impairment losses on financial assets were €4,218 million in 2010, a 28.4% increase from €3,286 million in 2009. This strong increase resulted mainly from the review carried out by the Bank of Spain of the references established in the Circular 4/2004 to determine the provisions for credit risk after taking into account the experience from recent years and the current economic situation. The NPL ratio increased from 3.6% in 2009 to 4.3% in 2010, while NPL coverage decreased from 77% in 2009 to 71% in 2010.

Profit attributable to the Parent was €3,885 million in 2010, a 18.9% or €908 million decrease from €4,793 million in 2009. The main reasons for this decrease were weak revenues affected by the economic environment and the increase in provisions mentioned above.

2009 compared to 2008

In 2009, Continental Europe contributed 46.4% of the profit attributable to the Group’s operating areas. The main driver of growth in Continental Europe was the rise in interest income.

Growth reflected some perimeter effect, mainly in total income from the consolidation of the acquired consumer businesses (primarily, GE Money in the first quarter of 2009).

Interest income was €11,456 million in 2009, which is a 23.7% or €2,197 million increase from the €9,259 million obtained in 2008. The increase was largely driven by active management of spreads that offset the slowdown in volumes, in line with the market trend. Interest income from the Santander Branch Network rose 16.0%, Santander Consumer Finance, aided by the latest acquisitions increased 31.8% and Global Wholesale Banking increased due to a sharp rise in spreads. Revenues from insurance increased 15.3% to €122 million.

Net fees and commissions were €3,787 million in 2009, a 7.0% decrease from €4,074 million in 2008 because of lower activity and lower demand for some products, especially mutual funds. Fees also decreased because of the Bank’s commitment of Zero services fees from the Queremos ser tu Banco (We want to be your Bank) policy.

114

Gains/(losses) on financial assets and liabilities were €687 million in 2009, a 10.1% decrease from €764 million in 2008 due to hedging of interest rates and exchange rates.

Total income grew 11.9%, a strong pace in the current environment, in line with growth from 2007 to 2008.

Administrative expenses were €5,334 million in 2009, a 7.6% increase from €4,956 million in 2008. This growth was mainly due to the consolidation of the units acquired from GE Money. Excluding these acquisitions, costs were almost flat, in line with the cost to income target ratio.

Impairment losses on financial assets were €3,286 million in 2009, a 32.7% increase from €2,476 million in 2008. Impairment losses grew due to new acquisitions, economic deterioration and the mix of the portfolio (more profitable but higher risk). NPL ratio increased from 2.3% in 2008 to 3.6% in 2009, while NPL coverage decreased from 90% in 2008 to 77% in 2009.

Profit attributable to the Parent was €4,793 million in 2009, a 2.7% increase from €4,668 million in 2008. Income growth absorbed the increase in loan-loss provisions due to increased profits of the Santander Branch Network, Portugal and Global Wholesale Banking. Profits for Banesto decreased 28.0% (mainly due to higher impairment losses) and for Santander Consumer Finance declined 9.2% (mainly because of Spain and discontinued operations, although its evolution gradually improved during the second half of the year).

United Kingdom


										Variations
	2010			2009			2008			2010/2009			2009/2008
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		4,431			3,934			2,411			12.6	%		63.2	%
Income from equity instruments		—			—			—			n/a			n/a
Income from companies accounted for using the equity method		—			—			1			n/a			n/a
Net fees and commissions		957			993			926			(3.6	%)		7.2	%
Gains/losses on financial assets and liabilities (net)		465			506			500			(8.1	%)		1.2	%
Other operating income/(expenses) (net)		28			27			49			3.7	%		(44.9	%)
TOTAL INCOME		5,881			5,460			3,887			7.7	%		40.5	%
Administrative expenses		(2,028	)		(1,997	)		(1,603	)		1.6	%		24.6	%
Personnel expenses		(1,209	)		(1,170	)		(986	)		3.3	%		18.7	%
Other general administrative expenses		(819	)		(827	)		(617	)		(1.0	%)		34.0	%
Depreciation and amortization		(286	)		(231	)		(158	)		23.8	%		46.2	%
Impairment losses on financial assets (net)		(760	)		(881	)		(457	)		(13.7	%)		92.8	%
Provisions (net)		(132	)		16			(29	)		(925.0	%)		(155.2	%)
Impairment losses on other assets (net)		—			—			—			n/a			n/a
Gains/(losses) on other assets (net)		47			—			32			n/a			n/a
OPERATING PROFIT/(LOSS) BEFORE TAX		2,722			2,367			1,672			15.0	%		41.6	%
Income tax		(737	)		(641	)		(425	)		15.0	%		50.8	%
PROFIT FROM CONTINUING OPERATIONS		1,985			1,726			1,247			15.0	%		38.4	%
Profit/(loss) from discontinued operations (net)		—			—			—			n/a			n/a
CONSOLIDATED PROFIT FOR THE YEAR		1,985			1,726			1,247			15.0	%		38.4	%
Profit attributable to non-controlling interest		—			—			—			n/a			n/a
Profit attributable to the Parent		1,985			1,726			1,247			15.0	%		38.4	%

115

2010 compared to 2009

In 2010, the United Kingdom contributed 17.9% of the profit attributable to the Parent bank’s total operating areas. The 2010 results were driven by strong income growth, strict control of costs and lower provisions.

Interest income was €4,431 million in 2010, a 12.6% or €497 million increase from €3,934 million in 2009. The increase in interest income reflects the balanced growth of loans and deposits. The higher spread on loans was partly offset by the higher cost of the deposit capturing campaign. Moreover, the increased cost of funds and liquid assets, mainly in the second half of 2010, partly offset the strength of the core activity adding pressure on net interest income. There was a positive impact from greater retention of mortgages and customers’ preference for variable rate mortgages in Retail Banking. In addition, growth in bank account liability balances and hedging strategies helped to reduce the impact of lower interest rates on deposits. Prudent management of spreads and growth in loans and deposits in SMEs and corporations also helped to increase interest income.

Net fees and commissions were €957 million in 2010, a 3.6% or €36 million decrease from €993 million in 2009. This decrease was in line with the market trend in the UK. In retail business, revenue was reduced by the lower cancellation of mortgages and the policy of reducing uncollateralized loans. The change in the mix from structured products to managed customer funds also continued, reducing current revenues but we expect it will produce higher fees in the future.

Gains / losses on financial assets and liabilities were €465 million in 2010, a 8.1% or €41 million decrease from €506 million in 2009 as the favorable market situation in 2009 was not repeated in 2010 and there were losses in the sale of the portfolio of Alliance & Leicester, which has been discontinued.

Administrative expenses were €2,028 million in 2010, a 1.6% or €31 million increase from €1,997 million in 2009. The cost savings obtained from synergies from the acquisition of Alliance & Leicester were reinvested in growth in Corporate Banking and Global Banking & Markets. We continued to eliminate overlapping functions in back office and support departments.

Impairment losses on financial assets were €760 million in 2010, a 13.7% or €121 million decrease from €881 million in 2009, due to the better evolution of retail products, mainly mortgages, enabling us to maintain high coverage levels.

The NPL ratio was 1.8% at the end of 2010 (compared to 1.7% at December 2009). The stock of foreclosed properties remained very low at 0.05% of the total portfolio. The evolution, in general, was better than the sector, according to the Council of Mortgage Lenders (the “CML”). NPL coverage was 46% (compared to 44% at December 2009).

Provisions were €132 million in 2010, a €148 million increase from releases of €16 million in 2009 mainly due to the establishment in the fourth quarter of 2010 of a £74 million provision for possible contingencies.

Profit attributable to the Parent was €1,985 million in 2010, a 15.0% or €259 million increase from €1,726 million in 2009, as a result of the combined effect of higher revenues, stable costs and lower provisions.

2009 compared to 2008

In 2009, United Kingdom contributed 16.7% of the profit attributable to the Parent bank’s total operating areas. The 2009 results were driven by strong income growth across all businesses, which exceeded the increase in impairment losses, as well as continued cost control.

Interest income was €3,934 million in 2009, a 63.2% or €1,523 million increase from €2,411 million in 2008. Of the total increase, €930 million represented the inclusion of the net interest income in 2009 of Alliance & Leicester. The remaining increase of €593 million was driven by strong income growth across all businesses. Net interest income grew because of active management of spreads with mortgage spreads being higher in new loans and because the impact of the reduction of spreads in deposits was offset by a balanced mix of products and proactive hedging strategies.

116

Net fees and commissions were €993 million in 2009, a 7.2% or €67 million increase from €926 million in 2008. Of the total increase, €302 million represented the inclusion of the fee income in 2009 of Alliance & Leicester. The remaining decrease of €234 million was largely due to lower fees on unsecured lending products, as part of our strategy to reduce unsecured lending exposures, and lower fees from current accounts due to repricing. In addition, mortgage fees were adversely impacted by a reduction in the volume of mortgage redemptions given decreased activity in the market as a result of declining house prices and lower levels of supply.

Gains / losses on financial assets and liabilities were €506 million in 2009, a 1.2% or €6 million increase from €500 million in 2008. Alliance & Leicester contributed a loss of €33 million, however, this was more than offset by an increase of €39 million in the rest of Santander UK, reflecting strong performances in the equity business of Santander Global Banking & Markets (due to sales of retail products through the branch network) and the short term markets business, which benefited from a favorable trading environment caused by wider spreads in an illiquid market.

Administrative expenses were €1,997 million in 2009, a 24.6% or €394 million increase from €1,603 million in 2008. Of the total increase, €564 million represented the inclusion of the administrative expenses in 2009 of Alliance & Leicester. An additional €67 million was due to costs related to Bradford & Bingley’s savings business for which only four months were included in 2008. The remaining administrative expenses decrease was largely due to the removal of duplications across back office and support functions due to the integration of Alliance & Leicester and Bradford & Bingley. Synergies of some £100 million were obtained, higher than the forecast for the year, and work continues in order to eliminate overlapping in back office and support functions in all businesses and achieve the additional savings envisaged for 2011.

Impairment losses on financial assets were €881 million in 2009, a 92.8% or €424 million increase from €457 million in 2008. Of the total increase, €237 million represented the inclusion of Alliance & Leicester’s impairment losses in 2009. The remaining increase of €187 million was distributed across all products with the largest increase relating to mortgages, as the impact of falling house prices and the lagged effect of unemployment, as anticipated, started to emerge. Most of the impact losses occurred in the first half of the year with second half performance stabilizing and in some areas improving. With respect to mortgages, the second half of the year saw a slower rate of growth in arrearages with fewer losses than observed earlier in the year in part as a result of collection activities and mitigating actions, but also due to the low interest rate environment and the slight upturn in housing prices. The improvement in performance across all portfolios in the second half of the year exceeded set expectations. A strong mortgage coverage ratio of close to 21% has been preserved.

The NPL ratio was 1.7% at the end of 2009 (compared to 1.6% at September 2009 and 1.0% at December 2008). The NPL ratio in mortgages rose by a smaller extent, ending the year at 1.4% (compared to 1.3% at September 2009 and 0.9% at December 2008). This ratio compares favorably with the rest of the sector, which, according to the CML, was 2.4% at the end of 2009. The stock of properties in possession dropped to only 0.05% of the total portfolio compared to 0.14% to the CML.

NPL coverage was 44% (compared to 48% at September 2009 and 69% at December 2008). This decline was due to a significant extent to the lower share in total unsecured loans, whose coverage is much higher, as secured loans’ coverage only declined three percentage points (December 2009: 21%; December 2008: 24%). Moreover, this coverage continues to be higher than the average of our competitors in the UK. Coverage of unsecured loans remained at more than 100%.

Profit attributable to the Parent was €1,726 million in 2009, a 38.4% or €479 million increase from €1,247 million in 2008. The comparison with 2008 reflects the inclusion of the results in 2009 of Alliance & Leicester (€308 million).

117

Latin America


										Variations
	2010			2009			2008			2010/2009			2009/2008
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		14,778			11,959			8,025			23.6	%		49.0	%
Income from equity instruments		80			96			58			(16.7	%)		65.5	%
Income from companies accounted for using the equity method		10			10			680			0.0	%		(98.5	%)
Net fees and commissions		4,661			3,925			3,208			18.8	%		22.4	%
Gains/losses on financial assets and liabilities (net)		1,410			1,663			857			(15.2	%)		94.0	%
Other operating income/(expenses) (net)		(163	)		15			10			n/a			50.0	%
TOTAL INCOME		20,776			17,668			12,838			17.6	%		37.6	%
Administrative expenses		(7,193	)		(6,032	)		(4,651	)		19.2	%		29.7	%
Personnel expenses		(3,955	)		(3,210	)		(2,504	)		23.2	%		28.2	%
Other general administrative expenses		(3,238	)		(2,822	)		(2,147	)		14.7	%		31.4	%
Depreciation and amortization		(778	)		(566	)		(404	)		37.5	%		40.1	%
Impairment losses on financial assets (net)		(4,687	)		(4,979	)		(3,020	)		(5.9	%)		64.9	%
Provisions (net)		(990	)		(681	)		(533	)		45.4	%		27.8	%
Impairment losses on other assets (net)		(12	)		(22	)		(6	)		(45.5	%)		266.7	%
Gains/(losses) on other assets (net)		255			40			54			537.5	%		(25.9	%)
OPERATING PROFIT/(LOSS) BEFORE TAX		7,371			5,428			4,278			35.8	%		26.9	%
Income tax		(1,717	)		(1,257	)		(663	)		36.6	%		89.6	%
PROFIT FROM CONTINUING OPERATIONS		5,654			4,171			3,615			35.6	%		15.4	%
Profit/(loss) from discontinued operations (net)		—			91			340			(100.0	%)		(73.2	%)
CONSOLIDATED PROFIT FOR THE YEAR		5,654			4,262			3,955			32.7	%		7.8	%
Profit attributable to non-controlling interest		850			428			346			98.6	%		23.7	%
Profit attributable to the Parent		4,804			3,834			3,609			25.3	%		6.2	%

2010 compared to 2009

In 2010, Latin America contributed 43.3% of the profit attributable to the Parent bank’s total operating areas with strong growth in all countries.

Interest income was €14,778 million in 2010, a 23.6% or €2,819 million increase from €11,959 million in 2009, due to greater volumes, the change of mix toward lower risk products and defending spreads in an environment of lower interest rates than in 2009. In local currency, the increase was 6.2%.

Net fees and commissions were €4,661 million in 2010, a 18.8% or €736 million increase from €3,925 million in 2009. The main drivers of growth were, in local currency, insurance activity (+18%), mutual funds (+14%), credit cards (+10%), cash management (+8%) and foreign trade (+7%). Income from the administration of accounts, however, was 2% lower due to the negative impact from regulatory changes that eliminated certain commissions.

Gains / losses on financial assets and liabilities were €1,410 million in 2010, a 15.2% or €253 million decrease from €1,663 million in 2009, largely due to large capital gains in securities portfolios in 2009 that were not repeated in 2010.

Administrative expenses were €7,193 million in 2010, a 19.2% or €1,161 million increase from €6,032 million in 2009. In Brazil, Mexico, Colombia, Uruguay and Puerto Rico, costs grew (in local currency) in line with or below their respective inflation rates. In Argentina, they increased 26.9% (in local currency) due to the renegotiation of the collective bargaining agreement (+23%) in a context of significant growth in inflation. In Chile, the impact of the earthquake and the signing of a collective bargaining agreement produced an increase of 7.8% (in local currency).

118

Impairment losses on financial assets were €4,687 million in 2010, a 5.9% or €292 million decrease from €4,979 million in 2009. The better macroeconomic environment and outlook, together with active risk management and a notable improvement in risk premiums (from 4.8% in 2009 to 3.6% in 2010), is beginning to be reflected in provisions (-19.5%). The NPL ratio declined 14 basis points, from 4.25% to 4.11%, while coverage was stable at 104%.

Profit attributable to the non-controlling interest was €850 million in 2010, a 98.6% or €422 million increase from €428 million in 2009. This strong increase is the net result of the sale of Santander Brazil shares in 2009 and 2010 and the acquisition of the non-controlling interest of Santander Mexico in September 2010.

Profit attributable to the Parent was €4,804 million in 2010, a 25.3% or €970 million increase from €3,834 million in 2009 reflecting the strong growth of the region, the strict control of expenses (with the increase being below that of inflation) and the intense management of recoveries of bad loans (resulting in a notable decline in loan-loss provisions). The increase in profit attributable to the Parent bank was positively affected by the exchange rate impact and negatively affected by the sale of Banco de Venezuela and by higher non-controlling interest. By segment and excluding these impacts, Retail Banking’s attributable profit was 32.8% higher, Wholesale Banking’s attributable profit declined 8.5% (notably influenced by very good results in 2009) and Asset Management and Insurance’s attributable profit rose 9.5%.

2009 compared to 2008

In 2009, Latin America contributed 37.1% of the profit attributable to the Parent bank’s total operating areas. This was due to a growth in all the countries in the region, with the exception of Mexico.

Interest income was €11,959 million in 2009, a 49% or €3,934 million increase from €8,025 million in 2008. Most of the increase represented the inclusion of Banco Real for all of 2009. Interest income also increased due to effective spread management and volumes. The rise in spreads on loans was due to the measures taken to increase entry prices and try to offset the higher cost of financing in the markets and the higher risk premium. Spreads on loans (with differences between countries) were higher than in 2008. After falling, spreads on deposits stabilized to some extent (decreases in year-end spreads compared to 2008 were 375 basis points in Mexico, 500 basis points in Brazil, 600 basis points in Colombia and 775 basis points in Chile).

Income from companies accounted for using the equity method was €10 million in 2009 compared to €680 million in 2008. This difference was due to the contribution from RFS Holdings, B.V. (essentially, Banco Real) which in 2008 consolidated nine months of profit after tax in this line, while in 2009 Banco Real results were consolidated in the appropriate income statement line items.

Net fees and commissions were €3,925 million in 2009, 22.4% or €717 million increase from €3,208 million in 2008 mostly due to the inclusion of Banco Real for the entire year. Of note was fee income growth in Chile (4% in local currency) as a result of increases in international trade (+50.0%), insurance (+20.5%) and credit cards (+19.4%). In other areas, fees decreased slightly due to regulatory pressures.

Gains / losses on financial assets and liabilities were €1,663 million in 2009, a 94% or €806 million increase from €857 million in 2008 due to inclusion of Banco Real together with higher customer activity and benefits from lower interest rates.

Administrative expenses were €6,032 million in 2009, a 29.7% or €1,381 million increase from €4,651 million in 2008 affected by the consolidation of Banco Real for all of 2009.

Impairment losses on financial assets were €4,979 million in 2009, a 64.9% or €1,959 million increase from €3,020 million in 2008. This increase was due to both the consolidation of Banco Real for the whole year and, equally, to increased provisions across the region. The economic downturn generally eroded credit quality. Most of the impact was felt in the first half of the year, second half performance stabilized in some countries and improved in others as a result of risk management activities. The NPL ratio was 4.2% at the end of 2009 (2.9% in December 2008), while coverage was 105% (108% in December 2008).

119

Profit attributable to the Parent was €3,834 million in 2009, a 6.2% or €225 million increase from €3,609 million in 2008. Retail Banking’s attributable profit declined 9.3% impacted by the sale of Banco de Venezuela and higher non-controlling interest in Brazil. Global Wholesale Banking’s attributable profit increased 77.9% due to 31.2% growth in total income, lower costs and reduced provisions for loan losses, and the attributable profit of Asset Management and Insurance rose 17.4%.

Sovereign


							Variations
(in millions of euros)	2010			2009⁽¹⁾			2010/2009

INTEREST INCOME / (CHARGES)		1,736			1,160			49.7	%
Income from equity instruments		1			1			0.0	%
Income from companies accounted for using the equity method		—			(3	)		(100.0	%)
Net fees and commissions		408			380			7.4	%
Gains/losses on financial assets and liabilities (net)		29			14			107.1	%
Other operating income/(expenses) (net)		(67	)		(89	)		(24.7	%)
TOTAL INCOME		2,107			1,463			44.0	%
Administrative expenses		(832	)		(766	)		8.6	%
Personnel expenses		(468	)		(457	)		2.4	%
Other general administrative expenses		(364	)		(309	)		17.8	%
Depreciation and amortization		(105	)		(115	)		(8.7	%)
Impairment losses on financial assets (net)		(510	)		(571	)		(10.7	%)
Provisions (net)		(66	)		(55	)		20.0	%
Impairment losses on other assets (net)		(19	)		(1	)		1,800.0	%
Gains/(losses) on other assets (net)		(6	)		(2	)		200.0	%
OPERATING PROFIT/(LOSS) BEFORE TAX		569			(47	)		n/a
Income tax		(143	)		22			n/a
PROFIT FROM CONTINUING OPERATIONS		426			(25	)		n/a
Profit/(loss) from discontinued operations (net)		—			—			n/a
CONSOLIDATED PROFIT FOR THE YEAR		426			(25	)		n/a
Profit attributable to non-controlling interest		—			—			n/a
Profit attributable to the Parent		426			(25	)		n/a


(1)		As Sovereign was fully acquired on January 30, 2009, only 11 months for 2009 are presented for 2009.

2010 compared to 2009

In 2010, Sovereign contributed 3.8% of the profit attributable to the Parent bank’s total operating areas.

Interest income for 2010 was €1,736 million, a 49.7% or €576 million increase as compared to €1,160 million for 2009, mainly due to the management of prices in loans, the lower cost of deposits and ALCO management, which offset the lower volume of loans.

Administrative expenses were €832 million in 2010, a 8.6% or €66 million increase as compared to €766 million in 2009. Depreciation and amortization was €105 million in 2010, a 8.7% or €10 million decrease as compared to €115 million in 2009. Operating expenses reflect the efforts to reduce costs, the positive impact of synergies and the optimization of structures.

120

Impairment losses on financial assets were €510 million in 2010, a 10.7% or €61 million decrease as compared to €571 million in 2009, due to containment of bad loans and the recovery capacity during the whole credit cycle. This is reflected in a better than expected evolution of credit quality: the NPL ratio declined from 5.35% to 4.61% and coverage rose from 62% to 75%.

Profit attributable to the Parent was €426 million in 2010, a €451 million increase as compared to a loss of €25 million in 2009. Sovereign consolidated the profitability of its franchise in 2010 and secured the breakeven point reached in the fourth quarter of 2009 due to effective management of spreads, the better mix of loans and deposits, control of costs and enhanced credit quality.

Corporate Activities


										Variations
	2010			2009			2008			2010/2009			2009/2008
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		(2,678	)		(2,210	)		(2,157	)		21.2	%		2.5	%
Income from equity instruments		64			121			229			(47.1	%)		(47.2	%)
Income from companies accounted for using the equity method		(2	)		(15	)		96			(86.7	%)		(115.6	%)
Net fees and commissions		(40	)		(5	)		59			700.0	%		(108.5	%)
Gains/losses on financial assets and liabilities (net)		(141	)		1,376			1,353			n/a			1.7	%
Other operating income/(expenses) (net)		137			52			32			163.5	%		62.5	%
TOTAL INCOME		(2,660	)		(681	)		(388	)		290.6	%		75.5	%
Administrative expenses		(690	)		(695	)		(455	)		(0.7	%)		52.7	%
Personnel expenses		(269	)		(307	)		(200	)		(12.4	%)		53.5	%
Other general administrative expenses		(421	)		(388	)		(255	)		8.5	%		52.2	%
Depreciation and amortization		(132	)		(114	)		(177	)		15.8	%		(35.6	%)
Impairment losses on financial assets (net)		(268	)		(1,861	)		(331	)		(85.6	%)		462.2	%
Provisions (net)		115			(762	)		(989	)		n/a			(23.0	%)
Impairment losses on other assets (net)		(207	)		(100	)		(1,027	)		107.0	%		(90.3	%)
Gains/(losses) on other assets (net)		(180	)		382			1,783			n/a			(78.6	%)
OPERATING PROFIT/(LOSS) BEFORE TAX		(4,022	)		(3,831	)		(1,584	)		5.0	%		141.9	%
Income tax		1,091			2,437			938			(55.2	%)		159.8	%
PROFIT FROM CONTINUING OPERATIONS		(2,931	)		(1,394	)		(646	)		110.3	%		115.8	%
Profit/(loss) from discontinued operations (net)		(13	)		(15	)		—			(13.3	%)		n/a
CONSOLIDATED PROFIT FOR THE YEAR		(2,944	)		(1,409	)		(646	)		108.9	%		118.1	%
Profit attributable to non-controlling interest		(25	)		(24	)		1			4.2	%		n/a
Profit attributable to the Parent		(2,919	)		(1,385	)		(647	)		110.8	%		114.1	%

2010 compared to 2009

Interest income /(charges) for Corporate Activities was a loss of €2,678 million in 2010, a 21.2% increase as compared to 2009 due to higher financial costs of credit. Corporate Activities mainly provides liquidity to the businesses of the Parent bank in Spain at the euribor or swap rate. The higher cost of credit, largely due to liquidity tensions in the market, was not immediately passed on to the various businesses. This increased cost was reflected in the financing of the goodwill of the Group’s investments and also proportionally raised the cost of such investments’ financing. The net interest income of the ALCO portfolios showed no substantial changes.

121

Income from equity instruments was €64 million in 2010, a 47.1% decrease from 2009. This item has declined significantly in recent years as a result of the disposal of our equity stakes.

Gains / losses on financial assets and liabilities were a loss of €141 million in 2010, a €1,517 million decrease as compared to gains of €1,376 million in 2009. This item includes gains / losses from centralized management of interest rate and currency risk of the Parent bank as well as from equities. The main reason for the variation in 2010 was due to hedging. In 2009, the impact from hedging the results of units was low, and there were positive returns on the ALCO portfolio of the Parent bank and on the business of equity stakes. In 2010, the situation reverted, with higher losses from the hedging of the results of subsidiaries (which were compensated with higher results in euros for the business units) and allowances for financial investments in the portfolio of equity stakes.

Administrative expenses were €690 million in 2010, in line with €695 million in 2009. The growth in general expenses from rentals was offset by the reduction in personnel expenses from variable remuneration.

In 2010, Corporate Activities net provisions were releases of €115 million, impairment losses on financial assets were €268 million, impairment losses on other assets were €207 million and losses on other assets were €180 million. Of note was that the significant gains and provisions booked in 2009 and described below did not occur in 2010.

Loss attributable to the Parent amounted to €2,919 million in 2010, a €1,534 million increase as compared to a loss of €1,385 million in 2009.

2009 compared to 2008

Net interest income for Corporate Activities was a loss of €2,210 million in 2009 in line with 2008.

Income from equity instruments was €121 million in 2009, a 47.2% decrease from 2008 due to lower dividends from Royal Bank of Scotland and Fortis (€436 million in 2009 versus €553 million in 2008).

Income from companies accounted for using the equity method was a loss of €15 million in 2009 compared to a gain of €96 million in 2008 due to the sale of the stake in CEPSA.

Gains / losses on financial assets and liabilities were €1,376 million in 2009, in line with €1,353 million in 2008. This includes results from centralized management of interest rate and currency risk of the Parent as well as from equities.

Administrative expenses were €695 million in 2009, a 52.7% increase as compared to 2008, partly offset by lower depreciation charges. The sale of Santander Financial City in Spain, together with the disposal of other buildings, generated higher administrative costs (higher rent) and lower amortizations.

In 2009, net provisions were €762 million, impairment losses were €1,861 million and gains on other assets were €382 million. These line items include the following: gains of €1,499 million from the initial public offering of Santander Brasil and gains of €218 million from the sale of Attijariwafa Bank. This was offset by loan loss provisions of €1.5 billion (€1,041 million net of taxes), provisions for real estate acquired of €814 million (€554 million net of taxes), an additional provision for Metrovacesa for €269 million, a restructuring fund for GE and Sovereign for €260 million and other funds for €463 million, including early retirements.

Loss attributable to the Parent amounted to €1,385 million in 2009 because of lower income (due to the sale of the stake in CEPSA and lower dividends from RBS and Fortis), higher costs (the sale of Santander Financial City in Spain which generated higher administrative costs) and higher provisions (mainly related to Metrovacesa).

122

Second level (business):

Retail Banking


										Variations
	2010			2009			2008			2010/2009			2009/2008
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		28,994			25,800			17,613			12.4	%		46.5	%
Income from equity instruments		101			128			154			(21.1	%)		(16.9	%)
Income from companies accounted for using the equity method		19			14			556			35.7	%		(97.5	%)
Net fees and commissions		8,058			7,527			6,861			7.1	%		9.7	%
Gains/losses on financial assets and liabilities (net)		1,333			1,452			1,100			(8.2	%)		32.0	%
Other operating income/(expenses) (net)		(384	)		(224	)		31			71.4	%		(822.6	%)
TOTAL INCOME		38,121			34,697			26,315			9.9	%		31.9	%
Administrative expenses		(13,929	)		(12,681	)		(9,857	)		9.8	%		28.6	%
Personnel expenses		(8,002	)		(7,236	)		(5,806	)		10.6	%		24.6	%
Other general administrative expenses		(5,927	)		(5,445	)		(4,051	)		8.9	%		34.4	%
Depreciation and amortization		(1,623	)		(1,362	)		(946	)		19.2	%		44.0	%
Impairment losses on financial assets (net)		(10,168	)		(9,744	)		(5,672	)		4.4	%		71.8	%
Provisions (net)		(1,222	)		(1,010	)		(607	)		21.0	%		66.4	%
Impairment losses on other assets (net)		(69	)		(57	)		(24	)		21.1	%		137.5	%
Gains/(losses) on other assets (net)		235			(33	)		43			n/a			n/a
OPERATING PROFIT/(LOSS) BEFORE TAX		11,345			9,810			9,252			15.6	%		6.0	%
Income tax		(2,743	)		(2,341	)		(1,825	)		17.2	%		28.3	%
PROFIT FROM CONTINUING OPERATIONS		8,602			7,469			7,427			15.2	%		0.6	%
Profit/(loss) from discontinued operations (net)		(14	)		46			319			n/a			(85.6	%)
CONSOLIDATED PROFIT FOR THE YEAR		8,588			7,515			7,746			14.3	%		(3.0	%)
Profit attributable to non-controlling interest		648			333			434			94.6	%		(23.3	%)
Profit attributable to the Parent		7,940			7,182			7,312			10.6	%		(1.8	%)

2010 compared to 2009

In 2010, the Group’s Retail Banking segment generated 71.5% of the profit attributed to the Group’s total operating areas.

Interest income / (charges) was €28,994 million in 2010, a 12.4% or €3,194 million increase from €25,800 million in 2009, driven by management of spreads against a background of weak business growth. This variation was positively impacted by the increase in scope of consolidation and exchange rates.

Net fees and commissions were €8,058 million in 2010, a 7.1% or €531 million increase from €7,527 million in 2009. This variation was also positively affected by the increase in scope of consolidation and exchange rates.

Gains / (losses) on financial assets and liabilities were €1,333 million in 2010, a 8.2% or €119 million decrease from €1,452 million in 2009.

123

Administrative expenses were €13,929 million in 2010, a 9.8% or €1,248 million increase from €12,681 million in 2009 while depreciation and amortization costs were €1,623 million in 2010, a 19.2% or €261 million increase from €1,362 million in 2009. These operating costs remained flat, eliminating the effects of the increase in the scope of consolidation and of the exchange rates.

Impairment losses on financial assets were €10,168 million in 2010, a 4.4% or €424 million increase from €9,744 million in 2009. These figures reflect the impact of the extraordinary provision in Spain made in the third quarter of 2010 because of the Bank of Spain’s new regulations. Excluding this one-off impact and the scope of consolidation and foreign exchange effects, provisions were lowered by 10.1%, reflecting the quality of integral management of risk in all of the Group’s units.

Profit attributable to non-controlling interest was €648 million in 2010, a €315 million increase as compared to €333 million in 2009. This increase is the net result of the placement of Santander Brazil shares in 2009 and 2010 and acquisition of the non-controlling interest of Santander Mexico in September 2010.

Profit attributable to the Parent was €7,940 million in 2010, a 10.6% or €758 million increase from €7,182 million in 2009 reflecting an increase in interest income together with a rigorous control of expenses.

Retail Banking in Continental Europe was affected the most by the economic environment. Total income declined 3.0% while profit attributable to the Parent bank dropped 23.1% because of higher provisions. The main drivers were moderate business volumes and falls in lending, good management of asset spreads in an environment of strong pressure and low interest rates, the impact of the Group’s policy for capturing deposits, control of costs and the effect of the extra provisions under the new regulations.

The profit of Retail Banking in the United Kingdom was 16.0% higher than in 2009. Growth in total income was spurred by net interest income and lower costs.

The results of Retail Banking in Latin America came from growth in basic revenues (net interest income and fee income), control of costs compatible with business development (benefiting from Brazil’s synergies) and lower loan-loss provisions. Total income and costs rose moderately. As a result of a lower level of provisions profit attributable to the Parent bank rose 41.6% albeit with increased non-controlling interest.

Despite the negative impact of markets, Global Private Banking’s volume of managed assets was higher than in 2009 due to the capturing of new business and more customers. The volume stood at €97,888 million at the end of 2010, a 10.6% increase compared to 2009 with the effect of the variation in the scope of consolidation eliminated. Profit attributable to the Parent bank was €283 million (as compared to €330 million in 2009). Total income was hit by net interest income due to the evolution of interest rates, offset by higher fee income. Expenses, due to continued strict control, remained relatively stable and provisions continued to have a low share of costs.

2009 compared to 2008

The Group’s Retail Banking segment generated 69.5% of the operating areas’ total profit attributable to the Parent bank.

Interest income increased 46.5% to €25,800 million due to the impact of new acquisitions (including Banco Real, Alliance & Leicester, Bradford & Bingley and GE Money) and effective margin management in all the regions. Loans grew 11% in 2009, while deposits experienced a growth of 23%, more positively impacted by the new acquisitions.

Net fees and commissions were €7,527 million in 2009, a 9.7% increase from €6,861 million in 2008, favorably influenced by the new acquisitions.

Gains / losses on financial assets and liabilities were €1,452 million in 2009, a 32.0% increase from €1,100 million in 2008.

124

Administrative expenses were €12,681 million in 2009, a 28.6% increase from €9,857 million in 2008. This increase was due to the inclusion of the administrative expenses of the new acquisitions. The underlying administrative expenses (excluding exchange rate effects and acquisitions) remained flat largely due to the streamlining of back-office operations and support functions due to the integration synergies. This had a positive effect on our cost income ratio.

Impairment losses on financial assets were €9,744 million in 2009, a 71.8% or €4,072 million increase from €5,672 million in 2008. This increase was due to the new acquisitions and a higher charge distributed across all products with the largest increase relating to mortgages, as the impact of falling housing prices and the lagging effect of unemployment, as anticipated, started to emerge in some countries. Most of the impact came through in the first half of the year, with second half performance stabilizing and in some areas improving.

Profit attributable to the Parent was €7,182 million in 2009, a 1.8% decrease from €7,312 million in 2008.

Retail Banking in Continental Europe increased its net interest income by 23.2% while attributable profit decreased by 3.7%. The main drivers were moderate business volumes, good management of spreads in an environment of lower interest rates, control of costs (flat on a like-for-like basis) and increase of impairment losses.

The profit of Retail Banking in the United Kingdom was 34.6% higher due to the good performance of Santander UK and the consolidation of Alliance & Leicester and Bradford & Bingley. The drivers were the same as for other units: higher revenues spurred by net interest income and lower growth in costs offset by higher loan-loss provisions.

The results of Retail Banking in Latin America are explained by the full consolidation of Banco Real for the all of 2009 together with growth in customer business, good net interest income performance within the region’s environment of lower economic growth, effective control of expenses compatible with business development and savings from synergies in Brazil. Net interest income rose 52.3%, compared to 2008, and total income was 36.6% higher compared to 2008, while operating expenses grew at a slightly slower pace improving the efficiency ratio. However, as a result of the big increase in loss provisions, attributable profit was 12.1% lower, although on an improving trend.

Private banking activity was lower in the first half of 2009 because of the economic developments in the second half of 2008. Total income declined 6.9% due to the reduction in average volumes managed and the shift in customer preferences towards a more conservative mix of products. This was mitigated to some extent by the 9.9% decline in personnel and general costs. Attributable profit was 1.6% higher at €330 million.

125

Global Wholesale Banking


										Variations
	2010			2009			2008			2010/2009			2009/2008
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		2,676			2,508			1,892			6.7	%		32.6	%
Income from equity instruments		197			187			164			5.3	%		14.0	%
Income from companies accounted for using the equity method		—			—			87			n/a			(100.0	%)
Net fees and commissions		1,292			1,128			883			14.5	%		27.7	%
Gains/losses on financial assets and liabilities (net)		1,364			1,384			995			(1.4	%)		39.1	%
Other operating income/(expenses) (net)		(22	)		(22	)		(45	)		—			(51.1	%)
TOTAL INCOME		5,507			5,185			3,976			6.2	%		30.4	%
Administrative expenses		(1,343	)		(1,169	)		(1,060	)		14.9	%		10.3	%
Personnel expenses		(898	)		(758	)		(672	)		18.5	%		12.8	%
Other general administrative expenses		(445	)		(411	)		(388	)		8.3	%		5.9	%
Depreciation and amortization		(137	)		(88	)		(98	)		55.7	%		(10.2	%)
Impairment losses on financial assets (net)		(5	)		34			(281	)		(114.7	%)		n/a
Provisions (net)		(11	)		5			(26	)		(320.0	%)		n/a
Impairment losses on other assets (net)		(10	)		(3	)		—			233.3	%		n/a
Gains/(losses) on other assets (net)		5			—			4			n/a			(100.0	%)
OPERATING PROFIT/(LOSS) BEFORE TAX		4,006			3,964			2,515			1.1	%		57.6	%
Income tax		(1,071	)		(1,084	)		(775	)		(1.2	%)		39.9	%
PROFIT FROM CONTINUING OPERATIONS		2,935			2,880			1,740			1.9	%		65.5	%
Profit/(loss) from discontinued operations (net)		—			—			—			n/a			n/a
CONSOLIDATED PROFIT FOR THE YEAR		2,935			2,880			1,740			1.9	%		65.5	%
Profit attributable to non-controlling interest		238			132			(1	)		80.3	%		n/a
Profit attributable to the Parent		2,697			2,748			1,741			(1.9	%)		57.8	%

2010 compared to 2009

The Global Wholesale Banking segment generated 24.3% of the operating areas’ total profit attributable to the Group in 2010. The rise in revenues was offset by higher costs and provisions and contributed to a 1.9% fall in profit attributable to the Parent bank. Other reasons for this fall included higher non-controlling interest in Brazil because of the listing in October 2009 and the higher provisions. Nonetheless, the performance in 2010 was still notable and only slightly behind 2009, a record year in revenues and profits which were spurred by high spreads and volatility and reduced competition. The normalization of the environment in 2010 contributed to positive results, which continued to be backed by a business model focused on customers, the area’s global capacities and its connection with local units.

Interest income / (charges) were €2,676 million in 2010, a 6.7% or €168 million increase from €2,508 million in 2009, after absorbing deleveraging of mature markets, the higher cost of liquidity and normalization of spreads.

Net fees and commissions were €1,292 million in 2010, a 14.5% or €164 million increase from €1,128 million in 2009, aided by the disintermediation trends in some Latin American countries. In these countries, more companies are obtaining liquidity through bond issuances made with the Bank instead of through loans. As a result, commissions have increased.

Gains / (losses) on financial assets and liabilities were €1,364 million in 2010, a 1.4% or €20 million decrease from €1,384 million in 2009.

126

Administrative expenses were €1,343 million in 2010, a 14.9% or €174 million increase from €1,169 million in 2009, reflecting the investments made and some exchange rate impact.

Depreciation and amortization costs were €137 million in 2010, a 55.7% or €49 million increase from €88 million in 2009.

Impairment losses on financial assets were €5 million in 2010 as compared to releases of €34 million in 2009.

Profit attributable to non-controlling interest was €238 million in 2010, a €106 million increase as compared to €132 million in 2009.

Profit attributable to the Parent was €2,697 million in 2010, a 1.9% or €51 million decrease from €2,748 million in 2009. The results were supported by strong and diversified client revenues (86% of the total). They were 3.4% higher than in 2009. The weak evolution in Spain was offset by a higher contribution in euros from other large areas.

The product areas also made progress in their increasingly global business vision, which is adapted to the changing needs of markets and clients. Their performance was as follows:

Global Transaction Banking, which includes Cash Management, Trade Finance and Basic Financing, increased its client revenues by 15%. Growth was solid but lower than in 2009 because of a smaller rise in volumes and lower spreads.

During 2010 Corporate Finance (including Mergers and Acquisitions and Asset & Capital Structuring) stepped up its efforts in origination and presentation of new ideas. This resulted in a larger and more solid pipeline of projects and allowed for maintaining operations in an unfavorable environment. Customer revenues rose 44% due to a very active fourth quarter in Brazil and the UK, which returned business to pre-crisis levels.

Credit Markets, which include origination and risk management units and distribution, with capital market instruments as well as pure loans and structured financings for the corporate, financial and public sectors, continued to generate solid client revenues (+14%) with a good performance by products and countries.

The client revenues of the rates area (including trading activities, structuring and distribution of foreign exchange and bonds and interest rate derivatives for the Group’s wholesale and retail clients) declined 10%. The larger volumes with institutional and mid-corp clients did not offset the impact on revenues of the normalization of spreads since the highs reached in 2009.

The revenues of the Global Equities area (activities related to the equity markets, settlement and custody) in 2010 were 10% lower than in 2009 (a record year). The factors behind the fall were the considerable degree of uncertainty in the markets, the significant fall in share prices, high volatility and sharp declines in trading volumes. Nonetheless, Santander managed to defend its position in key markets.

2009 compared to 2008

Global Wholesale Banking generated 26.6% of the operating areas’ profit attributable to the Parent bank in 2009. Growth was generated by clients in our core markets and was positively influenced by our diversified portfolio.

This performance was backed by a customer-focused business model, the area’s global reach and its connection with local units, and strict control of expenses and risks. Another decisive factor is the strength of the Group’s capital and liquidity which, within rigorous control of both variables, enabled us to maintain a high level of unrestricted activity and take on new operations.

127

The business model and the strong balance sheet were combined with a more favorable environment, higher spreads and volatilities than in 2008 and many competitors focused on aspects other than pure business. All of this enabled Santander to penetrate attractive business segments profitably and occupy spaces left by others without increasing risk levels.

Interest income was €2,508 million in 2009, a 32.6% or €616 million increase from €1,892 million in 2008. Net fees and gains on financial assets and liabilities increased 27.7% and 39.1%, respectively, due to increased transaction volumes and margin improvements.

Administrative expenses were €1,169 million in 2009, a 10.3% increase from €1,060 million in 2008. This increase, much lower than that of total income (+30.4%), was due to strict control of expenses and allowed for improvement in the efficiency ratio.

Impairment losses on financial assets were a gain of €34 million in 2009 versus a loss of €281 million in 2008. The main reason is a decrease in provisions, which had increased in 2008 due to certain large operations that took place in the second half of 2008.

Profit attributable to the Parent was €2,748 million in 2009, a 57.8% increase from €1,741 million in 2008. All geographic areas increased their revenues: Continental Europe (+27%), United Kingdom (+7%) and Latin America (+26%). These growth rates were achieved with strict management of volumes and risks. The area’s risk weighted asset levels at the end of 2009 were lower than in 2008.

The product areas also made progress in their increasingly global business vision, which is adapted to the changing needs of markets and customers. Their performance was as follows:

Global Transaction Banking: increased its customer revenues 34%, backed by solid market position, where it provides local and regional solutions for corporate and institutional customers.

Corporate Finance: reduced its customer revenues by 41% due to the decline in the number and size of corporate operations and the impact on year-on-year comparisons of the high revenues from a particular operation in 2008. Excluding this operation, and backed by the strong performance of the asset & capital structuring business, revenues were almost in line with those in 2008.

Credit Markets: increased their customer revenues by 76% backed by all products and countries, particularly Spain and Latin America. In loans, Santander enjoyed a good year and participated in several large operations that contributed to the total with more than €25 billion.

Rates: increased their customer revenues by 14% backed by all countries and business lines, although with slowing growth (+64% in the first half and +41% in the first nine months). The strong growth at the start of the year, based on higher spreads because of the lack of depth of the market, greater penetration and good credit management, was reduced in the last part of 2009 following a trend toward normalization of market conditions.

128

Asset Management and Insurance


										Variations
	2010			2009			2008			2010/2009			2009/2008
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		232			201			190			15.4	%		5.8	%
Income from equity instruments		—			—			6			—			(100.0	%)
Income from companies accounted for using the equity method		—			—			53			—			(100.0	%)
Net fees and commissions		424			431			464			(1.6	%)		(7.1	%)
Gains/losses on financial assets and liabilities (net)		50			34			26			47.1	%		30.8	%
Other operating income/(expenses) (net)		375			338			254			10.9	%		33.1	%
TOTAL INCOME		1,081			1,004			993			7.7	%		1.1	%
Administrative expenses		(294	)		(279	)		(293	)		5.4	%		(4.8	%)
Personnel expenses		(161	)		(149	)		(135	)		8.1	%		10.4	%
Other general administrative expenses		(133	)		(130	)		(158	)		2.3	%		(17.7	%)
Depreciation and amortization		(48	)		(32	)		(18	)		50.0	%		77.8	%
Impairment losses on financial assets (net)		(2	)		(10	)		—			(80.0	%)		n/a
Provisions (net)		(15	)		(36	)		(18	)		(58.3	%)		100.0	%
Impairment losses on other assets (net)		—			(1	)		2			(100.0	%)		n/a
Gains/(losses) on other assets (net)		1			—			1			n/a			(100.0	%)
OPERATING PROFIT/(LOSS) BEFORE TAX		723			646			667			11.9	%		(3.1	%)
Income tax		(200	)		(219	)		(174	)		(8.7	%)		25.9	%
PROFIT FROM CONTINUING OPERATIONS		523			427			493			22.5	%		(13.4	%)
Profit/(loss) from discontinued operations (net)		—			—			—			—			—
CONSOLIDATED PROFIT FOR THE YEAR		523			427			493			22.5	%		(13.4	%)
Profit attributable to non-controlling interest		60			28			22			114.3	%		27.3	%
Profit attributable to the Parent		463			399			471			16.0	%		(15.3	%)

2010 compared to 2009

In 2010 this segment generated 4.2% of the operating areas’ total attributable profit.

Total income in 2010 was €1,081 million, a 7.7% or €77 million increase from €1,004 million in 2009, boosted by insurance income and stable revenue from mutual funds.

Administrative expenses were €294 million in 2010, a 5.4% increase from €279 million in 2009.

Depreciation and amortization increased by €16 million in 2010 because of the one-off impact of the change in accounting criteria for amortization of intangible insurance assets.

Profit attributable to the Parent was €463 million in 2010, an increase of 16.0% or €64 million from €399 million in 2009, as a result of lower provisions and a more favorable tax rate which offset the higher non-controlling interest in Brazil.

Santander Asset Management generated profit attributable to the Parent bank in 2010 of €81 million, higher than in 2009 and reflecting the recovery in volumes, the rise in average commissions in the main markets due to the better product mix and a reduction in loan loss provisions.

129

Total revenues from mutual and pension funds, before distribution to the distribution networks, amounted to €1,278 million (+8%), while the total contribution to profits rose 12.3% to €1,099 million.

Total managed assets amounted to more than €124 billion at the end of 2010 (+7% and benefiting from the appreciation of currencies against the euro).

The global area of Santander Insurance generated profit attributable to the Parent bank of €381 million, 9.0% more than in 2009. The main reason for this was greater activity, which absorbed the higher non-controlling interest in Brazil.

Total revenues (the area’s total income plus fee income paid to the networks) were €2,688 million, 11% more than in 2009 (+3.5% in local currency).

The total contribution to the Group’s results (profit before tax of the insurance companies and brokers and fees received by networks) increased 10.7% to €2,491 million (+3.3% in local currency).

2009 compared to 2008

This segment accounted for 3.9% of profit attributable to the Parent bank in 2009.

Total income increased slightly in 2009 (+1.1%) as a result of higher revenues from insurance partly offset by a decrease in asset management, particularly fee income. A key factor was the sharp decline in the managed volumes of mutual funds, mainly in Spain.

Administrative expenses were €279 million in 2009, a 4.8% decrease from €293 million in 2008 reflecting continuous efforts to adapt the structures to the new revenue environment.

Profit attributable to the Parent was €399 million, a 15.3% decrease due to higher impairment losses on assets, provisions and tax rate.

Santander Asset Management generated fee and commission income in 2009 of €1,178 million, 23.6% lower than in 2008 because of the preference for liquidity and deposits by financial agents and the impact of the markets on portfolios, both in lower average volumes under management as well as their composition (more conservative and lower return).

Of note, however, was the trend towards stabilization of revenues as of the second quarter in contrast to the double digit falls at the end of 2008 and the start of 2009. This was due to the gradual recovery of mutual fund markets, which has begun in Latin America and is now spreading to Europe, which improved volumes.

Total managed assets stood at €116,500 million at the end of 2009, 15% more than a year earlier but still 6% below the average volume of 2008.

Attributable profit was €54 million (-65.9%), after deducting operating expenses and fees paid to the commercial networks.

Santander Insurance generated fee and commission income in 2009 of €1,861 million, a 6.0% increase as compared to 2008.

Total income in this area amounted to €728.7 million, a 21.5% increase as compared to the previous year. This increase together with moderate growth of general administrative expenses (+3.8) lead to attributable profit of €350 million, 12.2% more than in 2008.

130

Santander Insurance continued to progress in its global business model and foster the development of new products via its distribution channels. It also consolidated its position with the acquisition of the 50% of the insurer Real Tokio Marine Vida e Previdencia in Brazil that the Group did not own and the integration of the businesses of Alliance & Leicester, GE Money and Sovereign.

Premium income was 14% lower, eroded by the Group’s reduced lending (which affected insurance products related to credits) and customers’ greater preference for liquidity, which reduced the demand for savings insurance.

Financial Condition

Assets and Liabilities

Our total assets were €1,217,500.7 million at December 31, 2010, a 9.6% or €106,971.2 million increase from total assets of €1,110,529.5 million at December 31, 2009. Our gross loans and advances to corporate clients, individual clients and government and public entities, including the trading portfolio, other financial assets at fair value and loans, increased by 6.2% to €743,850.9 million at December 31, 2010 from €700,424.0 million at December 31, 2009. The increase in our total assets is mostly explained by the following two positive effects: the exchange rate impact from the appreciation of currencies against the euro during 2010, which amounted to 17% for the Chilean peso, 14% for the Mexican peso, 13% for the Brazilian real, 8% for the dollar and 3% for sterling; and a small rise in the perimeter due to the acquisitions of Santander Consumer Finance. The impact of both effects on customer balances was +5 percentage points in loans and in customer funds.

Customer deposits, which comprise deposits from clients and securities sold to clients under agreements to repurchase, increased by 21.6% from €506,976.2 million at December 31, 2009, to €616,375.8 million at December 31, 2010. This increase was also affected by both the exchange rate impact and the consolidation effect described above. After adjusting for these effects, the rise in deposits was 17% reflecting the focus on capturing customer funds by all of the Group’s units. Other managed funds, including mutual funds, pension funds, managed portfolios and savings-insurance policies, increased by 0.9% from €144,312.7 million at December 31, 2009, to €145,546.7 million at December 31, 2010.

In addition, and as part of the global financing strategy, during 2010 the Group issued €116,239 million of senior debt (including Santander UK’s medium term program), including €10,613 million of mortgage bonds (cédulas hipotecarias) and €287 million of subordinated debt.

During 2010 €112,730 million of senior debt (including Santander UK’s medium term program), including €3,550 million of mortgage bonds (cédulas hipotecarias) and €7,728 million of subordinated debt, matured.

In the first quarter of 2010, in order to improve its capital structure and strengthen the balance sheet, Grupo Santander successfully completed a purchase offer for a series of subordinated debt issues. This meant purchase and subsequent cancellation of debt securities for the following nominal amounts: €181 million, ₤1,309 million and US$1,632 million.

Goodwill was €24,622 million at the end of 2010, a €1,757 million increase from €22,865 million at the end of 2009 mainly due to the impact of exchange rates.

Capital

Stockholders’ equity, net of treasury stock, at December 31, 2010, was €75,018.3 million, an increase of €6,351.7 million or 9.3% from €68,666.6 million at December 31, 2009, mainly due to the decrease of negative valuation adjustments, the increase of reserves and the decrease of dividends paid partially offset by a decrease in the consolidated income.

131

Our eligible stockholders’ equity was €69,347 million at December 31, 2010. The surplus over the minimum required by the Bank of Spain was €21,886 million. In accordance with the Basel II Accord criteria (which provide the framework under which Spanish entities must report capital ratios as of June 30, 2008), at December 31, 2010 the BIS II ratio was 13.1% (as compared to 14.2% at December 31, 2009), Tier I Capital was 10.0% (10.1% a year earlier) and core capital was 8.8% (8.6% in December 2009). See Item 4 of Part I, “Information on the Company—B. Business Overview—Supervision and Regulation—Capital Adequacy Requirements”.

B. Liquidity and capital resources

Management of liquidity

For information about our liquidity risk management process, see Item 11 of Part I, “Quantitative and Qualitative Disclosures About Market Risk—Part. 10 Market Risk—Statistical Tools for Measuring and Managing Market Risk—Non Trading activity—Liquidity Risk” and “—Quantitative analysis—B. Non Trading Activity—Asset and liability management— Management of structural liquidity”.

Sources of funding

As a financial group, a principal source of our liquidity is our customer deposits which consist primarily of demand, time and notice deposits. In addition, we complement the liquidity generated by our customer deposits through access to the domestic and international capital markets and to the interbank market (overnight and time deposits). For this purpose, we have in place a series of domestic and international programs for the issuance of commercial paper and medium and long- term debt. We also maintain a diversified portfolio of liquid and securitized assets throughout the year. In addition, another source of liquidity is the generation of cash flow.

At December 31, 2010, we had outstanding €192.9 billion of senior debt, of which €93.2 billion were mortgage bonds and €6.9 billion were promissory notes. Additionally, we had €30.5 billion in outstanding subordinated debt (which includes €6.9 billion preferred securities and €0.4 billion in preferred shares).

The following table shows the average balances during the years 2010, 2009 and 2008 of our principal sources of funds:


	2010		2009		2008
	(in thousands of euros)
Due to credit entities		134,577,332		141,930,426		114,360,961
Customer deposits		568,914,742		463,602,299		354,193,915
Marketable debt securities		209,005,806		221,230,091		237,824,647
Subordinated debt		34,095,612		39,008,547		36,257,108

Total		946,593,492		865,771,363		742,636,631

The average maturity of our outstanding debt as of December 31, 2010 is as follows:


(1) Senior debt		2.7 years
(2) Mortgage debt		13.0 years
(3) Dated subordinated debt		6.8 years

For more information see Notes 22.b, 23.a and 51.a to our consolidated financial statements.

132

The cost and availability of debt financing are influenced by our credit ratings. A reduction in these ratings could increase the cost of and reduce our market access to debt financing. Our credit ratings are as follows:


	Long-Term	Short-Term	Financial Strength

Standard & Poor’s	AA	A1+
Fitch	AA	F1+	A/B
Moody’s	Aa2	P1	B-
DBRS	AA	R1 (high)

Our total customer deposits, excluding assets sold under repurchase agreements, totaled €570.7 billion at December 31, 2010. Loans and advances to customers (gross) totaled €743.9 billion at the same date.

We remain well placed to access various wholesale funding sources from a wide range of counterparties and markets, and the changing mix between customer deposits and repos, deposits by banks and debt securities in issue primarily reflects comparative pricing, maturity considerations and investor counterparty demand rather than any material perceived trend.

We use our liquidity to fund our lending and investment securities activities, for the payment of interest expense, for dividends paid to shareholders and the repayment of debt.

We, Grupo Santander, are a European, Latin American and North American financial group. Although at this moment we are not aware of any material legal or economic restrictions on the ability of our subsidiaries to transfer funds to the Bank (the Parent company) in the form of cash dividends, loans or advances, capital repatriation and other forms, or to have access to foreign currency at the official exchange rate, there is no assurance that in the future such restrictions will not be adopted or how they would affect our business. Nevertheless, the geographic diversification of our businesses limits the effect of any restrictions that could be adopted in any given country.

We believe that our working capital is sufficient for our present requirements and to pursue our planned business strategies.

As of December 31, 2010, and to the present date, we did not, and presently do not, have any material commitments for capital expenditures.

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

We do not currently conduct any significant research and development activities.

D. Trend information

The global financial services sector is likely to remain competitive with a large number of financial service providers and alternative distribution channels. Additionally, consolidation in the sector (through mergers, acquisitions or alliances) is likely to occur as other major banks look to increase their market share, combine with complementary businesses or strengthen their balance sheets. In addition, regulatory changes will take place in the future that we expect will increase the overall level of regulation in the markets.

The following are the most important trends, uncertainties and events that are reasonably likely to have a material adverse effect on the Parent bank or that would cause the disclosed financial information not to be indicative of our future operating results or our financial condition:

•

a continued downturn in the Spanish and the United Kingdom real estate markets, and a corresponding increase in mortgage defaults, which could impact our NPL and decrease consumer confidence and disposable income;

133

•

uncertainties relating to economic growth expectations and interest rates cycles, especially in the United States, Spain, the United Kingdom, other European countries and Latin America, and the impact they may have over the yield curve and exchange rates;

•

the resulting effect of the global economic slowdown on Europe and the US and fluctuations in local interest and exchange rates;

•

continued changes in the macroeconomic environment, such as sustained unemployment above historical levels, could further deteriorate the quality of our customers’ credit;

•

increases in our cost of funding, partially as a result of the fragility of the Spanish, Portuguese, Irish and Greek economies, could adversely affect our net interest margin as a consequence of timing differences in the repricing of our assets and liabilities;

•

the effects of withdrawal of significant monetary and fiscal stimulus programs and uncertainty over government responses to growing public deficits;

•

continued instability and volatility in the financial markets;

•

a drop in the value of the euro relative to the US dollar, the Sterling pound or Latin American currencies;

•

inflationary pressures, particularly in Latin America, because of the effect they may have in relation to increases of interest rates and decreases of growth;

•

increased consolidation of the global financial services sector, which could further reduce our spreads;

•

although it is foreseeable that entry barriers to domestic markets in Europe will eventually be lowered, our possible plans of expansion into other markets could be affected by regulatory requirements of the national authorities of these countries;

•

acquisitions or restructurings of businesses that do not perform in accordance with our expectations or that subject us to previously unknown risks;

•

increased regulation, government intervention and new laws prompted by the financial crisis which could change our industry and require us to modify our businesses or operations;

•

the risk of further reductions in liquidity and increases of credit spreads as a consequence of the crisis in the financial markets, which could affect not only our cost of funding but also the value of our proprietary portfolios and our assets under management.

134

E. Off-balance sheet arrangements

As of December 31, 2010, 2009 and 2008, we had outstanding the following contingent liabilities and commitments:


	2010		2009		2008
	(in thousands of euros)
Contingent liabilities:
Financial guarantees and other sureties		18,395,112		20,974,258		15,614,342
Irrevocable documentary credits		3,815,796		2,636,618		3,590,454
Other guarantees		36,733,325		35,192,187		45,613,498
Other contingent liabilities		851,020		453,013		504,900

		59,795,253		59,256,076		65,323,194

Commitments:
Balances drawable by third parties		179,963,765		150,562,786		123,329,168
Other commitments		23,745,628		12,967,970		8,395,838

		203,709,393		163,530,756		131,725,006

Total:		263,504,646		222,786,832		197,048,200

For more information see Note 35 to our consolidated financial statements.

In addition to the contingent liabilities and commitments described above, the following table provides information regarding off-balance sheet funds managed by us as of December 31, 2010, 2009 and 2008:


	2010		2009		2008
	(in thousands of euros)
Off-balance sheet funds:
Mutual funds		113,509,684		105,216,486		90,305,714
Pension funds		10,964,711		11,309,649		11,127,918
Other managed funds		20,314,226		18,364,168		17,289,448

		144,788,621		134,890,303		118,723,080

Relationship with unconsolidated companies

We have holdings in companies over which we are in a position to exercise significant influence, but that we do not control or jointly control. According to IFRS-IASB, these investments in associated companies are accounted for using the equity method (see further details of these companies in Exhibit II to our consolidated financial statements).

Transactions with these companies are made under market conditions and are closely monitored by our regulatory authorities. See Note 53 to our consolidated financial statements for further information.

Also, we use special purpose vehicles (fondos de titulización) in our securitization activity. According to the IFRS, only those vehicles that meet certain requirements are consolidated in the Group’s financial statements. We are not required to repurchase assets from or contribute additional assets to any of these special purpose vehicles. We do, however, provide in the ordinary course of business certain loans (amounting to €270.4 million to fondos de titulización in Spain as of December 31, 2010) to some of these special purpose vehicles, which are provided for in accordance with the risks involved. In 2010, the Group securitized €26 billion of medium and long-term assets of which €19 billion were placed in the market and the remainder were retained by the Group’s various units. In addition, €500 million of securitization bonds issued by Group companies were repurchased in the secondary market in 2010.

In the ordinary course of business, Santander UK enters into securitization transactions using special purpose securitization companies which are consolidated and included in Santander UK’s financial statements. Santander UK is under no obligation to support any losses that may be incurred by the securitization companies or the holders of the securities and has no right or obligation to repurchase any securitized loan. Santander UK has made some interest-bearing subordinated loans to these securitization companies.

135

We do not have any further transactions with unconsolidated entities other than those mentioned above.

We have no other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

F. Tabular disclosure of contractual obligations

The following table summarizes our contractual obligations by remaining maturity at December 31, 2010:


			More than		More than
			1 year but		3 years but
Contractual obligations	Less than		less than 3		less than 5		More than
(in millions of euros)	1 year		years		years		5 years		Total

Deposits from credit institutions		47,163		9,218		10,500		4,012		70,893
Customer deposits		481,628		68,481		16,467		14,809		581,385
Marketable debt securities		41,296		63,476		25,961		57,496		188,229
Subordinated debt		1,587		2,318		1,776		24,794		30,475
Operating lease obligations		303		646		443		2,327		3,719
Purchase obligations		4		7		5		4		20
Other long-term liabilities (1)		—		—		—		9,519		9,519

Total		571,981		144,146		55,152		112,961		884,240


(1)		Other long-term liabilities relate to pensions and similar obligations.

For a description of our trading and hedging derivatives, which are not reflected in the above table, see Note 36 to our consolidated financial statements.

For more information on our marketable debt securities and subordinated debt, see Notes 22 and 23 to our consolidated financial statements.

G. Other disclosures

Higher-Risk Loans

Grupo Santander does not have any significant exposure to higher-risk loans. Our credit profile is focused on retail banking with a medium-low risk profile and with broad diversification both by geography and segment and nearly 59% of the Group’s total loan portfolio is secured (in most cases, by real estate).

Mortgages to individuals represent approximately 37% of the Group’s total lending. These mortgages are focused on our core markets, Spain and the UK, and are principal residence mortgages with a low risk profile, low non-performing ratios (below the ratios of our peers) and an acceptable coverage ratio. This low risk profile allows us to envisage a relatively minor impact at Group level and a low final estimated loss.

In Spain, at December 31, 2010, the loan portfolio and thus its risk profile mainly comprises primary residence loans, with an average loan to value ratio (LTV) of 50.5% and an affordability rate of 29% under management criteria. Residential mortgages account for 22% of the total credit risk portfolio in Spain, of which 85% has a LTV under 80%.

All customers applying for a prime residential mortgage are subject to a rigorous assessment of credit risk and affordability.

136

In evaluating the payment capacity (affordability) of a potential customer, the credit analyst must determine if the income of the customer is sufficient to meet the payment of the loan installments taking into consideration other income that the customer may receive. In addition, the analyst must decide if the customer’s income will be stable over the term of the loan.

We define the affordability rate as the index that measures the financial ability of the family unit calculated as follows: (Monthly payments corresponding to the requested operation + monthly payments for other loans) /( Net monthly salary + other monthly justified income).

This ratio is considered predictive of the customer’s payment capacity. The ratio indicates the percentage of a customer’s income that is currently available to repay debt obligations. For this reason, it is included as part of our credit policy in the application process for the mortgage portfolio and is used either as a minimum acceptance criteria or in prescriptive analyses (decision trees/ rules/ decision models).

The UK’s mortgage portfolio is focused on primary residence mortgages with high quality risk in terms of LTV (51% as of December, 31, 2010). The mortgages with the highest risk profile (buy-to-let) account for a small percentage of the total (slightly more than 1%).

Due to the economic downturn, the portfolio of loans to real estate developers has been significantly reduced, especially in Spain. At December 31, 2010, it accounted for 1.3% of the Group’s total portfolio. The Group’s risk policies stipulate that these loans should be granted not just based on the quality of the projects but also on the credit quality of the clients.

Changes in Practices

There have not been any significant changes in policies and practices in response to the effects of the current economic environment that might affect the quality of the credit information presented. This is due to the fact that the following policies and practices already formed part of our normal course of business:

a) Medium-low risk profile of the portfolio

Our risk profile is characterized by the prevalence of primary residence loans and a low effort rate of loan approval, which leads to a medium-low risk profile for the mortgage portfolio. This is due to the establishment of risk management frameworks and policies that reflect our risk management principles.

In addition to the tasks performed by the internal audit division, the risk unit has a specific risk monitoring function for adequate credit quality control with local and global teams.

b) Suspended accrual interest of non-performing past-due assets

Balances are deemed to be impaired, and the interest accrual suspended, when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts and on the dates initially agreed upon, after taking into account the guarantees received to secure (fully or partially) collection of the related balances. For all non-performing past due assets, any collections relating to impaired loans and advances are used to recognize the accrued interest and the remainder, if any, is applied to reduce the principal amount outstanding. The amount of the financial assets that would be deemed to be impaired had the conditions thereof not been renegotiated, is not material with respect to the Group’s financial statements taken as a whole.

When the recovery of any recognized amount is considered unlikely, the amount is written off, without prejudice to any actions that we may initiate to seek collection.

137

c) Allowances for credit losses and internal model

As of July 2008, the Bank of Spain had approved for regulatory capital calculation purposes the Group’s internal models affecting the vast majority of the Group’s credit risk net exposure. The Bank of Spain will continue to review the models for the purpose of calculating allowances for loan losses. The calculation obtained based on the output parameters of internal models is consistent with the best estimate of the Group as to the probable losses using possible scenarios which rely on the approved internally developed models, and which constitute an appropriate basis for determining loan loss allowances. While these models are not yet approved by the Bank of Spain for loan loss allowance calculation, we are required to calculate the allowances according to the instructions described in Item 4 in our annual report on Form 20-F for the year ended December 31, 2010, and are subject to continuing review by Bank of Spain, and subsequent continuous improvement of the processes within our internal model. The difference between loan loss provisions calculated using internal models and those calculated under Bank of Spain guidance, was not material for each one of the three years ending December 31, 2010.

Declines in Collateral Value

Declines in collateral value are not relevant in our portfolio given that residential mortgages with LTV up to 90% amount to only approximately 3% of the total Group’s lending as of December 31, 2010. When a mortgage with these characteristics is authorized, the Group’s polices establish that the client must provide additional guarantees such as more properties, insurance coverage or others.

Other

During 2010, the general deterioration of the economic environment had a negative effect on the evolution of non-performing loans and the cost of credit. This effect was softened by prudent risk management which kept non-performing loan and coverage ratios at reasonable levels. Both ratios compare well with those of our competitors.

We use credit derivatives to cover loans and trading transactions. The volume of this activity is small compared to that of our peers and is subject to strict internal controls that minimize operational risk. Risk in these activities is controlled via a series of limits such as VaR, nominal by rating, sensitivity to the spread by rating and name, and sensitivity to the rate of recovery and to correlation. Jump-to-default limits are also set by geographic area, sector and liquidity.

Exposures related to complex structured assets

We have a very limited exposure to complex structured assets. See “Item 11. Quantitative and Qualitative Analysis About Market Risk—Part 10. Market Risk—Quantitative analysis—D.Exposures related to complex structured assets”.

138

Item 6. Directors, senior management and employees

A. Directors and senior management

We are managed by our board of directors, which currently consists of 19 members. In accordance with our By-laws (Estatutos), the board shall consist of at least 14 and not more than 22 members. Each member of the board is elected to a five-year term by our shareholders at a general meeting. Approximately one-fifth of the members are elected each year and members may be re-elected.

An amendment of our By-laws is being proposed for the consideration of our shareholders at the 2011 annual general meeting which will be held on the first or the second call on June 16, 2011 or June 17, 2011, respectively, in order to reduce the directors’ term of office from five to three years among other items.

If the amendment is approved approximately one-third of the board’s members will be up for re-election annually.

The Rules and Regulations of the Board¹ have already been amended by agreement of the board at its meeting of April 25, 2011 to include, among other items, the reduction of the directors’ term of office from five to three years.

Our board of directors holds its meetings in accordance with an annual calendar. The Rules and Regulations of the Board provide that the board shall hold not less than nine annual ordinary meetings; however, in 2010 it met 12 times. Our board of directors elects our chairman, vice chairmen and chief executive officer from among its members. Between board meetings, lending and other board powers reside with the executive committee (comisión ejecutiva) and with the risk committee (comisión delegada de riesgos). The chairman is the Bank’s most senior officer and, as a result, all powers as may be delegated under Spanish law, our By-laws and the Rules and Regulations of the Board of Directors have been delegated to him. The chairman leads the Bank’s management team in accordance with the decisions made and the criteria set by our shareholders at the general shareholders’ meeting and by the board.

By delegation and under the direction of the board and of the chairman, the chief executive officer leads the business and assumes the Bank’s highest executive functions.

Our board has ultimate lending authority and it delegates such authority to the risk committee, which generally meets twice a week.

Members of our senior management are appointed and removed by the board.


¹		The Rules and Regulations of the Board are available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Board of directors—Rules and Regulations of the Board of Directors”.

139

Our current executive officers are:


Name		Position with Banco Santander
Emilio Botín		Chairman of the board of directors and of the executive committee
Alfredo Sáenz		Second vice chairman of the board of directors and chief executive officer
Matías R. Inciarte		Third vice chairman of the board of directors and chairman of the risk committee
Ana P. Botín		Chief executive officer, Santander UK
Francisco Luzón		Director, executive vice president, America
Juan R. Inciarte		Director, executive vice president, strategy
José A. Alvarez		Executive vice president, financial and investor relations
Nuno Amado		Executive vice president, Santander Totta
Ignacio Benjumea		Executive vice president, general secretariat
Juan Manuel Cendoya		Executive vice president, communications, corporate marketing and research
José María Espí		Executive vice president, risk
José María Fuster		Executive vice president, technology and operations
José Luis G. Alciturri		Executive vice president, human resources
Enrique G. Candelas		Executive vice president, Santander branch network — Spain
José G. Cantera (*)		Chief executive officer, Banesto
Juan Guitard		Executive vice president, internal auditing
Adolfo Lagos		Executive vice president, global wholesale banking
Jorge Maortua		Executive vice president, global wholesale banking
Javier Marín		Executive vice president, global private banking, asset management and insurance
Jorge Morán		Executive vice president, USA
José M. Nus		Executive vice president, Santander UK
César Ortega		Executive vice president, general secretariat
Javier Peralta		Executive vice president, risk
Jaime P. Renovales		Executive vice president, general secretariat
Marcial Portela		Executive vice president, America
Magda Salarich		Executive vice president, Santander Consumer Finance
José Tejón		Executive vice president, financial accounting and control
Juan A. Yanes		Executive vice president, USA
Jesús M^a Zabalza		Executive vice president, America


(*)		José G. Cantera is not an executive vice president of Banco Santander.

141

The following is a summary of the relevant business experience and principal business activities of our current directors and executive officers:

Emilio Botín (chairman of the board of directors and of the executive committee)

Born in 1934. He joined the board of directors of Banco Santander in 1960 and was appointed chairman of the board in 1986.

Fernando de Asúa (first vice chairman of the board of directors and chairman of the appointments and remuneration committee)

Born in 1932. Former vice chairman of Banco Central Hispanoamericano from 1991 to 1999. He was appointed director in April 1999 and first vice chairman in July 2004. He is a former chairman of IBM España, S.A. and he is currently the honorary chairman. In addition, he is a non-executive vice chairman of Técnicas Reunidas, S.A.

Alfredo Sáenz (second vice chairman of the board of directors and chief executive officer)

Born in 1942. Former chief executive officer and vice chairman of Banco Bilbao Vizcaya, S.A. and chairman of Banca Catalana until 1993. In 1994, he was appointed chairman of Banesto and in February 2002, second vice chairman and chief executive officer of Santander.

Matías R. Inciarte (third vice chairman of the board of directors and chairman of the risk committee)

Born in 1948. He joined Banco Santander in 1984 and was appointed executive vice president and chief financial officer in 1986. He was appointed director in 1988 and second vice chairman in 1994. He is a non-executive director of Banesto, Sanitas, S.A. de Seguros and Financiera Ponferrada, S.A., SICAV and since 2008, president of the Fundación Príncipe de Asturias. Prior to joining Banco Santander, he was minister of the presidency of the Spanish Government from 1981 to 1982.

Manuel Soto (fourth vice chairman of the board of directors and chairman of the audit and compliance committee)

Born in 1940. He was appointed director in April 1999. He is a non-executive vice chairman of Indra Sistemas, S.A. and a non-executive director of Cartera Industrial REA, S.A. In addition, he was formerly chairman of Arthur Andersen’s Global Board and manager for EMEIA (Europe Middle East, India and Africa).

Assicurazioni Generali, S.p.A. (“Assicurazioni”)

An Italian insurance company represented on our board by its honorary chairman, Antoine Bernheim. Assicurazioni is a former director of Banco Central Hispanoamericano from 1994 to 1999. Assicurazioni was appointed director in April 1999.

Antoine Bernheim (Representative of the company director Assicurazioni)

Born in 1924. He joined the board of directors of Assicurazioni Generali in 1973, becoming the company’s vice chairman in 1990 and chairman from 1995 to 1999 and from 2002 to 2010. He is vice chairman of LVMH.

Antonio Basagoiti

Born in 1942. Former executive vice president of Banco Central Hispanoamericano. He was appointed director in July 1999. In November 2010 he was appointed non-executive chairman of Banesto. He is a non-executive proprietary vice chairman of Faes Farma, S.A. and a non-executive director of Pescanova, S.A. He is a former chairman of Unión Fenosa, S.A.

142

Ana P. Botín

Born in 1960. Former executive vice president of Banco Santander, S.A., former chief executive officer of Banco Santander de Negocios from 1994 to 1999 and former executive chairwoman of Banesto from 2002 to 2010. In November 2010, she was appointed chief executive officer of Santander UK. She is also a member of the International Advisory Board of the New York Stock Exchange and of the board of Georgetown University.

Javier Botín

Born in 1973. He was appointed director in July 2004. He is chairman and chief executive officer of JB Capital Markets, Sociedad de Valores, S.A.

Lord Burns

Born in 1944. He was appointed director in December 2004. He is also a non-executive chairman of Santander UK plc and Alliance & Leicester plc. In addition, he is non-executive chairman of Channel Four Television Corporation. He was Permanent Secretary to the UK Treasury and chaired the UK Parliamentary Financial Services and Markets Bill Joint Committee and was a non-executive chairman of Marks & Spencer Group plc, Glas Cymru (Welsh Water) and a non-executive director of Pearson Group plc., British Land plc and Legal & General Group plc.

Guillermo de la Dehesa

Born in 1941. Former secretary of state of economy and secretary general of commerce of the Spanish Government and chief executive officer of Banco Pastor. He is a state economist and Bank of Spain’s office manager (on leave). He was appointed director in June 2002. He is an international advisor of Goldman Sachs International, and a non-executive director of Campofrío Food Group, S.A. and Amadeus IT Holding, S.A. He is also chairman of the Centre for Economic Policy Research (CEPR) in London, member of the Group of Thirty of Washington, chairman of the board of trustees of the IE Business School and non-executive chairman of Aviva Vida y Pensiones, S.A. de Seguros y Reaseguros.

Rodrigo Echenique

Born in 1946. He was appointed director in October 1988. Former chief executive officer of Banco Santander, S.A. from 1988 to 1994.

Antonio Escámez

Born in 1951. Former director and executive vice president of Banco Central Hispanoamericano from 1988 to 1999. He was appointed director in April 1999. He is also a chairman of Fundación Banco Santander, a non-executive chairman of Santander Consumer Finance, S.A., Open Bank, S.A. and Arena Media Communications España, S.A., and a non-executive vice chairman of Attijariwafa Bank.

Ángel Jado

Born in 1945. Former director of Banco Santander from 1972 to 1999 and director of Banco Banif, S.A. from 2001. He was appointed director on June 11, 2010. Since 2001 he is director of Banif, S.A.

Francisco Luzón

Born in 1948. He joined Banco Santander in 1996 as executive vice president, adjunct to the chairman. Former chairman of Banco Exterior de España (from 1988 to 1996), Caja Postal (from 1991 to 1996), Corporación Bancaria de España (from 1991 to 1996) and of Argentaria (1996). He is also a non-executive director of Industria de Diseño Textil, S.A., global vice chairman of Universia and second vice chairman of the Royal Board of Trustees of the Spanish National Library.

143

Abel Matutes

Born in 1941. He joined Banco Santander in 2002 as member of the board. Former foreign minister of the Spanish Government and EU commissioner for the portfolios of Loans and Investment, Financial Engineering and Policy for Small and Medium-sized Companies (1989); North-South Relations, Mediterranean Policy and Relations with Latin America and Asia (1989) and of the Transport and Energy and Supply Agency of Euroatom (1993). He is also a chairman of Grupo de Empresas Matutes, and director of FCC Construcción, S.A. and TUI AG.

Juan R. Inciarte

Born in 1952. He joined Banco Santander in 1985 as director and executive vice president of Banco Santander de Negocios. He was appointed executive vice president in 1989 and was a director of Banco Santander from 1991 to 1999. He was appointed director in January 2008. He is also a non-executive vice chairman of Santander UK plc and a director of Santander Consumer Finance, S.A. and Alliance & Leicester plc.

Luis Alberto Salazar-Simpson

Born in 1940. He joined Banco Santander in 1999 as a member of the board. He is chairman of France Telecom España, S.A.

Isabel Tocino

Born in 1949. She joined Banco Santander in 2007 as a member of the board. Former minister for environment of the Spanish Government, former chairwoman of the European Affairs and of the Foreign Affairs Committees of Spanish Congress. She is currently an elected member of the Spanish State Council, a professor of the Complutense University of Madrid, a non-executive director of Televisión Autonómica de Madrid, S.A. (Telemadrid) and Diagonal Gest and a member of the Royal Academy of Doctors.

José A. Alvarez

Born in 1960. He joined the Bank in 2002. In 2004, he was appointed executive vice president, Financial and Investor Relations.

Nuno Amado

Born in 1959. He joined the Bank in 1997 as a member of the executive committee of BCI/Banco Santander Portugal. In December 2004, he was appointed director and vice chairman of Santander Totta’s executive committee. In July 2006, he was appointed executive vice president. Also in 2006, he was appointed Santander Totta’s chief executive officer.

Ignacio Benjumea

Born in 1952. He joined Banco Santander in 1987 as general secretary of Banco Santander de Negocios. In 1994 he was appointed executive vice president and general secretary and secretary of the board of Banco Santander. He is also a director of Bolsas y Mercados Españoles, Sociedad Holding de Mercados y Sistemas Financieros, S.A., Sociedad Rectora de la Bolsa de Madrid, S.A. and La Unión Resinera Española, S.A.

Juan Manuel Cendoya

Born in 1967. Former manager of the Legal and Tax Department of Bankinter, S.A. from 1999 to 2001. He joined the Bank in July 2001 as executive vice president, communications, corporate marketing and research.

144

José María Espí

Born in 1944. He joined the Bank in 1985 and, in 1988, was appointed executive vice president, human resources. In 1999 he was appointed executive vice president, risk. He is also chairman of Unión de Crédito Inmobiliario, S.A., E.F.C. and director of UCI, S.A.

José María Fuster

Born in 1958. He joined the Group in 1988. In 2004, he was appointed chief information officer of Grupo Santander. In the same year, he was also named member of the board of Abbey National plc and the board of Advisors of IBM Corporation. In 2006, he was appointed executive director of Banesto and, in 2007, executive vice president of technology and operations at Banco Santander. Presently, José María Fuster is also a director of Ingeniería de Software Bancario, S.A. (ISBAN).

José Luis G. Alciturri

Born in 1949. He joined the Bank in 1996. Since November 2003, he has been responsible for the Group’s human resources. In 2007, he was appointed executive vice president.

Enrique G. Candelas

Born in 1953. He joined Banco Santander in 1975 and was appointed senior vice president in 1993. He was appointed executive vice president, Santander Branch Network Spain in January 1999.

José G. Cantera

Born in 1966. He joined Banesto in 2003. In 2006, he was appointed Banesto’s chief executive officer. Formerly, he was member of the executive committee of Citigroup EMEA and member of the board of directors of Citigroup Capital Markets Int. Ltd. and Citigroup Capital Markets UK.

Juan Guitard

Born in 1960. Former general secretary of the board of Banco Santander de Negocios (from 1994 to 1999) and manager of the investment banking department of the Bank (from 1999 to 2000). He rejoined the Bank in 2002, being appointed executive vice president, vice-secretary general of the board. On March 15, 2009, he was appointed head of internal auditing.

Adolfo Lagos

Born in 1948. Former chief executive officer of Grupo Financiero Serfin since 1996. He was appointed executive vice president, America, in October 2002 and executive vice president, global wholesale banking, in April 2003.

Jorge Maortua

Born in 1961. Former executive vice president of Banesto since 2001. He joined the Bank in 2003 as head of global treasury and was appointed executive vice president, global wholesale banking, in 2004.

Javier Marín

Born in 1966. He joined the Bank in 1991. After serving in various positions within the Group, he was appointed executive vice president of the global private banking division in 2007. In November 2009, he was appointed head of the asset management and global private banking division. In December 2010 he was appointed head of the global private banking, asset management and insurance division.

145

Jorge Morán

Born in 1964. He joined the Bank in 2002. He was appointed executive vice president, asset management and insurance, in 2004. In December 2005, he was appointed executive vice president and chief operating officer of Santander UK and, in 2006, executive vice president in charge of insurance and global direct banking. In December 2010 he was appointed chief executive officer of Sovereign and country head of all our businesses in the United States.

José M. Nus

Born in 1950. He joined Santander UK in 2010 as executive director and chief risk officer. He is also an executive vice president of Santander. Formerly, he was executive director and chief risk officer of Banesto. He has also been executive vice president, risk in Argentaria and Bankinter, and member of the board of directors in Banco de Vitoria, Banco de Negocios Argentaria, Banco de Credito Local and Banco de Alicante. He is currently a member of the board of Societat Catalana d’Economia.

César Ortega

Born in 1954. He joined the Bank in 2000 and was appointed executive vice president, general secretariat, in 2006. He is also a non-executive director of Fomento de Construcciones y Contratas, S.A.

Javier Peralta

Born in 1950. He joined the Bank in 1989 and was appointed executive vice president in 1993. In 2002, he was appointed executive vice president, risk.

Jaime P. Renovales

Born in 1968. He joined the Group in 2003 as secretary of the board of Banco Español de Crédito (Banesto). In March 2009, he was appointed executive vice president of Banco Santander, vice-secretary general and vice-secretary of the board. He is also director of Santander Seguros y Reaseguros, Compañía Aseguradora, S.A.

Marcial Portela

Born in 1945. He joined the Bank in 1998 as executive vice president. In 1999, he was appointed executive vice president, America. In 2010 he was appointed chief executive officer of Santander Brasil. He is also a director of Best Global, S.A.

Magda Salarich

Born in 1956. She joined the Bank in 2008 as executive vice president responsible for Santander’s Consumer Finance division. Previously, she has held several positions in the automobile industry, including the position of director and executive vice president of Citroën España and head of commerce and marketing for Europe of Citroën Automobiles.

José Tejón

Born in 1951. He joined the Bank in 1989. In 2002, he was appointed executive vice president, financial accounting and control.

Juan A. Yanes

Born in 1962. He joined Grupo Santander in 1991 and was involved in Investment Banking, Corporate Finance, and Financial Markets until 1999. From 1999 until 2009, he was in the Risk Management Division. In 2009 he was appointed as Chief Corporate Officer for Santander USA. He is a member of the board for the different units of Santander USA.

146

Jesús M^a Zabalza

Born in 1958. Former executive vice president of La Caixa (from 1996 to 2002). He joined the Bank in 2002, being appointed executive vice president, America.

* * * * * *

In addition, Ramón Tellaeche, an adjunct to executive vice president of the Bank, is the head of the payment means division, and José A. Villasante, an adjunct to executive vice president of the Bank, is the head of the Santander Universidades division.

The following is a description of arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any person referred to above was appointed.

There is one director that is an international financial institution that holds shares in the Bank: Assicurazioni Generali S.p.A. (represented by Antoine Bernheim).

See also Item 7 of Part I, “Major Shareholders and Related Party Transactions — A. Major Shareholders— Shareholders’ agreements”.

B. Compensation

Directors’ compensation

By-law stipulated fees

Article 58 of the Bank’s current By-laws was approved at the annual shareholders’ meeting held on June 21, 2008 and provides that the directors will be entitled to receive 1% of the Bank’s net profit for such year for discharging their duties as members of the board of directors, including annual retainer and attendance fees. However, the board of directors may resolve to reduce this percentage. Previously, the 1% limit applied only with respect to the annual retainer and did not include attendance fees.

The amount set by the board of directors for 2010, calculated pursuant to the aforementioned Article 58 of the By-laws, was 0.183% of the Bank’s profit for 2010, compared to 0.144% and 0.124% in 2009 and 2008, respectively, in like-for-like terms. At the proposal of the appointments and remuneration committee, on December 20, 2010 the board resolved to leave the annual retainer for 2010 unchanged from 2009 and 2008.

Previously, at the board meeting held on December 22, 2008, the directors resolved to reduce the annual retainer corresponding to the directors for 2008 by 10% compared to 2007 and established the following retainer amounts (the respective proportional amounts were allocated to any directors who did not sit on the board for the whole year): €106,300 gross retainer per director in 2010, 2009 and 2008 and each member of the following board committees received the following gross retainers in 2010, 2009 and 2008: executive committee, €213,200; audit and compliance committee, €50,000; appointments and remuneration committee, €30,000. Also, the first vice chairman and the fourth vice chairman received a gross amount of €36,000 each in 2010, 2009 and 2008.

Furthermore, the directors receive fees for attending board and committee meetings, excluding executive committee meetings.

147

The amounts of the fees for attending the meetings of the board of directors and of the board committees (excluding the executive committee) were the same in 2010, 2009 and 2008 and will remain unchanged for 2011 in accordance with the proposal made by the appointments and remuneration committee at its meeting on December 14, 2010 and approved by the directors at the board meeting on December 20, 2010. These attendance fees were originally approved by the directors at the board meeting held on December 17, 2009 in the following amounts:

- Board of directors: €2,540 for resident directors and €2,057 for non-resident directors.

- Risk committee and audit and compliance committee: €1,650 for resident directors and €1,335 for non-resident directors.

- Other committees: €1,270 for resident directors and €1,028 for non-resident directors.

Salary compensation

Following is the detail of the salaries received by the Bank’s executive directors: Emilio Botín, Alfredo Sáenz, Matías R. Inciarte, Ana P. Botín, Francisco Luzón and Juan R. Inciarte, who took office as member of the board of directors on March 24, 2008.

Thousands of Euros

2010

2009

2008

Total salaries

22,670

25,784

25,489

Of which: variable remuneration in cash (or bonus)

11,917

(*)

15,240


(*)		At the annual general meeting on June 11, 2010, the shareholders approved the first cycle of the deferred and conditional share plan, whereby payment of a portion of the variable remuneration for 2010 amounting to €6,362,000 will be deferred over the next three years and will accrue, where appropriate, in three equal installments and will be recognized as remuneration in each of the aforementioned years, provided that the conditions for entitlement to the remuneration are met. Note 5.d.iv to our consolidated financial statements includes detailed information on the aforementioned deferred variable remuneration.

The amounts of fixed salary remuneration received by the executive directors in 2010 were approved at the board meeting held on December 21, 2009, following the proposal of the appointments and remuneration committee during its meeting of December 17, 2009.

Also, at the meeting held on December 14, 2010, the appointments and remuneration committee proposed to the board of directors that the executive directors’ variable salary remuneration for 2010 should include a deferred portion payable in shares, as resolved by the shareholders at the annual general meeting held on June 11, 2010 (see Note 5.d.iv to our consolidated financial statements). This proposal was approved by the directors at the board meeting held on December 20, 2010. Previously, at the board meetings of December 22, 2008 and January 26, 2009, the directors had resolved to reduce these amounts by 15% as compared to 2007 (10% in the case of Ana P. Botín).

148

The detail, by director, of the remuneration earned by the Bank’s directors in 2010 is as follows:


	Thousands of euros
	2010																								2009		2008
	Bylaw-stipulated retainers												Salary of executive						Other
	Annual retainer								Attendance fees				directors (1)						remuneration
							Appointments								Variable
					Audit and		and								remuneration
			Executive		compliance		remuneration				Other		Fixed		in cash				Share plan
Directors	Board		committee		committee		committee		Board		fees		remuneration		(a)		Total		(b)		Other		Total		Total		Total

Emilio Botín		106		213		—		—		28		4		1,344		1,682		3,026		486		1		3,864		3,992		5,420
Fernando de Asúa		142		213		50		30		28		191		—		—		—		—		—		654		647		642
Alfredo Sáenz		106		213		—		—		28		4		3,703		3,351		7,054		1,301		473		9,179		10,237		9,295
Matías R. Inciarte		106		213		—		—		28		163		1,710		1,994		3,704		622		226		5,062		5,339		6,541
Manuel Soto		142		—		50		30		25		32		—		—		—		—		—		279		277		274
Assicurazioni Generali, SpA.		123		—		—		—		16		—		—		—		—		—		—		139		134		140
Antonio Basagoiti		106		213		—		—		28		156		—		—		—		—		7		510		510		517
Ana P. Botín		106		213		—		—		28		4		1,353		1,440		2,793		321		16		3,481		3,647		4,021
Javier Botín (2)		106		—		—		—		25		—		—		—		—		—		—		131		129		129
Lord Terence Burns		106		—		—		—		19		—		—		—		—		—		—		125		125		123
Guillermo de la Dehesa		106		213		—		30		28		13		—		—		—		—		—		390		386		384
Rodrigo Echenique (**)		106		213		—		30		28		11		—		—		—		—		35		423		418		443
Antonio Escámez		106		213		—		—		23		149		—		—		—		—		39		530		537		535
Ángel Jado (***)		59		—		—		—		13		—		—		—		—		—		—		72		—		—
Francisco Luzón		106		213		—		—		23		1		1,656		2,146		3,802		522		1,004		5,671		5,811		6,851
Abel Matutes		106		—		50		—		25		16		—		—		—		—		—		197		192		194
Juan R. Inciarte (*)		106		—		—		—		28		120		987		1,304		2,291		505		111		3,161		3,121		3,830
Luis Ángel Rojo (3)		106		—		50		30		8		21		—		—		—		—		—		215		225		229
Luis Alberto Salazar-Simpson		106		—		50		—		25		19		—		—		—		—		—		200		202		198
Isabel Tocino		106		—		—		—		28		—		—		—		—		—		—		134		132		129

Total 2010		2,162		2,130		250		150		482		904		10,753		11,917		22,670		3,757		1,912		34,417		—		—

Total 2009		2,108		2,132		248		149		440		900		10,544		15,240		25,784		2,403		1,897		—		36,061		—

Total 2008		2,084		2,132		248		149		411		942		10,249		15,240		25,489		6,612		1,827		—		—		39,894


(*)		Appointed as member of the Bank’s board of directors on January 28, 2008, Juan R. Inciarte took office and was appointed as a member of the risk committee on March 24, 2008.

(**)		Ceased to be a member of the risk committee on March 24, 2008. He was appointed as a member of the audit and compliance committee on December 14, 2010.

(***)		Appointed as member of the Bank’s board of directors by the shareholders at the general meeting held on January 11, 2010, Angel Jado took office on the same date.

(a)		Relating to the variable remuneration in cash received in 2010.

(b)		Amounts received in 2010 in respect of the variable remuneration in shares granted through the Plan I10 approved by the shareholders at the general meeting held on June 21, 2008.

(1)		Recognized under staff costs at the Bank, except for the salary of Ana P. Botín, whose salary for the first eleven months of 2010 was recognized at Banco Español de Crédito, S.A.

(2)		Amounts contributed to Marcelino Botín Foundation.

(3)		Luis Ángel Rojo died on May 24, 2011.

149

Other remuneration

The total amount recorded under “Other remuneration — share plan” as of December 31, 2010 in the foregoing table of €3.8 million and €2.4 million as of December 31, 2009, relates to the variable remuneration received in 2010 and 2009 by the Bank’s directors in the form of Banco Santander, S.A. shares under the I-10 and I-09 incentive plans (Plans I-10 and I-09) approved by the shareholders at the annual general meeting on June 23, 2007. As established in the aforementioned plans, the number of shares received was determined based on the achievement of the pre-established targets to which the awards were tied. Targets corresponding to the maximum payouts under the plans were not met in 2009 and 2010.

As of December 31, 2008, €6.6 million, related to the variable share-based remuneration received in 2008 by the Bank’s directors through the exercise of Banco Santander, S.A. share options granted under the I-06 incentive plan (Plan I-06) approved by the shareholders at the annual general meeting of Banco Santander, S.A. held on June 18, 2005 and, in the case of Ana P. Botín, through the delivery of shares of Banco Español de Crédito, S.A. under an incentive plan for executives of that entity approved by the shareholders at its annual general meeting held on February 28, 2006 (see Note 5.d.i to our consolidated financial statements).

The amounts recorded under “Other remuneration — Other” include, among others, the life and medical insurance costs borne by the Group relating to the Bank’s directors.

Compensation to the board members as representatives of the Bank and to senior management

Representation on other boards

By resolution of the executive committee, all the remuneration received by the Bank’s directors who represent the Bank on the boards of directors of listed companies in which the Bank has a stake (at the expense of those companies) and which relates to appointments made after March 18, 2002, will accrue to the Group. The remuneration received by such directors was as follows:


		Thousands of Euros
	Company	2010		2009		2008

Emilio Botín	Shinsei Bank, Ltd.		—		30.1		53.0
Fernando de Asúa	CEPSA		—		100.2		97.2
Antonio Escámez	Attijariwafa Bank Société Anonyme		10.0		5.0		14.8

			10.0		135.3		165.0

Emilio Botín ceased to discharge his duties as director of Shinsei Bank, Ltd. on June 23, 2009 and received compensation of €73,100.

Also, in each year from 2005 through 2008, Emilio Botín received options to acquire shares of Shinsei Bank, Ltd. (Shinsei) as follows: 10,000 shares at a price of JPY 416 per share in 2008; 10,000 shares at a price of JPY 555 per share in 2007; 25,000 shares at a price of JPY 825 per share in 2006; and 25,000 shares at a price of JPY 601 per share in 2005. At December 31, 2010, the market price of the Shinsei share was JPY 106 and, therefore, regardless of the stipulated exercise periods, the options granted in each of those years would not have given rise to any gains had they been exercised.

Fernando de Asúa ceased to discharge his duties as director of CEPSA on October 1, 2009 after the Group sold its ownership interest in that company.

Furthermore, other directors of the Bank earned a total of €741,000 in 2010 as members of the boards of directors of Group companies (2009: €663,000; 2008: €729,000), the detail being as follows: Lord Burns received €607,000 as non-executive chairman of the Group companies Santander UK Plc and Alliance & Leicester Plc.; Antonio Basagoiti received €83,000 as non-executive chairman of the board of directors of Banesto and by the concept of bylaw stipulated directors fees; Ángel Jado received €9,000 from Banco Banif, S.A. as a member of its board prior to joining the board of directors of the Bank and Matías R. Inciarte received €42,000 as a non-executive director of U.C.I., S.A.

150

Senior management

The following table details the remuneration paid to the Bank’s executive vice presidents, excluding executive directors’ remuneration, in 2010, 2009 and 2008:


	Number of		Thousands of Euros
	executive		Salary							Other
Year	vice presidents (1)		Fixed		Variable			Total		Remuneration		Total

2008		24		21,219		34,674			55,893		27,598		83,491
2009		24		21,512		36,468			57,980		16,745		74,725
2010		23		23,756		28,484	(2)		52,240		14,700		66,940


(1)		At some point in the year they occupied the position of executive vice president. The amounts reflect the annual remuneration regardless of the number of months in which the position of executive vice president was occupied.

(2)		At the annual general meeting held on June 11, 2010, the shareholders approved the first cycle of the deferred conditional delivery share plan, whereby payment of a portion of the variable remuneration for 2010 amounting to €11,482 million will be deferred over the next three years and will accrue, where appropriate, in three equal installments and will be recognized as remuneration in each of the aforementioned years, provided that the conditions for entitlement to the remuneration are met. See Notes 5 and 47 to our consolidated financial statements.

The amounts in the Other Remuneration column in the foregoing table include all the non-cash salary remuneration paid to the executive vice presidents, such as the life insurance premiums of €1,099,000 (€1,148,000 in 2009 and €1,029,000 in 2008), termination or retirement benefits, and variable share-based variable remuneration. The variable share-based remuneration, which totalled €9,190,000 in 2010 (€5,982,000 in 2009), related to the I-10 and I-09 incentive plans approved by the shareholders at the annual general meeting on June 23, 2007. As established in the aforementioned plans, the number of shares received by the executive vice presidents (a total of 1,078,730 Santander shares in 2010 and 746,756 in 2009) was determined based on the achievement of the pre-established targets to which the awards were tied. Targets corresponding to maximum payouts under the plans were not met in 2009 and 2010. Also, in 2008 a total of €22,410,000 was allocated due to the exercise by the executive vice presidents of 5,317,978 Santander share options under the I-06 incentive plan (see Note 47 to our consolidated financial statements) and the delivery of Banesto shares under the incentive plan for executives approved by the shareholders at Banesto’s annual general meeting held on February 28, 2006.

Following details the maximum number of options or Santander shares that the Bank’s executive vice presidents (excluding executive directors) were entitled to receive at December 31, 2010, 2009 and 2008 under the various plans. See Note 47 to our consolidated financial statements.


Maximum number of	December 31,		December 31,		December 31,
options/shares	2010		2009		2008

Plan I-06 (*)		—		—		1,499,010
Plan I-09		—		—		822,508
Plan I-10		—		1,154,158		1,280,124
Plan I-11		1,226,754		1,312,214		1,446,259
Plan I-12		1,498,713		1,562,227		—
Plan I-13		1,468,762		—		—


(*)		The exercise period was from January 15, 2008 to January 15, 2009.

Additionally, with respect to the obligatory investment share plan, the annual investment made in February 2010, 2009 and 2008 by the executive vice presidents (excluding current executive directors) amounted to €3.2 million (equal to 330,104 shares), €2.9 million (equal to 508,764 shares) and €3.4 million (equal to 261,681 shares), respectively.

Lastly, the final number of Santander shares allocated to senior management for deferral purposes under the deferred and conditional share plan (see Note 47 to our consolidated financial statements), calculated taking into account the average market price of the shares weighted by daily volume in the 15 trading days prior to December 20, 2010 (the date on which the board of directors approved the bonus for 2010), is 1,496,628 shares.

151

The actuarial liability recognized in respect of post-employment benefits earned by the Bank’s senior managers totaled €227 million at December 31, 2010 (December 31, 2009: €245 million; December 31, 2008: €240 million). Settlements of €47 million took place in 2010. The net charge to the consolidated income statement amounted to €31 million in 2010 (2009: €40 million; 2008: €41 million). Additionally, the total sum insured under life and accident insurance policies relating to this group amounted to €61 million at December 31, 2010 (December 31, 2009: €63 million; December 31, 2008: €59 million).

Pension commitments, other insurance and other items of directors

The total balance of supplementary pension obligations assumed by the Group over the years to its current and retired employees (covered mostly by in-house provisions which amounted to €9,519 million at December 31, 2010) includes the obligations to those who have been directors of the Bank during the year and who discharge (or have discharged) executive functions. The total pension obligations to these directors, together with the total sum insured under life insurance policies and other items, amounted to €325 million at December 31, 2010 (December 31, 2009: €292 million; December 31, 2008: €311 million).

The following table provides information on: (i) the pension obligations assumed and covered by the Group; and (ii) other insurance, which includes premiums that are paid by the Group and the related cost which is included in the Other remuneration column in the table of page 150 above, in both cases in respect of the Bank’s executive directors:


	Thousands of Euros
	2010				2009				2008
	Accrued				Accrued				Accrued
	Pension		Other		Pension		Other		Pension		Other
	Obligations		Insurance		Obligations		Insurance		Obligations		Insurance

Emilio Botín		25,029		—		24,642		—		25,579		—
Alfredo Sáenz		86,620		11,108		85,740		11,108		80,049		10,785
Matías R. Inciarte		44,560		5,131		52,536		5,131		50,894		4,982
Ana P. Botín		31,329		1,403		23,775		1,403		21,737		1,403
Francisco Luzón		55,950		9,934		53,513		9,031		53,083		7,624
Juan R. Inciarte		11,629		2,961		10,969		2,961		9,918		2,875

		255,117		30,537		251,175		29,634		241,260		27,669

The amounts in the Accrued Pension Obligations column in the foregoing table relate to the accrued present actuarial value of the future annual payments to be made by the Group. These amounts were obtained using actuarial calculations and cover the obligations to pay the respective pension supplements or lump sums. In the case of Emilio Botín, Alfredo Sáenz, Matías R. Inciarte and Ana P. Botín, these supplements or sums were calculated as 100% of the sum of the fixed annual salary received at the date of effective retirement or, where appropriate, at the date of opting to receive the benefit in a lump sum, plus 30% of the arithmetical mean of the last three variable remuneration payments received until that date. In addition to the above-calculated amounts, Francisco Luzón will receive the amounts received by him in the year before retirement or early retirement or, where appropriate, at the date of opting to receive the benefit in a lump sum, in his capacity as a member of the board of directors or the committees of the Bank or of other Group companies. Similarly, in addition to the above amounts, Juan R. Inciarte will receive 100% of the gross fixed annual salary received at the date of effective retirement or, where appropriate, at the date of opting to receive the benefit in a lump sum.

On December 17, 2007, March 24, 2008, July 21, 2008, and April 28, 2009, the board of directors of the Bank resolved to authorize a change in the contracts of the executive directors and other members of the Bank’s senior management granting them the right, once they reach the date of retirement or pre-retirement, as appropriate, to opt to receive their accrued pensions or amounts similar thereto in the form of an annuity or a lump sum. In order to maintain the financial neutrality for the Group, the amount to be received in the form of a lump sum by the commitment beneficiary at the date of retirement must be the aliquot part of the market value of the assets assigned to cover the mathematical provisions of the policy instrumenting these commitments to senior management at the date of economic effect of exercising the option. The senior management who are still in service on reaching the age of retirement or who at the date of the contract entered into have passed the age of retirement must state whether they wish to opt for this form of benefit. This option will mean that no further pension benefit will accrue and the lump sum to be received, which will be updated at the agreed-upon interest rate, will be fixed. Should the senior management subsequently die while still in service and prior to retirement, the lump sum of the pension will be paid to his/her heirs.

152

In 2009, Emilio Botín and Alfredo Sáenz, who had passed the age of retirement, exercised the option to receive their respective accrued pensions as a lump sum on the date of their effective retirement.

Furthermore, at the board meeting held on December 21, 2009, the Bank’s directors resolved that the executive directors -and other members of senior management who are beneficiaries of defined benefit plans and have not reached the age of retirement- may opt, upon reaching the age of 60 and on each of their following birthdays until they are 64 years of age, to receive their accrued pensions as a lump sum, which will be determined at the date of economic effect of exercising the option and which they (or their heirs in the event of death) will be entitled to receive when they retire or are declared to be disabled. In order to maintain the financial neutrality for the Group, the amount to be received in the form of a lump sum by the commitment beneficiary at the date of retirement must be the aliquot part of the market value of the assets assigned to cover the mathematical provisions of the policy instrumenting these commitments to senior management at the date of economic effect of exercising the option. This option will mean that no further pension benefit will accrue and the lump sum to be received, which will be updated at the agreed-upon interest rate, will be fixed. Also, any person who exercises this option must undertake not to retire early or to retire, in both cases at his/her own request, within two years from the exercise date.

Lastly, the board of directors’ resolution referred to in the preceding paragraph also regulated the impact of the deferral of the computable variable remuneration on the determination of the pension obligations (or similar amounts), in the form of an annuity or a lump sum, for pre-retirement, early retirement or normal retirement.

In 2010, Matías R. Inciarte, who had reached the age of 60, exercised the option to receive his accrued pension as a lump sum on the date of effective retirement.

The amounts included in the foregoing table in respect of the pension obligations accrued to the directors Emilio Botín and Alfredo Sáenz in 2009 and to the director Matías R. Inciarte in 2010 are those relating to the aforementioned lump sums, and no further amounts will accrue in respect of pensions after those dates. The lump sums will be updated at the agreed-upon interest rate.

Pension provisions recognized and reversed in 2010 amounted to €9,570,000 and €7,408,000, respectively (2009: €5,703,000 and €4,000, respectively; 2008: €26,974,000 and €11,000, respectively).

Additionally, other directors have life insurance policies the cost of which is borne by the Group with the related insured sum being €3 million at 31 December 31, 2010 (2009 and 2008: €3 million each year). Also, payments made in 2010 to the members of the board entitled to post-employment benefits amounted to €2.6 million (2009: €2.6 million).

153

Share-based payments to directors

The details of these plans granted to directors (see Note 47 to our financial statements) are as follows:

i) I-06 plan

In 2004, a long-term incentive plan (I-06) was designed consisting of options on shares of the Bank and was tied to the achievement of two pre-determined targets, which have since been achieved. The exercise period was from January 15, 2008 to January 15, 2009. The executive directors were beneficiaries of this plan; the number of Bank share options held by them is indicated below:


					Options
	Options				Granted		Options Exercised
	at									Number				Market		Remuneration		Options					Options				Date of		Date of
	December 31,		Exercise				Number of			of Shares		Exercise		Price		Allocated		at		Number of			at		Exercise		Commencement		Expiry of
	2005,		Price				Options			Acquired		Price		Applied		(Thousands		December 31,		Options			December 31,		Price		of Exercise		Exercise
	2006 and 2007		(Euros)		Number		Exercised			(***)		(Euros)		(Euros)		of Euros)		2008		Cancelled			2009		(Euros)		Period		Period

I-06 plan
Emilio Botín		541,400		9.09		—		(541,400	)		541,400		9.09		12.40		1,780		—		—			—		—		—		—
Alfredo Sáenz		1,209,100		9.09		—		—					—		—		—		1,209,100		(1,209,100	)		—		9.09		01/15/08		01/15/09
Matías R. Inciarte		665,200		9.09		—		(332,600	)		67,901		9.09		14.12		1,661		332,600		(332,600	)		—		9.09		01/15/08		01/15/09
Ana P. Botín (*)		293,692		9.09		—		—					—		—		—		293,692		(293,692	)		—		9.09		01/15/08		01/15/09
Francisco Luzón		639,400		9.09		—		(300,000	)		60,656		9.09		14.04		1,473		339,400		(339,400	)		—		9.09		01/15/08		01/15/09
Juan R. Inciarte (**)		419,000		9.09		—		(419,000	)		419,000		9.09		11.72		1,090		—		—			—		—		—		—

		3,767,792		9.09				(1,593,000	)								6,004		2,174,792		(2,174,792	)		—		9.09


(*)		Approved by Banesto’s shareholders at its annual shareholders’ meeting on February 28, 2006.

(**)		Juan R. Inciarte was appointed as member of the board of directors in 2008. The data on his options for prior dates relate to the options granted to him as an executive prior to his appointment as director.

(***)		Under the three-year I-06 incentive plan (see Note 47 to our consolidated financial statements), each purchase option granted entitles the beneficiary to acquire one Bank share at a price of €9.09, and the number of shares acquired on the exercise of the options was determined on the basis of the settlement method used, which can be cash for stock or cashless for cash. In the case of cash-for-stock settlements, the number of shares granted as consideration for the payment in cash of the exercise price was equal to the number of options exercised.

As detailed in the foregoing table, the remuneration allocated to executive directors due to the exercise of Banco Santander, S.A. share options under the I-06 incentive plan (see Note 47 to our consolidated financial statements) amounted to €6,004,000 in 2008. Additionally, the remuneration allocated to Ana P. Botín due to the delivery of Banesto shares under the incentive plan for executives approved by the shareholders at the annual shareholders’ meeting of that entity on February 28, 2006 amounted to €608,000. The share options under I-06 plan that had not been exercised at December 31, 2008 expired on January 15, 2009.

154


			Rights				Rights		Shares			Rights					Rights		Shares			Rights
	Rights at		granted in		Rights at		granted in		delivered in			cancelled in			Rights at		granted in		delivered in			cancelled in			Rights at
	December 31,		2008		December 31,		2009		2009			2009			December 31,		2010		2010			2010			December 31,		Grant		Share delivery
	2007		(number)		2008		(number)		(number)			(number)			2009		(number)		(number)			(number)			2010		date		deadline
Plan I09:
Emilio Botín		41,785		—		41,785		—		(37,937	)		(3,848	)		—		—		—			—			—		06-23-07		07-31-09
Alfredo Sáenz		110,084		—		110,084		—		(99,945	)		(10,139	)		—		—		—			—			—		06-23-07		07-31-09
Matías R. Inciarte		53,160		—		53,160		—		(48,264	)		(4,896	)		—		—		—			—			—		06-23-07		07-31-09
Ana P. Botín (*)		27,929		—		27,929		—		(25,357	)		(2,572	)		—		—		—			—			—		06-23-07		07-31-09
Francisco Luzón		44,749		—		44,749		—		(40,628	)		(4,121	)		—		—		—			—			—		06-23-07		07-31-09
Juan R. Inciarte (**)		43,322		—		43,322		—		(39,332	)		(3,990	)		—		—		—			—			—		06-23-07		07-31-09

		321,029		—		321,029		—		(291,463	)		(29,566	)		—		—		—			—			—

Plan I10:
Emilio Botín		62,589		—		62,589		—		—			—			62,589		—		(56,825	)		(5,764	)		—		06-23-07		07-31-10
Alfredo Sáenz		164,894		—		164,894		—		—			—			164,894		—		(149,707	)		(15,187	)		—		06-23-07		07-31-10
Matías R. Inciarte		79,627		—		79,627		—		—			—			79,627		—		(72,293	)		(7,334	)		—		06-23-07		07-31-10
Ana P. Botín (*)		41,835		—		41,835		—		—			—			41,835		—		(37,982	)		(3,853	)		—		06-23-07		07-31-10
Francisco Luzón		67,029		—		67,029		—		—			—			67,029		—		(60,856	)		(6,173	)		—		06-23-07		07-31-10
Juan R. Inciarte (**)		64,983		—		64,983		—		—			—			64,983		—		(58,998	)		(5,985	)		—		06-23-07		07-31-10

		480,957		—		480,957		—		—			—			480,957		—		(436,661	)		(44,296	)		—

Plan I11:
Emilio Botín		—		68,848		68,848		—		—			—			68,848		—		—			—			68,848		06-21-08		07-31-11
Alfredo Sáenz		—		189,628		189,628		—		—			—			189,628		—		—			—			189,628		06-21-08		07-31-11
Matías R. Inciarte		—		87,590		87,590		—		—			—			87,590		—		—			—			87,590		06-21-08		07-31-11
Ana P. Botín (*)		—		46,855		46,855		—		—			—			46,855		—		—			—			46,855		06-21-08		07-31-11
Francisco Luzón		—		77,083		77,083		—		—			—			77,083		—		—			—			77,083		06-21-08		07-31-11
Juan R. Inciarte (**)		—		50,555		50,555		—		—			—			50,555		—		—			—			50,555		06-21-08		07-31-11

		—		520,559		520,559		—		—			—			520,559		—		—			—			520,559

Plan I12:
Emilio Botín		—		—		—		82,941		—			—			82,941		—		—			—			82,941		06-19-09		07-31-12
Alfredo Sáenz		—		—		—		228,445		—			—			228,445		—		—			—			228,445		06-19-09		07-31-12
Matías R. Inciarte		—		—		—		105,520		—			—			105,520		—		—			—			105,520		06-19-09		07-31-12
Ana P. Botín (*)		—		—		—		56,447		—			—			56,447		—		—			—			56,447		06-19-09		07-31-12
Francisco Luzón		—		—		—		92,862		—			—			92,862		—		—			—			92,862		06-19-09		07-31-12
Juan R. Inciarte (**)		—		—		—		60,904		—			—			60,904		—		—			—			60,904		06-19-09		07-31-12

		—		—		—		627,119		—			—			627,119		—		—			—			627,119

Plan I13:
Emilio Botín		—		—		—		—		—			—			—		82,941		—			—			82,941		06-11-10		07-31-13
Alfredo Sáenz		—				—		—		—			—			—		228,445		—			—			228,445		06-11-10		07-31-13
Matías R. Inciarte		—		—		—		—		—			—			—		105,520		—			—			105,520		06-11-10		07-31-13
Ana P. Botín (*)		—		—		—		—		—			—			—		56,447		—			—			56,447		06-11-10		07-31-13
Francisco Luzón		—		—		—		—		—			—			—		92,862		—			—			92,862		06-11-10		07-31-13
Juan R. Inciarte (**)		—		—		—		—		—			—			—		60,904		—			—			60,904		06-11-10		07-31-13

		—		—		—		—		—			—			—		627,119		—			—			627,119


(*)		Without prejudice to the Banesto shares relating to Ana P. Botín by virtue of the Banesto Share-Based Payment Incentive Plan approved by the shareholders at the annual general meeting of Banesto held on June 27, 2007, the maximum number of Santander shares shown in the foregoing table relates to the aforementioned executive director, based on the resolution adopted at the aforementioned annual general meeting.

(**)		Juan R. Inciarte was appointed as member of the board of directors in 2008. The data on his options include the options granted to him as an executive prior to his appointment as director.

(***)		Without prejudice to the Banesto shares relating to Ana P. Botín by virtue of the Banesto Share-Based Payment Incentive Plan approved by the shareholders at the annual general meeting of Banesto held on February 24, 2010, the maximum number of Santander shares shown in the foregoing table relates to the aforementioned executive director, based on the resolution adopted at the aforementioned annual general meeting.

156

iii) Obligatory investment share plan

Pursuant to the Obligatory investment share plan (see Note 47 to our consolidated financial statements), prior to February 29, 2008, February 28, 2009 and February 28, 2010, the current executive directors acquired as deferred share-based variable remuneration the number of Bank shares shown in the table below, which represented a cost of €1.5 million in 2008, €0.8 million in 2009 and €1.5 million in 2010. Executive directors who hold the shares acquired through the Obligatory investment and remain in the Group’s employ for three years from the date on which the Obligatory investment is made will be entitled to receive the same number of Bank shares as that composing their initial Obligatory investment.

The annual shareholders’ meeting of June 19, 2009 introduced, for the third cycle, an additional requirement to that of remaining in the Bank’s employ, namely, that in the three-year period from the investment in the shares none of the following circumstances may arise: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations (including, in particular, risk regulations) applicable to the executive in question; or (iii) a material restatement of the Group’s financial statements, except if required pursuant to a change in accounting standards.


	3rd Cycle		2nd Cycle		1st Cycle
Executive directors	2010-2012		2009-2011		2008-2010

Emilio Botín		20,515		19,968		16,306
Alfredo Sáenz		49,000		47,692		37,324
Matías R. Inciarte		25,849		25,159		20,195
Ana P. Botín (*)		18,446		16,956		13,610
Francisco Luzón		28,434		27,675		22,214
Juan R. Inciarte		15,142		14,738		14,617

		157,386		152,188		124,266


(*)		In accordance with the resolution adopted by the shareholders at the annual shareholders’ meeting of Banco Santander held on June 23, 2007, the maximum number of shares relating to Ana P. Botín for the 2008-2010 cycle is that shown in the foregoing table, as approved by the annual shareholders’ meeting of Banesto held on June 27, 2007. Also, the maximum number of shares relating to Ana P. Botín for the 2009-2011 and 2010-2012 cycles as beneficiary of this plan is in line with the resolution adopted at the annual shareholders’ meeting of Banco Santander held on June 21, 2008 and by the shareholders at the annual shareholders’ meeting of Banesto held on February 24, 2010.

On March 31, 2011, shares acquired by the current executives prior to February 29, 2008 were granted to them in the amounts shown on the above table.

The obligatory investment share plan ended in 2010.

iv) Deferred and conditional share plan

At the annual general meeting held on June 11, 2010, the shareholders approved the first cycle of the deferred and conditional share plan, applicable to the variable salary remuneration to be received in 2010 by the executive directors and executives and employees of Santander Group whose variable remuneration or annual bonus for 2010 generally exceeds €300,000 (gross) with a view to deferring a portion of the aforementioned variable remuneration or bonus over a period of three years in which it will be paid, where appropriate, in Santander shares.

157

Other than certain exceptions included in the plan regulations, in addition to the beneficiary remaining in the Group’s employ, none of the following circumstances may occur for the individual to be able to accrue share-based renumeration:

(i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, that relating to risks; (iii) a material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in capital adequacy and the qualitative assessment of risk.

The share-based bonus will be deferred over three years and will be paid, where appropriate, in three installments starting at the end of the first year.

The number of shares allocated to each executive director for deferral purposes, calculated taking into account the average market price of the shares weighted by daily volume in the 15 trading days prior to December 20, 2010 -the date on which the board of directors approved the bonus for 2010 as follows:


Executive directors	1st Cycle

Emilio Botín		94,345
Alfredo Sáenz		312,450
Matías R. Inciarte		135,188
Ana P. Botín (*)		91,187	(*)
Francisco Luzón		154,981
Juan R. Inciarte		61,386


(*)		Shares of Banco Español de Crédito, as authorized by the shareholders at Banesto’s annual general meeting of February 23, 2011. In this case, the share price of Banesto used to calculate the number of shares was €6.143, the average market price of the Banesto share weighted by daily volume in the 15 trading days prior to January 19, 2011, the date on which the board of directors of that entity approved the variable remuneration of its executive directors for 2010.

A detailed description of the terms of the first cycle of this plan is contained in our 2009 annual report on Form 20-F.

Although a second cycle of this plan is being proposed to our shareholders at the 2011 annual general meeting, the executive directors will not be beneficiaries of it.

General description of long term incentive plan, deferred and conditional share plan, restricted shares plan and share ownership guidelines

Executive directors and the other members of the Bank’s senior management may (or must) participate in the following plans and must comply with the following guidelines:

1.		Performance shares plan;

2.		Obligatory investment plan with matched deferred bonus in shares or matched deferred bonus plan;

3.		Deferred and conditional share plan;

4.		Restricted shares plan; and

5.		Share ownership guidelines.

In addition, the Bank had a long-term incentive plan (I-06 plan) which expired on January 15, 2009.

Under Spanish law and our By-laws, the implementation of the first four plans, as well as the I-06 share option plan, requires specific resolutions of shareholders adopted at general shareholders’ meetings, which, to date, have been the following:

The shareholders acting at the general shareholders meeting of June 18, 2005, authorized a share option plan of the Bank (I-06 plan) tied to certain targets.

158

At the general shareholders’ meeting of June 23, 2007, the shareholders authorized the first two cycles of the performance shares plan (the I-09 and I-10 plans), the first cycle of the matched deferred bonus plan and the restricted shares plan, in the case of the latter for a 12-month period and up to a maximum of 2,189,004 shares. The maximum amount of all shares to be delivered by application of these programs was fixed at 28,144,334 shares (the 2007 Total Limit).

At the general shareholders’ meeting of June 21, 2008, the shareholders authorized the third cycle of the performance shares plan (the I-11 plan), the second cycle of the matched deferred bonus plan and the restricted shares plan, in the case of the latter for a 12-month period and up to a maximum of 1,900,000 shares. The maximum amount of all shares to be delivered by application of these programs was fixed at 19,960,000 shares (the 2008 Total Limit).

At the general shareholders’ meeting held on June 19, 2009, the shareholders authorized the fourth cycle of the performance shares plan (the I-12 plan), the third cycle of the matched deferred bonus plan and the restricted shares plan. In the case of the latter, the authorization was for a 12-month period and for up to a maximum of 2,478,000 shares. The aggregate maximum amount of shares to be delivered pursuant to these programs was fixed at 26,027,580 shares (the 2009 Total Limit).

At the general shareholders’ meeting held on June 11, 2010, the shareholders authorized the fifth cycle of the performance shares plan (the I-13 plan), the first cycle of Deferred conditional delivery share plan and the restricted shares plan, in the case of the latter for a 12-month period and up to a maximum of 2,500,247 shares. The aggregate maximum amount of shares to be delivered pursuant to these programs was fixed at 25,028,650 shares (the 2010 Total Limit).

I-06 Plan

At the general shareholders’ meeting held on June 18, 2005, a long-term incentive plan (the I-06 plan) for executive directors, which consisted of options on shares of the Bank and was tied to two pre-determined targets (increase in the trading price of the Bank’s shares and growth in earnings per share — in both cases above a sampling of comparable banks), was approved. The appointments and remuneration committee and the board of directors at their meetings on March 26, 2007 each took note of compliance with the conditions to which the plan was subject giving participants the right to exercise options to purchase shares of the Bank during the period between January 15, 2008 and January 15, 2009.

Options not exercised as of January 15, 2009 expired without value and this plan was cancelled at December 31, 2009.

1. Performance shares plan

The performance shares plan is implemented with a multiannual incentive plan, which is payable in shares of the Bank. The beneficiaries of the plan are the executive directors and other members of senior management, together with any other Group executives determined by the board of directors or, when delegated by the board, the executive committee.

This plan involves successive three-year cycles of share grants to the beneficiaries, so that each year one cycle will begin and, from 2009 onwards, another cycle will end. The aim is to establish an adequate sequence between the end of the incentive program linked to the previous Plan I-06 and the successive cycles of this plan. Thus, the first two cycles commenced in July 2007, the first cycle having a term of two years (Plan I-09) and the second cycle having a standard three-year term (Plan I-10). The first cycle (Plan I-09) was terminated on July 31, 2009 and the second cycle (Plan I-10) was terminated on July 31, 2010. In June 2008, 2009 and 2010 the third, fourth and fifth cycles of the performance share plan (Plan I-11, Plan I-12 and Plan I-13, respectively) were approved.

For each cycle a maximum number of shares is established for each beneficiary who remains in the Group for the duration of the plan. The targets, which, if met, will determine the number of shares to be delivered with respect to the cycles approved through June 2008, were defined by comparing the Group’s performance with that of a benchmark group of financial institutions and were linked to two parameters, namely Total Shareholder Return (TSR) and growth in Earnings per Share (EPS). The targets, which, if met, will determine the number of shares to be delivered under Plan I-12 and Plan I-13, are defined by comparing the Group’s performance with that of a benchmark group of financial institutions and are linked to only one parameter, namely Total Shareholder Return (TSR).

159

The ultimate number of shares to be delivered will be determined in each of the cycles by the degree of achievement of the targets on the third anniversary of commencement of each cycle (with the exception of the first cycle, for which the second anniversary was considered), and the shares will be delivered within a maximum period of seven months from the beginning of the year in which the cycle ends.

At December 31, 2010, there were three cycles in effect: I-11, I-12 and I-13 plans. The table below describes the number of participants and the maximum number of shares to be distributed.

Number of

Year

Number of

Deadline for

shares

granted

persons

Date granted

delivery of shares

Plans in effect at December 31, 2010

55,602,193

Of which:

I-11 plan

17,122,650

2008

5,771

June 21, 2008

July 31, 2011

I-12 plan

18,866,927

2009

6,510

June 19, 2009

July 31, 2012

I-13 plan

19,612,616

2010

6,782

June 11, 2010

July 31, 2013

1.1. Third cycle (I-11 plan)

A detailed description of the terms of this cycle (I-11 plan) is contained in our 2008 annual report on Form 20-F.

1.2. Fourth cycle (I-12 plan)

A detailed description of the terms of this cycle (I-12 plan) is contained in our 2009 annual report on Form 20-F.

1.3. Fifth cycle (I-13 plan)

The fifth cycle (I-13 plan) was approved at the annual general meeting of June 11, 2010, upon a proposal made by the board after a report of the appointment and remuneration committee.

The fifth cycle (I-13 plan) is subject to the following rules:

(i) Beneficiaries: The beneficiaries are the executive directors, other members of senior management and such other managers of Grupo Santander (excluding Banesto) as determined by the board of directors or the executive committee by delegation therefrom. The overall number of participants at December 31, 2010 was 6,782.

(ii) Objectives: The objectives used to determine the number of shares for distribution are tied to Total Shareholder Return (TSR). The determination of such initial and final values will be calculated based on the listing prices indicated in sub-section (iii) below.

160

At the end of the respective cycle, the TSR for Santander and each of the entities of the group identified below (the Reference Group) will be calculated and will be listed in descending order. The application of the TSR indicator will determine the percentage of shares to vest, based on the following scale and on the relative position of Santander within the Reference Group:


Santander’s position in the		Percentage shares earned of
TSR ranking		the maximum
1^st to 5^th		100.0%
6^th		82.5%
7^th		65.0%
8^th		47.5%
9^th		30.0%
10^th onwards		0%

The Reference Group is made up of the following 16 entities:


Bank		Country
Itaú Unibanco Banco Múltiplo		Brazil
BBVA		Spain
BNP Paribas		France
Credit Suisse		Switzerland
HSBC Holdings		United Kingdom
ING Group		The Netherlands
Intesa Sanpaolo		Italy
JP Morgan Chase & Co.		United States
Mitsubishi UFJ Financial Group		Japan
Nordea Bank		Sweden
Royal Bank of Canada		Canada
Société Générale		France
Standard Chartered		United Kingdom
UBS		Switzerland
UniCredit		Italy
Wells Fargo & Co.		United States

After a report from the appointments and remuneration committee, the board or the executive committee by delegation therefrom, will have the power to adapt, if appropriate, the composition of the Reference Group in the event of unforeseen circumstances that may affect the entities initially comprising such Group. In such cases, no shares will be earned if Santander ranks below the mean (50^th percentile) of the Reference Group; the maximum percentage of shares will be earned if Santander is included in the first quartile (including the 25^th percentile) of the Reference Group; 30% of the maximum number of shares will be earned at the mean (50^th percentile); and, for intermediate positions below the 50^th percentile but above the 25^th percentile, it will be calculated by linear interpolation.

161

(iii) Duration: This fifth cycle will cover 2010, 2011 and 2012. In order to calculate TSR, the average weighted by daily volume of the average weighted listing prices of the fifteen trading sessions immediately preceding (but not including) April 1, 2010 will be taken into account (to calculate the value at the beginning of the period) and that of the fifteen trading sessions immediately preceding (but not including) April 1, 2013 (to calculate the value at the end of the period). To receive shares, those qualified must continue to be actively employed by the Group, except in the event of death or disability, through June 30, 2012. Delivery of the shares, if appropriate, will be made on the date determined by the board of director or by the executive committee by delegation therefrom but not later than July 31, 2013.

The shares will be delivered by the Bank or by another company of the Group, as the case may be.

1.4. Sixth cycle (I-14 plan)

The board, pursuant to a proposal of the appointments and remuneration committee, has submitted for the approval of our shareholders at the 2011 annual general meeting a new cycle (I-14 plan), the features of which are similar to those of previous cycles and are summarized below:

1.		Beneficiaries: The executives of the Santander Group (excluding Banesto) as determined by the board of directors, or the executive committee by delegation therefrom, excluding the executive directors, other members of senior management and those other executives who are beneficiaries of the deferred and conditional variable remuneration plan referred to in page 169 below. The overall number of participants is expected to be approximately 6,500, although the board of directors, or the executive committee by delegation therefrom, may decide to include or exclude additional participants, without changing the maximum overall number of shares to be delivered that is authorised at any time.

2.		Objectives: The objectives used to determine the number of shares for distribution (the “Objectives”) are linked to Total Shareholder Return (“TSR”).

		For the purposes of the I-14 plan, TSR is the difference (expressed as a percentage) between the final value of an investment in common shares in each of the compared institutions at the end of the period and the value of the same investment at the beginning of the period. Dividends or other similar items received by the shareholders for such investment during the corresponding period of time will be considered for the calculation of such final value as if they had been invested in more shares of the same kind on the first date on which the dividend or similar item was due to the shareholders and at the average weighted listing price on such date. The determination of such initial and final values are based on the listing prices indicated in sub-section 3 below.

162

At the end of the respective cycle, the TSR for Santander and each of the entities of the group identified below (the “Reference Group”) will be calculated and will be listed in descending order. The application of the TSR indicator will determine the percentage of shares to be distributed, based on the following scale and on the relative position of Santander within the Reference Group:


Position of Santander in	Percentage shares earned
the TSR ranking	of the maximum
1st – 5th		100.0	%
6th		86	%
7th		72	%
8th		58	%
9th		44	%
10th		30	%
11th and below		0	%

The Reference Group will be made up of the following 17 entities:


Bank		Country
Itaú Unibanco Banco Múltiplo		Brazil
Barclays		United Kingdom
Bank of America		The USA
BBVA		Spain
BNP Paribas		France
HSBC Holdings		The UK
ING Group		The Netherlands
Intesa Sanpaolo		Italy
JP Morgan Chase & Co.		The USA
Mitsubishi UFJ Financial Group		Japan
Nordea Bank		Sweden
Royal Bank of Canada		Canada
Société Générale		France
Standard Chartered		The UK
UBS		Switzerland
UniCredit		Italy
Wells Fargo & Co.		The USA

The board, or the executive committee by delegation therefrom, will, after a report from the appointments and remuneration committee, have the power to adapt, if appropriate, the composition of the Reference Group in the event of unforeseen circumstances that may affect the entities initially comprising such Group. In such cases, no shares will be earned if Santander ranks below the mean (50 percentile) of the Reference Group; the maximum percentage of shares will be earned if Santander is included in the first quartile (including the 25 percentile) of the Reference Group; 30% of the maximum number of shares will be earned at the mean (50 percentile); and, for intermediate positions between (but excluding) the mean and the first quartile (excluding the 25 percentile), earned shares will be calculated by linear interpolation.

163

3.		Duration: This sixth cycle will comprise the years 2011, 2012 and 2013. The calculation of the TSR will take into account the average weighted daily volume of the average weighted listing prices for the fifteen trading sessions immediately preceding (but not including) April 1, 2011 (to calculate the value at the beginning of the period) and that of the fifteen trading sessions immediately preceding (but not including) April 1, 2014 (to calculate the value at the end of the period).

		To receive the shares, one must remain in active service with the Group through June 30, 2014,² and there must be a determination by the board of directors, upon a proposal from the appointments and remuneration committee, of the absence of any of the following circumstances during the period prior to delivery:

	(i)		poor financial performance of the Group;

	(ii)		breach by the beneficiary of internal regulations, particularly those relating to risks;

	(iii)		material restatement of the Group’s financial statements, except when pursuant to a change in the accounting standards; or

	(iv)		significant changes in the financial capital or risk profile of the Group.

		The delivery of shares, if any, shall take place no later than July 31, 2014, on a date determined by the board of directors, or by the executive committee by delegation therefrom.

		The shares will be delivered by the Bank or by another company of the Group, as the case may be.

4.		Other rules: In the event of a change in the number of shares due to a decrease or increase in the par value of the shares or a transaction with an equivalent effect, the number of shares to be delivered will be modified so as to maintain the percentage of the total share capital represented by them, and the corresponding adjustments shall be made in order for the calculation of TSR to be correct.

		Information from the stock exchange with the largest trading volume or, in case of doubt, from the stock exchange of the place where the registered office is located, shall be used to determine the listing price of each share.

		If necessary or appropriate for legal, regulatory or similar reasons, the delivery mechanisms provided for herein may be adapted in specific cases without altering the maximum number of shares linked to the plan or the basic conditions upon which the delivery thereof is made contingent. Such adaptations may include the substitution of the delivery of shares for the delivery of equivalent amounts in cash.


2		When termination of the employment relationship with Banco Santander or another entity of the Santander Group is due to retirement, early retirement or pre-retirement of the beneficiary, for a termination judicially declared to be improper, unilateral separation for good cause by an employee (which includes, in any case, those situations set forth in article 10.3 of Royal decree 1382/1985, of 1 August, governing the special relationship of senior management, for the persons subject to these rules), permanent disability or death, or as a result of an employer other than Banco Santander ceasing to belong to the Santander Group, as well as in those cases of mandatory redundancy, the right to delivery of the shares shall continue subject to the same terms as if none of such circumstances had occurred, except for the following changes:

(i)		In the case of death, the right shall pass to the successors of the beneficiary.

(ii)		The number of shares to deliver shall be the result of multiplying the maximum number of shares to be delivered to the beneficiary by the quotient resulting from dividing the number of days elapsed between January 1, 2011 and the date of occurrence of the death, retirement, pre-retirement, redundancy, leave or other circumstance causing the application of this rule, inclusive, by the number of days between January 1, 2011 and June 30, 2014, both inclusive.

In cases of justified temporary leave due to temporary disability, suspension of the contract due to maternity or paternity, or leave to care for children or a relative, there shall be no change in the rights of the beneficiary.

If the beneficiary goes to another company of the Santander Group (including through international assignment and/or expatriation), there will be no change in the rights thereof.

If the employment relationship terminates by mutual agreement or because the beneficiary obtains a leave not referred to in any of the preceding paragraphs, the terms of the termination or temporary leave agreement shall apply.

164

		The shares to be delivered may be owned by the Bank or by any of its subsidiaries, be newly-issued shares, or be obtained from third parties that have signed agreements to ensure that the commitments made will be met.

5.		Maximum limit: The aggregate maximum limit of shares to be delivered in relation to the sixth cycle of the Performance Shares Plan will be 19,000,000, equal to 0.2251% of the share capital as of the date of the call to the Meeting (the “Aggregate Limit”).

2. Obligatory investment plan with matched deferred bonus in shares or matched deferred bonus plan

The matched deferred bonus plan is implemented via the multiannual incentive plan, which is payable in shares of the Bank and is conditional upon compliance with certain investment and continued service requirements.

The current beneficiaries of the plan are the Group’s top executives, who include the executive directors, non-director members of senior management and other executives.

This plan, which was discontinued in 2010, is structured in three-year cycles which start each year. The beneficiaries of the plan must use 10% of their gross annual variable cash-based remuneration (or bonus) to acquire shares of the Bank in the market (the “Obligatory Investment”). As resolved by the shareholders at the relevant general shareholders’ meeting, the Obligatory Investments were made before February 29, 2008, February 28, 2009 and February 28, 2010, respectively.

Participants who hold the shares acquired through the obligatory investment and remain in the Group’s employ for three years from the date on which the obligatory investment is made will be entitled to receive the same number of Bank shares as that composing their initial obligatory investment.

The shares will be delivered within a period of one month from the third anniversary of the date on which the obligatory investment was made.

The shareholders at the annual general meeting of June 19, 2009 introduced, for the third cycle, a requirement additional to that of remaining in the Group’s employ, which is that in the three-year period from the investment in the shares, none of the following circumstances should concur: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, those relating to risks that is applicable to the executive in question; or (iii) a material restatement of the Group‘s financial statements, except when it is required pursuant to a change in accounting standards.

There are in effect two cycles of this plan (second and third cycle), main terms of which are described in our 2008 and 2009 annual report on Form 20-F, respectively.

3. Deferred and Conditional Share Plan

This deferred and conditional share plan is implemented via a multiannual incentive plan, which is payable in shares of the Bank. The beneficiaries of the plan are the executive directors and executives and employees of our Group whose annual variable remuneration or bonus for 2010 generally exceeds €300,000 (gross), with a view to deferring a portion of the aforementioned variable remuneration or bonus over a period of three years in which it will be paid in Santander shares.

165

The share-based bonus will be deferred over a period of three years and will be paid, where appropriate, in three instalments starting in the first year. The amount of shares will be calculated based on the tranches of the following scale established by the board of directives on the basis of the gross variable cash-based remuneration or annual bonus for 2010:


Reference bonus
(thousands of euros)		% deferred
< 300		0%
300 – 600		20%
600 – 1,200		30%
1,200 – 2,400		40%
> 2,400		50%
Total

To accrue share-based deferred remuneration the beneficiary must remain in the Group’s employ, and with the exceptions envisaged in the plan none of the following circumstances shall occur in the period prior to each of the grants: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, that relating to risks that is applicable to the executive in question; (iii) a material restatement of the Group‘s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in economic capital and the qualitative assessment of risk.

A detailed description of the terms of the first cycle of the deferred and conditional share plan is contained our 2009 annual report on Form 20-F.

The board, pursuant to a proposal of the appointments and remuneration committee, has submitted for the approval of our shareholders at the 2011 annual general meeting a second cycle of this plan, the features of which are similar to those of the previous cycle and are summarized below:

(i)		Purpose and beneficiaries: The second cycle of the deferred and conditional share plan shall be applied in relation to the variable remuneration in cash or bonus for financial year 2011 approved by the board of directors, or the appropriate body in each case, for the executive directors or employees of the Santander Group whose gross variable remuneration or annual bonus for 2011 is generally above €300,000 (gross), in order to defer a portion of said variable remuneration or bonus for payment, if any, within a three-year period in Santander shares, in accordance with the rules set forth below. This second cycle shall not apply to the executive directors, other members of senior management or other executives who are beneficiaries of the deferred and conditional variable remuneration plan referred to in page 169 below.

(ii)		Operation: In addition to the beneficiary remaining with the Santander Group³, the accrual of deferred remuneration in the form of shares is conditional upon none of the following circumstances existing during the period prior to each of the deliveries, in the opinion of the board of directors, and following a proposal of the appointments and remuneration committee:

(i)

poor financial performance of the Group;


3		When termination of the employment relationship with Banco Santander or another entity of the Santander Group is due to retirement, early retirement or pre-retirement of the beneficiary, for a termination judicially declared to be improper, unilateral separation for good cause by an employee (which includes, in any case, those situations set forth in article 10.3 of Royal decree 1382/1985, of 1 August, governing the special relationship of senior management, for the persons subject to these rules), permanent disability or death, or as a result of an employer other than Banco Santander ceasing to belong to the Santander Group, as well as in those cases of mandatory redundancy, the right to delivery of the shares (as well as the corresponding dividends) shall remain under the same conditions in force as if none of such circumstances had occurred.

In the case of death, the right shall pass to the successors of the beneficiary.

If the beneficiary goes to another company of the Santander Group (including through international assignment and/or expatriation), there will be no change in the rights thereof.

None of the above circumstances shall give the right to receive the deferred amount in advance. If the beneficiary or the successors thereof maintain the right to receive deferred remuneration in shares (as well as the corresponding dividends), such remuneration shall be delivered within the periods and upon the terms set forth in the plan rules.

166

	(ii)		breach by the beneficiary of the internal regulations, including in particular those related to risks;

	(iii)		material restatement of the Group’s financial statements, except when pursuant to a change in the accounting standards; or

	(iv)		significant changes in the financial capital or risk profile of the Group.

The deferral of the bonus in shares will last for a period of three years and will be paid, where applicable, in three equal parts from the first year on.

The amount to be deferred in shares shall generally be calculated in accordance with the following scale set by the board of directors based on the gross amount of variable remuneration in cash or annual bonus corresponding to financial year 2011:


Reference bonus
(thousands of euros)		% deferred in the tranche
Less than or equal to 300		0%
More than 300 to 600 (inclusive)		20%
More than 600		30%

		Upon each delivery of shares, and thus subject to the same requirements, the beneficiary will be paid an amount in cash equal to the dividends payable for such shares from the date of notice of the bonus and through the time of delivery, whether on the first, second or third anniversary. Under the the Santander Scrip Dividend Program (Santander Dividendo Elección), if applicable, the price offered by the Bank for the free allotment rights corresponding to such shares will be paid.

		The beneficiaries of this second cycle of the deferred and conditional share plan may not directly or indirectly hedge the shares prior to their delivery.

(iii)		Maximum number of shares to be delivered: Based on the above scale, the board of directors has estimated that the maximum amount to defer in shares of the total bonus for the financial year 2011 of the beneficiaries of this cycle is € 40 million (the “Maximum Amount Distributable in Shares”). The maximum number of Santander shares that may be delivered under this cycle of the plan (the “Deferred and Conditional Share Plan Limit”) will be determined by applying the following formula:


	Deferred and Conditional Share Plan Limit =		Maximum Amount Distributable in Shares

			Santander Share Price

		where “Santander Share Price” will be the average weighted daily volume of the average weighted listing prices of the relevant Santander shares for the fifteen trading sessions prior to the date on which the board of directors approves the bonus for the executive directors of the Bank for financial year 2011.

(iv)		Other rules: In the event of a change in the number of shares due to a decrease or increase in the par value of the shares or some other transaction with a similar effect, the number of shares to be delivered will be modified so as to maintain the percentage of the total share capital represented by them.

		Information from the stock exchange with the largest trading volume or, in case of doubt, from the stock exchange of the place where the registered office is located, shall be used to determine the listing price of each share.

167

		If necessary or appropriate for legal, regulatory or similar reasons, the delivery mechanisms provided for herein may be adapted in specific cases without altering the maximum number of shares under the plan or the basic conditions upon which the delivery thereof is made contingent. Such adaptations may include the substitution of the delivery of shares for the delivery of equivalent amounts in cash.

		The shares to be delivered may be owned by the Bank or by any of its subsidiaries, be newly-issued shares, or be obtained from third parties that have signed agreements to ensure that the commitments made can be met.

4. Restricted shares plan

This plan consists of the delivery of shares without charge subject to mandatory continuity with the Group for a period of three to four years. After completion of the required minimum period established in each case, the participant will have the right to receive the shares.

The Bank intends to use this plan selectively as an instrument to retain or hire managers or employees (with the exception of executive directors) of the Bank and other companies of the Group. The board of directors, or the executive committee by delegation therefrom, has the power to decide on the use of this instrument.

The limits authorized at the annual general shareholders’ meetings of June 23, 2007, June 21, 2008 and June 19, 2009 expired without any share delivery commitment having been assumed.

At December 31, 2010, the authorized limit was 2,500,247 shares as approved at the annual general shareholders’ meeting of June 11, 2010. As of the date of this report on Form 20-F, no delivery commitment has been assumed under such authorization.

The use of such limit must also take into account the 2010 Total Limit mentioned above in this section.

A proposal for a new limit under this plan is not included in the agenda of the 2011 annual general meeting.

5. Share ownership guidelines

The Group’s principal executives, including executive directors, must own a specific number of Santander shares on a permanent basis while serving at the Bank.

This obligation currently affects the Group’s highest ranking executives, including the Bank’s executive directors, and requires that they have invested in a number of Santander shares equivalent to one year’s fixed remuneration and that they comply with this obligation within a five-year period that began on March 26, 2007.

Deferred and conditional variable remuneration plan

Directive 2010/76/EU, of 24 November, amending the rules for supervisory review of remuneration policies, and the Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors (CEBS), published on December 10, 2010, introduced more stringent standards than those issued by the Financial Stability Board in 2009, which required changes to the executive remuneration policy applied by the Group as from January 1, 2011.

The changes mainly involve the implementation of a new remuneration plan for the executive directors and certain executives (including senior management) and employees who assume risks, perform control functions or receive overall remuneration which puts them at the same remuneration level as senior executives and employees who assume risks. All of them are referred to as “Identified Staff” in accordance with the aforementioned Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors on December 10, 2010.

This new plan, the first cycle of which is being submitted for approval at the 2011 annual general meeting, is called the deferred and conditional variable remuneration plan and the beneficiaries thereof will not be beneficiaries of the sixth cycle of the performance share plan and the second cycle of the deferred and conditional share plan.

168

The purpose of this first cycle of the deferred and conditional variable remuneration plan is to defer a portion of the variable remuneration or bonus of the beneficiaries thereof for a period of three years, with any subsequent payment being made in cash and in Santander shares pursuant to the rules set forth below. The number of beneficiaries of this new deferred and conditional variable remuneration plan is approximately 250 persons, who will be, for purposes of this first cycle, grouped as follows: “executive directors,” made up of the directors of the Bank with executive duties, “division directors,” made up of divisional directors and other Group executives with similar profiles, and “other executives subject to supervision,” made up of the other executives who are beneficiaries of this first cycle.

The total variable remuneration (bonus) for financial year 2011 of the beneficiaries of this first cycle of the deferred and conditional variable remuneration plan will be paid in accordance with the following percentages, based on the time at which the payment occurs and the group to which the beneficiary belongs (the “immediate payment percentage,” to identify the portion of the bonus for which payment will not be deferred, and the “deferred percentage,” to identify the portion of the bonus for which payment will be deferred):


	Immediate payment percentage			Deferred percentage
Executive Directors		40	%		60	%
Division Directors and other executives of the Group with a similar profile		50	%		50	%
Other Executives Subject to Supervision		60	%		40	%

Taking into account the foregoing, the total variable remuneration (bonus) for financial year 2011 for the beneficiaries of this first cycle will be paid as follows:

(i)		In 2012, each beneficiary, based on the group to which the beneficiary belongs, will receive the Immediate Payment Percentage applicable in each case in halves and net of taxes or withholding, in cash and Santander shares (the “Initial Date” which is understood as the specific date on which the Immediate Payment Percentage is paid).

(ii)		The payment of the Deferred Percentage of the bonus applicable in each case based on the group to which the beneficiary belongs will be deferred for a period of 3 years and will be paid in thirds, within fifteen days following the anniversaries of the Initial Date in 2013, 2014 and 2015 (the “Anniversaries”), provided that the conditions listed below are met.

(iii)		Of the deferred amount, upon payment (or withholding) of the taxes applicable at any time, the resulting net amount will be paid in thirds, within fifteen days following the first, second and third Anniversaries, 50% in cash and the other 50% in Santander shares.

(iv)		Beneficiaries who receive Santander shares pursuant to paragraphs (i) to (iii) above may not transfer them or engage in the direct or indirect hedging thereof for a period of one year from each delivery of shares. Nor may the beneficiaries engage in direct or indirect hedging of the shares prior to the delivery thereof.

169

In addition to the beneficiary remaining with the Santander Group,⁴ the accrual of deferred remuneration is conditional upon none of the following circumstances occurring during the period prior to each of the grants, in the opinion of the board of directors, and following a proposal of the appointments and remuneration committee:

(i)		poor financial performance of the Group;

(ii)		breach by the beneficiary of internal regulations, particularly those relating to risks;

(iii)		material restatement of the Group’s financial statements, except when pursuant to a change in the accounting standards; or

(iv)		significant changes in the financial capital or risk profile of the Group.

The board of directors, upon a proposal of the appointments and remuneration committee, and based on the degree of compliance with such conditions, will on each occasion determine the amount of the deferred remuneration to be paid.

If the above requirements are met on each Anniversary, the cash and shares will be delivered to the beneficiaries, in thirds, within fifteen days following the first, second and third Anniversary.

On each delivery of shares and cash, and thus subject to the same requirements, the beneficiary will be paid an amount in cash equal to the dividends paid for such shares and the interest accrued on the deferred cash amount of the annual bonus, in both cases from the Initial Date until the date of payment of the shares and cash in each applicable case. In cases of application of the Santander Scrip Dividend program (Santander Dividendo Elección), the price paid will be that offered by the Bank for the free allotment rights corresponding to such shares.

The final number of shares actually allocated to each beneficiary will be calculated taking into account: (i) the amount resulting from accounting for the applicable taxes (or withholding); and (ii) the average weighted daily volume of the average weighted listing prices for the 15 trading sessions prior to the date on which the board of directors approves the bonus for the executive directors of the Bank for financial year 2011.


4		When termination of the employment relationship with Banco Santander or another entity of the Santander Group is due to retirement, early retirement or pre-retirement of the beneficiary, for a termination judicially declared to be improper, unilateral separation for good cause by an employee (which includes, in any case, those situations set forth in article 10.3 of Royal decree 1382/1985, of August 1, governing the special relationship of senior management, for the persons subject to these rules), permanent disability or death, or as a result of an employer other than Banco Santander ceasing to belong to the Santander Group, as well as in those cases of mandatory redundancy, the right to delivery of the shares and the deferred cash amounts (as well as the corresponding dividends and interest) shall remain under the same conditions in force as if none of such circumstances had occurred.

In the case of death, the right shall pass to the successors of the beneficiary.

If the beneficiary goes to another company of the Santander Group (including through international assignment and/or expatriation), there will be no change in the rights thereof.

None of the above circumstances shall give the right to receive the deferred amount in advance. If the beneficiary or the successors thereof maintain the right to receive deferred remuneration in shares and in cash (as well as the corresponding dividends and interest), such remuneration shall be delivered within the periods and upon the terms set forth in the plan rules.

170

Taking into account that the board of directors has estimated that the maximum amount of the bonus to be delivered in shares to the beneficiaries of the first cycle of the deferred and conditional variable remuneration plan is 165 million euros (the “Maximum Amount Distributable in Variable Remuneration Shares” (“MADVRS”)), the maximum number of Santander shares that can be delivered to such beneficiaries under this cycle of the plan (the “Variable Remuneration Shares Limit” (“VRSL”)) will, after deducting the applicable taxes (or withholding), be determined by application of the following formula:


VRSL	=	MADVRS
VRSL	=	Santander Share Price

where “Santander Share Price” will be the average weighted daily volume of the average weighed listing prices of the relevant Santander shares for the fifteen trading sessions prior to the date on which the board of directors approves the bonus for the executive directors of the Bank for financial year 2011.

The Maximum Distributable Amount in Variable Remuneration Shares includes an estimate of the maximum amount of the bonus to be delivered in shares for the executive directors of the Bank, which is € 17.5 million (the “Maximum Amount Distributable in Shares for Executive Directors” or “MADSED”). The maximum number of Santander shares that may be delivered to the executive directors under this cycle of the plan (the “Executive Director Share Limit” or “EDSL”) will be determined, after the deduction (or withholding) of applicable taxes, by applying the following formula:


EDSL	=	MADSED
EDSL	=	Santander Share Price

where “Santander Share Price” will be the average weighted daily volume of the average weighted listing prices for the fifteen trading sessions prior to the date on which the board of directors approves the bonus for the executive directors of the Bank for financial year 2011.

171

Santander UK

The long-term incentive plans on shares of the Bank originally granted by management of Santander UK to its employees (consisting of Santander UK shares) are as follows:

Date of

Exercise price

commencement

expiry of

Number of

in pounds

Year

Employee

Number of

of exercise

exercise

sterling (*)

granted

group

persons

period

Plans outstanding at 01/01/08

8,048,312

5.34

Options granted (Sharesave)

5,196,807

7.69

2008

Employees

6,556

(**)

11/01/08

11/01/11

Options exercised

(6,829,255

)

4.91

11/01/08

11/01/13

Of which:

Executive options

(132,107

)

4.11

Sharesave

(4,506,307

)

3.07

MTIP

(2,190,841

)

8.73

Options cancelled (net) or not exercised

(262,868

)

4.87

Of which:

Sharesave

(233,859

)

4.13

MTIP

(29,009

)

10.88

Plans outstanding at 12/31/08

6,152,996

7.00

Options granted (Sharesave)

4,527,576

7.26

2009

Employees

7,066

(**)

11/01/09

11/01/12

11/01/09

11/01/14

Options exercised

(678,453

)

Of which:

Sharesave

(678,453

)

3.85

Options cancelled (net) or not exercised

(1,277,590

)

Of which:

Sharesave

(1,277,590

)

7.48

Plans outstanding at 12/31/09

8,724,529

7.24

Options granted (Sharesave)

3,359,425

6.46

2010

Employees

4,752

(**)

11/01/10

11/01/13

11/01/10

11/01/15

Options exercised

(72,516

)

7.54

Of which:

Sharesave

(72,516

)

7.54

Options cancelled (net) or not exercised

(3,072,758

)

6.82

Of which:

Sharesave

(3,072,758

)

6.82

Plans outstanding at 12/31/10

8,938,680

7.09

Of which:

Executive Options

12,015

4.54

2003-2004

Executives

03/26/06

03/24/13

Sharesave

8,926,665

7.09

2004-2008-2009-2010

Employees

13,195

(**)

04/01/06

11/01/15


(*)		At December 31, 2010, 2009 and 2008, the euro/pound sterling exchange rate was €1.16178/GBP 1; €1.12600/GBP 1 and €1.04987/GBP 1, respectively.

(**)		Number of accounts/contracts. A single employee may have more than one account/contract.

In 2005, the Group designed a Medium-Term Incentive Plan (MTIP) involving the delivery of Bank shares to Santander UK executives. Under the plan, effective allocation of the shares in 2008 was tied to the achievement of business targets by Santander UK (in terms of net profit and income). This plan was approved by the shareholders at the general shareholders’ meeting on June 17, 2006. Subsequently, it was considered necessary to amend the conditions of the plan in order to reflect the impact of the sale of Santander UK’s life insurance business to Resolution on the income targets of Santander UK for 2007. The board of directors, after obtaining a favorable report from the appointments and remuneration committee, submitted this amendment for ratification by the shareholders at the general shareholders’ meeting held on June 23, 2007. The amendment was approved thereat. In the first half of 2008, all the shares under this plan were delivered, and the plan was cancelled on June 30, 2008.

172

In 2008, the Group launched a voluntary savings scheme for Santander UK employees (Sharesave Scheme) whereby employees who join the scheme will have between GBP 5 and GBP 250 deducted from their net monthly pay over a period of three or five years. When this period has ended, the employees may use the amount saved to exercise options on shares of the Bank at an exercise price calculated by reducing by up to 20% the average purchase and sale prices of the Bank shares in the first three trading days of September 2008. This scheme, which commenced in September 2009, was approved at the general shareholders’ meeting held on June 21, 2008 and is authorized by the UK tax authorities (HMRC). At the annual general meetings held on 19 June 2009 and 11 June 2010, our shareholders approved a plan with similar features to the plan approved in 2008.

A new version of the plan is included in the agenda of the 2011 annual general meeting.

C. Board practices

Date of expiration of the current term of office of the directors and the period during which the directors have served in that office:

The period during which the directors have served in their office is shown in the table under Section A of this Item 6.

The date of expiration of the current term of office is shown in the table below:


		Date of
Name		expiration (1)
Emilio Botín		1^st half 2013
Fernando de Asúa		1^st half 2015
Alfredo Sáenz		1^st half 2015
Matías R. Inciarte		1^st half 2014
Manuel Soto		1^st half 2014
Assicurazioni Generali, S.p.A.		1^st half 2012
Antonio Basagoiti		1^st half 2012
Ana P. Botín		1^st half 2011
Javier Botín		1^st half 2015
Lord Burns		1^st half 2011
Guillermo de la Dehesa		1^st half 2014
Rodrigo Echenique		1^st half 2011
Antonio Escámez		1^st half 2012
Ángel Jado		1^st half 2015
Francisco Luzón		1^st half 2012
Abel Matutes		1^st half 2014
Juan R. Inciarte		1^st half 2013
Luis Alberto Salazar-Simpson		1^st half 2013
Isabel Tocino		1^st half 2015


(1)		Pursuant to the provisions of our By-laws, one-fifth of the board will be renewed every year, based on length of service and according to the date and order of their respective appointments.

		A proposal to reduce the term of the office for our directors from five to three years has been submitted for the consideration of our shareholders at the 2011 annual general meeting which, if approved, will result in approximately one-third of the directors (as opposed to one-fifth) being up for annual re-election.

At the 2011 annual general meeting, the following directors will be proposed for re-election for a period of three years: Ana P. Botín, Rodrigo Echenique, Lord Burns and Assicurazioni.

173

The principal terms and conditions of the contracts entered into by the Bank with its executive directors are as follows:

(i) Exclusivity and non-competition

Executive directors may not enter into other service contracts with other companies or entities, unless express prior authorization is obtained from the board of directors. In addition, executive director’s contracts contain non-compete provisions, which prohibit executive directors from providing services to companies engaged in activities of a nature similar to that of the Bank or the consolidated Group.

To that end, during its meeting on January 24, 2011, the board, without the participation of the executive directors, unanimously voted, following the favorable report from the appointments and remuneration committee, to draft an addenda to the contracts of executive directors and members of senior management in order to include certain amendments to the clauses applicable to the termination of services of such officers with respect to the prohibition against competition and solicitation of customers, employees and providers.

(ii) Code of conduct

Executive directors are required to strictly observe the provisions contained in the Rules and Regulations of the Board. They also must observe the provisions of Grupo Santander’s General Code of Conduct and the Code of Conduct in the Securities Market, specifically with respect to rules of confidentiality, professional ethics and conflicts of interest.

(iii) Remuneration

The remuneration for undertaking their executive responsibilities is compatible with the joint participation in the year’s profits (annual retainer and attendance fees) to which directors are entitled, as it is expressly stated by our By-laws and the Rules and Regulations of the Board.

a. Fixed remuneration of executive directors

The fixed remuneration received by the executive directors during the last three fiscal years was as follows:


Thousands of euros	2010			Change (%)			2009		2008

Emilio Botín		1,344			—			1,344		1,305
Alfredo Sáenz		3,703			—			3,703		3,595
Matías R. Inciarte		1,710			—			1,710		1,661
Ana P. Botín		1,353	(*)		4.6	%		1,294		1,269
Francisco Luzón		1,656			10.0	%		1,505		1,461
Juan R. Inciarte		987			—			987		958


Total		10,754			2.0	%		10,543		10,249


(*)		It is the sum of the fixed remuneration received from Banesto by Ana P. Botín for the first eleven months of 2010, and that accrued from December 1, 2010 as a result of the change in her responsibilities (chief executive officer of Santander UK).

		b. Variable remuneration of executive directors

The variable remuneration for financial year 2010 had a cash component and another deferred component made up entirely of shares:

1. The variable remuneration (bonus) for executive directors was set taking into account compliance with the targets for profit before tax (PBT), comparison to other financial entities, and the quality of the results obtained. This last item is assessed with respect to the recurrence thereof (eliminating special or extraordinary transactions), the appropriate management of risk, and the efficient consumption of capital.

174

2. A portion of the bonus payable in shares is deferred for a period of three years. The percentage of the bonus that is deferred depends on the tranches set at the 2010 general shareholders’ meeting, at which this system was approved as the first cycle of the deferred and conditional share plan.

3. Finally, as part of the variable remuneration for financial year 2010, our shareholders at the general shareholders’ meeting for such year approved participation of the executive directors in a new cycle of the performance shares plan, i.e., the fifth cycle, also known as Plan I-13, which, like the previous ones, consists of a promise to deliver a number of Santander shares to each participant within three years based on the achievement of certain goals —in this case those linked to total shareholder return on the Bank’s shares— and compliance with certain conditions.

The amounts received by each executive director in terms of variable remuneration in cash with respect to the last two financial years were as follows:


Thousands of euros	*2010 ()**		Change (%)			2009		2008
Emilio Botín		1,682		(15.3	%)		1,987		1,987
Alfredo Sáenz		3,351		(29.4	%)		4,745		4,745
Matías R. Inciarte		1,994		(20.3	%)		2,503		2,503
Ana P. Botín		1,440		(19.4	%)		1,786		1,786
Francisco Luzón		2,146		(22.0	%)		2,753		2,753
Juan R. Inciarte		1,304		(11.1	%)		1,466		1,466


Total		11,917		(21.8	%)		15,240		15,240


(*)		Not included are the amounts whose handing-over in the form of shares are deferred and conditional by resolution of the general meeting of shareholders on June 11, 2010, and which amount to a total of €6,362,000.

c. Pension rights

Executive directors are entitled to receive a pension supplement upon retirement or early retirement, which the Bank may cause to be externally funded.

The Bank may request the early retirement of executive directors, provided that they are over 50 years of age and have more than 10 years’ service with the Bank and/or other companies of the Group. Executive directors may also request early retirement themselves if they are over 55 years of age and have 10 years’ service with the Bank and/or other companies of the Group. Notice of the decision to retire or to take early retirement must in any event be given 60 days in advance.

Pension rights are also recognized in the event of incapacity, and in case of death of the executive director, in favor of the spouse (widow benefits) and children (orphan benefits).

Generally, the amount of the pension supplement consists of the amount necessary to reach an annual gross amount equal to 100% of the fixed salary received by the director at the time the director actually ceased working, plus 30% of the average of the last three variable remuneration amounts received. In certain cases, if early retirement occurs at the request of the director, the amount resulting from the application of the method described above would be reduced by percentages ranging from 20% to 4%, depending on the age of the director at the time of early retirement.

For further details, see “B. Compensation — Compensation to the board members as representatives of the Bank and to Senior Management — Pension commitments, other insurance and other items”.

175

(iv) Termination

The Bank’s executive directors have indefinite-term employment contracts.

Executive directors whose contracts are terminated voluntarily or due to breach of duties are not entitled to receive any economic compensation. If the contracts are terminated for reasons attributable to the Bank or due to certain objective circumstances (such as those affecting the executive directors’ functional and organic statute), the directors will be entitled, at the date of termination of their employment relationships with the Bank, to the following:

	–		In the cases of Emilio Botín and Alfredo Sáenz, on proceeding to retired status, to receive the amounts corresponding to accrued pension (€25.0 million and €86.6 million, respectively) in the form of capital with no additional amount accruing by way of pension in the future after the exercising by each of the directors of the consolidation option referred to under Note 5.c to our consolidated financial statements.

			If termination of the contract with Alfredo Sáenz had occurred in 2010, he could have chosen to proceed to retired status or to receive a severance compensation equivalent to 40% of his annual fixed salary multiplied by the number of years of his service at the Bank, up to a maximum of 10 times his annual fixed salary. However, Alfredo Sáenz has waived his right to receive such severance compensation.

	–		In the case of Matías R. Inciarte, to take pre-retirement and to receive his accrued pensions in the form of capital (€44,560,000) without any additional amounts accruing in respect of pensions in the future since the consolidation option referred to in Note 5.c has been exercised.

			At December 31, 2009 and 2008, Matías R. Inciarte would have been entitled to take pre-retirement and accrue annual pension supplements amounting to €2,507,000 and €2,416,000, respectively, in those years.

	–		In the case of Ana P. Botín, pursuant to a change in her contract approved by the directors at the board meeting held on January 24, 2011, following the report of the appointments and remuneration committee, to take pre-retirement and accrue a pension supplement. At December 31, 2010, the annual pension supplement would amount to €2,556 thousand (December 31, 2009: €1,841,000; December 31, 2008: €1,781,000).

			At December 31, 2009 and 2008, Ana P. Botín was entitled to receive a termination benefit amounting to five years’ annual fixed salary at the date of termination (2009: €6,472,000, 2008: €6,345,000), although this entitlement to termination benefit had ceased as a result of the change in her contract.

	–		In the case of Francisco Luzón, to take pre-retirement and to accrue a pension supplement. At December 31, 2010, the annual pension supplement would amount to €2,850,000 (2009: €2,701,000; 2008: €2,648,000).

	–		In the case of Juan R. Inciarte, pursuant to a change in his contract approved by the directors at the board meeting held on January 24, 2011, following the report of the appointments and remuneration committee, to take pre-retirement and accrue a pension supplement. At December 31, 2010, the annual pension supplement would amount to €908,000 (December 31, 2009: €869,000, December 31, 2008: €958,000).

			As of December 31, 2009 and 2008, Juan R. Inciarte was entitled to receive an indemnity amounting to 5 yearly payments of the annual fixed salary he received at the time of termination (€4,936,000 and €4,792,000, respectively), this indemnity right having been eliminated as a result of the amendment to his contract.

In the event of Ana P. Botín, Francisco Luzón or Juan R. Inciarte proceeding to pre-retired or retired status, they would be entitled to choose between receiving their accrued pensions (or amounts equivalent thereto) in the form of income or capital (i.e., as a lump sum consideration) in whole but not in part. Such right is independent of the option to which they are entitled beginning from the age of 60 years (see Note 5.c to our consolidated financial statements).

176

(v) Insurance

The Bank provides to its executive directors life insurance, the premium for which is included in the column Other remuneration in the table of page 150 above, accident insurance, whose coverage varies in each cases on the basis of the policy set by the Bank for its senior executives, and a reimbursement for healthcare insurance.

(vi) Confidentiality and return of documents

The contracts contain confidentiality agreements, which cover the periods during and after the termination of the employment relationship.

(vii) Other conditions

The contracts provide for the following advance notice periods for termination of the executive officers’ position by the Bank or resignation by the executive officer.

Date of current contract

By decision of the

Advance notice period

(month/day/year)

Bank (months)

director (months)

Emilio Botín

04/29/2009

)

Alfredo Sáenz

04/29/2009

Matías R. Inciarte

04/29/2009

Ana P. Botín

04/29/2009

Francisco Luzón

04/29/2009

Juan R. Inciarte

04/29/2009


(*)		It is not contractually established.

Audit and compliance committee and appointments and remuneration committee

An audit and compliance committee as well as an appointments and remuneration committee operate as part of the board of directors. The audit and compliance committee consists exclusively of 5 external directors (all of whom are independent in accordance with the principles set forth in Article 6.2(c) of the Rules and Regulations of the Board). The appointments and remuneration committee consists of 4 external directors (all of whom are independent in accordance with the principles set forth in Article 6.2(c) of the Rules and Regulations of the Board). These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE.

The audit and compliance committee

The audit and compliance committee was created to provide support and specialization for the tasks of controlling and reviewing the Bank’s accounts and compliance function. Its mission, which has been defined and approved by the board, is established in our By-laws and in the Rules and Regulations of the Board.

Only non-executive directors can be members of this committee with independent directors (as defined in the Rules and Regulations of the Board) having a majority representation. Its chairman must always be an independent director (as defined in the Rules and Regulations of the Board) and someone who has the necessary knowledge and experience in matters of accounting, auditing or risk management. Currently, the chairman of the audit and compliance committee is Manuel Soto.

The members of the audit and compliance committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitude and experience in the areas of accounting, auditing or risk management.

177

Functions of the audit and compliance committee:

a) Have its chairman and/or secretary report to the general shareholders’ meeting with respect to matters raised therein by shareholders regarding its powers.

b) Propose the appointment of the auditor, as well as the conditions in which such auditor will be hired, the scope of its professional duties and, if applicable, the revocation or non-renewal of its appointment. The committee shall favor the Group’s auditor also assuming responsibility for auditing the companies which comprise the Group.

c) Review the accounts of the Company and the Group, monitor compliance with legal requirements and the proper application of generally accepted accounting principles, and report on the proposals for alterations to the accounting principles and standards suggested by management.

d) Supervise the Bank’s internal audit services, and particularly:

(i) Propose the selection, appointment and withdrawal of the party responsible for internal audit;

(ii) Review the annual working plan for internal audit and the annual activities report;

(iii) Ensure the independence and effectiveness of the internal audit function;

(iv) Propose the budget for this service;

(v) Receive periodic information regarding the activities thereof; and

(vi) Verify that senior management takes into account the conclusions and recommendations of its reports.

e) Supervise the process for gathering financial information and for the internal control systems. In particular, the audit and compliance committee shall:

	(i)		Supervise the process of preparing and presenting the regulated financial information relating to the Company and the Group, as well as its integrity, reviewing compliance with regulatory requirements, the proper demarcation of group consolidation and the correct application of accounting standards;

	(ii)		Supervise the effectiveness of the systems for the internal monitoring and management of risks, reviewing them periodically, so that the principal risks are identified, managed and properly disclosed; and

	(iii)		Discuss with the external auditor any significant weaknesses detected in the internal control system during the course of the audit.

f) Report on, review and supervise the risk control policy established in accordance with the provisions of the Rules and Regulations of the Board.

g) Serve as a channel of communication between the board and the auditor, assess the results of each audit and the response of the management team to its recommendations, and act as a mediator in the event of disagreement between the board and the auditor regarding the principles and standards to be applied in the preparation of the financial statements. Specifically, it shall endeavor to ensure that the statements ultimately drawn up by the board are submitted to the general shareholders’ meeting without any qualifications or reservations in the auditor’s report.

h) Supervise the fulfillment of the audit contract, endeavoring to ensure that the opinion on the annual financial statements and the main contents of the auditor’s report are set forth in a clear and accurate fashion.

178

i) Ensure the independence of the auditor, by taking notice of those circumstances or issues that might risk such independence and any others related to the development of the auditing procedure, as well as receive information and maintain such communication with the auditor as is provided for in legislation regarding the auditing of financial statements and in technical auditing regulations. And, specifically, verify the percentage represented by the fees paid for any and all reasons of the total income of the audit firm, and the length of service of the partner who leads the audit team in the provision of such services to the Company. The annual report shall set forth the fees paid to the audit firm, including information relating to fees paid for professional services other than audit work.

In any event, the audit and compliance committee should receive annually from the external auditor written confirmation of the latter’s independence versus the Company or institutions directly or indirectly linked to the Company, as well as information on any type of additional services provided to such institutions by the aforementioned auditor or by persons or institutions related to the latter, as stipulated in External Auditing Law 19/1988, of July 12.

Likewise, prior to the issuing of the external auditor’s report, the committee shall issue annually a report expressing an opinion on the independence of the external auditor. In any event, such report should make a statement as to the providing of the additional services referred to in the preceding paragraph.

j) The committee shall ensure that the Company publicly communicates a change of auditor and accompanies such communication with a declaration regarding the possible existence of disagreements with the outgoing auditor and, if any, regarding the content thereof and, in the event of the resignation of the auditor, the committee shall examine the circumstances causing it.

k) Report to the board, in advance of its adoption of the corresponding decisions, regarding:

(i) The financial information that the Company must periodically make public, ensuring that such information is prepared in accordance with the same principles and practices applicable to the annual financial statements.

(ii) The creation or acquisition of equity interests in special purpose entities or entities domiciled in countries or territories that are considered to be tax havens.

l) Supervise the observance of the Code of Conduct of the Group in the Securities Markets, the Manuals and Procedures for the Prevention of Money Laundering and, in general, the rules of governance and compliance in effect in the Company, and make such proposals as are deemed necessary for the improvement thereof. In particular, the committee shall have the duty to receive information and, if applicable, issue a report on disciplinary penalties to be imposed upon members of the senior management.

m) Review compliance with such courses of action and measures as result from reports issued or inspection proceedings carried out by administrative authorities having functions of supervision and control.

n) Know and, if applicable, respond to the initiatives, suggestions or complaints put forward or raised by the shareholders regarding the area of authority of this committee and which are submitted to it by the office of the general secretary of the Company. The committee shall also:

(i) Receive, deal with and keep a record of the complaints received by the Bank on matters related to the process of gathering financial information, auditing and internal controls.

(ii) Receive on a confidential and anonymous basis communications from Group employees who express their concern on possible questionable practices in the areas of accounting or auditing.

o) Receive information from the person responsible for the Company’s taxation matters on the tax policies applied, at least prior to the drawing-up of the annual accounts and the filing of the Corporate Tax return, and where relevant, on the tax consequences of transactions or matters submitted to the board of directors or the executive committee for approval, unless such bodies have been informed directly, in which case this will be reported to the committee at the first subsequent meeting held by it. The audit and compliance committee shall transfer the information received to the board of directors.

179

p) Report on any proposed amendments to the Rules and Regulations of the Board prior to the approval thereof by the board of directors.

q) Evaluate, at least once a year, the committee’s operation and the quality of its work.

r) And the others specifically provided for in the Rules and Regulations of the Board.

The Group’s 2010 audit and compliance committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Committees report”.

The following are the current members of the audit and compliance committee:


Name		Position

Manuel Soto		Chairman
Fernando de Asúa		Member
Rodrigo Echenique		Member
Abel Matutes		Member
Luis Alberto Salazar-Simpson		Member

Ignacio Benjumea also acts as secretary to the audit and compliance committee but is classified as a non-member.

The appointments and remuneration committee:

The Rules and Regulations of the Board state that the members of this committee must all be non-executive directors with independent directors (as defined in the Rules and Regulations of the Board) having a majority representation including an independent director as chairman (as defined in the Rules and Regulations of the Board).

Currently, the chairman of the appointments and remuneration committee is Fernando de Asúa, the first vice chairman of the board of directors.

The members of the appointments and remuneration committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitudes and experience and the goals of the committee.

Functions of the appointments and remuneration committee:

a) Establish and review the standards to be followed in order to determine the composition of the board and select those persons who will be proposed for election to serve as directors. In particular, the appointments and remuneration committee:

(i) Shall evaluate the competencies, knowledge and experience required of the director;

(ii) Shall specify the duties and the aptitudes needed of the candidates to fill each vacancy, evaluating the time and dedication needed for them to properly carry out their commitments; and

(iii) Shall receive for consideration the proposals of potential candidates to fill vacancies that might be made by the directors.

b) Prepare the proposals for appointment, re-election and ratification of directors provided for the Rules and Regulations of the Board, as well as the proposals for appointment of the members of each of the committees of the board of directors. Likewise, it shall prepare, the proposals for the appointment of positions on the board of directors and its committees.

180

c) Annually verify the classification of each director (as executive, proprietary, independent or other) for the purpose of their confirmation or review at the ordinary general meeting and in the annual corporate governance report.

d) Report on proposals for appointment or withdrawal of the secretary of the board, prior to submission thereof to the board.

e) Report on appointments and withdrawals of the members of senior management.

f) Propose to the board:

(i) The policy for compensation of directors and the corresponding report.

(ii) The policy for compensation of the members of senior management.

(iii) The individual compensation of the directors.

(iv) The individual compensation of the executive directors and, if applicable, external directors, for the performance of duties other than those of a mere director, and other terms of their contracts.

(v) The basic terms of the contracts and compensation of the members of senior management.

(vi) The remuneration of those other officers who, though not members of senior management, receive significant compensation, particularly variable compensation and whose activities may have a significant impact on the assumption of risk by the Group.

g) Ensure compliance with the policy established by the Company for compensation of the directors and the members of senior management.

h) Periodically review the compensation programs, assessing the appropriateness and yield thereof and endeavoring to ensure that the compensation of directors shall conform to standards of moderation and correspond to the earnings of the Company.

i) Ensure the transparency of such compensation and the inclusion in the annual report and in the annual corporate governance report of information regarding the compensation of directors and, for such purposes, submit to the board any and all information that may be appropriate.

j) Ensure compliance by the directors with the duties prescribed the Rules and Regulations of the Board, prepare the reports provided for therein and receive information, and, if applicable, prepare a report on the measures to be adopted with respect to the directors in the event of non-compliance with the above mentioned duties or with the Code of Conduct of the Group in the Securities Markets.

k) Examine the information sent by the directors regarding their other professional obligations and assess whether such obligations might interfere with the dedication required of directors for the effective performance of their work.

l) Evaluate, at least once a year, its operation and the quality of its work.

m) Report on the process of evaluation of the committee and of the members thereof.

n) And others specifically provided for in the Rules and Regulations of the Board.

The Group’s 2010 appointments and remuneration committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Committees report”.

181

The table below shows our employees by type of business:


	Number of employees
	2010		2009		2008
Retail Banking		171,964		163,184		165,244
Asset Management and Insurance		1,338		1,558		1,435
Global Wholesale Banking		3,037		2,898		2,572
Corporate Activities		2,530		1,820		1,710

Total		178,869		169,460		170,961

As of December 31, 2010, we had 2,216 temporary employees (as compared to 1,577 as of December 31, 2009 and 1,814 as of December 31, 2008). In 2010, the average number of temporary employees working for the Group was 1,897 employees.

E. Share ownership

As of May 27, 2011, the direct, indirect and represented holdings of our current directors were as follows:


	Direct		Indirect stake				% of
Directors	Stake		and represented		Total shares		Capital stock
Emilio Botín (1)		8,200,236		151,922,027		160,122,263		2.118	%
Fernando de Asúa		63,600		51,420		115,020		0.001	%
Alfredo Sáenz		987,913		1,278,851		2,266,764		0.027	%
Matías R. Inciarte (3)		993,591		164,125		1,157,716		0.014	%
Manuel Soto		62,446		365,377		427,823		0.005	%
Assicurazioni Generali S.p.A		75,000		50,059,290		50,134,290		0.594	%
Antonio Basagoiti		712,920		—		712,920		0.008	%
Ana P. Botín (1)		5,106,835		4,024,136		9,130,971		0.000	%
Javier Botín (1)(2)		4,793,481		4,676,610		9,470,091		0.000	%
Lord Burns (Terence)		30,103		27,001		57,104		0.001	%
Guillermo de la Dehesa		103		—		103		0.000	%
Rodrigo Echenique		658,758		9,542		668,300		0.008	%
Antonio Escámez		757,596		—		757,596		0.009	%
Ángel Jado		1,877,500		4,950,000		6,827,500		0.081	%
Francisco Luzón		1,257,943		59,873		1,317,816		0.016	%
Abel Matutes		126,890		2,355,145		2,482,035		0.029	%
Juan R. Inciarte		1,375,665		—		1,375,665		0.016	%
Luis Alberto Salazar-Simpson		253,205		5,801		259,006		0.003	%
Isabel Tocino		39,861		—		39,861		0.000	%

Total		27,373,646		219,949,198		247,322,844		2.930	%


(1)		Emilio Botín has attributed the right of vote in a general shareholders’ meeting of 91,866,035 shares (1.088% of the capital stock) held by the Marcelino Botín Foundation, of 8,096,742 shares held by Jaime Botín, of 9,042,777 shares held by Emilio Botín O., of 9,130,971 shares held by Ana P. Botín and of 9,470,091 shares held by Javier Botín. This table shows the direct and indirect shareholding of the two latter who are directors, but in the column showing the percentage of capital stock, these shareholdings are presented together with those that belong or are also represented by Emilio Botín.

(2)		Javier Botín is a proprietary non-executive director as he represents in the board of directors a 2.118% of the Bank’s capital stock which corresponds to the holdings of the Marcelino Botín Foundation, Emilio Botín, Ana P. Botín, Emilio Botín O., Jaime Botín, Paloma O’Shea and his own.

(3)		Matías R. Inciarte has the right to vote 79,262 shares owned by two of his children.

184

Santander’s capital is comprised of only one class of shares, all of which are ordinary and have the same rights.

As of May 27, 2011 our current executive officers (not directors) referred to above under Section A of this Item 6 as a group beneficially owned, directly or indirectly, 4,846,987 ordinary shares, or 0.06% of our issued and outstanding share capital as of that date. Together with the options granted, no individual executive officer beneficially owns, directly or indirectly, one percent or more of the outstanding share capital as of that date.

Item 7. Major Shareholders and Related Party Transactions

A. Major shareholders

As of December 31, 2010, to our knowledge no person beneficially owned, directly or indirectly, 5% or more of our shares.

At December 31, 2010 a total of 1,146,412,946 shares, or 13.76% of our share capital, were held by 1,153 registered holders with registered addresses in the United States and Puerto Rico, including JPMorgan Chase, as depositary of our American Depositary Share Program. These ADSs were held by 21,487 record holders. Since certain of such shares and ADSs are held by nominees, the foregoing figures are not representative of the number of beneficial holders. Our directors and executive officers did not own any ADSs as of December 31, 2010.

To our knowledge, we are not controlled directly or indirectly, by any other corporation, government or any other natural or legal person. We do not know of any arrangements which would result in a change in our control.

Shareholders’ agreements

The Bank was informed in February 2006 of an agreement among certain shareholders. The agreement was also communicated to the CNMV, following the filing of the agreement both with the CNMV and in the Mercantile Registry of Cantabria.

The agreement was entered into by Emilio Botín, Ana P. Botín, Emilio Botín O., Javier Botín, Simancas, S.A., Puente San Miguel, S.A., Puentepumar, S.L., Latimer Inversiones, S.L. and Cronje, S.L. Unipersonal and relates to the shares of the Bank held by them or those over which they have voting rights.

Under this agreement and through the establishment of restrictions on the free transferability of their shares and the regulation of the exercise of the voting rights inherent in them, these shareholders have agreed to act in a coordinated manner in order to develop a common, lasting and stable policy and an effective and unified presence and representation in the Bank’s governing bodies.

The agreement comprises a total of 44,396,513 shares of the Bank (0.533% of its share capital at the end of the year 2010). In addition and in accordance with the first clause of the shareholders’ agreement, the agreement will be extended only in terms of the exercising of voting rights to other shares of the Bank that are subsequently held, directly or indirectly, by the signatories or those over which they have voting rights. As a result, as of December 31, 2010, another 34,342,041 shares (0.412% of the Bank’s share capital at the end of the year 2010) are also included in the syndicate of shareholders.

The chairman of the syndicate of shareholders is the person who is at any time the chairman of the Marcelino Botín Foundation, which is currently Emilio Botín.

Members of the syndicate are obliged to group together the voting rights and other political rights inherent in the syndicated shares, so that the exercising of such rights and, in general, the conduct of the members of the syndicate before the Bank, is done in a coordinated and unified fashion. For such purpose, the representation of such shares is attributed to the chairman of the syndicate as the common representative of the members of the syndicate.

Except for the transfers made to other members of the syndicate or the Marcelino Botín Foundation, the prior authorization of the syndicate is required before any proposed transfer of shares and it can freely authorize or deny any such proposed transfer.

185

B. Related party transactions

Loans made to members of our board of directors and to our executive officers

The Group’s direct risk exposure to the Bank’s directors and the guarantees provided for them are detailed below.


	Thousands of Euros
	2010						2009						2008
	Loans						Loans						Loans
	and						and						and
	Credits		Guarantees		Total		Credits		Guarantees		Total		Credits		Guarantees		Total
Alfredo Sáenz		31		—		31		16		—		16		25		—		25
Matías R. Inciarte		14		—		14		7		10		17		20		10		30
Manuel Soto		2		—		2		—		—		—		5		—		5
Antonio Basagoiti		36		1		37		47		1		48		66		1		67
Ana P. Botín		2		—		2		3		—		3		5		—		5
Javier Botín		5		—		5		2		—		2		—		—		—
Rodrigo Echenique		16		—		16		9		—		9		12		—		12
Antonio Escámez		1,500		—		1,500		1,488		—		1,488		1,474		—		1,474
Ángel Jado		3,002		—		3,002		—		—		—		—		—		—
Francisco Luzón		9,230		—		9,230		5,004		—		5,004		1,649		—		1,649
Juan R. Inciarte		370		—		370		421		—		421		465		—		465
Luis Alberto Salazar-Simpson		401		—		401		434		—		434		461		—		461
Isabel Tocino		30		—		30		40		—		40		49		—		49

		14,639		1		14,640		7,471		11		7,482		4,231		11		4,242

Additionally, the total amount of loans and credits made by us to our executive officers who are not directors, as of December 31, 2010, amounted to €30 million (see Note 53 to our consolidated financial statements).

Loans extended to related parties were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectibility or present other unfavorable features.

Loans made to other Related Parties

The companies of the Group engage, on a regular and routine basis, in a number of customary transactions among Group members, including:

	•		overnight call deposits;

	•		foreign exchange purchases and sales;

	•		derivative transactions, such as forward purchases and sales;

	•		money market fund transfers;

	•		letters of credit for imports and exports;

and others within the scope of the ordinary course of the banking business, such as loans and other banking services to our shareholders, to employees of all levels, and the associates and the members of the families of all these persons, as well as those other businesses conducted by the companies of the Group. All these transactions are made:

	•		in the ordinary course of business;

	•		on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other persons; and

	•		did not involve more than the normal risk of collectibility or other unfavorable features.

186

As of December 31, 2010 our loans and credits to associated and jointly controlled entities, amounted to €144 million. Those loans and credits represented 0.02% of our total net loans and credits and 0.2% of our total stockholders’ equity as of December 31, 2010.

For more information, see Notes 3 and 53 to our consolidated financial statements.

C. Interests of experts and counsel

Not Applicable.

Item 8. Financial Information

A. Consolidated statements and other financial information

Financial Statements

See Item 18 for our consolidated financial statements.

(a)

Index to consolidated financial statements of Santander


	Page

Report of Deloitte, S.L.		F-1

Consolidated Balance Sheets as of December 31, 2010, 2009 and 2008		F-2

Consolidated Income Statements for the Years Ended December 31, 2010, 2009 and 2008		F-3

Consolidated Statements of Recognized Income and Expense for the Years Ended December 31, 2010, 2009 and 2008		F-4

Consolidated Statements of Changes in Total Equity for the Years Ended December 31, 2010, 2009 and 2008		F-5

Consolidated Statement of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008		F-8

Notes to the Consolidated Financial Statements		F-9

Legal Proceedings

i. Tax-related proceedings

At December 31, 2010, the main tax-related proceedings concerning the Group were as follows:

	-		“Mandados de Segurança” filed by Banco Santander Brasil, S.A. and certain Group companies in Brazil challenging the increase in the rate of Brazilian social contribution tax on net income from 9% to 15% stipulated by Interim Measure 413/2008, ratified by Law 11,727/2008.

	-		“Mandados de Segurança” filed by certain Group companies in Brazil claiming their right to pay the Brazilian social contribution tax on net income at a rate of 8% and 10% from 1994 to 1998.

	-		The “Mandados de Segurança” filed by Banco Santander, S.A. and other Group entities claiming their right to pay the Brazilian PIS and COFINS social contributions only on the income from the provision of services. In the case of Banco Santander, S.A., the “Mandado de Segurança” was declared unwarranted and an appeal was filed at the Federal Regional Court. In September 2007 the Federal Regional Court found in favor of Banco Santander, S.A., but the Brazilian authorities appealed against the judgment at the Federal Supreme Court. In the case of Banco ABN AMRO Real, S.A., in March 2007 the court found in its favor, but the Brazilian authorities appealed against the judgment at the Federal Regional Court, which handed down a decision partly upholding the appeal in September 2009. Banco ABN AMRO Real, S.A. filed an appeal at the Federal Supreme Court.

187

	–		Real Leasing, S.A., Arrendamiento Mercantil and Banco ABN AMRO Real, S.A. have filed various administrative and legal claims in connection with the deductibility of the provision for doubtful debts for 1995.

	–		Banco Santander Brasil, S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against various municipalities that demand payment of the Service Tax on certain items of income from transactions not classified as provisions of services.

	–		In addition, Banco Santander Brasil, S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against the tax authorities in connection with the social security tax on certain items which are not considered to be employee remuneration.

	–		In November 2009 Banco Santander Brasil, S.A. and certain of its subsidiaries availed themselves of the program for the deferral and payment in cash of tax and Social Security debts established in Law 11941/2009. The main processes included in this program, which were reported in prior years, refer to litigation related to (i) the right to consider the social contribution tax on net income as deductible in the calculation of Brazilian legal entities income tax, (ii) the right to pay the Brazilian social contribution tax on net income at a rate of 8%, and (iii) the deductibility for income tax purposes of the depreciation expense in the same period as that in which lease income is recognized in finance lease companies. The participation in this program entails payment of the disputed amounts and the discontinuance of the related court proceedings.

	–		In December 2008, the Brazilian tax authorities issued an infringement notice against Banco Santander Brasil, S.A. in relation to income tax (IRPJ and CSL) for 2002 to 2004. The tax authorities took the view that Banco Santander Brasil, S.A. did not meet the necessary legal requirements to be able to deduct the goodwill arising out of the acquisition of Banespa. Banco Santander Brasil, S.A. filed an appeal at Conselho Administrativo de Recursos Fiscais (CARF) against the infringement notice. In June 2010 the Brazilian tax authorities issued infringement notices in relation to this same matter for 2005 to 2007. Banco Santander Brasil, S.A. filed an appeal against these procedures at CARF. The Group considers, based on the advice of its external legal counsel, that the stance taken by the Brazilian tax authorities is not correct, that there are sound defense arguments to appeal against the infringement notice and that, therefore, the risk of loss is remote. Consequently, no provisions have been recognized in connection with these proceedings because this matter should not affect the consolidated financial statements.

	–		In December 2010, the Brazilian tax authorities issued an infringement notice against Santander Seguros, S.A., as the successor by merger to ABN AMRO Brazil Dois Participacoes, S.A., in relation to income tax (IRPJ and CSL) for 2005. The tax authorities questioned the tax treatment applied to a sale of Real Seguros, S.A. shares made in that year. The aforementioned entity filed an appeal against the infringement notice. Also, the tax authorities issued infringement notices against Banco Santander, S.A. in connection with income tax (IRPJ and CSL), questioning the tax treatment applied to the economic compensation received under the contractual guarantees provided by the sellers of the former Banco Meridional. The entity filed an appeal against the aforementioned infringement notice.

	–		A claim was filed against Abbey National Treasury Services plc by tax authorities abroad in relation to the refund of certain tax credits and other associated amounts. A favorable judgment at first instance was handed down in September 2006, although the judgment was appealed against by the tax authorities in January 2007 and the court found in favor of the latter in June 2010. Abbey National Treasury Services plc plans to appeal against this judgment to a higher court.

	–		Legal action filed by Sovereign Bancorp Inc. to take a foreign tax credit in connection with taxes paid outside the United States in fiscal years 2003 to 2005 in relation to financing transactions carried out with an international bank.

188

ii. Non-tax-related proceedings

At December 31, 2010, the main non-tax-related proceedings concerning the Group were as follows:

	•		Customer remediation: claims associated with the sale by Santander UK (formerly Abbey) of certain financial products to its customers.

			The provisions recorded by Santander UK in this respect were calculated on the basis of the estimate of the number of claims that will be received, of those, the number that will be upheld and the estimated average settlement per case.

	•		LANETRO, S.A. (currently ZED WORLDWIDE, S.A.): claim (ordinary lawsuit no. 558/2002) filed by LANETRO, S.A. against Banco Santander, S.A. at Madrid Court of First Instance no. 34, requesting that the Bank comply with the obligation to subscribe to €30.05 million of a capital increase at the plaintiff.

			On December 16, 2003, a judgment was handed down dismissing the plaintiff’s request. The subsequent appeal filed by LANETRO was upheld by a decision of the Madrid Provincial Appellate Court on October 27, 2006. In a decision handed down on March 30, 2010, the Supreme Court dismissed an extraordinary appeal against procedural infringements and partly upheld a cassation appeal filed in both cases by the Bank against the decision of the Madrid Provincial Appellate Court.

			Zed Worldwide, S.A. requested the court-ordered enforcement of the decision. On January 25, 2011, the court of First Instance issued an order to enforce the decision handed down by the Madrid Provincial Appellate Court, whereby the Bank has to subscribe to 75.1 million shares at their par value of €0.4 per share totaling €30.05 million. Zed Worldwide filed an appeal for reconsideration of the order enforcing the decision, which the Bank has opposed. On March 23, 2011, the Court of first instance dismissed the appeal for reconsideration.

	•		Proceeding under Civil Procedure Law filed by Galesa de Promociones, S.A. against the Bank at Elche Court of First Instance no. 5, Alicante (case no. 1946/2008). The claim sought damages amounting to €51,396,971.43 as a result of a judgment handed down by the Supreme Court on November 24, 2004 setting aside a summary mortgage proceeding filed by the Bank against the plaintiff company, which concluded in the foreclosure by the Bank of the mortgaged properties and their subsequent sale by the latter to third-party buyers. The judgment of the Supreme Court ordered the reversal of the court foreclosure proceeding prior to the date on which the auctions were held, a circumstance impossible to comply with due to the sale of the properties by the Bank to the aforementioned third parties, which prevented the reincorporation of the properties into the debtor company’s assets and their re-auction.

			The damages claimed are broken down as follows: (i) €18,428,076.43 relating to the value of the property auctioned; (ii) €32,608,895 relating to the loss of profit on the properties lost by the plaintiff, which was prevented from continuing its business activity as a property developer; and (iii) €360,000 relating to the loss of rental income.

			On March 2, 2010, the court of first instance handed down a decision partly upholding both the claim filed against the Bank and the counterclaim, ordering the Bank to pay the plaintiff €4,458,960.61, and Galesa Promociones, S.A. to pay the Bank €1,428,075.70, which resulted in a net loss of €3,030,874.91 for the Bank. Two appeals against this decision were filed on May 31, 2010: one by Galesa and the other one by the Bank. On November 11, 2010, the Alicante Provincial Appellate Court handed down a decision upholding the appeal filed by the Bank and dismissing the appeal brought by Galesa de Promociones S.A., as a result of which and by way of offsetting the indemnity obligations payable by each party, the Bank became a creditor of Galesa in the amount €400,000.

			Galesa de Promociones S.A. filed a cassation appeal against the above decision at the Supreme Court, for which leave to proceed has not yet been granted. Both parties have appealed before the Court and the Bank has filed a pleading for the inadmission of the appeal.

189

	•		Declaratory large claims action brought at Madrid Court of First Instance no. 19 (case no. 87/2001) in connection with a claim filed by Inversión Hogar, S.A. against the Bank. This claim sought the termination of a settlement agreement entered into between the Bank and the plaintiff on December 11, 1992.

			On May 19, 2006, a judgment was handed down at first instance, whereby the agreement was declared to be terminated and the Bank was ordered to pay €1.8 million, plus the related legal interest since February 1997, to return a property that was given in payment under the aforementioned agreement, to pay an additional €72.9 million relating to the replacement value of the assets foreclosed and subsequently sold by the Bank, and to pay all the related court costs. The Bank and Inversión Hogar, S.A. filed appeals against the judgment.

			On July 30, 2007, the Madrid Provincial Appellate Court handed down a decision upholding in full the appeal filed by the Bank, reversing the judgment issued at first instance and dismissing the appeal filed by Inversión Hogar, S.A. On completion of the clarification procedure, as it had announced previously, Inversión Hogar, S.A. filed a cassation appeal against the aforementioned decision and an extraordinary appeal for procedural infringements at the Civil Division of the Supreme Court, which issued an order on December 1, 2009, admitting for consideration the appeals filed by Inversión Hogar, S.A. and its subsidiaries, with a summons to the Bank to present the related notice of opposition to these appeals, which was submitted on January 21, 2010. The Supreme Court has set the issuing of the judgment for September 29, 2011.

	•		Claim in an ordinary proceeding filed by Inés Arias Domínguez and a further 17 persons against Santander Investment, S.A. at Madrid Court of First Instance no. 13 (case no. 928/2007), seeking damages of approximately €43 million, plus interest and costs. The plaintiffs, who were former shareholders of Yesocentro, S.A. (Yesos y Prefabricados del Centro, S.A.) alleged that Santander Investment, S.A. breached the advisory services agreement entered into on October 19, 1989 between the former Banco Santander de Negocios, S.A. and the plaintiffs, in relation to the sale of shares owned by the plaintiffs to another company called Invercámara, S.A.

			This claim was contested by Santander Investment, S.A. on November 5, 2007. The preliminary hearing was set for April 28, 2008 although it was subsequently postponed until a motion for a preliminary ruling on a civil issue filed by the Bank was resolved.

			In an order issued by Madrid Court of First Instance no. 13 on September 11, 2008, which was ratified by an order issued by the Madrid Provincial Appellate Court on March 24, 2010, the proceeding was stayed on preliminary civil ruling grounds because another proceeding based on the same events had been initiated by other shareholders of Yesocentro at the Madrid Court of First Instance no. 47 (proceeding no. 1051/2004) and, therefore, the former proceeding was stayed until a final decision had been handed down on the latter. In the proceeding filed at Court no. 47, a first instance judgment was handed down partly upholding the claim as well as an appeal judgment partly upholding the appeals filed by the plaintiffs and the Bank. On January 10, 2011, the Bank filed a cassation appeal and an extraordinary appeal on the grounds of procedural infringements.

	•		On February 6, 2008, Banco Santander, S.A. filed a request for arbitration with the Secretary of the Spanish Arbitration Court against the business entity Gaesco Bolsa, Sociedad de Valores, S.A., claiming €66,418,077.27 that the latter owes Banco Santander, S.A. as a result of the early termination of the financial transaction framework agreement entered into by the aforementioned company and Banco Santander, S.A. and of the financial transactions performed under the agreement. In the same proceedings Gaesco filed a counterclaim against the Bank. On May 12, 2009, an arbitral award was issued upholding all the claims of Banco Santander, S.A. and dismissing the counterclaim filed by Gaesco Bolsa, Sociedad de Valores, S.A. Gaesco filed for the annulment of the arbitral award at Madrid Provincial Appellate Court.

			Additionally, Mobilaria Monesa, S.L. (parent of the former Gaesco) filed a claim against Banco Santander, S.A. at Santander Court of First Instance no. 5, reproducing the claims discussed and already resolved in arbitration circumstance which was brought to the Court’s attention in the notice of opposition thereto filed by the Bank.

190

			The above proceeding was stayed by Santander Provincial Appellate Court (order dated December 20, 2010) due to the Court issuing the preliminary civil ruling on the grounds claimed by the Bank— until the request for annulment of the arbitral award of May 12, 2009 is resolved.

			The Group considers that the risk of loss arising as a result of these matters is remote and, accordingly, it has not recognized any provisions in connection with these proceedings.

	•		Former employees of Banco do Estado de São Paulo S.A., Santander Banespa, Cia. de Arrendamiento Mercantil: a claim was filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s By-laws in the event that the entity obtained a profit and that the distribution of this profit, in the form of this bonus, were approved by the board of directors. The bonus was not paid in 1994 and 1995 since the bank did not make a profit and partial payments were made from 1996 to 2000 in variable percentages as agreed by the board of directors, and the relevant clause was eliminated from the By-laws in 2001. In September 2005 the Regional Labor Court ordered Banco Santander Banespa, Cia. de Arrendamiento Mercantil (currently Banco Santander (Brasil), S.A.) to pay the half-yearly bonus and the Bank subsequently lodged an appeal at the High Labor Court. Decisions were handed down in June 2008 and in March 2011 ordering the Bank to pay the half-yearly bonus from 1996 onwards for a maximum amount equivalent to the share in the profits. A related appeal against these decisions was filed at the Federal Supreme Court, and is currently pending.

	•		Padrão Comércio de Incorporacão de Imóveis Ltda.: A claim for BRL 87 million against Banco Santander (Brasil), S.A. for purported wrongful charges made by Banco do Estado de São Paulo, S.A. (“Banespa”) since the account was opened in 1994 until 1996. In 2006 the Pernambuco Court of Justice handed down a decision at first instance against Banespa for not having submitted all the relevant documentation. Banespa then filed an appeal, dismissed in 2009, in which a new expert’s report was requested and additional documentation was provided which evidenced that at least a portion of the funds under dispute had been used by the plaintiff. Taking into account the outcome of the aforementioned appeal, the inability to submit the aforementioned additional documentation due to procedural reasons and the scant possibilities, in the opinion of the legal advisers of Banco Santander (Brasil), S.A., owing to all the above factors, of obtaining a favorable decision by filing a special appeal with the Federal Court, it was decided to start a negotiation process with Padrão which led to an agreement, reached in June 2010, whereby Banco Santander (Brasil), S.A. paid BRL 54.5 million. In exchange Padrão withdrew the aforementioned claim against Banco Santander Brasil. The agreement was certified by the court.

	•		“Planos economicos”: Like the rest of the banking system, Santander Brasil has been the subject of claims from customers, mostly depositors, and of class actions brought by consumer protection associations and the public prosecutor’s office, among others, in connection with the possible effects of certain legislative changes relating to differences in the monetary adjustments to interest on bank deposits and other inflation-linked contracts (planos económicos). The plaintiffs considered that their vested rights in relation to the inflationary adjustments had been impaired due to the immediate application of these adjustments. In April 2010, the High Court of Justice set the statute of limitations period for these class actions at five years, as requested by the banks, rather than twenty years, as sought by the plaintiffs, which will significantly reduce the number of actions of this kind brought and the amounts claimed in this connection. As regards the substance of the matter, the decisions issued to date have been adverse for the banks, although two proceedings have been brought at the High Court of Justice and the Supreme Federal Court as a result of which the matter is expected to be definitively settled. In August 2010, the High Court of Justice handed down a decision finding for the plaintiffs in terms of substance, but excluding one of the planos from the claim, thereby reducing the claimed amount and confirming the five-year statute of limitations period for these class actions. Shortly thereafter, the Supreme Federal Court issued an injunctive relief order whereby all the proceedings in progress were stayed until this court issues a final decision on the matter. Consequently, enforcement of the aforementioned decision handed down by the High Court of Justice was also stayed.

191

	•		Proceeding under Civil Procedure Law (case no. 1043/2009) conducted at Madrid Court of First Instance no. 26, following a claim brought by Banco Occidental de Descuento, Banco Universal, C.A. against the Bank for USD 150,000,000 in principal plus USD 4,656,164 in interest for alleged termination of an escrow contract. On October 7, 2010, the Bank was served notice of a decision dated October 1, 2010 which upheld the claim filed by Banco Occidental de Descuento, Banco Universal, C.A. without a ruling being issued in relation to court costs. The Bank filed an appeal against the aforementioned first-instance decision. Banco Occidental de Descuento, Banco Universal, C.A. filed another appeal against the ruling that declared that the Bank should not bear the court costs. The plaintiff requested provisional enforcement of the decision, against which the Bank has submitted notice of opposition.

	•		The bankruptcy of various Lehman Group companies was made public on September 15, 2008. Various customers of Santander Group were affected by this situation since they had invested in securities issued by Lehman or in other products which had such assets as their underlying security.

			On November 12, 2008, the Group announced the implementation of a solution (which was of a strictly commercial, exceptional nature and did not imply any admission of misselling) for holders of one of the products sold -Seguro Banif Estructurado- issued by the insurance company Axa Aurora Vida, which had as its underlying security a bond issued and guaranteed by Lehman.

			The solution involved replacing the Lehman issuer risk with the issuer risk of Santander Group subsidiaries. The exchange period ended on December 23, 2008. As a result of the exchange, at 2008 year-end a loss was recognized under “Gains/Losses on financial assets and liabilities” in the consolidated income statement for the difference of €46 million (€33 million after tax) between the fair value of the bonds received and the bonds delivered in the exchange.

			In February 2009 the Group offered a similar solution to other customers affected by the Lehman bankruptcy. The cost of this transaction, before tax, was €143 million (€100 million after tax), which were recognized under Gains/Losses on financial assets and liabilities in the consolidated income statement for 2008.

			At the date hereof, certain claims had been filed in relation to this matter. The Bank’s directors and its legal advisers consider that the various Lehman products were sold in accordance with the applicable legal regulations in force at the time of each sale or subscription and that the fact that the Group acted as intermediary would not give rise to any liability in relation to the insolvency of Lehman. Accordingly, the risk of loss is considered to be remote and, therefore, it has not been necessary to recognize any liability in this connection.

	•		The investigation, on the grounds of alleged fraud, of Bernard L. Madoff Investment Securities LLC (“Madoff Securities”) by the US Securities and Exchange Commission (“SEC”) took place in December 2008. The exposure of customers of the Group through the subfund Optimal Strategic US Equity (“Optimal Strategic”) was €2,330 million, of which €2,010 million related to institutional investors and international private banking customers and the remaining €320 million were in the investment portfolios of the Group’s private banking customers in Spain, who were qualifying investors.

			On January 27, 2009, the Group announced its decision to offer a solution to those of its private banking customers who had invested in Optimal Strategic and had been affected by the alleged fraud. This solution, which was applied to the principal amount invested, net of redemptions, totaled €1,380 million. It consisted of a replacement of assets whereby the private banking customers could exchange their investments in Optimal Strategic US for preference shares to be issued by the Group for the aforementioned amount, with an annual coupon of 2% and a call option that could be exercised by the issuer in year ten. At December 31, 2008, the Group determined that these events had to be considered to be adjusting events after the reporting period, as defined in IAS 10.3, because they provided evidence of conditions that existed at the end of the reporting period and, therefore, taking into account IAS 37.14, it recognized the pre-tax cost of this transaction for the Group (€500 million —€350 million after tax—) under “Gains/Losses on financial assets and liabilities” in the consolidated income statement for 2008.

			The Group has at all times exercised due diligence in the management of its customers’ investments in the Optimal Strategic fund. These products have always been sold in a transparent way pursuant to applicable legislation and established procedures and, accordingly, the decision to offer a solution was taken in view of the exceptional circumstances attaching to this case and based on solely commercial reasons due to the interest the Group has in maintaining its business relationship with these customers.

192

			At the time of the transactions, Madoff Securities was a broker-dealer authorized, registered and supervised by the SEC and was also authorized as an investment advisor by the US Financial Industry Regulatory Authority (FINRA). As the SEC has stated, Madoff Securities had been regularly inspected by the aforementioned supervisory body in recent years, and at no time was its reputation and solvency questioned by the market or by the US supervisory authorities.

			At the date hereof, certain claims had been filed in relation to this matter. The Group is currently assessing the appropriate legal action to be taken. As discussed above, the Group considers that it has at all times exercised due diligence and that these products have always been sold in a transparent way pursuant to applicable legislation and established procedures. Therefore, except for the three cases in which the decisions handed down at first instance upheld the claim on the grounds that are very particular to each specific case (which have been appealed against by the Bank), no provisions were recognized for the other claims since the risk of loss is considered remote.

			On March 18, 2009, the Group issued the preference shares earmarked for the replacement of assets offered to the private banking customers affected by the fraud perpetrated by Madoff Securities and those affected by the Lehman bankruptcy who were not able to participate in the exchange made on December 23, 2008 (referred to above). The preference shares have been listed on the London Stock Exchange since March 23, 2009. The level of acceptance of the exchange proposal was close to 97%.

			On May 26, 2009, two funds managed by Optimal Investment Services, S.A., an indirect subsidiary of Banco Santander, S.A., announced that they had entered into an agreement with Irving H. Picard, the court-appointed trustee for the liquidation of Madoff Securities. Under the agreement, the trustee allowed the funds’ claims in the liquidation proceeding and reduced his clawback demands on the funds by the amounts withdrawn by the latter from Madoff Securities, in the 90 days prior to bankruptcy, which US legislation allows him to claim, in exchange for the partial payment of those demands by the funds. The funds are Optimal Strategic U.S. Equity Limited and Optimal Arbitrage Limited. These are the only Optimal funds that had accounts at Madoff Securities.

			Pursuant to the agreement, the funds’ claims against Madoff Securities’ estate were allowed in their full amounts, calculated on a cash-in, cash-out basis, of USD 1,540,141,277.60 and USD 9,807,768.40, respectively, and the funds were entitled to Securities Investor Protection Corporation advances of USD 500,000 each. The funds paid 85% of the clawback claims asserted by the trustee. The payments totaled USD 129,057,094.60 for Strategic U.S. Equity and USD 106,323,953.40 for Arbitrage.

			The funds agreed not to file any other claims against Madoff Securities’ estate (in liquidation). The agreement also contains an “equal treatment” provision, so that if the trustee settled similar clawback claims for less than 85%, the funds would receive a rebate of a portion of their payments to make the percentages applied to the funds equal to those applied to other investors in comparable situations.

			The agreement followed the trustee’s investigation of Optimal’s conduct in dealing with Madoff Securities, including a review of Optimal’s documents relating to its due diligence, in which the trustee concluded that its conduct did not provide grounds to assert any claim against the Optimal companies or any other entity of Santander Group (other than the clawback claims described above, which did not arise from any inappropriate conduct by the funds).

			The agreement contains releases of all clawback and other claims the trustee may have against the funds for any matters arising out of the funds’ investments with Madoff Securities. The trustee’s release applies to all potential claims against other Optimal companies, Santander Group companies and their investors, directors, agents and employees who agree to release the trustee and the Madoff Securities estate (in liquidation), to the extent the claims arise out of the funds’ dealings with Madoff Securities. It also releases the funds from potential clawback liability for any other withdrawals made by them from Madoff Securities.

			The agreement between the trustee and the aforementioned Optimal funds was approved by the United States Bankruptcy Court in New York on June 16, 2009.

Madoff Securities is currently in liquidation in accordance with the Securities Investor Protection Act of 1970 at the United States Bankruptcy Court in New York. Bernard L. Madoff, the chief executive of Madoff Securities, pleaded guilty to perpetrating what was probably the largest pyramid fraud in history and was sentenced to 150 years’ imprisonment.

* * * * *

193

At 2010, 2009 and 2008 year-end the Group had recognized provisions that reasonably cover any liabilities that might arise from these tax-related and non-tax-related proceedings.

The total amount of payments made by the Group arising from litigation in 2010, 2009 and 2008 is not material with respect to these consolidated financial statements.

Other Litigation

In addition to the matters described above, the Bank and its subsidiaries are from time to time subject to certain claims and parties to certain legal proceedings incidental to the normal course of our business, including in connection with the Group’s lending activities, relationships with the Group’s employees and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in early stages of discovery, the Bank cannot state with confidence what the eventual outcome of these pending matters will be, what the timing of the ultimate resolution of these matters will be or what the eventual loss, fines or penalties related to each pending matter may be. The Bank believes that it has made adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings and believes that liabilities related to such claims and proceedings should not have, in the aggregate, a material adverse effect on the Group’s business, financial condition, or results of operations. However, in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by the Bank; as a result, the outcome of a particular matter may be material to the Bank’s operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and the level of the Bank’s income for that period.

Dividend Policy

We have normally paid an annual dividend in quarterly installments. The table below sets forth the historical per share and per ADS (each of which represents the right to receive one of our shares) amounts of interim and total dividends in respect of each fiscal year indicated.


	Euro per Share Interim										Dollars per ADS Interim
	First		Second		Third		Fourth		Total		First		Second		Third		Fourth		Total
2005		0.09296		0.09296		0.09296		0.13762		0.4165		0.09591		0.09466		0.09523		0.147016		0.432816
2006		0.106904		0.106904		0.106904		0.199913		0.5206		0.11582		0.11593		0.11400		0.222418		0.568168
2007		0.122940		0.122940		0.122940		0.281961		0.650781		0.137526		0.145308		0.149199		0.355829		0.787862
2008		0.135234		0.135234		0.122940		0.257373		0.650781		0.172148		0.137700		0.126043		0.266604		0.702495
2009		0.135234		0.12		0.12294		0.221826		0.60		0.156275		0.142827		0.136266		0.239545		0.674913
2010		0.135234		0.119		0.117		0.228766		0.60		0.140799		0.132571		0.1267		0.252342		0.652412

In June 2010, the board of directors approved a first dividend on account of the earnings for the 2010 financial year for a gross amount of €0.135234 per share, which was paid on August 2, 2010.

Based on a resolution of our shareholders acting at the general shareholders’ meeting held on June 19, 2009, the Bank offered shareholders the option to receive a scrip dividend as payment of the second interim dividend on account of 2009. Because 81% of the capital opted to receive shares instead of cash at the general shareholders’ meeting held on June 11, 2010, shareholders approved the offer of this option again as payment in lieu of the second interim dividend to shareholders on account of the 2010 earnings.

194

Under the flexible remuneration framework, known as Santander Dividendo Elección, in respect of the second interim dividend each shareholder received a free allotment right of new shares for each Santander share held. Shareholders could sell these rights to the Bank at a fixed gross price (€0.119 per right), sell them on the stock market during a number of days in the month of October 2010 at their quotation price or receive new shares in the proportion of one new share for every 78 rights. There is no Spanish withholding applicable to the last two options.

In order to attend to shareholders who chose the latter option (83.97% of the capital), a free of charge capital increase was carried out for €44,356,665.50, which was represented by 88,713,331 shares.

On November 3, 2010, shareholders who opted to sell their rights to the Bank received the corresponding amount in cash and on November 8, 2010 those who chose the share option received the new shares.

Additionally, at the general shareholders’ meeting held on June 11, 2010, our shareholders approved to offer this option again to the shareholders as payment of the third interim dividend.

Under this Santander Dividendo Elección flexible remuneration framework, in respect of the third interim dividend each shareholder received a free allotment right of new shares for each Santander share held. Shareholders could sell these rights to the Bank at a fixed gross price (€0.117 per right), sell them on the stock market during a number of days in the month of January 2011 at their quotation price or receive new shares in the proportion of one new share for every 65 rights. There is no Spanish withholding applicable to the last two options.

In order to attend to shareholders who chose the latter option (86.74% of the capital), a free of charge capital increase was carried out for €55,576,453, which was represented by 111,152,906 shares.

Following this increase, the Bank’s share capital is €4,220,137,502 represented by 8,440,275,004 shares, par value €0.50 each.

Finally, on May 1, 2011, the Bank paid in cash a fourth dividend for 2010 financial year of a gross amount of €0.228766 per share. With the payment of this dividend (which, if the proposal to be submitted to shareholders at the 2011 annual general meeting is approved, was the last payment), the payment per share corresponding to 2010 was €0.60 and the total remuneration distributed to the shareholders was €4,999 million.

For a discussion of regulatory and legal restrictions on our payments of dividends, see “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Restrictions on Dividends”.

For a discussion of Spanish taxation of dividends, see “Item 10. Additional Information—E. Taxation—Spanish tax considerations—Taxation of dividends”.

195

The dividends paid on the guaranteed non-cumulative preference stock of certain of our subsidiaries are limited by our Distributable Profits in the fiscal year preceding a dividend payment. “Distributable Profits” with respect to any year means our reported net profits after tax and extraordinary items for such year as derived from the Parent bank’s non-consolidated audited profit and loss account prepared in accordance with Bank of Spain requirements and guidelines in effect at the time of such preparation. Such requirements and guidelines may be expected to reflect the Bank of Spain regulatory policies applicable to us, including without limitation those relating to the maintenance of minimum levels of capital. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Capital Adequacy Requirements” and “—Restrictions on Dividends”. According to our interpretation of the relevant Bank of Spain requirements and guidelines, Distributable Profits during the preceding five years were:

Year Ended December 31,

IFRS-IASB

2006

2007

2008

2009

2010

(in thousands of euros)

3,256,190

4,070,247

4,826,218

4,150,813

3,331,865

The portion of our net income attributable to our subsidiaries has increased steadily in recent years as our subsidiaries have grown and we have acquired new subsidiaries. Such profits are available to us only in the form of dividends from our subsidiaries and we are dependent to a certain extent upon such dividends in order to have Distributable Profits sufficient to allow payment of dividends on our guaranteed preferred stock of our subsidiaries as well as dividends on our shares (although the payment of dividends on the shares is limited in the event of the non-payment of preference share dividends). We generally control a sufficient proportion of our consolidated subsidiaries’ voting capital to enable us to require such subsidiaries to pay dividends to the extent permitted under the applicable law. As a result of our growth, the Bank, as the holding entity of the shares of our various companies, has added investments in our subsidiaries, the financial costs of which are borne by us.

B. Significant Changes

For significant changes that have occurred since December 31, 2010, see our Form 6-K relating to our first quarter 2011 results filed with the Securities and Exchange Commission on May 2, 2011.

Item 9. The Offer and Listing

A. Offer and listing details

Market Price and Volume Information

Santander’s Shares

During 2010 our shares were the shares with the highest trading volume on the Spanish stock exchanges. At December 31, 2010, our shares represented 18.46% of the IBEX 35 Stock Exchange Index, the second highest percentage among all Spanish issuers represented in this index. Our market capitalization of €66,033 million at 2010 year-end was the second largest of any Spanish company, according to information published by the Sociedad de Bolsas, S.A. (“Sociedad de Bolsas”).

At December 31, 2010, we had 3,202,324 registered holders of our shares and, as of such date, a total of 1,146,412,946 of our shares or 13.76% were held by 1,153 registered holders with registered addresses in the United States and Puerto Rico, including JP Morgan Chase, as depositary of our American Depositary Share program.

Our shares are traded on Spain’s automated “continuous market”, the national, centralized market which integrates by computer quotations originating in the four Spanish stock exchanges (Madrid, Barcelona, Valencia and Bilbao) (the “Automated Quotation Systems”). Our shares are also listed on the New York (in the form of American Depositary Shares), London, Milan, Lisbon, Buenos Aires and Mexico Stock Exchanges. At December 31, 2010, 62.72% of our shares were held of record by non-residents of Spain.

196

The table below sets forth the high, low and last daily sales prices in euros for our shares on the continuous market for the periods indicated.


	Euros per Share
	High		Low		Last

2006 Annual		14.37		10.54		14.14

2007 Annual		15.00		12.56		14.79

2008 Annual		14.59		5.11		6.75

2009 Annual		11.96		4.00		11.55
First Quarter		7.24		4.00		5.19
Second Quarter		8.60		5.39		8.56
Third Quarter		11.22		8.12		11.00
Fourth Quarter		11.96		10.42		11.55

2010 Annual		11.98		7.30		7.93
First Quarter		11.98		9.24		9.84
Second Quarter		10.79		7.36		8.74
Third Quarter		10.43		8.68		9.32
Fourth Quarter		9.63		7.30		7.93

Last six months
2010
November		9.01		7.30		7.30
December		8.49		7.82		7.93
2011
January		9.07		7.40		8.95
February		9.32		8.74		8.94
March		8.78		8.03		8.19
April		8.66		8.05		8.62
May (through May 26, 2011)		8.39		7.77		7.90

On May 26, 2011, the reported last sale price of our shares on the continuous market was €7.90.

American Depositary Shares (ADSs)

Our ADSs have been listed and traded on the New York Stock Exchange since July 30, 1987. Each ADS represents one of our shares and is evidenced by an American Depositary Receipt, or ADR. The deposit agreement, pursuant to which ADRs have been issued, is among us, JP Morgan Chase, as depositary, and the holders from time to time of ADRs. At December 31, 2010, a total of 311,401,365 of our ADSs were held by 21,487 registered holders. Since certain of such of our shares and our ADSs are held by nominees, the number of record holders may not be representative of the number of beneficial owners.

197

The table below sets forth the reported high, low and last sale prices for our ADSs on the New York Stock Exchange for the periods indicated.


	Dollars Per ADS
	High		Low		Last

2006 Annual		18.73		13.16		18.66
2007 Annual		22.14		17.29		21.54
2008 Annual		22.24		6.06		9.49

2009
Annual		17.83		4.90		16.44
First Quarter		9.86		4.90		6.90
Second Quarter		12.17		7.15		12.10
Third Quarter		16.50		11.34		16.15
Fourth Quarter		17.83		15.22		16.44

2010
Annual		17.50		8.77		10.65
First Quarter		17.50		12.65		13.27
Second Quarter		14.77		8.77		10.50
Third Quarter		13.73		10.92		12.66
Fourth Quarter		13.46		9.62		10.65

Last six months
2010
November		12.56		9.62		9.62
December		11.28		10.37		10.65
2011
January		12.39		9.74		12.24
February		12.69		11.79		12.30
March		12.16		11.07		11.71
April		12.48		11.48		12.40
May (through May 26, 2011)		12.34		10.90		11.22

On May 26, 2011, the reported last sale price of our ADSs on the New York Stock Exchange was $11.22.

B. Plan of distribution

Not Applicable

C. Markets

General

Spanish Securities Market

The Spanish securities market for equity securities (the “Spanish Stock Exchanges”) consists of four stock exchanges located in Madrid, Barcelona, Bilbao and Valencia (the “local exchanges”). The majority of the transactions conducted on them are done through the Automated Quotation System (Sistema Interbancario Bursátil Español or “S.I.B.E.”). During the year ended December 31, 2010, the Automated Quotation System accounted for the majority of the total trading volume of equity securities on the Spanish Stock Exchanges.

Automated Quotation System

The Automated Quotation System was introduced in 1989 and links the four local exchanges, providing those securities listed on it with a uniform continuous market that eliminates most of the differences among the local exchanges. The principal feature of the system is the computerized matching of buy and sell orders at the time of entry of the order. Each order is executed as soon as a matching order is entered, but can be modified or canceled until executed. The activity of the market can be continuously monitored by investors and brokers. The Automated Quotation System is operated and regulated by the Sociedad de Bolsas, a corporation owned by the companies that manage the local exchanges. All trades on the Automated Quotation System must be placed through a bank, brokerage firm, an official stock broker or a dealer firm member of a Spanish stock exchange directly.

198

There is a pre-opening session held from 8:30 a.m. to 9:00 a.m. each trading day on which orders are placed at that time. The computerized trading hours are from 9:00 a.m. to 5:30 p.m. Each session will end with a 5 minute auction, between 5:30 and 5:35 p.m., with a random closedown of 30 seconds. The price resulting from each auction will be the closing price of the session.

From May 14, 2001, new rules came into effect regarding the maximum price fluctuations in the price of stocks. Under the new rules, each stock in the continuous market is assigned a static and a dynamic range within which the price of stocks can fluctuate. The price of a stock may rise or fall by its static range (which is published once a month and is calculated according to the stock’s average historic price volatility) above or below its opening price (which shall be the closing price of the previous session). When the stock trades outside of this range, the trading of the stock is suspended for 5 minutes, during which an auction takes place. After this auction, the price of the stock can once again rise or fall by its static range above or below its last auction price (which will be considered as the new static price before triggering another auction). Furthermore, the price of a stock cannot rise or fall by more than its dynamic price range (which is fixed and published once a month and is calculated according to the stock’s average intra-day volatility), from the last price at which it has traded. If the price variation exceeds the stock’s dynamic range a five minute auction is triggered.

Moreover, there is a block market (el mercado de bloques) allowing for block trades between buyers and sellers from 9:00 a.m. to 5:30 p.m. during the trading session. Under certain conditions, this market allows cross-transactions of trades at prices different from prevailing market prices. Trading in the block market is subject to certain limits with regard to price deviations and volumes.

Between 5:30 p.m. and 8:00 p.m., trades may occur outside the computerized matching system without prior authorization of the Sociedad de Bolsas, at a price within the range of 5% above the higher of the average price and closing price for the day and 5% below the lower of the average price and closing price for the day, if there are no outstanding bids or offers, as the case may be, on the system matching or bettering the terms of the proposed off-system transaction, and if the trade involves more than €300,000 and more than 20% of the average daily trading volume of the stock during the preceding quarter. At any time before 8:00 p.m., trades may take place (with the prior authorization of the Sociedad de Bolsas) at any price if:

•

the trade involves more than €1.5 million and more than 40% of average daily trading volume of the stock during the preceding quarter;

•

relates to a merger or spin-off of a listed company;

•

relates to the reorganization of a business group;

•

the transaction is executed for the purposes of settling litigation;

•

involves certain types of contracts or complex transactions; or

•

the Sociedad de Bolsas finds other justifiable cause.

Information with respect to computerized trades between 9:00 a.m. and 5:30 p.m. is made public immediately, and information with respect to trades outside the computerized matching system is reported to the Sociedad de Bolsas and published in the Boletín de Cotización and in the computer system by the next trading day.

Clearance and Settlement System

Until April 1, 2003, transactions carried out on the regional Spanish stock exchanges and the continuous market were cleared and settled through the Servicio de Compensación y Liquidación de Valores, S.A. (the “SCL”). Since April 1, 2003, the settlement and clearance of all trades on the Spanish stock exchanges, the Public Debt Market (Mercado de Deuda Pública), the AIAF Fixed Income Market (Mercado AIAF de Renta Fija) and Latibex — the Latin American stock exchange denominated in euros, are made through the Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A. (“Iberclear”), which was formed as a result of a merger between SCL and Central de Anotaciones del Mercado de Deuda Pública (CADE), which was managed by the Bank of Spain.

199

Book-Entry System

Ownership of shares listed on any Spanish stock exchange is required to be represented by entries in a register maintained by Iberclear, and transfers or changes in ownership are effected by entries in such register. The securities register system is structured in two levels: the central registry managed by Iberclear which keeps the securities balances of the participants, and a detailed registry managed by the participants where securities are listed by holder’s name.

Securities Market Legislation

The Spanish Securities Markets Act, which came into effect in 1989, among other things:

•

established an independent regulatory authority, the CNMV, to supervise the securities markets;

•

established a framework for the regulation of trading practices, tender offers and insider trading;

•

required stock exchange members to be corporate entities;

•

required companies listed on a Spanish stock exchange to file annual audited financial statements and to make public quarterly financial information;

•

established a framework for integrating quotations on the four Spanish stock exchanges by computer;

•

exempted the sale of securities from transfer and value added taxes;

•

deregulated brokerage commissions as of 1992; and

•

provided for transfer of shares by book-entry or by delivery of evidence of title.

The Securities Markets Act was amended by Law 37/1998, which implemented two European Union directives into Spanish law. The first is Directive 93/22/CE, relating to investment services within securities, later amended by Directive 95/26/CE of the European Parliament and Council. The second is Directive 97/9/CE of the European Parliament and Council, relating to indemnity systems.

Law 37/1998 introduced some innovations to the Securities Markets Act. The first was the recognition that both Spanish and other European Union Member State companies authorized to provide investment services have full access to the official secondary markets, with full capacity to operate, thereby enabling the direct admission of banking entities into the stock exchange area. The second innovation was that the scope of the Securities Markets Act was enlarged to include a list of financial instruments, such as financial exchange contracts, or installment financial contracts, which expanded the categories of securities included.

The Securities Markets Act has been further amended by Law 44/2002 (November 22, 2002) on reform measures of the financial system, which introduced certain modifications to the laws governing financial markets and corporations, generally, including:

•

provisions regarding market transparency such as: requiring listed companies to establish an audit committee, redefining the reporting requirements for relevant events, rules relating to the treatment of confidential and insider information and related party transactions, and prevention of manipulative and fraudulent practices with respect to market prices;

•

the establishment of Iberclear; and

•

the authorization of the Minister of Economy and Finance to regulate financial services electronic contracts.

200

On July 17, 2003, the Securities Market law was amended by Law 26/2003 in order to reinforce the transparency of listed companies. It introduced:

•

information and transparency obligations including detailed requirements of the contents of the corporate website of listed companies and the obligation to file with the CNMV an annual corporate governance report; and

•

the obligation to implement a series of corporate governance rules including, among others, regulations regarding the boards of directors and the general shareholders’ meeting.

On March 11, 2005, Royal Decree Law 5/2005 was approved, modifying the Securities Market Law in order to implement the Directive 2003/71/EC of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading. The Directive: (i) harmonizes the requirements for the process of approval of prospectuses, which enables a prospectus to be valid throughout the European Union; and (ii) incorporates the application of the country of origin principle.

On April 22, 2005, the Securities Market Law was amended by Law 5/2005 on supervision of financial conglomerates in order to make the sectoral rules applicable to investment firms more consistent with other sectoral rules applicable to other groups with similar financial activities, such as credit institutions and insurance undertakings.

On November 14, 2005, the Securities Market Law was further amended by Law 19/2005, which refers to the European public limited-liability companies with registered offices in Spain and, on November 24, 2005, by Law 25/2005, of November 24, 2005, which regulates the capital risk entities.

Royal Decree 1310/2005 (November 4) partially developed the Securities Market Law 24/1988, in relation to the admission to trading of securities in the official secondary markets, the sale or subscription public offers and the prospectus required to those effects.

Royal Decree 1333/2005 (November 11), which developed the Securities Market Law 24/1988, in relation to market abuse.

Law 12/2006 (May 16) amended the Securities Market Law by (i) introducing a new article relating to notifications to the CNMV of transactions that might constitute insider dealing or market manipulation, (ii) completing the regulation of Bolsas y Mercados Españoles, and (iii) clarifying the regulation of significant participations on the entities which manage the clearing and settlement of securities and the Spanish secondary markets.

Law 36/2006 (November 30), relating to measures to prevent the tax fraud, among others, amends article 108 of the Securities Market Law.

Law 6/2007 (April 12) amends the Securities Market Law, in order to modify the rules for takeover bids and for issuers transparency. This Law came into effect on August 13, 2007, and partially integrates into the Spanish legal system Directive 2004/25/EC of the European Parliament and of the Council of April 21, 2004 on takeover bids and Directive 2004/109/EC of the European Parliament and of the Council of December 15, 2004 on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC. This Law has been further developed by Royal Decree 1066/2007 (July 27) on rules applicable to takeover bids for securities and by Royal Decree 1362/2007 (October 19) on transparency requirements for issuers of listed securities. For a brief description of the provisions of Law 6/2007 as regards the rules applicable to takeover bids see “Item 10. Additional Information—B. Memorandum and Articles of Association—Tender Offers”.

Law 6/2007 (i) introduces several changes to the periodical financial information, annual, biannual and quarterly, to be published by issuers of listed securities; and (ii) introduces new developments to the system which establishes the duty to notify significant stakes in an enterprise, such as:

•

Anyone with a right to acquire, transfer or exercise voting rights granted by the shares, regardless of the actual ownership of the shares; and anyone owing, acquiring or transferring other securities or financial instruments which grant a right to acquire shares with voting rights, will also have to notify the holding of a significant stake in accordance with the developing regulations;

201

•

Directors of listed companies, in addition to notifying any transaction concerning the shares or other securities or financial instruments of the issuer which are linked to these shares, will have to inform the CNMV of their stake upon appointment or resignation;

•

Listed companies will be required to notify transactions concerning their treasury shares in certain cases, which will be established in the developing regulations.

Law 47/2007 (December 19) amends the Securities Market Law in order to adapt it to Directive 2004/39/EC on markets in financial instruments (MiFID), Directive 2006/73/EC implementing Directive 2004/39/EC with respect to the organizational requirements and operating conditions for investment firms and defining terms for the purpose of that Directive, and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions. The amendments introduced by Law 47/2007 represent important reforms of the Securities Market Law and serve to (i) increase the number of investment services that can be performed by the entities; (ii) reinforce the measures for the protection of investors; (iii) establish new organizational procedures for investment firms; and (iv) reinforce the supervisory powers of the CNMV, establishing cooperation mechanisms among supervisory authorities. Directive 2006/49/EC and MiFID implementation have been introduced by Royal Decrees 216/2008 and 217/2008 (both of February 15), respectively.

Trading by Santander’s Subsidiaries in the Shares

Some of our subsidiaries, in accordance with customary practice in Spain, and as permitted under Spanish law, have regularly purchased and sold our shares both for their own account and for the accounts of customers. Our subsidiaries have intervened in the market for our shares primarily in connection with customer transactions and, occasionally, in connection with transactions by non-customers that are undertaken for commercial purposes or to supply liquidity to the market when it is reasonable to do so. Such trading activity also has provided a mechanism for accumulating shares that were used to meet conversions into our shares, of bonds issued by us and other affiliated companies and to make offerings of shares. We expect that our subsidiaries may continue to purchase and sell our shares from time to time.

Our trading activities in our shares are limited to those set forth above. The continuous market is driven by orders, which are matched by the market’s computer system according to price and time entered. Santander and Banesto’s broker subsidiaries, Santander Investment Bolsa, S.V., S.A., and Banesto Bolsa, S.A., S.V.B., and the other brokers authorized to trade on the continuous market (“Member Firms”) are not required to and do not serve as market makers maintaining independently established bid and ask prices. Rather, Member Firms place orders for their customers, or for their own account, into the market’s computer system. If an adequate counterparty order is not available on the continuous market at that time, the Member Firm may solicit counterparty orders from among its own clients and/or may accommodate the client by filling the client’s order as principal.

Under the Capital Companies Law of Spain, a company and its subsidiaries are prohibited from purchasing shares of the company in the primary market. However, purchase of the shares is permitted in the secondary market provided that: (1) the aggregate nominal value of such purchases (referred to as “treasury stock” or “autocartera”) and of the shares previously held by the company and its subsidiaries does not exceed 10% of the total outstanding capital stock of the company, (2) the purchases are authorized at a meeting of the shareholders of the acquiring company and, if the acquisition relates to shares in the parent company, the acquiring company’s parent, and (3) such purchases, together with the shares previously held by the company and its subsidiaries, do not result in a net equity less than the company’s stock and its legal or by-laws undisposable reserves.

The law requires that the CNMV be notified each time the acquisition of treasury stock made since the last notification reaches 1% of the voting rights of the company, regardless of any other preceding sales. The Capital Companies Law establishes, in relation to the treasury stock shares (held by us and our affiliates), that the exercise of the right to vote and other non-financial rights attached to them shall be suspended. Financial rights arising from treasury stock held directly by us, with the exception of the right to allotment of new bonus shares, shall be attributed proportionately to the rest of the shares.

The portion of trading volume in the shares represented by purchases by our subsidiaries has varied widely from day to day and from month to month and may be expected to do so in the future. In 2010, 6.56% of the volume traded of the shares was effected not as principal by Santander Investment Bolsa, S.V., S.A. and 3.12% was effected not as principal by Banesto Bolsa, S.A., S.V.B. The portion of trading volume in shares allocable to purchases and sales as principal by our companies was approximately 5.6% in the same period. The monthly average percentage of outstanding shares held by our subsidiaries ranged from 0.200% to 0.603% in 2010. At December 31, 2010, the Parent bank and our subsidiaries held 22,292,972 of our shares (0.268% of our total capital stock as of that date).

202

D. Selling shareholders

Not Applicable.

E. Dilution

Not Applicable.

F. Expense of the issue

Not Applicable.

Item 10. Additional Information

A. Share capital

Not Applicable.

B. Memorandum and articles of association

The following summary of the material terms of our By-laws is not meant to be complete and is qualified in its entirety by reference to our By-laws. Because this is a summary, it does not contain all the information that may be important to you. You should read our By-laws carefully before you decide to invest. Copies of our By-laws are incorporated by reference.

The current By-laws for Banco Santander, S.A., except for subsections 1 and 2 of Article 5 regarding the Bank’s share capital, were approved by our shareholders acting at the general shareholders’ meeting held on June 21, 2008 and incorporated with the office of the Mercantile Registry on August 11, 2008.

Subsections 1 and 2 of Article 5 of the By-Laws show the current figure of the Bank’s share capital and the number of shares which was most recently amended by the share capital increase carried out on February 1, 2011 and filed with the office of the Mercantile Registry on the same day.

The current By-laws are included in Exhibit 1.1. The By-laws are also available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors — General information — By-laws”.

A proposal has been submitted for the consideration of our shareholders at the 2011 annual general meeting to amend our By-laws whose primary purpose is to bring them into line with recent legislative amendments affecting capital corporations in Spain, including, specifically, those arising from the following sets of legal provisions:

(i)

The restated text of the Spanish Capital Corporations Law (Ley de Sociedades de Capital) approved by Royal Legislative Decree 1/2010, of July 2, as subsequently amended by Royal Decree-Law 13/2010, of December 3, on tax, labour and deregulating actions for the promotion of investment and job creation;

(ii)		Law 12/2010, of June 30, amendatory of Law 19/1988, of July 12, on Audit of Financial Statements; Law 24/1988, of July 28, on the Securities Market, and the restated text of the Business Corporations Law (Ley de Sociedades Anónimas) for adjustment thereof to European Community law;

(iii)		Law 2/2011, of March 4, on Sustainable Economy.

(iv)

Also proposed is the inclusion in our By-laws of certain provisions contained in the Spanish Capital Corporations Law and which were already included in the former Business Corporations Law as a consequence of the entry into force of, among other laws, Law 3/2009, of April 3, on structural modifications of commercial companies and Law 16/2007, of 4 July, on the reform and adjustment of commercial legislation in accounting matters for international harmonisation thereof based on European Union law.

203

In addition, some other provisions aimed at improving or refining the Bank’s rules on corporate governance (in particular, the reduction of the directors’ term of office from five to three years) and at making other technical improvements have been included in the proposal to amend our By-laws.

The board of directors, at its meeting held on April 25, 2011, agreed to amend the Rules and Regulations of the Board in order, among others, to bring some aspects of its internal regulations into line with applicable recent legislative amendments affecting capital corporations in Spain.

All references to the Rules and Regulations of the Board in this annual report on Form 20-F are references to the new text.

The Rules and Regulations of the Board are available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Board of directors—Rules and Regulations of the Board of Directors”.

General

As of December 31, 2010, the Bank’s share capital was €4,164,561,049, represented by a single class of 8,329,122,098 book-entry Santander shares with a nominal value of €0.50 each.

All of our shares are fully paid and non-assessable. Spanish law requires that bank-listed equity securities be issued in book-entry form only.

Register

Santander is registered with the Commercial Registry of Santander (Finance Section). The Bank is also recorded in the Special Registry of Banks and Bankers with registration number 0049, and its fiscal identification number is A-39000013.

Corporate Object and Purpose

Article 2 of our By-laws states that the corporate objective and purpose of Santander consists of carrying-out all types of activities, operations and services specific to the banking business in general and which are permitted under current legislation and the acquisition, holding and disposal of all types of securities.

Certain Provisions Regarding Shareholder Rights

As of the date of the filing of this report, Santander’s capital is comprised of only one class of shares, all of which are ordinary shares and have the same rights. Santander may issue non-voting shares for a nominal amount of not more than one-half of the paid-up share capital, and redeemable shares for a nominal amount of not more than one-fourth of its share capital.

Our By-laws do not contain any provisions relating to sinking funds.

Our By-laws do not specify what actions or quorums are required to change the rights of holders of our stock. Under Spanish law, the rights of holders of stock may only be changed by an amendment to the By-laws of the company that complies with the requirements explained below under “—Meetings and Voting Rights.”

Meetings and Voting Rights

We hold our annual general shareholders’ meeting during the first six months of each fiscal year on a date fixed by the board of directors. Extraordinary meetings may be called from time to time by the board of directors whenever the board considers it advisable for corporate interests, and whenever so requested by shareholders representing at least 5% of the outstanding share capital of Santander. Notices of all meetings are published, at least one month prior to the date set for the meeting, in the Official Gazette of the Mercantile Register and in one of the local newspapers having the largest circulation in the province where the registered office of Santander is located. In addition, under Spanish law, the agenda of the meeting must be sent to the CNMV and the Spanish Stock Exchanges and published on the company’s website. Our last ordinary general meeting of shareholders was held on June 11, 2010 and our last extraordinary general meeting of shareholders was held on January 26, 2009. The 2011 annual general shareholders’ meeting has been convened to be held on first or on second call on June 16, 2011 or June 17, 2011, respectively.

204

Each Santander share entitles the holder to one vote. Registered holders of any number of shares who are current in the payment of capital calls will be entitled to attend shareholders’ meetings. Our By-laws do not contain provisions regarding cumulative voting.

Any Santander share may be voted by proxy. Subject to the limitations imposed by Spanish law, proxies may be given to any individual or legal person, must be in writing or by remote means of communication and are valid only for a single meeting except where the representative is the spouse or an ascendant or descendant of the shareholder giving the proxy, or where the proxy-holder holds a general power of attorney executed as a public instrument with powers to manage the assets of the represented party in the Spanish territory. According to Spanish law, if a director or another person solicits a proxy for a director thus obtaining more than three proxies and the director is subject to a conflict of interest, the director holding the proxies may not exercise the voting rights attaching to the represented shares in connection with decisions relating to:

•

his appointment or ratification, removal, dismissal or withdrawal as director;

•

the institution of a derivative action against him; or

•

the approval or ratification of transactions between Santander and the director in question, companies controlled or represented by him, or persons acting for his account.

In accordance with the Rules and Regulations for the General Shareholders’ Meeting and in the manner established by such Rules and Regulations, the Group’s website includes from the date when the call of the general shareholders’ meeting is published, the text of all resolutions proposed by the board of directors with respect to the agenda items and the details regarding the manner and procedures for shareholders to follow to confer representation on any individual or legal entity. The manner and procedures for electronic delegation and voting via the Internet are also indicated.

At both general shareholders’ meetings held in 2004 (the annual shareholders’ meeting of June 19, 2004 and the extraordinary general meeting of October 21, 2004) our shareholders could exercise their voting and representation rights prior to the meetings by electronic means (via the Internet). In addition, at the extraordinary general shareholders’ meeting of October 21, 2004, our shareholders could vote by mail and in the annual shareholders’ meetings held on June 18, 2005, June 17, 2006, June 23, 2007, June 21, 2008, June 19, 2009 and June 11, 2010, and in the extraordinary general shareholders’ meeting of October 23, 2006, July 27, 2007 and January 26, 2009 our shareholders, besides exercising their voting and representation rights prior to the meeting by mail or via the Internet, were able to attend (besides attending and voting in person) via the Internet and were also able to vote in real time on the Internet on the resolutions considered at the meeting.

Only registered holders of Santander shares of record at least five days prior to the day on which a meeting is scheduled to be held may attend and vote at shareholders’ meetings. As a registered shareholder, the depositary will be entitled to vote the Santander shares underlying the Santander ADSs. The deposit agreement requires the depositary to accept voting instructions from holders of Santander ADSs and to execute such instructions to the extent permitted by law.

In general, resolutions passed by a general meeting are binding upon all shareholders. In certain circumstances, Spanish law gives dissenting or absent shareholders the right to have their Santander shares redeemed by us at prices determined in accordance with established formulae or criteria. Santander shares held by the Bank or its affiliates are counted for purposes of determining quorums but may not be voted by the Bank or by its affiliates.

Resolutions at general meetings are passed provided that, regarding the voting capital present or represented at the meeting, the number of votes in favor is higher than the number of votes against or blank and abstentions.

205

In accordance with Spanish law, a quorum on first call for a duly constituted ordinary or extraordinary general meeting of shareholders requires the presence in person or by proxy of shareholders representing at least 25% of the subscribed voting capital. On the second call there is no quorum requirement. Notwithstanding the above, a quorum of at least 50% of the subscribed voting capital is required on the first call of the ordinary or extraordinary general meeting of shareholders to validly approve any of the following actions:

•

issuance of bonds;

•

increase or reduction of share capital;

•

rescission or limitation of the preferential right to subscribe new issuance of shares;

•

change of the registered address of Santander to a foreign country;

•

transformation of Santander, or merger, or spin-off, or global assignment of assets and liabilities, and

•

any other amendment of our By-laws.

A quorum of 25% of the subscribed voting capital is required to vote on such actions on the second call. A two-third majority of the present or represented voting capital is required to approve all of the above listed actions when the shareholders’ meeting is held on second call and less than 50% of the subscribed voting capital is present or represented.

For purposes of determining the quorum, those shareholders who vote by mail or through the Internet are counted as being present at the meeting, as provided by the Rules and Regulations of the Bank’s general shareholders’ meetings.

Changes in Capital

Any increase or reduction in share capital must be approved at the general meeting in accordance with the procedures explained above in the section entitled “Meetings and Voting Rights”. However, the shareholders acting at the general shareholders’ meeting may delegate to the board of directors the power to increase share capital.

The capital increase may be effected by issuing new shares or by increasing the par value of existing shares. Capital reduction may be effected by reducing the par value of existing shares, by repurchasing them, or dividing them into groups for exchange.

Unpaid subscription amounts on partially paid-up shares must be paid by the shareholders at the time determined by the board of directors, within five years of the date of the resolution providing for the capital increase.

At the Bank’s annual meeting of shareholders held on June 19, 2009, the shareholders passed resolutions which, among other things, grant the Bank the authority to increase the Bank’s capital by up to €2,038,901,430.5.

At the Bank’s annual meeting of shareholders held on June 11, 2010, the shareholders passed resolutions which, among other things, permit the Bank to issue bonds convertible or exchangeable into the Bank’s common stock in an amount up to €7 billion aggregate principal amount.

A proposal has been included in the agenda of the 2011 annual general meeting to deprive of the effect, to the extent of the unused part, the above authorization and to grant powers to the board of directors to issue debentures, bonds and other simple fixed income securities or debt instruments of a similar nature (including certificates, promissory notes or warrants) as well as fixed-income securities that are convertible into and/or exchangeable for shares of the Bank.

The proposal establishes a maximum aggregate limit on issuances made under the delegation to €8 billion or the equivalent thereof in another currency.

Dividends

We normally pay an annual dividend in advance in quarterly installments in August and November of the current year and February and generally in May, of the following year. We and our domestic banking subsidiaries are subject to certain restrictions on dividend payments, as prescribed by the Ministry of Economy and Finance and the Bank of Spain. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Restrictions on Dividends”.

206

Once the annual accounts have been approved, the shareholders at the general shareholders’ meeting will resolve on the allocation of the results for the fiscal year. Dividends may only be distributed out of the earnings for the fiscal year or with a charge to unappropriated reserves, after the payments required by the law and the By-laws have been made, provided that the stockholders’ equity disclosed in the accounts is not reduced, to less than the share capital as a result of the distribution. If there are any losses from prior fiscal years that reduce the Bank’s stockholders’ equity below the amount of the share capital, the earnings must be used to offset such losses.

The amount, time and form of payment of the dividends, to be distributed among the shareholders in proportion to their paid-in capital will be established by resolutions adopted at the general meeting. The shareholders at the general shareholders’ meeting and the board of directors may make resolutions as to the distribution of interim dividends, subject to limitations and in compliance with the requirements established by the law.

A shareholder’s dividend entitlement lapses five (5) years after the dividend payment date.

The shareholders at the general shareholders’ meeting may resolve that dividends in kind can be paid, provided that:

•

the property or securities to be distributed are of the same nature;

•

the property or securities have been admitted to listing on an official market as of the effective date of the resolution, or liquidity is guaranteed by Santander within a maximum period of one year; and

•

the property or securities are not distributed for a value that is lower than the value at which they are recorded on Santander’s balance sheet.

Preemptive Rights

In the event of a capital increase each shareholder has a preferential right by operation of law to subscribe for shares in proportion to its shareholding in each new issue of Santander shares. The same right is vested on shareholders upon the issuance of convertible debt. Holders of convertible debt also have preemptive rights. However, preemptive rights of shareholders and holders of convertible debt may be excluded under certain circumstances by specific approval at the shareholders’ meeting (or upon its delegation by the board of directors) and preemptive rights are deemed excluded by operation of law in the relevant capital increase when the shareholders approve:

•

capital increases following conversion of convertible bonds into Santander shares;

•

capital increases due to the absorption of another company or of part of the spun-off assets of another company, when the new shares are issued in exchange for the new assets received; or

•

capital increases due to Santander’s tender offer for securities using Santander’s shares as all or part of the consideration.

If capital is increased by the issuance of new shares in return for capital from certain reserves, the resulting new Santander shares will be distributed pro rata to existing shareholders.

Redemption

Our By-laws do not contain any provisions relating to redemption of shares except as set forth in connection with capital reductions. Nevertheless, pursuant to Spanish law, redemption rights may be created at a duly held general shareholders’ meeting. Such meeting will establish the specific terms of any redemption rights created.

Registration and Transfers

The Santander shares are in book-entry form in the Iberclear system. We maintain a registry of shareholders. We do not recognize, at any given time, more than one person as the person entitled to vote each share in the shareholders meeting.

207

Under Spanish law and regulations, transfers of shares quoted on a stock exchange are normally made through a Sociedad o Agencia de Valores, credit entities and investment services companies, that are members of the Spanish stock exchange.

Transfers executed through stock exchange systems are implemented pursuant to the stock exchange clearing and settlement procedures of Iberclear. Transfers executed “over the counter” are implemented pursuant to the general legal regime for book entry transfer, including registration by Iberclear.

New shares may not be transferred until the capital increase is registered with the Commercial Registry.

Liquidation Rights

Upon a liquidation of Santander, our shareholders would be entitled to receive pro-rata any assets remaining after the payment of our debts, taxes and expenses of the liquidation. Holders of non-voting shares, if any, are entitled to receive reimbursement of the amount paid before any amount is distributed to the holders of voting shares.

Change of Control

Our By-laws do not contain any provisions that would have an effect of delaying, deferring or preventing a change in control of the company and that would operate only with respect to a merger, acquisition or corporate restructuring involving Santander or any of our subsidiaries. Nonetheless, certain aspects of Spanish law described in the following section may delay, defer or prevent a change of control of the Bank or any of our subsidiaries in the event of a merger, acquisition or corporate restructuring.

Legal Restrictions on Acquisitions of Shares in Spanish Banks

Certain provisions of Spanish law require notice to the Bank of Spain prior to the acquisition by any individual or corporation of a substantial number of shares of a Spanish bank.

Any individual or corporation that wishes to acquire, directly or indirectly, a significant holding (participación significativa) in a Spanish bank must give advance notice to the Bank of Spain describing the size of such participation, its terms and conditions, and the anticipated closing date of the acquisition. “Significant participation” is defined as 5% of the outstanding share capital or voting rights of the bank or any lesser participation that gives the acquirer effective influence or control over the target bank.

In addition, prior notice must be given to the Bank of Spain of any increase, direct or indirect, in any significant holding resulting in percentage equity interest or voting rights reaching or surpassing one of the following percentages: 20%, 30% or 50%. Notice to the Bank of Spain is also required from anyone who, as a result of the contemplated acquisition, may attain sufficient power to control the credit entity.

Any acquisition mentioned in the preceding sentence to which the required notice was not given or even if given, a three month period after receipt of notice has not yet elapsed, or that is opposed by the Bank of Spain will have the following effects: (1) the acquired shares will have no voting rights, (2) the Bank of Spain may seize control of the bank or replace its board of directors, and (3) a fine may be levied on the acquirer.

The Bank of Spain has sixty business days after the receipt of notice to object to a proposed transaction. Such objection may be based on finding the acquirer unsuitable on the basis, inter alia, of its commercial or professional reputation, its solvency or the transparency of its corporate structure. If sixty business days elapse without any word from the Bank of Spain, its authorization is deemed granted. However, absent objection by the Bank of Spain, it may set forth a different maximum period for closing the proposed transaction.

Any individual or institution that plans to sell its significant holding, or reduce it to one of the above-mentioned levels of ownership, or because of any sale will lose control of the entity, must provide advance notice to the Bank of Spain indicating the amount of the transaction and its anticipated closing date. Failure to comply with these requirements may subject the offending party to penalties.

208

Credit entities must notify the Bank of Spain as soon as they become aware of any acquisition or transfer of significant shares of its capital stock that exceeds the above-mentioned percentages. Furthermore, banks are required to inform the Bank of Spain as soon as they become aware, and in any case not later than 15 days after, any acquisition by a person or a group of at least 1% of such a bank’s total equity. The Bank of Spain also requires each bank to notify the Bank of Spain of a list, dated on the last day of each quarter and during April, July, October and January of all its shareholders that are financial institutions and all other shareholders that own at least 0.25% of the bank’s total equity.

If the Bank of Spain determines at any time that the influence of a person who owns a significant participation of a bank may adversely affect that bank’s financial situation, it may request that the Ministry of Economy and Finance: (1) suspend the voting rights of such person’s shares for a period not exceeding 3 years; (2) seize control of the bank or replace its board of directors; or (3) revoke the bank’s license in exceptional circumstances. A fine may also be levied on the relevant person.

Tender Offers

Law 6/2007, of April 12, which amends the Securities Market Law, has modified the rules for takeover bids. This Law, which came into effect on August 13, 2007, partially transposes into the Spanish legal system Directive 2004/25/EC of the European Parliament and of the Council of April 21, 2004 on takeover bids.

The new rules replace the traditional system where launching a takeover bid was compulsory prior to acquiring a significant shareholding in the target company and partial bids were permitted for a regime where takeover bids must be made for all the share capital after obtaining the control of a listed company (i.e. 30% of the voting rights or appointment of more than one-half of the members of the company’s board of directors) whether such control is obtained by means of an acquisition of securities or an agreement with other holders of securities.

The above does not prevent parties from making voluntary bids for a number that is less than the totality of securities in a listed company.

Law 6/2007 also regulates, among other things, (i) new obligations for the board of directors of the offeree company in terms of preventing the takeover bid (passivity rule); and (ii) the squeeze-out and sell-out rights when the offeror is a holder of securities representing at least 90% of the voting capital of the offeree company and the prior takeover bid has been accepted by holders of securities representing at least 90% of the voting rights covered by the bid.

Royal Decree 1066/2007 on rules applicable to takeover bids for securities further developed the regulations on takeover bids established by Law 6/2007, completing the amendments introduced by Law 6/2007, in order to ensure that takeover bids are carried out within a comprehensive legal framework and with absolute legal certainty. The Royal Decree contains provisions regarding: (i) the scope and application to all takeover bids, whether voluntary or mandatory, for a listed company; (ii) the rules applicable to mandatory takeover bids when control of a company is obtained; (iii) other cases of takeover bids, such as bids for de-listing of securities and bids that must be made when a company wishes to reduce capital through the acquisition of its own shares for subsequent redemption thereof; (iv) the consideration and guarantees offered in a bid; (v) stages of the procedure that must be followed in a takeover bid; (vi) the mandatory duty of passivity of the offeree company’s board of directors and the optional regime of neutralization of other preventive measures against bids; (vii) changes to, withdrawal of, and cessation of effects of the bid; (viii) the acceptance period, the calculation of the acceptances received and the settlement of the bid; (ix) the procedures applicable to competing offers; (x) the rules for squeeze-outs and sell-outs; and (xi) certain rules on supervision, inspection and sanctions applicable with respect to the regulations on takeover bids.

Reporting Requirements

Royal Decree 1362/2007 requires that any entity which acquires or transfers shares and as a consequence the number of voting rights held exceeds, reaches or is below the threshold of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%, of the voting rights of a company, for which Spain is the member state of origin, listed on a Spanish stock exchange or on any other regulated market in the European Union, must, within 4 days after that acquisition or transfer, report it to such company, and to the CNMV. This duty to report the holding of a significant stake is applicable not only to the acquisitions and transfers in the terms described above, but also to those cases in which in the absence of an acquisition or transfer of shares, the percentage of an individual’s voting rights exceeds, reaches or is below the thresholds that trigger the duty to report, as a consequence of an alteration in the total number of voting rights of an issuer. Similar disclosure obligations apply, among others, in the event of: (i) the acquisition or disposal of any financial instruments entitling the holder to acquire the company’s shares (such as options, futures, swaps, etc.); (ii) certain voting, deposit, temporary transfer or other agreements regarding the relevant shares; or (iii) custodians or proxy-holders who can exercise with discretion the voting rights attached to the relevant shares. The above mentioned threshold percentage will be 1% or any multiple of 1% whenever the person who has the duty to notify is a resident of a tax haven or of a country or territory where there is no taxation or where there is no obligation to exchange tax information (in accordance with Spanish law).

209

In addition, any Spanish company listed on the Spanish stock exchanges must report any acquisition by such company (or a subsidiary) of the company’s own shares if the acquisition, together with any acquisitions since the date of the last report and without deducting sales of its own shares by the company or by its subsidiaries, causes the company’s ownership of its own shares to exceed 1% of its voting rights. See “Item 9. The Offer and Listing—C. Markets—Trading by Santander’s Subsidiaries in the Shares.”

Members of the board of directors of listed companies, in addition to notifying the CNMV of any transaction concerning the shares or other securities or financial instruments of the issuer which are linked to these shares, are required to inform the CNMV of their ratio of voting rights upon appointment or resignation.

In addition, top managers of any listed company must report to the CNMV the acquisition or disposal of shares or other securities or financial instruments of the issuer which are linked to these shares.

Board of Directors

Our board of directors may be made up of a minimum of 14 and a maximum of 22 members, appointed by our shareholders acting at the general meeting of shareholders.

Members of the board of directors are elected for an initial term of five years but can be re-elected. One fifth of the members of the board are elected each year.

An amendment of our By-laws will be proposed to the 2011 annual general shareholders’ meeting, which has been convened to be held on first or on second call on June 16, 2011 or June 17, 2011, respectively, in order to reduce the directors’ term of office to three years, among other things.

It follows from the foregoing that, if the amendment is approved, approximately one-third of the members will be up for re-election anually.

The Rules and Regulations of the Board have already been amended by agreement of the board at its meeting of April 25, 2011 to include, among other things, the reduction of the directors’ term of office from five to three years.

A director could serve for a term shorter than the one for which he or she has been initially elected if the shareholders acting at a duly called general meeting decide that that director be replaced before completing his or her term.

Although there is no provision in Spanish law regarding the composition of a board of directors, the Rules and Regulations of the Board provide that in exercising its powers to make proposals at the general shareholders’ meeting and to designate directors by interim appointment to fill vacancies (co-option), the board shall endeavor to ensure that the external or non-executive directors represent a wide majority over the executive directors and that the former include a reasonable number of independent directors. In addition, in all events, the board of directors shall endeavor such that the number of independent directors represent at least one-third of all directors.

Article 42.1 of our By-laws also provides that the shareholders at the general shareholders’ meeting shall endeavor to ensure that external or non-executive directors represent a large majority of the board of directors, and that a reasonable number of the board of directors are independent directors. In addition, the shareholders at the general shareholders’ meeting shall likewise endeavor to ensure that independent directors represent at least one-third of the total number of directors.

210

These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. See Item 16G of Part II, “Corporate Governance—Independence of the directors on the board of directors”. The Bank currently complies with this requirement.

Certain Powers of the Board of Directors

The actions of the members of the board are limited by Spanish law and certain general provisions contained in our By-laws. For instance, Article 57 of our By-laws states that the directors will be liable to Santander, to our shareholders and to our corporate creditors for any damages that they may cause by acts or omissions which are contrary to law or to the By-laws or by acts or omissions contrary to the duties inherent in the exercise of their office.

A director’s power to vote on a proposal, arrangement or contract in which such director is materially interested is not regulated by our By-laws. Conflicts of interest are regulated by Article 30 of the Rules and Regulations of the Board. Under Article 30, a director is obliged to inform the board of any direct or indirect conflict of interest which may exist with the Bank. If such a conflict relates to a particular transaction, then the director (i) may not undertake the transaction without the board’s authorization (such authorization can only be granted following a report of the appointments and remuneration committee); and (ii) the director may not take part in the discussion or voting regarding the transaction to which the conflict relates.

According to our By-laws, unpaid subscription amounts on partially paid-up shares shall be paid up by the shareholders at the time determined by the board of directors, within five years of the date of the resolution providing for the capital increase. The manner and other details of such payment shall be determined by the resolution providing for the capital increase. Without prejudice to the effects of default as set forth by law, any late payment of unpaid subscription amounts shall bear, for the benefit of the Bank, such interest as is provided by law in respect of late payments, starting from the day when payment is due and without any judicial or extra-judicial demand being required. In addition, the Bank shall be entitled to bring such legal actions as may be permitted by law in these cases.

Our current By-laws provide that the members of the board of directors are entitled to receive compensation for performing the duties entrusted to them by reason of their appointment, to be paid as a share in profits and by-law mandated compensation. This compensation has two components: an annual retainer and attendance fees. Attendance fees must be paid in advance on account of the profits for the fiscal year. The specific amount payable to each of the directors will be determined by the board of directors, taking into consideration the positions held by each director on the board and their membership in and attendance at the meetings of the various committees. The aggregate amount of the compensation for performing the duties entrusted to the directors by reason of their appointment is equal to one percent of Santander’s profit for the fiscal year, provided, however, that the board may resolve that such percentage be reduced in those years in which the board deems it justified.

Directors may also receive compensation in the form of shares of the Bank or options over the shares, or other remuneration linked to share value following a resolution adopted by the shareholders at the general shareholders’ meeting (conducted in accordance with our By-laws and applicable Spanish legislation).

Regardless of the limit set above, the directors are entitled to receive compensation (salaries, incentives, bonuses, pension, insurance and severance payments) that the board of directors consider appropriate, for the performance of duties in Santander other than the duties of supervision and collective decision-making that the directors perform as members of the board.

The board of directors must, on an annual basis, prepare a report, which sets forth the standards and basis used to determine the compensation of the directors and the compensation received by each director.

Board of Directors Qualification

There are no mandatory retirement provisions due to age for board members in our By-laws or in the regulations of our board of directors. These regulations contain provisions relating to the cessation of directorship for other reasons.

211

C. Material contracts

During the past two years, the Bank was not a party to any contract outside its ordinary course of business that was material to the Group as a whole, except as disclosed in “Item 4. Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—ABN AMRO Holding N.V. (“ABN AMRO”).”

D. Exchange controls

Restrictions on Foreign Investments

Under present regulations, foreign investors may transfer invested capital, capital gains and dividends out of Spain without limitation on the amount other than applicable taxes. See “—Taxation”. On July 4, 2003, Law 19/2003 was approved which updates Spanish exchange control and money laundering prevention provisions, by recognizing the principle of freedom of the movement of capital between Spanish residents and non-residents. The law establishes procedures for the declaration of capital movements for purposes of administrative or statistical information and authorizes the Spanish Government to take measures which are justified on grounds of public policy or public security. It also provides the mechanism to take exceptional measures with regard to third countries if such measures have been approved by the European Union or by an international organization to which Spain is a party. The Spanish stock exchanges and securities markets are open to foreign investors. Royal Decree 664/1999, on Foreign Investments (April 23, 1999), established a new framework for the regulation of foreign investments in Spain which, on a general basis, will no longer require any prior consents or authorizations from authorities in Spain (without prejudice to specific regulations for several specific sectors, such as television, radio, mining, telecommunications, etc.). Royal Decree 664/1999 requires notification of all foreign investments in Spain and liquidations of such investments upon completion of such investments to the Investments Registry of the Ministry of Economy and Finance, strictly for administrative statistical and economical purposes. Only investments from “tax haven” countries (as they are defined in Royal Decree 1080/1991), shall require notice before and after performance of the investment, except that no prior notice shall be required for: (1) investments in securities or participations in collective investment schemes that are registered with the CNMV, and (2) investments that do not increase the foreign ownership of the capital stock of a Spanish company to over 50%. In specific instances, the Counsel of Ministers may agree to suspend, all or part of, Royal Decree 664/1999 following a proposal of the Minister of Economy and Finance, or, in some cases, a proposal by the head of the government department with authority for such matters and a report of the Foreign Investment Body. These specific instances include a determination that the investments, due to their nature, form or condition, affect activities, or may potentially affect activities relating to the exercise of public powers, national security or public health. Royal Decree 664/1999 is currently suspended for investments relating to national defense. Whenever Royal Decree 664/1999 is suspended, the affected investor must obtain prior administrative authorization in order to carry out the investment.

E. Taxation

The following is a discussion of the material Spanish and US federal income tax consequences to you of the ownership and disposition of ADSs or shares.

The discussion of Spanish tax consequences below applies to you only if you are a non-resident of Spain and your ownership of ADSs or shares is not effectively connected with a permanent establishment or fiscal base in Spain and only if you are a US resident entitled to the benefits of the Convention Between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “Treaty”).

You should consult your own tax adviser as to the particular tax consequences to you of owning the shares or ADSs including your eligibility for the benefits of any treaty between Spain and the country of your residence for the avoidance of double taxation, the applicability or effect of any special rules to which you may be subject, and the applicability and effect of state, local, foreign and other tax laws and possible changes in tax law.

212

Spanish tax considerations

The following is a summary of material Spanish tax matters and is not exhaustive of all the possible tax consequences to you of the acquisition, ownership and disposition of ADSs or shares. This discussion is based upon the tax laws of Spain and regulations thereunder, which are subject to change, possibly with retroactive effect.

Taxation of dividends

Under Spanish law, dividends paid by a Spanish resident company to a holder of ordinary shares or ADSs not residing in Spain for tax purposes and not operating through a permanent establishment in Spain are subject to Spanish Non-Resident Income Tax at a 19% rate.

In addition, according to the Spanish Non-Resident Income Tax Law, if you are resident in the European Union or in a country, such as the United States, with which there is an effective exchange of information for tax purposes as defined in Spanish Law 36/2006 and you do not operate in Spain through a permanent establishment, dividends up to 1,500 euros, considering all Spanish-source dividends you may obtain in the calendar year, are exempt from Spanish taxation. However, Spanish withholding tax will nevertheless be required to be deducted from the gross amount of the dividends, and you will have to seek a refund of such withholding taxes from the Spanish tax authorities, following the standard refund procedure described below.

We will levy an initial withholding tax on the gross amount of dividends at a 19% tax rate, following the procedures set forth by the Order of April 13, 2000. However, under the Treaty and subject to the fulfillment of certain requirements, you may be entitled to a reduced rate of 15%.

To benefit from the Treaty’s reduced rate of 15%, you must provide our depositary, JPMorgan Chase Bank, N.A., with a certificate from the United States Internal Revenue Service (the “IRS”) stating that to the knowledge of the IRS, you are a resident of the United States within the meaning of the Treaty. The IRS certificate is valid for a period of one year.

According to the Order of April 13, 2000, to get a direct application of the Treaty-reduced rate of 15%, the certificate referred to above must be provided to our depositary before the tenth day following the end of the month in which the dividends were distributable by us. If you fail to timely provide our depositary with the required documentation, you may obtain a refund of the 4% in excess withholding that would result from the Spanish tax authorities in accordance with the procedures below.

Spanish refund procedure

According to Spanish Regulations on Non-Resident Income Tax, approved by Royal Decree 1776/2004, dated July 30, 2004, as amended, a refund of the amount withheld in excess of the rate provided by the Treaty can be obtained from the relevant Spanish tax authorities. To pursue the refund claim, if you are a US resident entitled to the benefits of the Treaty, you are required to file all of the following:

•

a Spanish 210 Form,

•

the certificate referred to in the preceding section, and

•

evidence that Spanish Non-Resident Income Tax was withheld with respect to you.

The refund claim must be filed within four years of the date on which the withheld tax was collected by the Spanish tax authorities. According to Order EHA/3316 of December 17, 2010, for dividends paid as of January 2011, the 210 Form has to be filed as from the first of February of the calendar year following the year in which the dividend was paid.

You are urged to consult your own tax adviser regarding refund procedures and any US tax implications of refund procedures.

Taxation of capital gains

Under Spanish law, any capital gains derived from securities issued by persons residing in Spain for tax purposes are considered to be Spanish source income and, therefore, are taxable in Spain. If you are a US resident, income from the sale of ADSs or shares will be treated as capital gains for Spanish tax purposes. Since January 1, 2010, Spanish Non-Resident Income Tax is levied at a 19% rate on capital gains realized by persons not residing in Spain for tax purposes who are not entitled to the benefit of any applicable treaty for the avoidance of double taxation.

213

Notwithstanding the above, capital gains derived from the transfer of shares on an official Spanish secondary stock market by any holder who is a resident of a country that has entered into a treaty for the avoidance of double taxation with Spain containing an “exchange of information” clause will be exempt from taxation in Spain. In addition, under the Treaty, capital gains realized by you upon the disposition of ADSs or shares will not be taxed in Spain provided you have not held, directly or indirectly, 25% or more of our stock during the twelve months preceding the disposition of the stock. You are required to establish that you are entitled to this exemption by providing to the relevant Spanish tax authorities an IRS certificate of residence in the United States, together with the appropriate Spanish 210 tax form, between January 1^st and January 20^th of the calendar year following the year in which the transfer of shares took place.

Spanish wealth tax

Individuals not residing in Spain who hold shares or ADSs located in Spain are subject to the Spanish wealth tax (Spanish Law 19/1991), which imposes a tax on property located in Spain on the last day of any year. The Spanish tax authorities may take the view that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. However, Law 4/2008, dated December 23, 2008, has amended the Spanish wealth tax law, introducing a 100% tax rebate and eliminating the obligation to file any form for tax periods starting as of January 1, 2008. Consequently, no obligation for this tax arises for non resident individuals holding shares or ADSs on December 31, 2008 or after.

Spanish inheritance and gift taxes

Transfers of shares or ADSs upon death or by gift are subject to Spanish inheritance and gift taxes (Spanish Law 29/1987) if the transferee is a resident of Spain for tax purposes, or if the shares or ADSs are located in Spain at the time of gift or death, or the rights attached thereto could be exercised or have to be fulfilled in the Spanish territory, regardless of the residence of the beneficiary. In this regard, the Spanish tax authorities may determine that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. The applicable tax rate, after applying all relevant factors, ranges between 0% and 81.6% for individuals.

Gifts granted to corporations non-resident in Spain are subject to Spanish Non-Resident Income Tax at a 19% tax rate on the fair market value of the shares as a capital gain. If the donee is a United States corporation, the exclusions available under the Treaty described in the section “—Taxation of capital gains” above will be applicable.

Expenses of transfer

Transfers of ADSs or shares will be exempt from any Spanish transfer tax or value-added tax. Additionally, no Spanish stamp tax will be levied on such transfers.

US Tax Considerations

The following summary describes the material US federal income tax consequences of the ownership and disposition of ADSs or shares, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to acquire such securities. The summary applies only to US Holders (as defined below) that hold ADSs or shares as capital assets for tax purposes and does not address special classes of holders, such as:

•

financial institutions;

•

insurance companies;

•

dealers and traders in securities that use a mark-to-market method of tax accounting;

•

holders holding ADSs or shares as part of a hedge, “straddle”, conversion transaction or integrated transaction;

•

holders whose “functional currency” is not the US dollar;

•

holders liable for the alternative minimum tax;

214

•

tax exempt entities, including “individual retirement accounts” and “Roth IRAs”;

•

partnerships or other entities classified as partnerships for US federal income tax purposes;

•

holders that own or are deemed to own 10% or more of our voting shares;

•

holders that acquired our ADSs or shares pursuant to the exercise of an employee stock option or otherwise as compensation; or

•

holders holding ADSs or shares in connection with a trade or business outside the United States.

If an entity that is classified as a partnership for US federal income tax purposes holds shares or ADSs, the US federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular US federal income tax consequences of owning and disposing of the shares or ADSs.

This summary is based upon tax laws of the United States including the Internal Revenue Code of 1986, as amended (the “Code”), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, all as of the date hereof, changes to any of which may affect the tax consequences described herein, possibly with retroactive effect. In addition, this summary is based on the Treaty and assumes that each obligation provided for in or otherwise contemplated by the deposit agreement or any other related document will be performed in accordance with its terms. US Holders are urged to consult their own tax advisers as to the US, Spanish and other tax consequences of the ownership and disposition of ADSs or shares in their particular circumstances.

As used herein, a “US Holder” is, for US federal income tax purposes, a beneficial owner of ADSs or shares that is:

(i)		a citizen or resident of the United States;

(ii)		a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state thereof or the District of Columbia; or

(iii)		an estate or trust the income of which is subject to US federal income taxation regardless of its source.

In general, for US federal income tax purposes, US Holders of ADSs will be treated as the owners of the underlying shares represented by those ADSs. Accordingly, no gain or loss will be recognized if a US Holder exchanges ADSs for the underlying shares represented by those ADSs.

The US Treasury has expressed concerns that parties to whom American depositary shares are released before delivery of shares to the depositary (“pre-release”), or intermediaries in the chain of ownership between US holders and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by US holders of American depositary shares. These actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of Spanish taxes and the availability of the reduced tax rate for dividends received by certain non-corporate holders, each described below, could be affected by actions taken by these parties or intermediaries.

Taxation of Distributions

Subject to the discussion of the passive foreign investment company rules below, to the extent paid out of our current or accumulated earnings and profits (as determined in accordance with US federal income tax principles), distributions, including the amount of any Spanish withholding tax, made with respect to ADSs or shares (other than certain pro rata distributions of our capital stock or rights to subscribe for shares of our capital stock) will be includible in the income of a US Holder as foreign-source ordinary dividend income. Because we do not maintain calculations of our earnings and profits under US federal income tax principles, it is expected that distributions generally will be reported to US Holders as dividends. These dividends will be included in a US Holder’s income on the date of the US Holder’s (or in the case of ADSs, the depositary’s) receipt of the dividend, and will not be eligible for the “dividends-received deduction” generally allowed to corporations receiving dividends from domestic corporations under the Code. The amount of the distribution will equal the US dollar value of the euros received, calculated by reference to the exchange rate in effect on the date that distribution is received (which, for US Holders of ADSs, will be the date that distribution is received by the depositary), whether or not the depositary or US Holder in fact converts any euros received into US dollars at that time. If the dividend is converted into US dollars on the date of receipt, a US Holder generally will not be required to recognize foreign currency exchange gain or loss in respect thereof. A US Holder may have foreign currency exchange gain or loss if the euros are converted into exchange US dollars after the date of receipt. Any gains or losses resulting from the conversion of euros into US dollars will be treated as ordinary income or loss, as the case may be, and will be US-source.

215

Subject to generally applicable limitations that may vary depending upon your circumstances and the discussion above regarding concerns expressed by the US Treasury, under current law, dividends paid to certain non-corporate US holders in taxable years beginning before January 1, 2013 will be taxed at favorable rates, up to a maximum rate of 15%. A US Holder must satisfy minimum holding period requirements in order to be eligible to be taxed at these favorable rates. Non-corporate holders are urged to consult their own tax advisers to determine the application of the rule regarding this favorable rate in their particular circumstances.

Subject to certain generally applicable limitations that may vary depending upon your circumstances and subject to the discussion above regarding concerns expressed by the US Treasury, a US Holder will be entitled to a credit against its US federal income tax liability for Spanish income taxes withheld at the rate provided by the Treaty. Spanish income taxes withheld in excess of the rate applicable under the Treaty will not be eligible for credit against a U.S Holder’s federal income tax liability. See “Spanish tax considerations — Spanish refund procedure —” for a discussion of how to obtain amounts withheld in excess of the applicable Treaty rate. The limitation on foreign taxes eligible for credit is calculated separately with regard to specific classes of income. Instead of claiming a credit, a US Holder may, at its election, deduct such otherwise creditable Spanish taxes in computing taxable income, subject to generally applicable limitations.

A US Holder must satisfy minimum holding period requirements in order to be eligible to claim a foreign tax credit for foreign taxes withheld on dividends. The rules governing foreign tax credits are complex and, therefore, US Holders are urged to consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to make effective use of foreign tax credits.

Sale or Exchange of ADSs or Shares

Subject to the discussion of the passive foreign investment company rules below, gain or loss realized by a US Holder on the sale or exchange of ADSs or shares will be subject to US federal income tax as capital gain or loss (and will be long-term capital gain or loss if the US Holder held the ADSs or shares for more than one year) in an amount equal to the difference between the US Holder’s tax basis in the ADSs or shares and the amount realized on the disposition, in each case as determined in US dollars. Gain or loss, if any, will be US-source for foreign tax credit purposes. The deductibility of capital losses is subject to limitations. Long-term capital gain of a non-corporate US holder is generally taxed at a preferential rate.

Passive Foreign Investment Company Rules

We believe that we were not a “passive foreign investment company” (“PFIC”) for US federal income tax purposes for the 2010 taxable year. However, because our PFIC status depends upon the composition of our income and assets and the fair market value of our assets (including, among others, less than 25% owned equity investments) from time to time, and upon certain proposed Treasury Regulations that are not yet in effect but are proposed to become effective for taxable years after December 31, 1994, there can be no assurance that we will not be a PFIC for any taxable year.

If we were a PFIC for any taxable year, any gain recognized by a US Holder on a sale or other disposition of ADSs or shares would be allocated ratably over the US Holder’s holding period for the ADSs or shares. The amounts allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be taxed as ordinary income. The amounts allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the amount allocated to each of those taxable years. Further, any distribution in respect of ADSs or shares in excess of 125% of the average of the annual distributions on ADSs or shares received by the US Holder during the preceding three years or the US Holder’s holding period, whichever is shorter, would be subject to taxation as described above. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the ADSs or shares.

In addition, if we were a PFIC in a taxable year in which we pay a dividend or the prior taxable year, the 15% dividend rate discussed above with respect to dividends paid to non-corporate holders would not apply.

216

Information Reporting and Backup Withholding

Payment of dividends and sales proceeds that are made within the United States or through certain US-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (i) the US Holder is an exempt recipient or (ii) in the case of backup withholding, the US Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a US Holder will be allowed as a credit against the US Holder’s US federal income tax liability and may entitle the US Holder to a refund, provided that the required information is timely furnished to the IRS.

For taxable years beginning after March 18, 2010, new legislation requires certain US Holders who are individuals to report information relating to their holdings of stock of certain non-US entities, subject to certain exceptions (including an exception for publicly traded stock and interests held in custodial accounts maintained by a US financial institution). US Holders are urged to consult their tax advisers regarding the effect, if any, of this legislation on the acquisition, ownership and disposition of ADSs or shares.

F. Dividends and paying agents

Not Applicable.

G. Statement by experts

Not Applicable.

H. Documents on display

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

I. Subsidiary information

Not Applicable.

217

Item 11. Quantitative and Qualitative Disclosures About Market Risk

Introduction

Our risk management activities involve the integrated qualification and quantification of the different types of risk (credit risk, operational risk, reputational risk and market risk) which are assumed by our business units in their activities.

We have divided this section into the following ten parts:

•

Corporate principles of risk management, control and risk appetite;

•

Corporate governance of the risk function;

•

Integral control of risk;

•

Credit risk;

•

Operational risk;

•

Reputational risk;

•

Adjustment to the new regulatory framework;

•

Economic capital;

•

Risk training activities; and

•

Market risk.

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

The importance of our risk policy was highlighted once again in 2010. The policy is focused on maintaining a medium-to-low, predictable profile in all risks and a diversified portfolio.

Our risk management policies were particularly effective in countering the turmoil that has affected financial markets since July, 2007.

For Grupo Santander, quality risk management is one of our hallmarks and thus a priority in our activity. Throughout our 150 years, Santander has combined prudence in risk management with use of advanced risk management techniques, which have proven to be decisive in generating recurrent and balanced earnings and creating shareholder value.

Grupo Santander’s banking business model from the risk standpoint

The banking business model chosen by the Group mainly determines our risk management, control and appetite.

• We focus on retail banking and maintain an internationally diversified presence characterized by market shares of more than 10% in the main markets where we operate. Wholesale banking business is conducted above all in core markets.

• The model enables us to generate results with a high degree of recurrence, with a strong capital base and liquidity.

• We operate in markets via subsidiaries that are autonomous in terms of capital as well as liquidity and compatible with corporate control. The corporate structure has to be simple minimizing the use of non-functional subsidiaries.

• We develop our model for operational and technological integration via corporate platforms and tools. This provides an agile aggregation of information in time and form.

218

• All the activity that we carry out is part of our social and reputational commitment in accordance with our strategic objectives.

The risks model that underpins the business model is based on the following principles:

• Independent working from the business areas. Matías R. Inciarte, the Group’s third vice chairman and chairman of the board’s risk committee, reports directly to the executive committee and to the board. The establishment of separate functions between the business areas (risk takers) and the risk areas responsible for measurement, analysis, control and information provides sufficient independence and autonomy to control risks appropriately.

• Involvement of senior management in all decisions taken.

• Collective decision-making (including at the branch level), which ensures a variety of opinions is heard and does not make results dependent on decisions taken solely by individuals. Joint responsibility for decisions on credit transactions between risk and business areas.

• Defining functions. Each risk taker unit and, where appropriate, risk manager has clearly defined the types of activities and segments, in which they could incur risks, and decisions they might make in the sphere of risks in accordance with delegated powers. How risk is contracted, managed and where transactions are booked is also defined.

• Centralized control. Risk control and management is conducted on an integrated basis through a corporate structure with global scope responsibilities (all risk, all businesses, all countries).

Management and control of risks at Grupo Santander is structured around the following phases:

• Establishment of risk policies and procedures. They constitute the basic framework for regulating risk activities and processes. At the local level, the risk units incorporate the corporate rules to their internal policies.

• Defining and assessing risk methodologies. The methodologies enable us to develop the internal risk models applied by the Group and identify risk measures, methods for evaluating products and methods for constructing yield curves.

• Risk measurement. This considers all the risk positions taken throughout the business perimeter and uses methodologies and models in accordance with a process of validation and approval based on components and dimensions of risk in the whole life cycle.

• Define and limit the risk appetite. The aim is to efficiently delimit the maximum risk levels by setting the global and specific limits for the different types of risk, products, customers, sectors and countries.

• Execute a system to monitor and control risks, which verifies every day and generates reports detailing the extent to which our risk profile is in line with the risk policies approved and the limits established.

Our risk management is fully identified with the Basel principles as it recognizes and supports the industry’s most advanced practices which we have been anticipating and, as a result, we have been using for many years various tools and techniques which will be referred to later in this section include:

• Internal rating and scoring models which, by assessing the various qualitative and quantitative components by client and operation, enable the probability of default to be estimated first and then, on the basis of estimates of losses, the expected loss.

• Economic capital, as the homogeneous metric of the risk assumed and the basis for measuring management, using RORAC, for pricing operations (bottom up) and for analysis of portfolios and units (top down), and VaR, as the element of control to set the market risk limits of the various trading portfolios.

• Analysis of scenarios and stress tests to complement the analysis of market and credit risk in order to assess the impact of alternative scenarios, including on provisions and on the capital.

219

We calculate the minimum regulatory capital in accordance with Bank of Spain circular 3/2008 on determining and controlling the minimum equity of credit institutions. This regulation completed the transfer to Spanish banking legislation of the Directives (2006/48EC and 2006/49/EC), which incorporate European Union (EU) regulations pursuant to the new Basel capital Accord (BIS II).

As a result of the new elements introduced into the regulatory framework, commonly known as BIS III, we took steps to apply with sufficient prevision the future requirements indicated in BIS III. This entails a greater requirement for high quality capital, sufficiency of capital conservation and counter cyclical measures.

We also foresaw the application of the two new liquidity ratios indicated in BIS III, which guarantee sufficient liquidity even in stress scenarios. These ratios are the liquidity coverage ratio (LCR) for the short term (30 days) and the net stable funding ratio (NSFR) regarding the financing structure.

As regards the new liquidity requirements and especially concerning the ratio of stable financing, we believe it is very important that the final definition to attain after agreed periods of observation and review reflects the differences associated with the various banking business models and avoids penalizing the flow of loans to the real economy.

Grupo Santander’s risk appetite

The risks, which we incur, must be delimited and quantified within the risk appetite framework defined and approved by the board. We define the risk appetite as the amount and type of risks considered as reasonable to assume in the execution of its business strategy.

The board, at the proposal of senior management, is responsible for establishing and monitoring our risk appetite and our tolerance to risk. Senior management is responsible for achieving the desired risk profile as well as managing risks on a day-to-day basis. We have the necessary metrics and infrastructure to guarantee management.

The risk appetite has quantitative and qualitative aspects and is directly linked to our global strategy, including assessing growth opportunities in businesses and key markets, liquidity and financing capacity and capital. Pillar 2, with its corresponding exercises of planning and stress test of capital, complements the risk appetite reference framework.

Formulating the risk appetite delimits the budgetary process, in which the main strategic parameters as well as their results, liquidity, capital, bad loans, VaR, etc. are analyzed and approved.

Risk appetite management criteria for each specific risk

The main criteria and metrics used are approved by the risk committee, the executive committee and, where appropriate, the board at least annually. Control and monitoring and conducted in accordance with various time frames (from daily to annual), on the basis of the metric and corresponding level of responsibility.

Criteria, metrics and limits (“hard” and “alert/control”) where necessary are set for each risk. The general criteria for each risk, which are developed in the following chapters, are set forth below:

• Credit risk: The credit risk appetite in general is articulated around control limits that can change during the year depending on banking business needs and our risk appetite, on the basis of segmenting the risk established (individualized management, standardized and wholesale). The results of the stress tests under various scenarios are also taken into account.

The main features for each credit risk segment are as follows:

• Standardized risks: Scoring models and automated decisions are used. The risks are grouped in credit management programs (CMPs), with credit policies designed and approved on the basis of the unit’s risk appetite and in accordance with their level of predictability. The annual CMPs are approved at the local level, in accordance with our policies.

• Individualized management: classified as of a certain risk exposure per customer. Each analyst is assigned a portfolio of customers to monitor. The ratings of each one are updated at least once a year.

220

• Global wholesale banking risk (GWB: includes corporate and financial institutions/IFIs): the distribution of the risk level by rating is used as the parameter for monitoring the portfolio. Limited for each group/customer are assigned at least once a year and all aggregated limits are analyzed, breaking them down by the level of rating. The revisions are done by sectors (corporate) and countries (IFIs).

As for the risk concentration appetite, our main objective is to maintain a well diversified risk portfolio from the standpoint of our exposure to large risks, certain markets and specific products. It is measured via three focal points (customers, products and sector) which include limits set such as warning or control signs.

• Market risk: Trading activity is customer-focused. The consistency between the proposed limits and the budget of the business is verified. Metrics are used such as VaR, P&L of management and capital. The VaR is established on the basis of the historic evolution of losses, and as consumption/P&L of management up to a certain percentage. Stress tests are also used.

Market/structural risks are linked to conservative management of our assets and liabilities, liquidity and structural foreign exchange. Criteria and metrics that are used that are mentioned in greater detail in the relevant sections.

• Operational and technology risk: Risk appetite is monitored on the basis of management and daily mitigation via the ratio of gross losses/gross income, self-assessment questionnaires/risk maps and management indicators.

• Compliance and reputational risk: The appetite for this risk is zero. Active policies to manage reputational risk are established by the corporate office created for this purpose.

Support indicators are used to monitor it:

	•		Anti-money laundering.

	•		Institutional relations with regulatory bodies.

	•		Codes of conduct of the securities markets.

	•		Marketing of products.

	•		Markets in financial instruments directive (MiFID).

	•		Others: Bank of Spain/Supervisors customer complaints and data protection.

Part 2. Corporate governance of the risk function

The risk committee is responsible for proposing to the board our risk policy. The board is responsible for approving the policy under its powers of administration and supervision. The committee also ensures that our activities are consistent with our risk tolerance level and establishes the global limits for the main risk exposures, reviewing them systematically and resolving those operations that exceed the powers delegated in bodies further down the hierarchy.

The committee is of an executive nature and takes decisions in the sphere of the powers delegated to it by the board. It is chaired by the third vice chairman of Grupo Santander and includes four other board members. The committee met 99 times during 2010, underscoring the importance that we attach to appropriate management of our risks.

The main responsibilities of the board’s risk committee are to:

• Propose to the board the risk policy for the Group, which must, in particular, identify:

- The different types of risk (operational, technological, financial, legal and reputational, among others) facing it;

221

- The information and internal control systems used to control and manage these risks;

- Set the level of risk considered acceptable;

- The measures envisaged to mitigate the impact of identified risks, in the event that they materialize;

• Systematically review exposures with the main customers, economic sectors, geographic areas and types of risk.

• Authorize the management tools and risk models as well as being familiar with the results of the internal validation.

• Ensure that the Group’s actions are consistent with the previously decided risk tolerance level.

• Know, assess and monitor the observations and recommendations periodically formulated by the supervisory authorities in the exercise of their function.

• Resolve transactions beyond the powers delegated to bodies further down the hierarchy, as well as the global limits of preclassification of economic Groups or in relation to exposures by classes of risk.

The board’s risk committee delegates some of its powers to other risk committees which are structured by geographic area, business and types of risk, which are defined in the corporate governance risk model.

In addition, both the executive committee and the Bank’s board pay particular attention to management of our risks.

Our risk function is conducted via two directorates-general of risk which are independent of the business areas, both from the hierarchical and functional standpoint. Both of them report to our third vice chairman, the most senior executive responsible for our risk management. The organizational and functional framework is as follows:

• General directorate of integral control and internal validation of risks, with responsibilities of global scope and corporate nature and support for the Group’s bodies of governance, which are:

- Validation of internal models of risk to assess the suitability and appropriateness of the classification systems, internal processes and treatment of data, in accordance with Basel II.

- Integral control of risks to guarantee that the management and control systems of the various risks are in line with the Bank’s global risk profile.

• Directorate general of risk, with functions in the following blocks:

- A corporate structure, with global scope responsibilities (“all risks, all countries”), which establishes the policies, methodologies and control: solvency, market and methodology.

- A business structure, centered on the execution and integration in management of the risks function in our retail, global and local businesses.

Part 3. Integral control of risk

In 2008 we launched the function of integral control of risks anticipating the new regulatory requirements, then being discussed in the main organizations and forums — Basel committee, CEBS, FSF, etc, — as well as the recommendations on best risk management practices formulated by various public and private bodies.

Organization, mission and features of integral control of risks

The organization of this function is part of the directorate general of integral control and internal validation of risk. This function supports our governance bodies in risk management and control.

222

Particular attention is paid to credit risk (including the risks of concentration and counterparty); market risk (including liquidity risk as well as structural risks of interest rates and exchange rates); operational and technology risks and risk of compliance and reputational risk.

Integral control of risk is aimed at tasks listed in three modules:

Module 1. Ensure that the management and control systems of the various risks inherent in our activity meet the most demanding criteria and the best practices observed in the industry and/or required by regulators.

Module 2. Ensure that senior management has at its disposal an integral vision of the profile of the various risks assumed and that these risks are in line with the previously agreed appetite for risks.

Module 3. Supervise appropriate compliance in time and form with the recommendations drawn up for risk management matters following inspections by internal auditing and by the supervisors to whom we are subject.

Integral control of risk supports the work of the risk committee, providing it with the best practices in risk management. The main features of this function are:

• Global and corporate scope: all risks, all businesses, all countries.

• A third layer of control, following the one by the person responsible for managing and controlling each risk in the sphere of each business or functional unit (first layer of control) and the corporate control of each risk (second layer). This ensures the vision and thus integral control of all risks incurred during the year.

• Special attention is paid to the development of best practices in the sphere of the financial industry in order to be able to quickly incorporate within Santander and at once any advances deemed opportune.

• Both the information available as well as the resources that we assign to controlling the various risks are optimized avoiding overlapping.

Methodology and tools

In order to systemize the function and adjust it to our specific needs, internal development of methodology and tools to support it was completed. This makes application of the methodology traceable. The methodology and the tools are articulated through the three modules previously referred to for all risks treated:

Module 1. A guide of tests or reviews exists for each risk, divided in spheres of control (for example, corporate governance, organizational structure, management systems, integration in management, technology environment, contingency plans and business continuity, etc).

Applying the tests and obtaining the relevant evidence which is assessed and enables the parameters of control of the various risks to be homogenized is done every 12 months. New tests are incorporated where needed. The support tool is the risk control monitor, which is a repository of the results of each test and of their work papers. A half yearly review of the state of each risk is also carried out monitoring the recommendations emanating from the annual report of integral control.

Module 2. Senior management is able to monitor integral vision of the various risks assumed and their adjustment to the previously formulated risk appetites.

Module 3. The SEGRE tool is used to track the recommendations made by internal auditing and by the supervisors regarding risk control and management and it also includes the recommendations by integral control. Use of this tool is coordinated with the relevant risk control areas so that monitoring is optimized. The Bank of Spain can access these tools if it so wishes.

223

During 2010:

a) The second cycle of reviewing the various risks was completed in close contact with the corporate areas of control, contrasting and assessing the control and management systems of these risks. Improvements were identified and recommendations made with corresponding schedule for implementation agreed within the areas. A semi-annual monitoring of the progress achieved with respect to the recommendations made in 2009 was also conducted.

b) The board and the executive committee were regularly informed and given an integral vision of all risks; and

c) Work continued on extending the integral control of risks model to the Group’s main units.

Part 4. Credit risk

Introduction to the treatment of credit risk

Credit risk is the possibility of losses stemming from the failure of clients or counterparties to meet their financial obligations with the Group.

Our risks function is organized on the basis of the type of customer in order to distinguish during the risk management process companies under individualized management from standardized customers.

• Those under individualized management are assigned, mainly because of the risk assumed, a risk analyst. This category includes the companies of wholesale banking, financial institutions and some of the companies of retail banking. Risk management is conducted through expert analysis backed up by tools to support decision making based on internal models of risk assessment.

• Standardized: a customer who has not been specifically assigned a risk analyst. This category includes individuals, individual businessmen and retail banking companies that are not segmented. Management of these risks is based on internal models of assessment and automatic decisions, complemented where the model does not go far enough or is not sufficiently precise by teams of analysts specialized in this type of risk.

Main volumes and performance

Our credit risk profile is characterized by diversified geographic distribution and predominantly retail banking activity.

A. Global map of credit risk in 2010

The table below sets out the global credit risk exposure in nominal amounts (except for derivatives and repos exposure which is expressed in equivalent credit) at December 31, 2010.

Growth in lending was moderate due to reduced demand. The exposure to credit risk increased 8.8%. Of this growth, 48% was due to the exchange rate effect during 2010 of the main currencies against the euro. The rest was evenly divided between outstanding commitments to customers and outstanding commitments to credit entities.

Spain was still the main unit with respect to exposure to credit risk, although it share of the total was 3 percentage points less than at the end of 2009. Of note in the rest of Europe, which accounts for more than one-third of the credit exposure, is the presence in the UK. Overall, Europe, including Spain, accounted for 71% of the total exposure.

In Latin America, which accounted for 23% of the exposure, 96% of the exposure to credit risk is classified as investment grade.

The US accounted for 6.5% of our total credit exposure at the end of 2010.

224

GRUPO SANTANDER. GROSS EXPOSURE TO CREDIT RISK
Million euros


													Outstanding
													to
	Out-			Commit-			Sovereign			Private fixed			cred. ent.			Commit-			Derivatives
	standing			ments to			fixed income			income			and central			ments to			and Repos									%/
	to customers			customers			(exc. trading)			(exc. trading)			banks			credit entities			(ECR)			Total			%			Dec. 09

Spain		277,583			61,492			26,956			7,674			19,260			1,484			32,644			427,092			35.4	%		-3.0	%
Parent Bank		168,070			45,097			16,210			4,892			14,059			1,210			26,568			276,105			22.9	%		-1.6	%
Banesto		79,842			10,154			7,980			1,198			3,204			273			5,905			108,556			9.0	%		-5.7	%
Others		29,671			6,241			2,765			1,584			1,997			1			171			42,430			3.5	%		-4.9	%
Rest of Europe		320,158			42,791			6,022			9,163			34,224			1			16,167			428,525			35.5	%		9.6	%
Germany		21,879			295			0			111			694			0			6			22,984			1.9	%		0.5	%
Portugal		23,062			7,831			5,515			3,517			1,466			1			1,880			43,272			3.6	%		11.6	%
Uk		242,864			32,154			145			5,431			31,380			0			13,650			325,624			27.0	%		11.7	%
Others		32,353			2,511			362			103			684			0			631			36,645			3.0	%		-2.6	%
Latin America		136,084			63,200			25,602			3,745			31,544			6			10,926			271,106			22.5	%		30.0	%
Brazil		81,684			42,159			18,040			2,613			24,008			0			5,758			174,263			14.4	%		32.0	%
Chile		27,397			7,929			1,764			948			2,313			6			2,938			43,296			3.6	%		24.8	%
Mexico		14,621			11,508			3,977			2			3,431			0			1,822			35,361			2.9	%		34.0	%
Others		12,382			1,603			1,820			183			1,791			0			407			18,186			1.5	%		18.5	%
United States		53,288			10,888			1,682			8,953			2,984			0			795			78,590			6.5	%		16.8	%
Rest of World		747			102			1			1			158			0			0			1,009			0.1	%		-33.9	%
Total Group		787,860			178,473			60,262			29,536			88,169			1,491			60,532			1,206,322			100	%		8.8	%
% of Total		65,3	%		14,8	%		5,0	%		2,4	%		7,3	%		0,1	%		5,0	%		100,0	%
% Change/Dec 09		6,9	%		19,6	%		1,2	%		-24,0	%		43,9	%		9,4	%		-0,7	%		8,8	%

Data at December 31, 2010, drawn up on the basis of legal company criteria.

ECR (equivalent credit risk: net value of replacement plus the maximum potential value. Includes mitigants)

Outstanding balances with customers including contingent risk and excluding repos (EUR 1,395 million) and other customer credit assets (EUR 12,406 million).

Total fixed income excludes the trading portfolio and investments of third party takers of insurance.

Balances with credit institutions and central banks include contingent risks and exclude repos, trading portfolio and other financial assets. Of the total, EUR 65,351 million are deposits in central banks.

B. Evolution of the volumes in 2010

The evolution of non-performing loans and the cost of credit reflect the impact of the deterioration of the economic environment softened by prudent risk management, which enabled, in general, these figures to remain lower than those of competitors. As a result, we maintain a significant level of coverage and available generic provisions.

Our ratio of non-performing loans (NPLs) was 3.55% at the end of 2010, up from 3.24% at the end of 2009, but grew more slowly compared to last few years. NPLs declined in Santander Consumer Finance, Brazil and Sovereign and rose in businesses in Spain. NPL coverage was 72.7% compared to 75.3% at the end of 2009.

Specific provisions for loan losses, net of recoveries, amounted to €12,342 million, 1.56% of the average credit exposure with customers (the year’s average lending plus financial guarantees), down from 1.57% in 2009.

225

GRUPO SANTANDER: RISK, NPLS, COVERAGE, PROVISIONS AND COST OF CREDIT
Million euros


	Credit risk												Spec. prov net
	with customers *				NPL ratio				Coverage				recovered write-offs **				Credit cost
	(million euros)				%				%				(million euros)				(% of risk)³
	2010		2009		2010		2009		2010		2009		2010		2009		2010²		2009¹

Continental Europe		370,673		366,970		4.34		3.64		71.4		76.6		6,190		5,084		1.62		1.39
Santander Branch Network		126,705		129,099		5.52		4.38		51.8		64.9		2,454		1,851		1.89		1.41
Banesto		86,213		86,681		4.11		2.97		54.4		64.1		1,272		737		1.52		0.89
Santander Consumer finance	67,820			60,214		4.95		5.39		128.4		96.8		1,884		2,005		2.85		3.38
Portugal		32,265		34,501		2.90		2.27		60.0		64.6		105		95		0.30		0.27
United Kingdom		244,707		238,215		1.76		1.71		45.8		43.8		826		1,018		0.34		0.43
Latin America		149,333		117,146		4.11		4.25		103.6		105.2		4,758		5,053		3.53		4.44
Brazil		84,440		65,611		4.91		5.27		100.5		99.2		3,703		3,537		4.93		5.88
Mexico		16,432		12,676		1.84		1.84		214.9		264.4		469		824		3.12		6.13
Chile		28,858		21,384		3.74		3.20		88.7		89.0		390		402		1.57		1.98
Puerto Rico		4,360		4,132		10.59		9.60		57.5		53.3		143		89		3.22		1.99
Colombia		2,275		1,719		1.56		1.83		199.6		187.5		15		31		0.68		1.94
Argentina		4,097		2,936		1.69		2.60		149.1		141.0		26		91		0.72		2.99
Sovereign Rest		40,604		38,770		4.61		5.35		75.4		62.5		479		578		1.16
Total Group		804,036		758,347		3.55		3.24		72.7		75.3		12,342		11,760		1.56		1.57

Memo item
Spain		283,424		284,307		4.24		3.41		57.9		73.4		4,352		3,497		1.53		1.20


*		Includes gross customer loans, guarantees, documentary credits and retail segment derivatives (ECR EUR 2,375 million).

**		Bad debts recovered.

1.		Excludes Sovereign

2.		Excludes the incorporation of AIG in Santander Consumer Finance Poland.

3.		(Specific allowances — recovery of bad debts)/ Total average credit risk.

226

In the case of companies and institutions under individualized management, our Parent bank has defined a single methodology for formulating a rating in each country. The rating is determined by an automatic model which reflects a first intervention by the analyst and which may be later complemented. The automatic model determines the rating in two phases, one quantitative and the other qualitative based on a corrective questionnaire which enables the analyst to modify the automatic scoring by a maximum of ±2 points of rating. The quantitative rating is determined by analyzing the credit performance of a sample of customers and the correlation with their financial statements. The questionnaire has 24 questions divided into six areas of assessment. The automatic rating (quantitative +corrective questionnaire) can be changed by an analyst by overriding it or by using a manual assessment model.

The ratings accorded to customers are regularly reviewed, incorporating new financial information available and the experience in the development of the banking relation. The regularity of the reviews increases in the case of clients who reach certain levels in the automatic warning systems and in those classified as special watch. The rating tools are also reviewed so that their accuracy can be fine-tuned.

During 2010, the quantitative model for rating wholesale banking was adjusted and new expert rating models were developed for funds, fund managers and leveraged buy outs (LBOs). In the case of standardized risks, both for transactions with companies as well as individuals, there are scoring tools which automatically assess the transactions.

These admission systems are complemented by performance assessment models which enable the risk assumed to be better predicted. They are used for both preventative activities as well as sales.

B. Parameters of credit risk

The assessment of a customer or transaction, through ratings or scorings, constitutes a judgment of the credit quality, which is quantified via probability of default (PD).

As well as evaluating the customer, quantifying credit risk requires other parameters to be estimated, such as exposure at default (EaD) and the percentage of EaD that might not be recovered (loss given default or LGD). Other aspects are also included such as quantifying off-balance sheet exposures, which depend on the type of product, or analysis of expected recoveries related to the existing guarantees, and other features of the operation, including the type of product, maturity, etc.

These factors comprise the main credit risk parameters. Their combination enables the probable or expected loss (EL) to be calculated. This loss is considered as one more cost of the activity as it reflects the risk premium and should be incorporated into the price of transactions.

228

The following charts show the distribution of failed consumer loans and mortgages since 2001 on the basis of the percentage recovered after discounting all the costs — including the financial opportunity — of the recovery process.

The risk parameters also calculate the regulatory capital in accordance with the rules of the new Basel Capital Accord (BIS II). The regulatory capital is the difference between the unexpected and the expected loss.

The unexpected loss is the basis for calculating the capital and makes reference to a very high level of loss, but not very probable, not considered recurrent and which must be met with equity.

In portfolios where the internal experience of defaults is scant, such as banks, sovereigns or global wholesale banking, estimates of the parameters come from alternative sources: market prices or studies by external agencies which draw on the shared experience of a sufficient number of institutions. These portfolios are called low default portfolios.

For the rest of portfolios, estimates are based on the institution’s internal experience. The PD is calculated by observing NPL entries and putting them in relation to the final rating assigned to the customer or with the scoring assigned to the operations.

The LGD calculation is based on observing the recovery process of operations not fulfilled, taking into account not only the revenues and costs associated with this process, but also the moment when they are produced and the indirect costs incurred in recovery activity.

The parameters estimated for global portfolios are the same for all the Group’s units. A financial institution with a rating of 8.5 will have the same PD regardless of the unit in which its exposure is recorded. On the other hand, retail portfolios have specific scoring systems in each unit of the Group. This requires separate estimates and specific assignment in each case.

The parameters are then assigned to the operations present in the balance sheet of units in order to calculate the expected losses and the capital requirements associated with their exposure.

229

D. Distribution of EaD and expected loss (EL) associated

The table below sets out the distribution by segments of the outstanding credit exposure to customers in terms of EaD. PD, LGD and EL. Approximately 77% of total risk with clients (excluding sovereign, counterparty risks and other assets) corresponds to companies, SMEs and loans to individuals, underlining the retail focus of business and of Santander’s risks. The expected loss from customer exposure is 1.39% (1.10% for our total credit exposure), which can be considered as a medium-to-low risk profile.

SEGMENTATION OF CREDIT RISK EXPOSURE
Million euros and %


						Average			Average
	EAD ¹		%			PD			LGD			EL

Sovereign debt		160,764		15.38	%		0.14	%		10.64	%		0.01	%
Counterparty		63,264		6.05	%		0.41	%		74.94	%		0.31	%
Public sector		12,539		1.20	%		0.73	%		12.01	%		0.09	%
Corporate		154,725		14.80	%		0.90	%		37.40	%		0.34	%
SMEs		172,547		16.51	%		5.79	%		31.50	%		1.83	%
Mortgages (individuals)		312,865		29.93	%		3.20	%		7.44	%		0.24	%
Consumer loans		119,921		11.47	%		8.69	%		54.57	%		4.74	%
Credit cards of individuals		31,193		2.98	%		5.46	%		63.74	%		3.48	%
Other asset		17,361		1.66	%		1.83	%		28.09	%		0.51	%
Memorandum item customers²		803,791		76.90	%		4.18	%		33.31	%		1.39	%

Total		1,045,180		100.00	%		3.29	%		33.44	%		1.10	%


Data at December 2010

1.		Excluding doubtful loans

2.		Excluding sovereign debt, banks and other financial entities and other assets.

Loss observed: measurements of credit cost

As well as using these advanced models, other usual measures are employed which provide prudent and effective management of credit risk on the basis of the loss observed.

Our cost of credit is measured by various means: change in net entries (final doubtful loans — initial doubtful loans + write-offs — recovered write-offs), net loan-loss provisions (net specific provisions — recovered write-offs) and net write-offs (write-offs —recovered write-offs).

231

The three approaches measure the same reality and, consequently, converge in the long term although they represent successive moments in credit cost measurement: flows of non-performing loans (changes in net entries), coverage of doubtful loans (net loan-loss provisions, NLLPs) and net write-offs, respectively. However, in the long term and within the same economic cycle, the three approaches show differences at certain times which are particularly significant at the start of a change of cycle. These differences are due to the various moments at which the losses are calculated, which are basically determined by accounting rules (for example, mortgages have a calendar of coverage and become write-offs more slowly than consumer loans). In addition, the analysis can be complicated by changes in the policy of coverage and entry into write-offs, composition of the portfolio, doubtful loans of entities acquired, changes in accounting rules, sale of portfolios, etc.

The following charts reflect the cost of our credit risk in our main areas of activity in 2010 and the comparison with prior years, measured in various ways:

The year-on-year change includes the exchange-rate impact which for Latin America was around -44.1% in net entries, 2.2% in net provisions and -17.2% in net write offs.

The general trend over the past few years has been to maintain the cost of our credit at low levels. In 2010, there was a small decline of one basis point in the cost of credit as a result of the still significant deterioration of the economic environment and the mix of retail portfolios which, although with a higher expected loss, have higher levels of direct and indirect profitability and a more predictable nature of risk. These portfolios performed well during the year, particularly in Latin America, which contained the amount of provisions made.

232

Credit risk cycle

Risk management consists of identifying, measuring, analyzing, controlling, negotiating and deciding the risks incurred by the Group’s operations. The process involves risk takers and senior management, as well as the risk areas.

The process emanates from senior management, via the board of directors and the risk committee; they set the risk policies and procedures, the limits and delegating of powers, and approve and supervise the framework of the risks function.

The risk cycle has three phases: pre-sale, sale and after sale:

• Pre-sale: this includes the planning and setting of objectives, determining the appetite for risk, approving new products, studying the risk and rating loans, and establishing limits.

• Sale: this covers the phase of decision-making both for operations under pre-classification as well as one-off transactions.

• After sale: monitoring, measurement, control and recovery management.

A. Planning and setting limits

Setting limits is a dynamic process which identifies our risk appetite by discussing business proposals and the opinion of risks.

The global plan of limits, the document drawn up on the basis of consensus which provides complete management of the balance sheet and of the inherent risks, establishes the risk appetite in the various factors.

The limits are based on two structures: customers/segments and products.

The most basic level in individualized management is the customer and when certain features are present — generally of relative importance — an individual limit (pre-classification) is set.

A pre-classification model based on a system for measuring and monitoring economic capital is used for large corporate groups. A more simplified version is used for those companies which meet certain requirements (high knowledge, rating, etc).

In the sphere of standardized risk, the planning and setting of limits is done through credit management programs (CMPs), a document reached by consensus between the business and risk areas and approved by the risk committee or committees delegated by it. The CMPs set out the expected results of business in terms of risk and return, as well as the limits to which activity is subject and management of the associated risks.

B. Risk study and process of credit rating

The study of risk is obviously a prior requirement for authorizing customer operations by the Group. It consists of analyzing the capacity of the customer to meet their contractual obligations with the Bank. This entails analyzing the customer’s credit quality, risk operations, solvency and return in accordance with the risk assumed.

The risk study is carried out every time there is a new customer or operation or with a pre-established regularity, depending on the segment. In addition, the rating is studied and reviewed every time there is an alert or something that affects the customer/transaction.

233

C. Decisions on transactions

The purpose of the decision-making process is to analyze and resolve operations, taking into consideration both the risk appetite as well as those elements of the operation that are relevant in the search for the balance between risk and return.

We have been using RORAC methodology (return on risk adjusted capital) since 1993 to analyze and set prices for operations and businesses.

D. Monitoring

As well as the tasks carried out by the internal auditing division, the directorate general of risks, through local and global teams, controls credit quality by monitoring the risks and has the resources and specific people to do it.

The monitoring is based on a continuous process of permanent observation, which enables incidents to be detected in advance in the evolution of risk, operations, customers, and their environment in order to take steps to mitigate them. The monitoring is conducted on the basis of customer segmentation.

We have a system called companies in special watch (FEVE) which identifies four levels on the basis of the degree of concern arising from the circumstances observed (extinguish, secure, reduce, monitor). The inclusion of a company in FEVE does not mean there have been defaults, but rather the advisability of adopting a specific policy toward that company and establishing the person and time frame for it. Clients in FEVE are reviewed at least every six months, and every quarter for the most serious cases. A company can end up in special watch as a result of monitoring, a review conducted by internal auditing, a decision of the person responsible for the company or the entry into functioning of the system established for automatic warnings.

Ratings are reviewed at least every year, but if weaknesses are detected, or on the basis of the rating, it is done more regularly.

As regards the risks of standardized clients, the main indicators are monitored in order to detect shifts in the performance of the loan portfolio with respect to the forecasts made in the credit management programs.

FEVE DECEMBER 2010
Million euros


									Total
	Extinguish		Secure		Reduce		Monitor		FEVE

Retail banking Spain		5,148		379		12,975		11,582		30,084
Banesto		8,499		460		2,720		11,116		22,795
Portugal		339		69		920		1,926		3,236
United Kingdom		236		14		933		2,318		3,502
Sovereign		2,640		231		742		1,992		5,605
Latin America		1,262		425		1,657		6,223		9,567

Total		18,124		1,577		19,930		35,157		74,789

Note: 2010 shows the application of the FEVE tool in Sovereign. The classification of risk in FEVE is independent in each institution and responds to the various criteria for classification of these risks and management of them on the basis of the category in which they are classified.

234

Credit exposure in Spain

a. General view of the portfolio

Our credit portfolio at the end of 2010 stood at €236 billion. Including guarantees and documentary credits, the total credit risk of our businesses in Spain amounted to €283 million, 35% of the Group’s total credit risk, which had an appropriate level of diversification, by product as well as customer segment.

The credit risk of commercial networks of the main businesses in Spain (Santander Branch Network, Banesto, Banif and Santander Consumer) accounted for 26% of the Group’s total, distributed as follows:

In accordance with Bank of Spain rules, we regard as doubtful those loans which have not been serviced for more than 90 days. The total debt of the customer will be considered doubtful when the unpaid part represents more than 25% of it or when prejudicial actions are taken. Those loans which, without being non-compliant, have reasonable doubts of being fully repaid are also considered as doubtful.

The non-performing loan (NPL) ratio in Spain was 4.24% concentrated in those sectors which were more affected by the economic downturn. This ratio is higher than that in 2009, but is growing more slowly than in prior years since the NPL ratios of a high percentage of credit portfolios in Spain were stable during 2010.

The NPL ratio in Spain is well below the aggregate of commercial banks as a whole, according to the Bank of Spain, underscoring our traditionally prudent risk management criteria.

Total provisions for covering the possible loss of these risks represent coverage of 58%.

In addition, and in line with the Bank of Spain’s rules, loans classified as substandard are those which, while being up-to-date on payments and give no reason for them to be classified as doubtful, show some weakness which could lead to non-payments and losses, as they involve the weakest customers from certain collectives or sectors affected by extraordinary circumstances of greater risk. This category has €10,808 million of classified risks.

235

b. Analysis of the mortgage portfolio of individual customers

In line with the Bank of Spain’s guidelines for greater transparency with respect to property, the table below sets out the loans granted to households to purchase homes by the main businesses in Spain. This portfolio, one of the main ones, stood at €61,936 million at the end of 2010 (26% of lending in Spain). Of this, €61,387 million, or 99%, had mortgage guarantees.

LOANS TO HOUSEHOLDS FOR THE ACQUISITION OF PROPERTY
Million euros


	Gross amount		Of which: doubtful

Loans to acquire property		61,936		1,388
Without mortgage guarantee		549		30
With mortgage guarantee		61,387		1,358

The NPL ratio of the portfolio with mortgage guarantee improved notably at the end of 2010, in a negative macroeconomic environment, to 2.2% from 2.5% a year earlier.

The portfolio of mortgages for property in Spain held its medium-low risk profile and had limited expectations of further deterioration:

• All mortgages pay principal from the very first day of the operation.

• The usual practice is to repay it ahead of time and so the average life of the operation is well below that of the contract.

• The Bank has recourse to all of the borrower’s assets, not just the property.

• Most mortgages have variable interest rates with spreads over Euribor.

• High quality of collateral: 94% of the portfolio is financing for the first residence.

• 85% of the portfolio has a loan to value ratio of less than 80%.

• The average affordability rate remained at close to 29%.

236

c. Financing provided for construction and real estate development

Lending to these sectors in Spain, in line with the Bank of Spain’s guidelines regarding classification by purpose, amounted to €27,334 million (3.7% of the Group’s total lending), 12% lower than in 2009 and 27% below 2008 using like-for-like criteria. This means a market share of around 10%, substantially lower than that of the Group’s combined businesses in Spain (15%).

The reduction in risk was largely due to a strict policy in admitting new loans with the consequent amortization of the credit transactions of the portfolio outstanding and proactive management of existing risks.

The non-performing loan ratio of this portfolio at the end of 2010 was 17% underscoring the deterioration in this sector. This is higher than the rest of the segments of the portfolio in Spain and shows the Group’s conservative policy in classifying bad loans. More than 75% of the €9,568 million classified as doubtful and sub-standard loans was up-to-date with payments. Coverage with specific provisions was 28% in accordance with applicable regulations.

FINANCING FOR CONSTRUCTION AND REAL ESTATE
DEVELOPMENT: DOUBTFUL AND SUBSTANDARD LOANS
Million euros


	Risk		Coverage
	Amount		Amount		%

Doubtful		4,636		1,321		29
Substandard		4,932		569		12
Generic coverage				768

Total		9,568		2,658		28

A large part of the exposure to the construction and real estate activity sectors are loans with mortgage guarantee (€21,210 million, 78% of the portfolio). Their distribution is shown below.

A particularly important product in the real estate promotion portfolio is mortgage loans to real estate developers. At the end of 2010, this amounted to €9,854 million and represented around 1.3% of our total credit portfolio. The exposure to this product was 9.3% less than in 2009 and in 2010 it dropped a further 20%.

At the end of 2010, this portfolio of loans had a larger number of customers, with a low degree of concentration and an appropriate level of guarantees and coverage.

238

The distribution was as follows:

• Developments completed and with the final certificate of work: 72.5% of outstanding risk.

• Developments more than 80% completed: 12.8% of outstanding risk.

• Developments between 50% and 80% completed: 3.1% of outstanding risk.

• Developments less than 50% completed: 11.5%.

Furthermore, close to 85% of this financing of real estate developments is totally completed or close to it, having overcome the risk of construction.

Policies and strategies established for management of these risks

The policies for managing this portfolio, periodically reviewed and approved by our senior management, are focused on reducing and stabilizing the current exposure without overlooking new businesses identified as viable.

In order to effectively manage credit exposure, we have specialized teams that not only form part of the risk areas, but also supplement its management and cover the whole life cycle of these operations: including their commercial management, juridical treatment, the eventuality of recovery management, etc.

Anticipative management of these risks has enabled us to significantly reduce our exposure (by 27% between 2008 and 2010), with financing of second homes accounting for a very small proportion of the portfolio. Mortgages for land that is not developed accounts for only 4.2% of the exposure to land; the rest is already classified as developed land or as the land which can be developed.

In the case of property financing projects, where the work is already completed, the significant reduction in the exposure (-20% in 2010) is backed by various actions. In addition to the already existing specialized channels, applying criteria of reducing sale prices and adapting the financing conditions to buyers’ needs, we were able to ensure subrogations of the already existing loans. These subrogations enable risk to be diversified in a business segment that has a much lower non-performing loan ratio.

The admission processes are managed by specialized teams who work in direct coordination with the commercial teams. The policies and criteria are clearly defined:

• Promoters with a comfortable solvency profile and with a proven track record in the market.

• Strict criteria of the parameters inherent in operations: exclusive financing for the cost of construction, high percentages of accredited sales, first residence financing, etc.

• Support for officially protected homes with percentages of accredited sales.

• Financing of restricted land, tied to the re-establishment of the adequate level of coverage of already existing financing or increase in guarantees.

In addition to permanent control by our risk monitoring teams, there is a technical unit specialized in monitoring and controlling this portfolio with regard to the progress of the work, compliance with planning and control of sales, as well as validation and control of the disbursement of certifications. All the mortgage loan distributions, disposal of amounts for all concepts and changes to the grace period are authorized on a centralized basis.

In the case of problematic projects in the construction phase the Group guarantees completion of the work in order to have finished buildings for sale in the market. In order to achieve this, each project is individually analyzed to develop the most effective series of measures such as structuring of payment to suppliers that guarantee completion of the work, establishing specific calendars, etc).

239

Analysis of restructuring the exposure is carried out with the joint participation of the risk and recovery areas, anticipating non-payment, with criteria centered on providing projects with a payments structure that causes the work to be completed. These transactions are authorized on a centralized basis by expert teams who ensure that the strictest criteria are applied in accordance with our prudent risk management. Possible losses are recognized when identified classifying the positions without waiting for non-payment according to the regulation established by the Bank of Spain and accounting for the corresponding provision that covers the expected loss of these positions.

Real estate assets on the balance sheet are managed by companies specialized in selling property (Altamira Santander Real Estate and Promodomus). Sales are conducted at reduced prices in line with the market’s situation.

d. Real estate acquired and foreclosed

One of the mechanisms used in Spain to manage risk efficiently is the purchase and foreclosure of real estate assets. The net balance of these assets at the end of 2010 was €5,195 million (gross amount of €7,509 million), with coverage of 31% that was above the minimum required by the Bank of Spain and in line with the Group’s usual criteria of prudence.

We view acquisitions as an efficient tool for resolving unpaid loans as opposed to initiating legal proceedings for the following reasons:

• The immediate availability of these assets as against the greater duration of legal processes.

• Cost savings.

• It facilitates the viability of companies as liquidity is injected into their activity.

• Reduction in the possible loss of value in the loans of these clients.

• Reduction in the exposure and of the expected loss.

240

The table below sets out the situation at the end of 2010 regarding acquired and foreclosed properties by the main businesses in Spain:

SPAIN: PROPERTIES ACQUIRED AND FORECLOSED
Million euros


	Gross amount		Allowance			Net amount
Finished buildings		3,098		25	%		2,339
Buildings under construction		564		25	%		425
Developed land		2,307		35	%		1,506
Land that can be developed		1,308		40	%		787
Other land		232		40	%		138

Total		7,509		31	%		5,195

The stock of this portfolio was 44% lower in 2010 than in 2009, due to the combination of lower gross entries of acquired properties (-20%) and a significant increase in sales (+31%). The property assets are managed by companies specialized in sales and aided by the structure of the commercial network which enables the assets to be placed in the market with acceptable levels of losses.

SPAIN: PROPERTIES ACQUIRED AND FORECLOSED
Billion euros


	2010		2009
Gross entries		2.1		2.5	-20	%
Sales		1.1	0.8		31	%
Difference		1.0		1.7	-44	%

Of the total amount, 41% are completed buildings available for sale and of the total land assets 95% is developed or can be developed with an appropriate coverage level of 37%.

e. Restructuring and Payment Agreements

Restructuring

Restructuring is one of the Group’s management tools used to adjust the maturity structures of principal and interest payments to correspond to the new payment capacity of customers, who may have difficulties meeting their payment obligations.

The Risk Department and the Global Area of Recoveries in coordination with the Business Areas carry out centralized actions for identifying those customers who could be restructured. Payment capacity is a central factor to be analyzed, given that the purpose of the restructuring is that the customer should once again be able to pay his/her debts. Factors considered are frequent late payments, non-payment and reduced income levels which would indicate that the customer might require a change in their loan terms due to changes in their economic situation. Restructuring is focused on customers with low capacity to meet current payment obligations and willingness to pay. In these cases, the deterioration in their payment capacity can be mitigated through modifications in the initial loan terms by adjusting the periodic payment requirements to match their current payment capacity. Once again, the Risk Department in coordination with the Global Area of Recoveries will monitor and approve the loan terms’ modification.

Among restructured transactions are included renegotiations (or renewed transactions), which are offered to clients in normal (non-doubtful) situations who, due to a change in their economic situation, suffer an eventual deterioration in their payment capacity and whose payment schedule is modified. This contingency can be solved by adapting the existing customer’s debt terms to the new capacity, facilitating compliance with the payment obligation. Once the conditions have been modified, the client will likely meet the payment of his installments without any problem and in a prompt and timely manner. At December 31, 2010, less than 10% of the outstanding risk of all clients whose payment schedule had been renegotiated was classified as doubtful.

Refinancing, in a strict sense, refers to transactions classified as doubtful, due to non payment or other situations.

At Grupo Santander, these transactions are restricted, on the basis of rigorous and selective criteria, to:

•

Viable transactions;

•

Transactions where the customer intends to pay;

241

•

Transactions which improve the Bank’s position in terms of expected loss; and

•

Transactions where the restructuring does not discourage additional effort by the customer.

We have defined the Corporate Policy of Restructurings in order to ensure homogeneous and rigorous application of these criteria within the various units. The general principles are as follows:

•

The customer’s risk is assessed overall, irrespective of the situation of each individual contract, and all the risks are provided with the highest possible level of guarantees.

•

As a general rule, the risk with the customer is not increased.

•

All the alternatives to the restructuring and its effects are evaluated, ensuring that the results are better than what might have been obtained if nothing was done.

•

Particular attention is paid to collateral and the possible future evolution of its value.

•

The restructured transactions are placed under special watch.

Our Corporate Policy permits various types of loan restructuring options based on the analysis of the deterioration in payment capacity and the characteristics of pre-existing risk, such as:

•

when there is a slight and prolonged deterioration in payment capacity:

	o		extending the period: customers installment is reduced by lengthening the period of the transaction

	o		final bullet (balloon payment): reduces installment by postponing part of the principal, which is paid together with the last payment. This alternative will be considered when the transaction is collateralized (e.g.: mortgages).

•

when there is a severe but transitory deterioration in payment capacity:

adjustment to short term: a grace period shall be applied on the principal during a reduced period, until the customer recovers its original payment capacity.

These options can be implemented individually or in combination depending on the customer risk characteristics.

Refinancing of transactions classified as doubtful does not refer to the release of provisions or the classification of these loans as normal, unless:

•

They meet the criteria in the regulations based on Bank of Spain circulars (payment of ordinary interest pending and new effective guarantees or reasonable certainty of payment capacity).

•

They fulfill the conditions which under prudent criteria are set out in the Group’s Corporate Policy which establish the following calendar of payments that a borrower must make on the refinanced loans before we return the loan to accrual status:

Cure Period

< 2 years

2-5 years

> 5 years

With collateral

3 installments

Without collateral

3 installments

9 installments

12 installments

242

According to our Corporate Policy, the restructuring should not have an influence on the allocation of provisions to a certain transaction. If the contract proceeds from a doubtful loan situation to a non-doubtful position, the provision, which might have been allocated, shall be maintained.

As at December 31, 2010, the refinanced debt of the whole Group amounted to €5,956 million, less than 1% of our portfolio. Of them, €3,688 million (61.9%) were standardized clients and €2,268 million (38.1%) non-standardized clients.

At the end of 2010, a high percentage of these credits (approximately 60%) are meeting their payment obligations and are not classified as doubtful due to customer arrears. Approximately 15% are still classified as doubtful, although the client is meeting its payment obligations, as the borrower has not yet fulfilled the “cure period” explained above.

The distribution of our refinanced debt by the most representative geographic segments where we operate is shown in the table below:

(Millions of euros)


	*Spain ()**		Portugal		UK		Brazil		Latin America		Sovereign		Total
Individuals		677		653		511		774		356		295		3,266
SME		286		71		17		479		60		—		913
Entities		1,401		—		229		—		91		56		1,777

TOTAL		2,364		724		757		1,253		507		351		5,956


(*)		Including Santander Retail Banking, Banesto and Santander Consumer Finance

The breakdown among Latin American countries (excluding Brazil) is shown in the table below:

(Millions of euros)


	Argentina		Colombia		Chile		Mexico		Puerto Rico		Total
Individuals		66		3		236		3		48		356
SME		4		1		33		4		18		60
Entities		2		2		—		76		11		91

TOTAL		72		6		269		83		77		507

The distribution for the segment of individuals and for the most relevant units according to the type of product is as follows:

(Millions of euros)

Santander
Retail

Banking

Portugal

Sovereign

Chile

Individuals

479

653

511

295

236

Mortgages

373

513

496

295

Consumer

105

—

219

Others

—

Credit cards

—

108

—

Payment Agreements

The above criteria are primarily aimed at situations of low impact on the customer’s payment capacity, which are estimated to be of medium/long duration. The most severe cases (the forgiveness of any part of principal or interest and/or the existence of delays in payment in excess of 180 days) are not eligible for loan restructuring and other solutions (“payment agreements”) to recover the appropriate amount must be sought. Our Risk Department evaluates on a case-by-case basis such situations to find the best solution.

243

Loans under “payment agreements” are maintained as non-accrual until they are totally covered. Allowances for loan losses provisions shall be maintained or increased if the term of the payment agreement requires it.

In addition, these portfolios are closely monitored by our risk management teams, the various supervisory authorities to whom the Group is subject and our internal audit division.

Analysis of the UK’s mortgage portfolio

As well as the risk portfolio in Spain, of note in standardized risks and because of its importance in Grupo Santander’s total lending is the UK mortgage portfolio.

This portfolio consists of first time buyer mortgages for properties in the UK, as there are no transactions that entail second or successive charges on mortgaged real estate. Most of the credit exposure is concentrated in greater London, where housing prices have been more stable even during the period of economic downturn.

Authorized valuers assess all properties before each transaction is approved, in accordance with the principles established by the Group for our risk management and in line with the methodology defined by the Royal institution of chartered Surveyors.

The portfolio performed favorably during 2010. Its nonperforming loan ratio at the end of the year was 1.41% compared to 1.52% in 2009 — the result of monitoring and constant control as well as strict lending policies, which include, among other measures, maximum loan to value (LTV) criteria in relation to properties in guarantee. On the basis of these policies, no mortgages have been granted since 2009 with LTVs of more than 100% and only 0.1% of those granted during this period have an LTV of more than 90%. The average LTV is 51%.

There is no risk appetite for subprime mortgages. The credit risk policies in force explicitly prohibit this type of loan and establish demanding requirements for credit quality, both regarding the transactions and customers. Buy-to-let loans with a higher risk profile account for only 1% of the total portfolio.

244

The following charts show the structure in LTV terms for the whole portfolio of residential mortgages and the distribution in terms of the income multiple:

UNITED KINGDOM: PORTFOLIO OF RESIDENTIAL MORTGAGES
Million euros


	December 2010
	Portfolio		% of loans

Residential mortgages		192,590		78.6
First home buyer		34,666		14.2
Mover		75,110		30.7
Remortgage		82,814		33.8

First Time Buyer: customers who buy a home for the first time.

Mover: customers who change home with or without changing the bank that granted the mortgage.

Remortgage: customers who transfer their mortgage from another bank.

An additional indicator of the portfolio’s good performance is the low volume of properties that have been repossessed, which at the end of 2010 amounted to €143 million (a mere 0.07% of the total mortgage exposure). The efficient management of these cases and the existence of a dynamic market for this type of property, which enables sales to take place in a short period, contribute to the good results obtained.

E. Control function

The management process is also aided during the various phases of the risk cycle by the control function. This provides a global vision of our portfolio of loans with the sufficient level of detail, enabling the current risk position and its evolution to be assessed.

The objective of the control model is to assess the risk of solvency in order to detect areas requiring attention and propose measures that tend to correct eventual deterioration. It is therefore vital that the control activity includes an analysis component that facilitates early detection of problems and the subsequent recommendations of action plans.

245

The evolution of risk with regard to budgets, limits and standards of reference is constantly and systematically controlled and the impact assessed in the face of future situations, both exogenous and arising from strategic decisions, in order to establish measures that put the profile and volume of the portfolio of risks within the parameters set by the Group.

The control function is conducted by assessing risks from various perspectives and establishing as the main elements control by countries, business areas, management models, products and processes. This facilitates the detection of focuses of specific attention for decision-making.

One of the focuses in 2010 was to strengthen the vision of various units from a local control standpoint, deepening their understanding of business, legislation, strategy, local regulations and evolution of their portfolios. The homogeneity of the control model was consolidated setting standards for the flow of information, analysis by portfolios and monitoring of the main management metrics, which enable the risk of each business segment to be constantly assessed.

In 2006, under the corporate framework established in the Group for complying with the Sarbanes-Oxley Act, a tool was created in our intranet to document and certify all sub processes, operational risks and controls that mitigate them. The risk division, as part of the Group, evaluates every year the efficiency of internal control of its activities.

Analysis of scenarios

As part of our continuous monitoring and control, we conduct simulations of our portfolio using adverse scenarios and stress tests in order to assess our solvency in the face of certain situations in the future. These simulations cover all our most relevant portfolios and are done systematically using a corporate methodology which:

• Determines the sensitivity of risk factors (PD, LGD) to certain macroeconomic variables.

• Defines reference scenarios (at the global level as well as for each of our units).

• Identifies rupture scenarios (levels as of which the sensitivity of risk factors to macroeconomic variables is more accentuated) and the distance of these scenarios from the current situation and the reference scenarios.

• Estimates the expected loss of each scenario and the evolution of the risk profile of each portfolio to movements in certain macroeconomic variables.

The simulation models use the data of a complete economic cycle to measure the performance of risk factors in the face of changes in macroeconomic variables.

In the wholesale sphere, as they are low default portfolios, there is insufficient data on defaults to conduct this measurement and expert criteria are used.

The scenarios take into account the vision of each unit as well as the global vision. The macroeconomic variables include:

• The unemployment rate

• Property prices

• GDP

• Interest rates

• Inflation

The analysis of scenarios enables senior management to better understand the foreseeable evolution of the portfolio in the face of market conditions and changing situations, and it is a key tool for assessing the sufficiency of the provisions established for stress scenarios.

246

The analysis of the baseline and acid scenarios for the whole Group and for each unit, with a time frame of five years, shows the strength of the balance sheet in the face of different market and macroeconomic situations.

EU Stress test exercises

In order to increase the confidence in European banks and raise the degree of transparency and standardization in the financial information supplied to the market, the committee of European Banking Supervisors (CEBS) published the results of the stress tests conducted during the first half of 2009 on 91 banking groups accounting for at least 50% of the domestic banking system of 20 European countries.

Carried out in coordination with the European Central Bank and the European Commission, as designers of the scenarios, and countries’ banking authorities, as those responsible for conducting the analysis, the stress tests of CEBS analyzed the level of capital the banks would reach in 2011 and their evolution compared to the end of 2009 (the starting point) in two types of scenarios: benchmark and adverse circumstances, including the impact of sovereign debt shocks.

STRESS TEST RESULTS
Million euros


	Benchmark			Adverse
	scenario			scenario

Net operating income 2010-2011		49,196			43,599
Provisions at December 2009		20,779			20,779
Total		69,975			64,378
Gross deterioration 2010-2011		(40,856	)		(50,288	)
Taxes		(6,701	)		(3,114	)
Net surplus stress test		22,419			10,976
Dividends, generic provisions not used and others		(14,555	)		(8,730	)
Change in Tier 1 capital		7,864			2,246
Risk assets		579,621			585,346
Tier 1		11,0	%		10,0	%

Source: Bank of Spain

In our case, the stress tests showed the strength and validity of our business model. Even in the most adverse scenario, we are projected to be able to generate profits, distribute dividends and continue to generate capital, keeping our Tier 1 capital ratio intact at 10.0% (surplus of €23,131 million over the 6% benchmark ratio).

On the basis of the like-for-like information supplied by CEBS, we are the European bank that would generate the highest profits before tax, and our return on risk assets and on Tier 1 capital would be the best of the 25 largest banks analyzed.

F. Recovery activity

Recovery management in 2010 continued to be a strategic element in the Bank’s risk management.

In order to carry out this function, which is essentially a business activity, we have a corporate model of management which sets the guidelines and general rules to be applied in the countries where we operate with the necessary adjustments on the basis of local business models and the economic situation of the respective environments.

This corporate model basically establishes procedures and management circuits on the basis of customers’ features, making a distinction between massive level management with the use of multiple channels and a more personalized management with specific managers assigned.

247

As a result of this segmentation in management, various mechanisms were established to ensure recovery management of customers in non-payment situations from the earliest phases to the writing-off of the debt. The recovery activity begins the very first day of non-payment of the loan and ends when the loan has been paid or reclassified. Preventative management is conducted in some segments before a non-payment situation arises.

Recovery activity, understood as an integral business, is supported by constant reviewing of the management processes and methodology. It is backed by our capacities with the participation and cooperation of other areas (commercial, resources, technology, human resources) as well as the development of technology solutions to improve effectiveness and efficiency.

We also greatly value the development of talent. We have a practical and hands-on training plan which deepens knowledge and facilitates the exchange of ideas and best practices, while always integrating recovery activity into our ordinary and commercial activity.

During 2010, all of these actions to ensure an efficient recovery process enabled us to improve the ratios for the recovery of nonperforming loans and prevent the approval of new ones. There was a notable reduction in net entries — a trend observed in most of our business units.

The results for the recovery of written-off assets were also good in 2010, as we focused both on working with customers in situations of non-payment and on actively managing portfolios. All of this made a greater degree of recovery in this line of activity possible.

Other standpoints of credit risk

There are spheres and/or specific points in credit risk that deserve specialized attention and which complement global management.

A. Risk of concentration

Control of risk concentration is a vital part of management. We continuously track the degree of concentration of our credit risk portfolios using various criteria: geographic areas and countries, economic sectors, products and groups of clients.

The board’s risk committee establishes the policies and reviews the appropriate exposure limits for appropriate management of the degree of concentration of credit risk portfolios.

We are subject to the Bank of Spain regulation on large risks. In accordance with circular 3/2008, no individual or economic group exposure, including all types of credit risks and equities, can exceed 25% of the Group’s shareholders’ equity. The total of large risks (those that exceed 10% of eligible equity) cannot be more than eight times higher than equity (excluded from this are exposures to OECD governments and central banks).

At December 31, 2010, there was only one economic group that exceeded 10% of shareholders’ funds: a Spanish multinational with an internal rating equivalent to A-. It represented 11.09% of eligible equity. After applying risk mitigation techniques and the rules for large risks, the percentage was decreased to 9.28% of eligible equity.

At December 31, 2010, the 20 largest economic and financial groups, excluding AAA governments and sovereign securities denominated in local currency, represented 6.0% of the outstanding credit risk of our clients (lending plus guarantees).

248

The distribution of the portfolio of companies by sectors is adequately diversified. The chart below shows the distribution of the credit exposure in our main units.

Our risk division works closely with the financial division to actively manage credit portfolios. Its activities include reducing the concentration of exposures through various techniques such as using credit derivatives and securitization to optimize the risk-return relation of the whole portfolio.

B. Credit risk by activities in financial markets

This section covers credit risk generated in treasury activities with clients, mainly credit institutions. This is developed through financing products in the money market with different financial institutions, as well as derivatives to provide service to our clients.

Risk is controlled through an integrated system and in real time which enables us to know at any moment the exposure limit available with any counterparty, in any product and maturity and in all of our units.

Risk is measured by its prevailing market as well as potential value (value of risk positions taking into account the future variation of underlying market factors in contracts).

The Equivalent credit Risk (ECR) is the Net Replacement value plus the Maximum Potential value of these contracts in the future. The capital at risk or unexpected loss is also calculated (i.e. the loss which, once the expected loss is subtracted, constitutes the economic capital, net of guarantees and recovery).

The total exposure to credit risk from activities in the financial markets was 63.2% with credit institutions. By product type, the exposure to derivatives was 52.3%, mainly products without options, and 47.7% to liquidity products and traditional financing.

Derivative transactions are concentrated in high credit quality counterparties; 62.8% of risk with counterparties has a rating equal to or more than A-. The total exposure in 2010 in terms of equivalent credit risk amounted to €46,893 million.

249

OTC DERIVATIVES DISTRIBUTION BY NET REPLACEMENT VALUE AND EQUIVALENT CREDIT RISK
Million euros at December 31, 2010


	Total ECR								Total net replacement value
	Trading		Hedging			Total			Trading			Hedging			Total

CDS protection acquired		663		134			798			178			210			388
CDS protection sold		55		2			57			(325	)		(33	)		(358	)
TRS total return swap		0		0			0			0			0			0
CDS options		0		0			0			0			0			0

Total credit derivatives		718		137			855			(147	)		177			30

Equity forwards		0		142			143			0			(286	)		(286	)
Equity options		522		1,013			1,535			(203	)		(362	)		(564	)
Equity swaps		0		513			513			0			165			165
Equity spot		0		0			0			0			0			0

Total equity derivatives		522		1,669			2,191			(203	)		(483	)		(685	)

Fixed-income forwards		56		38			94			30			1			31
Fixed-income options		0		1			1			0			0			0
Fixed-income spot		0		0			0			0			0			0

Total fixed income derivatives		56		39			95			30			1			31

Asset swaps		1,686		2,600			4,286			(1,688	)		389			(1,299	)
Exchange-rate options		304		140			443			(74	)		(303	)		(377	)
Exchange-rate swaps		4,353		12,045			16,398			603			1,805			2,408
Other exchange-rate derivatives		5		6			11			1			1			2

Total exchange rates		6,348		14,791			21,139			(1,159	)		1,893			734

Asset swaps		0		293			293			0			(52	)		(52	)
Call money swaps		371		20			391			(86	)		(8	)		(94	)
IRS		14,935		10,439			25,375			1,008			3,170			4,178
Forward interest rates		1		4			4			0			(11	)		(11	)
Other interest-rate derivatives		916		1,423			2,339			643			(1,914	)		(1,271	)
Interest rate structures		338		493			831			222			(256	)		(34	)

Total interest-rate derivatives		16,561		12,673			29,234			1,787			929			2,717

Commodities		239		13			252			164			11			175

Total commodity derivatives		239		13			252			164			11			175

Total otc derivatives		24,444		29,322			53,766			473			2,529			3,002

Collateral		0		(6,873	)		(6,873	)

Total		24,444		22,449			46,893

250

NOTIONAL OTC DERIVATIVE PRODUCTS BY MATURITY
Million euros


	1 year						1-5 years						5-10 years						over 10 years						Total REC
	T		H		Total		T		H		Total		T		H		Total		T		H		Total		T		H		Total

CDS protection acquired		4		5		9		66		15		81		16		56		72		577		58		636		663		134		798
CDS protection sold		5		2		7		40		0		40		10		0		10		0		0		0		55		2		57
TRS total return swap		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
CDS options		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0

Total credit derivatives		9		7		16		105		15		120		26		56		82		578		59		636		718		137		855

Equity forwards		0		142		143		0		0		0		0		0		0		0		0		0		0		142		143
Equity options		168		564		732		346		382		728		8		62		70		0		5		5		522		1,013		1,535
Equity swaps		0		163		163		0		301		301		0		3		3		0		47		47		0		513		513
Equity spot		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0

Total equity derivatives	168			869		1,038		346		683		1,029		8		65		72		0		52		52		522		1,669		2,191

Fixed-income forwards		56		38		94		0		0		0		0		0		0		0		0		0		56		38		94
Fixed-income options		0		0		0		0		1		1		0		0		0		0		0		0		0		1		1
Fixed-income spot		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0

Total fixed income derivatives		56		38		94		0		1		1		0		0		0		0		0		0		56		39		95

Asset swaps		1,121		2,234		3,356		491		284		775		26		79		105		48		2		50		1,686		2,600		4,286
Exchange-rate options		222		130		352		81		10		91		1		0		1		0		0		0		304		140		443
Exchange-rate swaps		1,539		2,142		3,681		1,649		5,649		7,297		1,163		1,925		3,088		2		2,329		2,331		4,353		12,045		16,398
Other exchange-rate derivatives		5		6		11		0		0		1		0		0		0		0		0		0		5		6		11

Total exchange rates		2,887		4,512		7,399		2,221		5,943		8,164		1,190		2,004		3,194		51		2,331		2,382		6,348		14,791		21,139

Asset swaps		0		1		1		0		27		27		0		48		48		0		217		217		0		293		293
Call money swaps		138		18		157		223		2		225		5		0		5		5		0		5		371		20		391
IRS		374		729		1,104		3,135		3,418		6,552		3,986		2,714		6,699		7,440		3,579		11,019		14,935		10,439		25,375
Forward interest rates		1		4		4		0		0		0		0		0		0		0		0		0		1		4		4
Other interest-rate derivatives		2		197		199		41		451		492		107		384		491		766		391		1,157		916		1,423		2,339
Interest rate structures		33		93		126		213		173		386		48		51		99		44		176		220		338		493		831

Total interest-rate derivatives		549		1,042		1,591		3,612		4,071		7,683		4,145		3,197		7,342		8,256		4,363		12,619		16,561		12,673		29,234

Commodities		108		0		108		119		13		132		12		0		12		0		0		0		239		13		252

Total commodity derivatives		108		0		108		119		13		132		12		0		12		0		0		0		239		13		252

Total otc derivatives		3,777		6,469		10,246		6,403		10,726		17,129		5,380		5,322		10,703		8,884		6,805		15,689		24,444		29,322		53,766

Collateral																										0		-6,873		-6,873

Total																										24,444		22,449		46,893


H = Hedging

T = Trading

DISTRIBUTION OF RISK IN OTC DERIVATIVES
BY TYPE OF COUNTERPARTY


Rating	%
AAA		11.6
AA		9.7
A		41.5
BBB		21.3
BB		13.3
B		1.6
Rest		0.9

251

The risk of these activities is controlled via a broad series of limits such as VaR, nominal by rating, sensitivity to the spread by rating and name, sensitivity to the rate of recovery and to correlation. Jump-to-default limits are also set by individual name, geographic area, sector and liquidity.

At December 31, 2010, for our trading activity, the sensitivity of lending to increases in spreads of one basis point was minus €1.5 million, and the average VaR during the year was €17.2 million. The latter was higher than in 2009 because of the greater volatility of credit spreads in the market.

In notional terms, the position in CDS incorporates €89.127 million of acquired protection and €79.764 million of sold protection.

C. Country risk

Country risk is a credit risk component in all cross-border credit transactions for circumstances different to the usual commercial risk. its main elements are sovereign risk, the risk of transfer and other risks which could affect international financial activity (wars, natural disasters, balance of payments crisis, etc).

The exposure susceptible to country-risk provisions at the end of 2010 was €435 million, of which €37 million corresponded to intragroup transactions. At the end of 2009, the total country risk in need of provisions was €444 million. Total provisions in 2010 stood at €69 million compared with €65 million in 2009.

Country risk management principles continued to follow very prudent criteria. Risk is assumed very selectively in transactions that are clearly profitable for the Group and which enhance the global customer relation.

D. Sovereign risk

As a general criterion, sovereign risk is that contracted in transactions with a central bank (including the regulatory cash reserve requirement), the issuer risk of the Treasury or the Republic (portfolio of state debt) and that arising from transactions with public institutions with the following features: their funds only come from institutions directly integrated into the state sector; and their activities are of a non-commercial nature.

At December 31, 2010, Europe accounted for 56.1% of sovereign risk, Latin America 37.7%, the US 5.1% and others 1%. Of note in Europe were the UK (27.2%) and Spain (21.2%) and in Latin America Brazil (27.1%) and Mexico (6.0%). As for those countries on the periphery of Europe, the percentages of total risk are low: Portugal (2.4%), Italy (0.3%), Ireland (0.2%) and Greece (0.1%).

Latin America’s exposure to sovereign risk mainly comes from the obligations to which subsidiary banks are subject for constituting certain deposits in the corresponding central banks as well as from fixed-income portfolios maintained as part of the structural interest rate risk management strategy. These exposures are in local currency and are financed by locally captured customer deposits, also denominated in local currency. The exposures to sovereign risk of Latin American issuers denominated in currencies other than the official one of the country of issue amounted to €1,812 million (2.7% of total sovereign risk with Latin American issuers).

E. Environmental risk

Analysis of the environmental risk of credit transactions is one of the main aspects of the strategic plan of corporate social responsibility. It revolves around the following two large points:

• Equator principles: this is an initiative of the World Bank’s International Financial Corporation. It is an international standard for analyzing the social and environmental impact of project finance transactions. The assumption of these principles represents a commitment to evaluating, on the basis of sequential methodology, the social and environmental risks of the projects financed.

– For transactions with an amount equal to or more than US$10 million, an initial questionnaire of a generic nature is filled out to establish the project’s risk in the socioenvironmental sphere (according to categories A, B and C, of greater to lower risk, respectively) and the transaction’s degree of compliance with the Equator Principles.

253

Part 5. Operational risk

Definition and objectives

We define operational risk (OR) as the risk of losses from defects or failures in its internal processes, employees or systems, or those arising from unforeseen circumstances. They are, in general, purely operational events, which makes them different from market or credit risks, although they also include external risks, such as natural disasters.

The objective in control and management of operational risk is to identify, measure/valuate, control/mitigate and monitor this risk.

Our priority is to identify and eliminate risk focuses, regardless of whether they produce losses or not. Measurement also helps to establish priorities in management of operational risk.

We opted, from the beginning, to use the standard method for calculating regulatory capital by operational risk, envisaged in the BIS II rules. We are weighing up the best moment to adopt the focus of advanced models (AMs), bearing in mind that a) the short-term priority in management of operational risk centers on its mitigation; and b) most of the regulatory requirements established for being able to adopt the AMs must be incorporated into the standard model (already achieved in the case of our operational risk management model).

Management model

The organizational model for controlling and managing risks is the result of adapting to the new BIS II environment, which establishes three levels of control:

• First level: control functions conducted by our units.

• Second level: functions carried out by the corporate areas.

• Third level: integral control functions by the risk division integral control area and internal validation of risk.

The technology and operations division is responsible for management and control of operational risk. Within this division, the corporate area of technological and operational risk, established in 2008, defines policies as well as managing and controlling these risks. The implementation, integration and local adjustment of the policies and guidelines established by this area is the responsibility of local executives in each unit.

This structure for operational risk management is based on the knowledge and experience of executives and professionals of our various units. Particular importance is attached to the role of local executives.

255

Management is based on the following elements:

The different phases of the technological and operational risk management model entail:

• Identifying the operational risk inherent in all activities, products, processes and banking systems.

• Measuring and assessing the operational risk objectively, continuously and in line with the regulatory standards (Basel II, Bank of Spain) and the banking industry, establishing risk tolerance levels.

• Continuously monitoring the exposure of operational risk in order to detect the levels of unassumed risk, implement control procedures, improve internal knowledge and mitigate losses.

• Establishing mitigation measures that eliminate or minimize operational risk.

• Producing regular reports on the exposure to operational risk and the level of control for senior management and the Group’s areas/units, as well as inform the market and regulatory bodies.

• Defining and implementing systems that enable operational risk exposures to be watched over and controlled and integrated into our daily management, taking advantage of existing technology and seeking the maximum computerization of applications.

• Defining and documenting operational risk management policies, and introduce methodologies for managing this risk in accordance with regulations and best practices.

Our operational risk management model contributes the following advantages:

• Integral and effective management of operational risk (identification, measurement/assessment, control/mitigation and information).

• Better knowledge of existing and potential operational risks and assigning responsibility for them to the business and support lines.

• Operational risk information helps to improve the processes and controls, reduce losses and the volatility of revenues.

256

Implementing the model: global initiatives and results

The main functions, activities and global initiatives are to:

• Define and implement the framework for corporate management of technological and operational risk management.

• Designate coordinators and create operational risk departments.

• Training and interchange of experiences: continuation of best practices within the Group.

• Foster mitigation plans: ensure implementation of corrective measures as well as ongoing projects.

• Ensure effective management of operational and technological risk.

• Supply adequate information on this type of risk.

The corporate function strengthens management of technological risk, including the following aspects, among others:

• The security of the information systems.

• The contingency and business continuity plans.

• Management of risk associated with the use of technologies (development and maintenance of applications, design, implementation and maintenance of technology platforms, output of computer processes, etc).

Almost all our units have been incorporated to the model with a high degree of uniformity. However, due to the different pace of implementation, phases, schedules and the historical depth of the respective data bases, the degree of progress varies from country to country.

On a general basis:

• Data bases of operational incidents that are classified are received every month. The capturing of events related to operational risk are not truncated (i.e. without exclusions for reasons of amount and with both the accounting impact —including positive effects— as well as the non-accounting impact).

• Self-assessment questionnaires filled out by almost all our units are received and analyzed.

• A corporate system of operational risk indicators is in place. It is in continuous evolution and coordination with the internal control area.

• The main and most frequent events are identified and analyzed, and mitigation measures taken which, in significant cases, are disseminated to our other units as a best practices guide.

• Processes are conducted to reconcile data bases with accounting data.

257

By consolidating the total information received, our operational risk profile is reflected in the following chart:

We exercise and control technological and operational risk via our governance bodies. The various areas of local resources hold meetings of monitoring committees with the corporate areas every month. In 2010, our management committee included treatment of relevant aspects in the management and mitigation of operational risk on a regular basis.

This management also led to a reduction in the gross loss, which was around 3% on a like-for-like basis.

In general, all our units continued to improve aspects related to management of operational risk as can be confirmed during the annual review carried out by internal auditing.

We, via approval in the risk committee, formalize every year the operational risk profiles and limits. A risk appetite is also established which must be in low and medium-low profiles on the basis of the measurement of various ratios. Limits are set by country and for the Group on the basis of the gross loss/gross income ratio.

In addition, our units conduct self-evaluation risk exercises in terms of frequency and severity. This enables limits to be set for the following year on the basis of the distribution and modeling of expected loss/unexpected.

Analysis and monitoring of controls in market transactions

The complexity of financial instruments makes it necessary for us to continuously strengthen operating control of our activity, enhancing the very demanding and conservative risk and operating principles that we have been regularly applying.

Over and above regular tracking of all aspects regarding operating control, all of our units paid more attention to the following aspects, so that the review is validated every month by each unit’s management committee. Of note are the following:

• Review of the valuation models and in general the valuation of portfolios.

• Capturing processes and independent validation of prices.

• Appropriate confirmation of transactions with counterparties.

• Reviewing cancellations/modifications of transactions.

• Reviewing and monitoring the effectiveness of guarantees, collateral and mitigation of risk.

258

Corporate information

The corporate area of control of technological and operational risk has a system for integral management of operational risk information, which every quarter consolidates the information available from each country/unit in the operational risk sphere and gives a global vision with the following features:

• Two levels of information: one corporate and one individualized for each country/unit.

• Dissemination of the best practices among countries/units of Grupo Santander, obtained from the combined study of the results of qualitative and quantitative analysis of operational risk.

Information is also prepared on the following aspects:

• Grupo Santander’s management model for operational risk

• Human resources and perimeter of action

• Analysis of the data base of errors and events

• Operational risk cost and accounting conciliation

• Self-assessment questionnaires

• Indicators

• Mitigating measures/asset management

• Contingency plans

• Regulatory framework: BIS II

• Insurance

This information acts as the basis for meeting the needs of reporting to the board’s risk committee, senior management, regulators, rating agencies, etc.

Insurance in the management of operational risk

We regard insurance as a key element in management of operational risk. The area responsible for operational risk has been closely cooperating with our insurance area since 2004 in all those activities that entail improvements in both areas. For example:

• Cooperation in the exposure of our operational risk control and management model to insurance and reinsurance companies.

• Analysis and monitoring of recommendations and suggestions to improve operational risks made by insurance companies via prior audits conducted by specialized companies as well as their subsequent implementation.

• Exchange of information generated in both areas in order to improve the quality of the data bases of errors and the perimeter of coverage of the insurance policies for the various operational risks.

• Close cooperation between local operational risk executives and local coordinators of insurance to strengthen mitigation of operational risk.

• Regular meetings on specific activities, states of situation and projects in both areas.

• Active participation of both areas in global sourcing of insurance, our maximum technical body for defining coverage strategies and contracting insurance.

259

Part 6. Reputational risk

We define reputational risk as that linked to the perception of the Bank by its various stakeholders, both internal and external, of its activity, and which could have an adverse impact on results, capital or business development expectations. This risk relates to juridical, economic-financial, ethical, social and environmental aspects, among others.

Various of our governance structures are involved in reputational risk management, depending on where the risk comes from. The audit and compliance committee helps the board to supervise compliance with our code of conduct in the securities markets, the manuals and the procedures to prevent money-laundering and, in general, the Bank’s rules of governance and compliance. It formulates the proposals needed for their improvement.

Management of reputational risk which might arise from an inadequate sale of products or an incorrect provision of services by the Group is mainly conducted by the following bodies and procedures:

The risk committee

This committee is the board’s responsibility, as part of its supervisory function. It defines our risk policy.

As the maximum body responsible for global management of risk and of all types of banking transactions, the committee assesses, with the support of the division of the secretary general, reputational risk in its sphere of activity and decisions.

Corporate marketing committee

This committee, our highest decisions making body for approving and monitoring products and services, is chaired by our secretary general. Representatives of the divisions of risk, financial management, technology and operations, general secretariat, financial accounting and control, internal auditing, retail banking, Santander global Banking & Markets, private banking, asset management and insurance are also involved.

The committee pays particular attention to adjusting the product or service to the framework where it is going to be sold and especially to ensuring that:

• Each product or service is sold by someone who knows how to sell it.

• The client knows what he or she is investing in and the risk of each product or service and this can be accredited with the relevant documents.

• The product or service fits the customer’s risk profile.

• Each product or service is sold where it can be, not only for legal or tax reasons (i.e. it fits into the legal and tax regime of each country), but also on the basis of the prevailing financial culture.

• When a product or service is approved the maximum limits for placement are set.

Marketing committees are created at the local level channeling to the corporate committee of marketing new product approval proposals, after issuing a favorable opinion, and approving products that are not new and marketing campaigns. In the respective approval processes, the marketing committees operate with a focus on risk.

The corporate marketing committee (CMC) held 21 meetings in 2010 and the local committee of marketing (LCM) of retail banking Spain met 10 times, analyzing a total of 237 products/services (197 were new products/services submitted to the CMC and 40 were approved by the LCM as they were not new products/services that fitted into those previously authorized by the CMC).

260

Of the 197 products/services submitted to the CMC, the number per country/unit and their share of the total was as follows: Spain 113 (57.4%); Chile: 15 (7.6%); Portugal: 14 (7.1%); Mexico: 12 (6.1%); UK: 11 (5.6%); Brazil: 11 (5.6%); US: 9 (4.6%); Argentina: 4 (2%); Colombia: 2 (1%); Puerto Rico: 2 (1%); Italy: 2 (1%); Peru: 1 (0.5%); and Uruguay: 1 (0.5%).

Global consulting committee

The global consulting committee (GCC) is the advisory body for the corporate marketing committee and is comprised of the representatives of areas that contribute to the vision of regulatory and market risks. This committee meets every quarter and can recommend the review of products affected by regulatory changes, deterioration of solvency (country, sectors and companies) or by changes in the Group’s vision of markets in the medium and long term.

Corporate office of reputational risk management

Integrated in the corporate area of compliance and reputational risk, within the division of the general secretariat, this office provides the corresponding bodies of governance with the necessary information to:

1. adequately analyze the risk to be approved with a two pronged purpose: impact on the Bank and on the customer.

2. monitor products throughout their life cycle.

During 2010, 52 products or services that are not considered to be new were presented to the corporate office for its approval. The office also responded to requests for 110 consultations from various areas and countries. The products approved by the office are successive issues of products previously approved by the corporate marketing committee or the local committee of marketing of retail banking Spain.

Manual of Procedures for the Sale of Financial Products

The manual, which has been used by Banco Santander since 2004 for the retail marketing of financial products in Spain, covers investment services for financial products including securities and other fixed-income or equity instruments, money market instruments, participations in collective investment institutions, savings and investment insurance, traded derivatives and OTC and atypical financial contracts. The corporate committee of marketing can also include other instruments in the sphere of the manual of procedures, as has been the case with structured deposits, savings insurance or investment and pension plans.

In 2010, 90 products/services subject to the manual were submitted for approval.

261

Part 7. Adjustment to the new regulatory framework

During 2010, we participated in impact studies promoted by the Basel committee and CEBS, and coordinated at the local level by the Bank of Spain to calibrate the new regulations denominated Basel III, the implementation of which involves establishing new standards for capital and liquidity with stricter criteria and standardized at the international level.

We have very solid capital ratios, adjusted to the business model and to its risk profile that put us in a comfortable position to meet Basel III. The impact analysis shows no significant effects on our high solvency ratios, which benefit from a considerable organic capital generation capacity. The new capital regulations will be gradually implemented between 2013 and 2019.

We have proposed adopting, during the next few years, the advanced internal ratings based (AIRB) models of Basel II for almost all our banks (covering more than 90% of net exposure of the credit portfolio under these models). Meeting this objective in the short term will also be conditioned by the acquisition of new entities as well as by the need of coordination among supervisors of the validation processes of internal models. We operate in countries where the legal framework between supervisors is the same as in Europe via the capital directive. However, in other areas, the same process is subject to the collaboration framework between the supervisor in the home country and that in the host country with different legislations, which, in practice, means adapting to different criteria and calendars in order to attain authorization for the use of advanced models on a consolidated basis.

With this objective, we continued in 2010 to gradually install the necessary technological platforms and methodological developments which will make it possible to progressively apply advanced internal models for calculating regulatory capital in the rest of our units. At the moment, we have the supervisory authorization to use advanced models for calculating the regulatory capital requirements by credit risk for the Parent bank and the main subsidiaries in Spain, the UK and Portugal (close to two-thirds of its total exposure at the end of 2010). The strategy of implementing Basel II in the Group is focused on achieving use of advanced models in the main institutions in the Americas and consumer banking in Europe.

As regards the rest of risks explicitly envisaged in Pillar 1 of Basel, we have authorization to use our internal model for the trading activity of Madrid treasury. During 2010 we obtained authorization for the units in Chile and Portugal thus continuing the gradual implementation of the rest of the units presented to the Bank of Spain.

In operational risk, we believe that development of the internal model should be largely based on the accumulated experience of the entity via the corporate guidelines and criteria established after assuming their control. We have made many acquisitions in the last few years that make necessary a longer period of maturity to develop the internal model based on its management experience of the various entities. However, although for the time being we have decided to adhere to the standard approach for calculating regulatory capital, we envisage the possibility of adopting the advanced management approach (AMA) once we have gathered sufficient information on the basis of our own management model in order to develop maximum virtues that characterize the Group.

In Pillar II, we use an economic capital approach to quantify our global risk profile and our solvency position within the process of self-evaluation conducted at the consolidated level (ICAAP). This process, which is complemented by the qualitative description of the risk management and internal control systems, is revised by the internal audit and internal validation teams, and is subject to approval by the board. Furthermore, every year the board establishes the strategic elements regarding risk appetite and solvency objectives. The economic capital model considers features not included in Pillar 1 (concentration, interest rate and business risks). Our diversification compensates the additional capital required for these risks.

In accordance with the capital requirements set out in the European Directive and the regulations of the Bank of Spain, we publish every year the Report with Prudential Relevance. This report, published for the first time with data at December 31, 2008, clearly shows the transparency requirements regarding Pillar III. We regard the requirements providing the market with information as vital for complementing the minimum capital requirements demanded by Pillar 1, and the supervisory exam process conducted via Pillar II. We are incorporating into our Pillar III report the recommendations of the committee of European Banking Supervisors (CEBS) in order to become an international benchmark in matters of transparency in the market.

262

We are also carrying out an ambitious training process on Basel at all levels reaching a large number of employees in all areas and divisions with a particular focus on those most affected by the changes resulting from the new international standards in matters of capital.

Internal validation of internal risk models

Internal validation is a prerequisite for supervisory validation. A specialized unit of Santander, with complete independence, obtains a technical opinion on whether the internal model is appropriate for the purposes used (internal and regulatory) and concludes on its usefulness and effectiveness.

As well as the regulatory requirement, internal validation is also a fundamental support for the board’s committee of risks and local committees of risks in their responsibilities of authorizing the use (management and regulatory) of models and their periodic review.

Our internal validation covers both credit risk and market risk models and those that set the prices of financial assets as well as the economic capital model. The scope of validation includes not only the most theoretical or methodological aspects but also the technology systems and the quality of data that make implementation effective and, in general, all relevant aspects for management of risk (controls, reporting, uses, involvement of senior management, etc).

The function of internal validation is located, at the corporate level, within the area of integral control and internal validation of risk which reports directly to our third vice chairman and chairman of the board’s risk committee. The function is global and corporate in order to ensure homogeneous application. This is done via four regional centers in Madrid, London, Sao Paulo and New York. These centers report to the corporate centre, which ensures uniformity in the development of their activities. This facilitates application of a common methodology supported by a series of tools developed internally in Santander which provide a robust corporate framework for use in all our units and which automate certain verifications in order to ensure the reviews are conducted efficiently.

Moreover, our corporate framework of internal validation is fully aligned with the criteria for internal validation of advanced models issued by the Bank of Spain. The criterion of separation of functions is maintained between the units of internal validation and internal auditing which, as our last element of control, is responsible for reviewing the methodology, tools and work done by internal validation and giving its opinion on its degree of effective independence.

Part 8. Economic capital

The concept of economic capital has traditionally been contrasted with that of regulatory capital, as this is the one required for the regulation of solvency. The new Basel capital framework clearly brings both concepts closer together. While Pillar 1 determines the minimum regulatory capital requirements, Pillar II quantifies, via economic capital, our global solvency position.

Our model of economic capital quantifies the consolidated risk profile taking into account all the significant risks of activity, as well as the substantial diversification effect on a multinational and multi-business Group like Santander. This economic capital model serves as our base for preparing our self-assessment of capital report in accordance with Bank of Spain regulations under the Basel II Pillar II framework.

The concept of diversification is fundamental for appropriately measuring the risk profile of a global activity Group. Although it is an intuitive concept and one present in risk management since banking began, we can also explain diversification as the fact that the correlation between various risks is imperfect and so the largest events of losses do not happen simultaneously in all portfolios or by types of risk. The sum of the economic capital of the different portfolios and types of risk, considered in isolation, is more than our total economic capital. In other words, our overall risk is less than the sum of its parts considered separately.

263

In addition, within the framework of the model for measurement and aggregation of economic capital, the risk of concentration for wholesale portfolios (large companies, banks and sovereigns) is also considered both in its dimension of exposure as well as concentration by sectors and countries. The existence of concentration in a country or a product in retail portfolios is captured by applying an appropriate model of correlations.

Global risk analysis profile

Our risk profile at December 31, 2010, measured in terms of economic capital, and distributed by types of risk and the main business units, is reflected below:

The distribution of economic capital among the main business units reflects the diversification of our activity and risk. Our diversification is going to increase even more with the acquisitions announced in the last few months in Poland, Germany, the UK, Mexico and the US, among others.

Continental Europe accounts for almost 40% of our capital, Latin America including Brazil (20%) almost one-third, the UK for 11%, and Sovereign for 6%, while the corporate area of financial management and equity stakes, which assumes the risk from the structural exchange-rate position (derived from stakes in subsidiaries abroad denominated in non-euro currencies) and most of the equity stakes accounts for 13%.

The economic capital at December 31, 2010 was €46,526 million, including non-controlling interest.

264

The benefit of diversification envisaged in the economic capital model, including both the intra-risks (assimilated to geographic) as well as inter-risks, amounted to around 22% at the end of 2010.

We also conduct capital planning with the main objective of obtaining future projections of economic and regulatory capital and so be able to assess situations of capital sufficiency in various scenarios. Each scenario incorporates the forecasts of results in a coherent way, both with their strategic objectives (organic growth, M&A, pay-out ratio, etc) as well as with the evolution of the economic situation and in the face of stress situations. Possible capital management strategies are identified that enable the Bank’s solvency situation to be optimized as well as the return on capital.

Return on risk adjusted capital (RORAC) and creation of value

We have been using RORAC methodology in our credit risk management since 1993 in order to:

• Calculate the consumption of economic capital and the return on it of our business units, as well as segments, portfolios and customers, in order to facilitate optimum assigning of economic capital.

• Budget the capital consumption and RORAC of our business units, including them in their remuneration plans.

• Analyze and set prices during the decision-taking process for operations (admission) and clients (monitoring).

RORAC methodology enables one to compare, on a like-for-like basis, the return on transactions, customers, portfolios and businesses, identifying those that obtain a risk adjusted return higher than the cost of our capital, aligning management of risk and business with the intention to maximize the creation of value, the ultimate aim of our senior management.

We regularly assess the level and evolution of value creation (VC) and the risk adjusted return (RORAC) of our main business units. The VC is the profit generated above the cost of the economic capital (EC) employed, and is calculated as follows:

Value creation = profit — (average EC x cost of capital)

The economic profit is obtained by making the necessary adjustments to attributable profit so as to extract just the recurrent profit that each unit generates in the year of its activity.

The minimum return on capital that a transaction must attain is determined by the cost of capital, which is the minimum required by shareholders. It is calculated objectively by adding to the free return of risk the premium that shareholders demand to invest in our Group. This premium depends essentially on the degree of volatility in the price of our shares in relation to the market’s performance. The cost of capital in 2010 applied to our various units was 13.606%.

A positive return from a transaction or portfolio means it is contributing to our profits, but it is not really creating shareholder value unless that return exceeds the cost of capital.

265

Part 10. Market Risk

Generally

The perimeter for measuring, controlling and monitoring the area of Market Risks covers those transactions where equity risk is assumed. This risk comes from the change in risk factors — interest rates, exchange rates, shares, the credit spread, raw material prices and the volatility of these elements— as well as the liquidity risk of the various products and markets in which the Group operates.

We are exposed to market risk mainly as a result of the following activities:

	•		Trading in financial instruments, which involves interest rate, foreign exchange rate, equity price, commodity price and volatility risks.

	•		Engaging in retail banking activities, which involves interest rate risk since a change in interest rates affects interest income, interest expense and customer behavior. This interest rate risk arises from the gap (maturity and repricing) between assets and liabilities.

	•		Investing in assets (including subsidiaries) whose returns or accounts are denominated in currencies other than the Euro, which involves foreign exchange rate risk between the euro and such other currencies.

	•		Investing in subsidiaries and other companies, which subject us to equity price risk; and

	•		Trading and non-trading activities which entail liquidity risk.

Primary Market Risks and How They Arise

The primary market risks to which we are exposed are interest rate risk, foreign exchange rate risk, equity price risk, volatility risk and liquidity risk. We are exposed to interest rate risk whenever there is a mismatch between interest rate sensitive assets and liabilities, subject to any hedging with interest rate swaps or other off-balance sheet derivative instruments. Interest rate risk arises in connection with both our trading and non-trading activities.

We are exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities, and off-balance sheet items denominated in different currencies, either as a result of trading or in the normal course of business. We maintain non-trading open currency positions arising from our investments in overseas subsidiaries, affiliates and their currency funding. The principal non-trading currency exposures are the euro to the US dollar and the British pound and the euro to the main Latin American currencies. Trading foreign exchange rate open risk is not material compared to non-trading foreign exchange risk.

We are exposed to equity price risk in connection with both our trading and non-trading investments in equity securities.

We are also exposed to liquidity risk. Market depth is the main liquidity driver in our trading portfolio, even though our policy is to trade the most liquid assets. Our liquidity risk also arises in non-trading activity due to the maturity gap between assets and liabilities in the retail banking business.

We use derivatives for both trading and non-trading activities. Trading derivatives are used to eliminate, to reduce or to modify risk in trading portfolios (interest rate, foreign exchange and equity), and to provide financial services to clients. Our principal counterparties for this activity are financial institutions. The principal types of derivatives used are: interest rate swaps, future rate agreements, interest rate options and futures, foreign exchange forwards, foreign exchange futures, foreign exchange options, foreign exchange swaps, cross currency swaps, equity index futures and equity options. The Group also has an incipient activity in commodity derivatives.

Derivatives are also used in non-trading activity in order to manage the interest rate risk and foreign exchange risk arising from asset and liability management activity. Interest rate and foreign exchange non-optional derivatives are used in non-trading activity.

267

We also use credit derivatives both to hedge credit risk in fixed income portfolios and to provide financial services to clients. To a lesser extent, they are used in proprietary trading and to diversify the global credit portfolio. Most of the activity is made in credit default swaps on individual names or indices.

Procedures for Measuring and Managing Market Risk

Our board, through its risk committee, is responsible for establishing our policies, procedures and limits with respect to market risks, including which businesses to enter and maintain. The committee also monitors our overall performance in light of the risks assumed. Together with the local and global assets and liabilities committees (“ALCO”), each Market Risk Unit measures and monitors our market risks, and provides figures to ALCO to use in managing such risks, as well as liquidity risk.

Our market risk policy is to maintain a medium to low risk profile in business units. The risk activity is regulated and controlled through certain policies, documented in the Corporate Framework on Market Risk Management ¹ (as described below), and through a limit structure on our exposure to these market and liquidity risks which includes global limits for the entire Group (total risk limit unit) to specific portfolio limits; in addition, authorized products are listed and reviewed periodically.

These policies, procedures and limits on market risk are applicable to all units, businesses or portfolios susceptible to market risk.

1. Market and Liquidity Risk Management Policies

In the Corporate Framework on Market Risk, there is a compilation of policies that describe the control framework used by our Group to identify, measure and manage market risk exposures inherent to our activities in the financial markets. The handbook is employed for market risk management purposes at all involved levels in the Parent bank and subsidiaries, providing a general and global action framework and establishing risk rules for all levels.

The handbook’s main objective is to describe and report all risk policies and controls that our board of directors has established as well as its risk predisposition.

All Group managers must ensure that each business activity is performed in accordance with the policies established in the Corporate Framework. The handbook is applied to all business units and activities, directly or indirectly, related to market risk decision-making.

2. Market Risk Management Procedures

All the functions developed by a risk manager are documented and regulated by different procedures, including measurement, control and reporting responsibilities. Internal and external auditors audit the compliance with this internal regulation control in order to ensure that our market risk policies are being followed.

3. Market Risk Limit Structure

The market risk limit structure can be defined as the board of director’s risk “appetite” and is managed by the Global Market Risk Function that accounts for all Group business units.

Its main functions are to:

•

Identify and define the main types of risk incurred efficiently and comprehensively to be consistent with the management and strategy of the business.

•

Quantify and inform the business areas of the risk levels and profile that senior management believes can be assumed, in order to avoid undesired risks.


1		In addition to this document, there is a Corporate Handbook on Structural Risks Management that explains in detail these type of risks, including items for interest rate risk, liquidity risk and structural exchange rate risk.

268

	•		Give flexibility to the business areas to build risk positions efficiently and on a timely basis according to changes in the market and in the business strategies, and always within the risk levels regarded as acceptable by the Group.

	•		Allow the generators of business to take prudent risks which are sufficient to attain budgeted results.

	•		Establish investment alternatives by limiting equity consumption.

	•		Define the range of products and underlying assets with which each unit of Treasury can operate, taking into consideration features such as the model and valuation systems, the liquidity of the tools used, etc. This will help to constrain all market risk within the business management and defined risk strategy.

The Global Market Risk Function defines the limit structure while the risk committee reviews and approves it. Business managers then administer their activities within these limits. The limit structure covers both our trading and non-trading portfolios and it includes limits on fixed income instruments, equity securities, foreign exchange and other derivative instruments.

Limits considered to be global limits refer to the business unit level. Local business managers set lower level limits, such as portfolio or trader limits. To date, system restrictions prevent intra-day limits.

Business units must always comply with approved limits. Potential excesses will require a range of actions carried out by the Global Market Risk Function unit including:

•

Providing risk reducing levels suggestions and controls. These actions are the result of breaking “alarm” limits.

•

Taking executive actions that require risk takers to close out positions to reduce risk levels.

Statistical Tools for Measuring and Managing Market Risk

1. Trading activity

The Trading Portfolio is defined as proprietary positions in financial instruments held for resale and/or bought to take advantage of current and/or expected differences between purchase and sale prices. These portfolios also include positions in financial instruments deriving from market-making, sale and brokering activity.

As a result of trading fixed income securities, equity securities and foreign exchange, we are exposed to interest rate, equity price and foreign exchange rate risks. We are also exposed to volatility when derivatives (options) are used.

Market risk arising from proprietary trading and market-making activities is actively managed through the use of cash and derivative financial instruments traded in OTC and organized markets.

Interest rate risk derived from market-making is typically hedged by buying or selling very liquid cash securities such as government bonds, or futures contracts listed in organized markets like Liffe, Eurex, MEFF and CBOT.

Foreign exchange rate risk is managed through spot transactions executed in the global foreign exchange inter-bank market, as well as through forward foreign exchange, cross currency swaps and foreign exchange options.

Equity price risk is hedged by buying or selling the underlying individual stocks in the organized equity markets in which they are traded or futures contracts on individual stocks listed in organized markets like MEFF and Liffe.

In the case of equity indexes such as S&P 500, Euro STOXX 50, or IBEX 35, the hedging is done through futures contracts listed in the aforementioned organized markets.

Volatility risk arising from market-making in options and option-related products is hedged by, either buying and selling option contracts listed in organized markets like Eurex, MEFF, and CBOT, or entering risk reversal transactions in the inter-bank OTC market.

269

Credit risk is managed through the use of credit derivatives.

We use Value at Risk (“VaR”) to measure our market risk associated with all our trading activity.

1.1 VaR Model

We use a variety of mathematical and statistical models, including VaR models, historical simulations, stress testing and evaluations of Return on Risk Adjusted Capital (“RORAC”) to measure, monitor, report and manage market risk. We call our VaR figures daily or annual “capital at risk” figures (“DCaR” or “ACaR”), depending on their time horizon, since we use them to allocate economic capital to various activities in order to evaluate the RORAC of such activities.

As calculated by us, DCaR is an estimate of the expected maximum loss in the market value of a given portfolio over a one-day time horizon at a 99% confidence interval. It is the maximum one-day loss that we estimate we would suffer on a given portfolio 99% of the time, subject to certain assumptions and limitations discussed below. Conversely, it is the figure that we would expect to exceed only 1% of the time, or approximately three days per year. DCaR provides a single estimate of market risk that is comparable from one market risk to the other.

The standard methodology used is based on historical simulation (520 days). In order to capture recent market volatility in the model, our DCaR figure is the maximum between the 1% percentile and the 1% weighted percentile of the simulated profit and loss distribution. This loss distribution is calculated by applying an exponential decline factor, which accords less weight to the observations furthest away in time.

We use DCaR estimates to alert senior management whenever the statistically estimated losses in our portfolios exceed prudent levels. Limits on DCaR are used to control exposure on a portfolio-by-portfolio basis. DCaR is also used to calculate the RORAC for a particular activity in order to make risk-adjusted performance evaluations.

Finally, in order to control derivative activities and credit management, because of their atypical nature, specific measures are evaluated daily. First, we look at the sensitivity to price movements of the underlying asset (delta and gamma), volatility (vega) and time (theta) and then measures are enacted such as the spread sensitivity, jump-to-default, and concentration of positions by rating levels.

To address the credit risk inherent in trading portfolios in accord with the recommendations of the Basel Committee on Banking Supervision, we also calculate an additional measurement (incremental default risk, IDR), in order to cover the risk of default that is not adequately captured in the VaR, via changes in lending spreads. The instruments affected are basically fixed-rate bonds, both public and private sector, derivatives on bonds (forwards, options, etc) and credit derivatives (credit default swaps, asset backed securities, etc). The method for calculating the IDR, in essence similar to that of the credit risk of positions outside trading, is based on direct measurements of the tails of the distribution of losses to the appropriate percentile (99.9%). The “saddle point” model is used, which provides estimates of total risk and the contributions of each counterparty to it. The calculations are also supplemented and calibrated with Monte Carlo simulations.

1.2 Assumptions and Limitations

Our DCaR and VaR methodology should be interpreted in light of the limitations of our model, which include:

•

A one-day time horizon may not fully capture the market risk of positions that cannot be liquidated or hedged within one day.

•

At present, we compute DCaR at the close of business and trading positions may change substantially during the course of the trading day.

270

1.3 Scenario Analysis and Calibration Measures

Because of these limitations in DCaR and VaR methodology, in addition to historical simulation, we use stress testing to analyze the impact of extreme market movements and to adopt policies and procedures in an effort to protect our capital and results of operation against such contingencies.

In order to calibrate our VaR model, we use back testing processes. Back testing is a comparative analysis between VaR estimates and the daily clean P&L (theoretical result generated assuming the Mark-to-Market daily variation of the portfolio only considering the movement of the market variables). The purpose of these tests is to verify and measure the precision of the models used to calculate VaR.

The analyses of our back testing comply, at a minimum, with the BIS recommendations regarding the verification of the internal systems used to measure and manage market risks.

2. Non Trading activity

2.1 Foreign Exchange Risk and Equity Price Risk

Due to its nature, changes in strategic positions have to be approved by local/global functions in ALCO committee. Position limits with respect to these investments are established, although they will be measured under VaR and other methods that attempt to implement immediate action plans if a particular loss level is reached.

Our foreign exchange rate risk with respect to our non-trading activity can be either permanent or temporary. The permanent risk reflects the book value of investments net of the initial goodwill, while the temporary risk basically stems from purchase/sale transactions made to hedge the exchange rate risk derived from dividend flows and expected results. The exchange rate differences generated for each position are recorded in reserves and in profit and loss account respectively.

In order to manage the exchange rate risk of the book value of permanent investments, our general policy is to finance the investment in local currency, provided there is a deep market which allows it and that the cost of doing so is justified by the expected depreciation. If local markets were not deep enough, our investments in foreign currency would be financed in euros and so would generate an exchange-rate risk. Certain one-off hedges of permanent investments are made when it is believed that a local currency could weaken against the euro more quickly than the market is discounting. In addition, transactions are carried out to hedge the currency risk of the Group’s results and dividends generated in non-euro currencies.

Our equity price risk arises from our portfolio of investments in industrial and strategic shareholdings. However, in the last few years the Group’s equity price risk has decreased due to divestments in the industrial and strategic equity portfolio.

2.2 Interest Rate Risk

We analyze the sensitivity of net interest margin and market value of equity to changes in interest rates. This sensitivity arises from gaps in maturity dates and review of interest rates in the different asset and liability accounts. Certain re-pricing hypotheses are used for products without explicit contractual maturities based on the economic environment (financial and commercial).

On the basis of the positioning of balance sheet interest rates, as well as the market situation and outlook, the financial measures are agreed to adjust the positioning to levels desired by the Group. These measures range from taking positions in markets to defining the interest rate features of commercial products. We manage investments by determining a target range for each sensitivity and providing the appropriate hedge (mainly with government debt, interest rate swaps and interest rate options) in order to maintain these sensitivities within that range.

The measures used to control interest rate risk are the interest rate gap and the sensitivity of net interest margin and market value to changes in interest rates, VaR and analysis of scenarios.

271

a) Interest rate gap of assets and liabilities

Interest rate gap analysis focuses on lags or mismatches between changes in the value of asset, liability and off-balance sheet items. Gap analysis provides a basic representation of the balance sheet structure and allows for the detection of interest rate risk by concentration of maturities. It is also a useful tool for estimating the impact of eventual interest rate movements on net interest margin or equity.

All on- and off-balance sheet items must be broken down by their flows and analyzed at in terms of repricing and maturity. In the case of those items that do not have a contractual maturity, an internal model of analysis is used and estimates are made of their duration and sensitivity.

b) Net interest margin sensitivity (NIM)

The sensitivity of net interest margin measures the change in the short/medium term in the accruals expected over a particular period (12 months), in response to a shift in the yield curve.

It is calculated by simulating the net interest margin, both for a scenario of a shift in the yield curve as well as for the current scenario. The sensitivity is the difference between the two margins calculated.

c) Market value of equity sensitivity (MVE)

Net worth sensitivity measures in the long term (the whole life of the transaction) the interest risk implicit in net worth (equity) on the basis of the effect that a change in interest rates has on the current values of financial assets and liabilities. This is an additional measure to the sensitivity of the net interest margin.

d) Value at Risk (VaR)

The Value at Risk for balance sheet activity and investment portfolios is calculated with the same standard as for trading, historical simulation with a confidence level of 99% and a time frame of one day. Statistical adjustments are made, which effectively and quickly incorporates the latest developments that condition the risk levels assumed.

e) Analysis of scenarios

Two scenarios for the performance of interest rates are established: maximum volatility and sudden crisis. These scenarios are applied to the balance sheet, obtaining the impact on net worth as well as the projections of net interest revenue for the year.

2.3 Liquidity risk

Liquidity risk is associated with our capacity to finance our commitments, at reasonable market prices, as well as to carry out our business plans with stable sources of funding. We permanently monitor maximum gap profiles.

We have a diversified portfolio of assets that are liquid or can be made so in the short term. We also have an active presence in a wide and diversified series of financing and securitization markets, limiting our dependence on specific markets and keeping open the capacity of recourse to alternative markets.

The measures used to control liquidity risk are the liquidity gap, liquidity ratio, stress scenarios and contingency plans.

272

a) Liquidity gap

The liquidity gap provides information on contractual and expected cash inflows and outflows for a certain period of time, for each of the currencies in which we operate. The gap measures the net need or excess of funds at a particular date, and reflects the level of liquidity maintained under normal market conditions.

b) Liquidity ratios

The liquidity coefficient compares liquid assets available for sale (after applying the relevant discounts and adjustments) with total liabilities to be settled, including contingencies. This coefficient shows, for currencies that cannot be consolidated, the level of immediate response of the entity to firm commitments.

Net accumulated liquidity is defined as the 30-day accumulated gap obtained from the modified liquidity gap. The modified contractual liquidity gap is calculated on the basis of the contractual liquidity gap and by placing liquid assets or repos at the point of settlement and not at their point of maturity.

In addition, we use the following other ratios or metrics regarding the structural liquidity position:

•

Loans / net assets.

•

Customer deposits, insurance and medium and long-term financing / lending.

•

Customer deposits, insurance and medium and long-term financing, shareholders’ funds and other liabilities / sum of credits and fixed assets.

•

Short-term financing / net liabilities.

c) Analysis of scenarios/contingency plan

Our liquidity management focuses on preventing a crisis. Liquidity crises, and their immediate causes, cannot always be predicted. Consequently, our contingency plan concentrates on creating models of potential crises by analyzing different scenarios, identifying crisis types, internal and external communications and individual responsibilities.

As a crisis can occur locally or globally, each local unit must prepare a plan of contingency financing. Each unit must inform the central unit of its plan at least every six months so that it can be reviewed and updated. These plans, however, must be updated more frequently if market circumstances make it advisable.

Lastly, Grupo Santander is actively participating in the process opened by the Basel Committee to strengthen bank liquidity², with a two-pronged approach: participating in the analysis of the impact of the regulatory changes raised — including, the introduction of two new ratios: Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) — and, participating in various forums (European Banking Federation, etc.), to discuss and comment on the issue, maintaining in both cases close co-operation with the Bank of Spain.


².		“Basel III: international framework for liquidity risk measurement, standards and monitoring” (Basel Committee on Banking Supervision, December 2010).

273

Quantitative analysis

A. Trading activity

Quantitative analysis of daily VaR in 2010

Our risk performance regarding trading activity in financial markets during 2010, measured by daily Value at Risk “VaR”, is shown in the following graph.

VaR during 2010 fluctuated more than 91% of the time in a range of between €24 million and €36 million. It exceeded €36 million in three periods — at the end of April, May and June. This was due to the increase in volatility due to the sovereign debt crisis in European markets, in the first two cases, and to the higher interest rate risk in Brazil and Mexico in the third case. The VaR reached a maximum of €37.5 million at the end of June and then declined because of the reduction in the credit risk spread in Madrid and interest rate and exchange rate in Mexico, to a minimum of €21.2 million in the middle of September. There was a “window effect” in the fourth quarter — exit from observations of the Lehman crisis (September-December 2008) from the time range with which VaR is calculated (2 years), which would have generated a reduction in VaR- which was offset by higher volatility in sovereign credit spreads.

The average VaR of the Group’s trading portfolio in 2010 (€28.7 million) was slightly lower than in 2009 (€30.2 million), even though 2010 experienced the aforementioned periods of higher volatility due to the European sovereign debt crisis. The changes in VaR in 2010 were mainly due to changes in the positions of portfolios in Brazil and Mexico. Compared to other financial groups, Grupo Santander has a low trading risk profile. Its dynamic management enables the Group to adopt changes of strategy in order to exploit opportunities in an environment of uncertainty.

VaR risk histogram

The histogram below shows the distribution of average risk in terms of VaR during 2010. It was between €24 million and €32 million on 75.7% of days. Of note were the levels of more than €36 million, mainly due to the increased volatility in markets because of the sovereign debt crisis in Europe.

274

Histogram of daily Marked-to-Market (“MtM”) results

The following histogram of frequencies shows the distribution of daily economic results on the basis of their size. The daily yield was between -€5 and +€15 million on 69.5% of trading days.

Risk management of structured derivatives

Our structured derivatives activity (non-organized markets) is mainly focused on structuring investment and hedging products for clients. These transactions include options on equities, currencies and fixed-income instruments.

Test and calibration measures

In accordance with the BIS recommendations on gauging and controlling the effectiveness of internal financial risk measurement and management systems, in 2010 the Group regularly carried out analysis and contrasting measures which confirmed the reliability of the model.

As in 2009, in 2010 there were no exceptions of VaR at 99% (days when the daily loss³ was higher than the VaR). Of note, however, was the exit of EaR⁴at 99% (days when the daily gain was more than the VaR) in May 2010, mainly due to the sharp fall in credit spreads following the agreement reached by euro zone ministers in conjunction with the European Central Bank (ECB) and the International Monetary Fund (IMF). This agreement included the launch of the European stabilization mechanism and the announcement of public debt purchases by the ECB, in order to contain the lack of confidence in the euro and in sovereign debt.

Scenario analysis

Various scenarios were analyzed in 2010. The chart below shows the results at December 31, 2010 for a scenario of maximum volatility, applying six standard deviations in various market factors for the trading portfolios.

Maximum volatility scenario

The table below shows, at December 31, 2010, the results by risk factor of (interest rates, equities, exchange rates, spreads on loans, commodities and the volatility of each one of them), in a scenario in which a volatility equivalent to six standard deviations in a normal distribution is applied. This scenario is based on taking for each risk factor the movement that represents a greater potential loss in the global portfolio. For the year-end, this scenario involved rises in interest rate in Latin American markets and falls in core markets (“flight into quality”), declines in stock markets, the dollar’s slide against all currencies except the euro, greater volatility and spreads on loans.


³		Results in terms of “clean P&L”. Excluding intraday results and those from commissions.

⁴		EaR is Earnings at Risk and is the counterparty of VaR on the profits side.

278

Maximum volatility Stress Test


€ million	Interest rate			Equities			Exchange rate			Credit Spread			Commodities			Total
Total Trading		(61.4	)		(68.8	)		(76.1	)		(94.2	)		(1.6	)		(302.1	)
Europe		(9.7	)		(16.4	)		(62.8	)		(54.6	)		(1.6	)		(145.1	)
Latin America		(51.2	)		(52.4	)		(10.9	)		—			—			(114.5	)
USA (New York)		(0.3	)		—			(0.3	)		—			—			(0.6	)
Global Activities		(0.2	)		—			(2.1	)		(39.6	)		—			(41.9	)

The stress test shows that the economic loss suffered by the Group in its trading portfolios, in terms of the Mark to Market (MtM) result would be €302 million, if the stress movements defined in the scenario materialized, a loss that would be distributed between Europe (exchange rates and spreads on loans), Latin America (fixed income) and global activities (spreads on loans).

B. Non-Trading Activity

B.1. Asset and liability management⁵

We actively manage the market risks inherent in retail banking. Management addresses the structural risks of interest rates, liquidity, exchange rates and credit.

The purpose of financial management is to make net interest revenue from our commercial activities more stable and recurrent, maintaining adequate levels of liquidity and solvency.

The Financial Management Area analyzes structural interest rate risk derived from mismatches in maturity and revision dates for assets and liabilities in each of the currencies in which we operate. For each currency, the risk measured is the interest gap, the sensitivity of net interest revenue, the economic value and the duration of equity.

The Financial Management Area manages structural risk on a centralized basis. This allows the use of homogenous methodologies, adapted to each local market where we operate.

In the euro-dollar area, the Financial Management Area directly manages the risks of the Parent bank and coordinates management of the rest of the units that operate in convertible currencies. There are local teams in the banks in Latin America that manage balance sheet risks under the same frameworks, in coordination with the global Financial Management Area.

The Asset and Liability Committees (ALCOs) of each country and, where necessary, the markets committee of the Parent Bank, are responsible for the risk management decisions.

B.1.1. Quantitative analysis of interest rate risk in 2010


⁵		Includes all the balance sheet except the trading portfolios.

279

a) Convertible currencies

At the end of 2010, the sensitivity of net interest margin at one year to parallel rises of 100 basis points was concentrated in the euro interest rate curve (€284.1 million), with the parent bank contributing the most, and in the sterling interest rate curve (£330.8 million). The sensitivity of the rest of convertible currencies was not very significant.

At the same date, the sensitivity of equity to parallel rises in the yield curve of 100 basis points in the euro interest rate curve was €1,265.7 million, most of it in the Parent bank. As regards the curve in sterling it was £406.2 million.

In accordance with the current environment of low interest rates, the Bank maintains a positive sensitivity, both in net interest margin (NIM) and to interest rate rises.

Structural Gap. Santander Parent Company (December 31, 2010) (*)


			Up to 1		1-3			3-5			More than 5
€ million	Not sensitive		year		years			years			years			TOTAL
Money and securities market				41,762		1,797			1,754			14,671			59,984
Loans		112		116,764		10,838			1,504			1,728			130,946
Permanent equity stakes		65,919													65,919
Other assets		17,346		51,705		51			53			91			69,246

Total assets		83,377		210,231		12,686			3,311			16,490			326,095

Money market		—		43,125		108			1,800			—			45,033
Customer deposits		—		39,513		13,314			9,704			14,649			77,180
Debt Issues and securitizations		—		77,605		13,789			14,592			10,766			116,752
Stockholders’ equity and other liabilities		82,219		44,054		1,011			712			1,122			129,118

Total liabilities		82,219		204,297		28,222			26,808			26,537			368,083

Balance sheet Gap		1,158		5,933		(15,537	)		(23,495	)		(10,047	)		(41,988	)
Off-balance sheet structural Gap		—		24,104		13,067			10,630			(2,078	)		45,723

Total structural Gap		1,158		30,037		(2,470	)		(12,865	)		(12,125	)		3,735

Accumulated Gap		—		30,037		27,567			14,702			2,577			—


(*)		Gap of euro-denominated assets and liabilities, excluding other currencies.

b) Latin America

The interest rate risk of Latin America’s balance sheet management portfolios, measured by the sensitivity of market value of the net interest margin (NIM) to a parallel movement of 100 basis points, remained at low levels during 2010 with a maximum of €79 million⁶ in April. It declined to a minimum of €6 million in September mainly due to the increased hedging in Brazil and the portfolio sale in Mexico. It then continued to increase until the end of the year largely because of the increase in deposits and issues in Brazil.


⁶		Sensitivity expressed as an absolute value. It is the aggregation of the sensitivity to many yield curves, grouped applying suppositions of correlation (betas) between them.

280

In terms of equity sensitivity, it fluctuated in a narrow range of between €651 million and €827 million, and increased in the fourth quarter, mainly because of the purchase of the credit portfolio in Brazil and Chile.

At the end of 2010, the region’s risk consumption, measured by the market value of equity sensitivity at 100 basis points, was €763 million (€704 million in 2009), while that of the net interest margin at one year, measured by its sensitivity at 100 basis points, was €45 million (€64 million in 2009).

Interest rate risk profile at December 31, 2010

The tables below show the distribution of risk by maturity in Latin America as of December 31, 2010 (figures in millions of euros).


Gaps in Local	Not
Currency	Sensitive			0-6 months			6-12 months			1-3 years			> 3 years			TOTAL
Assets		50,273			85,009			19,659			45,031			21,114			221,086
Liabilities		54,232			73,683			5,351			26,446			4,536			164,248
Off-balance Sheet		2,637			9,829			(6,681	)		(5,747	)		(1,024	)		(986	)

Gap		(16,452	)		(1,727	)		7,626			(1,109	)		15,554			3,891


Gaps in Foreign	Not
Currency	sensitive			0-6 months			6-12 months			1-3 years		> 3 years		TOTAL
Assets		2,948			20,864			3,983			2,973		7,643		38,411
Liabilities		2,419			22,432			4,425			3,730		7,906		40,912
Off-balance Sheet		(2,546	)		315			(433	)		2,181		1,469		986

Gap		(2,341	)		(1,887	)		(875	)		5		1,206		(3,891	)

281

B.1.2. Structural management of credit risk

The purpose of structural management of credit risk is to reduce the concentrations that can naturally occur as a result of business activity through the sale of assets. These transactions are offset by acquiring other assets that diversify the credit portfolio. The financial management area analyzes these strategies and makes proposals to the ALCO in order to minimize the exposure to credit risk and help create value.

During 2010:

•

€26 billion of assets were securitized, of which €19 billion were placed in the market and the rest retained by the Group’s various units. These retained securitizations increased the Group’s liquidity position through its discounting capacity in central banks.

•

Repurchases were made in the secondary market of securitization bonds of the higher tranches of Group issuers (around €500 million).

B.1.3. Management of structural liquidity

Management of financing and liquidity risk, fully consolidated before the onset of the financial turbulence, has been one of the main pillars behind the success of our business model during this critical period.

This framework of liquidity management has not required changes to make it function correctly and has given us a significant competitive advantage. Specifically, it has enabled the Group and its subsidiaries to successfully tackle the business liquidity needs during the worst moments of the crisis and take advantage of growth opportunities offered by the market.

The great capacity to attract customer deposits, combined with strong issuance activity in institutional markets, has given us the necessary liquidity to finance the acquisition of new units in the last few years. It has also helped to bolster our capacity to create value, while at the same time further improve the diversification of financing sources.

On the other hand, the acquisition of new units in the last few years was made possible by the Group’s excellent access to liquidity. This also helped to boost the Bank’s capacity to create value, while further diversifying the sources of financing and achieving a better positioning in attracting deposits.

The Group’s liquidity management framework and its situation at the end of 2010 is set out below.

1. Management framework

Liquidity management is based on three fundamental pillars:

A) Organizational and governance model: A solid model of governance that ensures the involvement of senior management and the board in taking decisions and facilitating their integration with the group’s global strategy.

B) Management: Adapted to each business’s liquidity needs, in accordance with the decentralized organizational model.

C) Balance sheet analysis and liquidity risk management: Profound analysis of the balance sheet and its evolution in order to support decision-taking.

A. Organizational and governance model

Decision-taking regarding structural risks is done by local ALCO committees in coordination with the markets committee. The latter is the highest decision-taking body and coordinates all global decisions that influence measurement, management and control of liquidity risk.

283

The committee is headed by the chairman of the Bank and comprises the second vice chairman and CEO, the third vice chairman (who is the maximum executive responsible for the Group’s risks), the chief financial officer and the executive vice president of risks and those responsible for the business and analysis units.

There are also ALCO committees for convertible currencies such as Latin American currencies.

The financial management area manages structural risks including liquidity and the global risk area is responsible for control. Both areas support the ALCO committees and present analysis and management proposals and also ensure compliance with the limits established.

In this way, and in line with the best practices of governance, the Group establishes a clear division between executing the financial management strategy (the responsibility of the financial management area) and monitoring and control (the responsibility of market risks).

B. Liquidity

Structural liquidity management aims to finance the Group’s recurring activity in optimum conditions of maturity and cost and avoid assuming undesired liquidity risks.

Liquidity and financing management is based on the following principles:

• Wide and very stable base of customer deposits: more than 85% are retail and are captured in the Group’s core markets by various units.

• Financing via medium and long-term issues of the balance sheet’s stable liquidity needs (the gap between loans and deposits), establishing a surplus of structural financing in order to be able to meet possible adverse situations.

• Diversification of financing sources to reduce the risk in relation to:

— instruments/investors

— markets/currencies

— maturities

• Strict control of short-term financing needs, within the Group’s policy of minimizing the degree of recourse to short term funds.

• Autonomy and responsibility of subsidiaries in managing the financing of liquidity, with no structural support from the Parent bank.

In practice, and applying these principles, our liquidity management consists of:

• Drawing up every year the liquidity plan based on the financing needs derived from the budgets of each business. On the basis of these needs and bearing in mind prudent limits on recourse to short-term markets, the year’s issuance and securitization plan is established by financial management.

• During the year the evolution of the balance sheet and financing needs is regularly monitored, giving rise to changes to the plan.

• Maintain an active presence in a wide and diversified series of financing markets. We have nine significant and independent issuance units, which avoid dependence on a specific market and maintain available a wide capacity of issuance in various markets.

• And backed by all this, we have an adequate structure of medium and long-term issues, well diversified by products (senior debt, subordinated, preferred shares, bonds, securitization) with an average conservative maturity (4.1 years at the end of 2010), to which are added the securitizations.

• All of this results in moderate needs of recourse to short-term wholesale financing at the group level, which, as reflected in the accompanying balance of liquidity, only represented 3% of net funds in 2010, down from 5% in 2009.

284

The subsidiaries have a large degree of autonomy to manage their liquidity within our decentralized financing model. Each one must budget their liquidity needs and assess their own capacity of recourse to the wholesale markets in order to establish the issuance and securitization plan in coordination with the Parent bank.

Only in the case of Santander Consumer Finance does the Parent bank (Banco Santander) provide the necessary liquidity and always at the market price taking into account the maturity of the finance and the rating of the relevant unit. Within the strategy of optimizing the use of liquidity, we have followed a policy in the last few years of strongly reducing the recourse of Santander Consumer Finance to the Parent bank, which is scheduled to be maintained in the coming years.

C. Analysis of the balance sheet and measurement of liquidity risk

Taking decisions on financing and liquidity is based on a deep understanding of our current situation (environment, strategy, balance sheet and state of liquidity), the future liquidity needs of businesses (projection of liquidity), as well as access to and the situation of financing sources in the wholesale markets.

The objective is to ensure that we maintain optimum levels of liquidity to cover short and long-term needs, optimizing the impact of its cost on the income statement.

This requires monitoring the structure of balance sheets, forecasting short and medium-term liquidity and establishing the basic metrics, in line with those reported in the next section.

Various stress tests are also conducted taking into account the additional needs that could arise from various extreme, although possible, events. These could affect the various items of the balance sheet and/or sources of financing differently (degree of renewal of wholesale financing, deposit outflows, deterioration in the value of liquid assets, etc), whether for global market reasons or specific ones of the Group.

All of this enables us to respond to a spectrum of potential, adverse circumstances, anticipating the corresponding contingency plans.

These actions are in line with the practices being fostered from the Basel committee in order to strengthen the liquidity of banks, whose objective is to define a framework of principles and metrics that is still being analyzed and discussed.

2. Current state of liquidity

We have an excellent structural position, with the capacity to meet the new conditions of stress in the markets. This is underscored by:

A) The robust balance sheet.

B) The dynamics of financing.

A. Robust balance sheet

The balance sheet at the end of 2010 was solid, as befits our retail nature. Lending, which accounted for 75% of net assets, was entirely financed by customer deposits and medium and long-term financing. Equally, the structural needs of liquidity, represented by loans and fixed assets, were also totally financed by structural funds (deposits, medium and long-term financing and capital).

As regards financing in wholesale markets, our structure is largely based on medium and long-term instruments (89% of the total). Short-term financing is a marginal part of the structure (3% of total funds) and it is amply covered by liquid assets.

285

B. Dynamics of financing

The evolution of 2010 enabled us to continue to improve our structural liquidity position, backed by two management drivers, which proved to be very effective in the current recession.

The first one was that we were able to increase our customer deposit base very significantly: €109 billion during 2010.

This growth was due to two effects. The effort made to attract deposits via the branch networks, which benefited from the customers’ confidence in our liquidity and solvency. All of this made Santander the bank chosen by depositors in many markets: the so-called flight to quality effect.

This increase occurred in an environment of deleveraging in which deposits were spurred by the higher rate of household and corporate savings, while lending slowed down, reflecting the lower rates of consumption and investment in various countries.

The evolution of 2010 was a good example of this, with our deposits growing 22% and lending rising 6%, both excluding the perimeter effect.

This capturing of stable funds coupled with the trend of moderate credit growth enabled us to reduce the credit/deposit ratio to 117% from 135% in 2009 and 150% in 2008.

The second driver was the high capacity of access to wholesale financing markets, which we can access regularly via our various units. This strategy enabled us to access different institutional investors in a wide variety of instruments and diversity of maturities.

As a result, our units captured during 2010 €38 billion in medium and long-term issue in wholesale markets of senior debt and covered bonds, a significantly higher volume than in 2009. This capacity is backed by our credit quality (AA from Standard & Poor’s and Aa2 from Moody’s). Moreover, in all cases the appetite for securities by investors is adjusted to placement prices that recognize the credit quality of the Group and its subsidiaries.

In short, a big rise in deposits, good access to medium and long-term wholesale markets and the generation of liquidity by businesses in scenarios such as today’s explain the improvement in our structural liquidity in the last 12 months. We thus began 2011 with a favorable liquidity situation and with reduced issuance needs. We have no concentration of maturities in the coming years when annual maturities will be less than in 2010 and, moreover, the dynamics of business mean it will not be necessary to cover all of them.

In any case, and while the current environment of uncertainty persists, we will continue to implement a conservative policy in issues, as we did in 2010, in order to bolster the already solid position.

B.2. Exchange rate risk; Portfolio of industrial and strategic shareholdings

B.2.1. Exchange rate risk

Structural exchange rate risk arises from our transactions in currencies, mainly related to permanent financial investments, and the results and the dividends of these investments.

This management is dynamic and seeks to limit the impact on equity of currency depreciations and optimize the financial cost of hedging.

As regards the exchange-rate risk of permanent investments, the general policy is to finance them in the currency of the investment provided the depth of the market allows it and the cost is justified by the expected depreciation. One-off hedging is also done when a local currency could weaken against the euro beyond what the market estimates.

287

At the end of 2010, the largest exposures of a permanent nature (with potential impact on net worth) were concentrated in Brazilian reais, followed by sterling, Mexican pesos, US dollars and Chilean pesos. We cover part of these positions of a permanent nature with exchange-rate derivatives.

In addition, financial management at the consolidated level is responsible for exchange-rate management of our expected results and dividends in those units whose currency is not the euro.

B.2.2. Portfolio of industrial and strategic shareholdings

In 2010, our exposure in industrial and strategic equity portfolios decreased 19.5% in market-to-market terms, mainly due to a lower valuation of the positions. As a reference, the Spanish equity benchmark index, the Ibex 35, decreased 17.4% in the same period. There have not been significant changes in the portfolio. The risk of the structural equity portfolio, measured in terms of VaR, decreased €150.9 million as compared to the end of 2009, to €218.5 million. This reduction is explained by the commented reduction of the market value of the portfolio and by a statistical effect, (i.e., the exit of the historic scenarios of the “Lehman crisis” period (4^th quarter 2008) from the temporal window (daily observations of the previous 2 years) used in the VaR calculation).

The average daily VaR for the structural equity portfolio for the year 2010 was €354.7 million, with a minimum of €218.5 million and a maximum of €417.3 million, which occurred in December and June 2010, respectively.

C. Structured financing transactions

Despite the complicated economic environment, Santander achieved growth of 12% in this activity in 2010 to a committed exposure of €19,445 million at the end of the year, corresponding to 673 transactions, and increased both the diversification by sectors and the internationalization of business. Leadership in project finance was strengthened with an exposure of €13,258 million (490 transactions), followed by €3,526 million in acquisition finance (37 transactions), of which €2,004 million related to 13 margin calls and leveraged buy-outs (LBOs) and other forms amounted to €2,661 million (146 transactions).

After analyzing the impact on the solar energy portfolio in Spain as a result of the entry into force of Royal Decree 14/2010 of December 23, no downward valuation adjustments in this type of lending were considered necessary beyond €104.5 million of loan-loss provisions for the whole portfolio of structured finance. Santander’s net exposure in project finance dropped by €1,300 million to €11,957 million at the end of 2010, as a result of three partial transfer transactions of the portfolio of projects to CLOs made in the three years prior to 2010.

As a result of integrating Alliance & Leicester into the Group in 2008, a portfolio of structured transactions is maintained. It is a diversified portfolio of specialized financing transactions. The exposure at the end of 2010 was 15.9% lower than in 2009 at £4,936 million (€5,735 million), corresponding to 241 transactions.

D. Exposures related to complex structured assets

Grupo Santander continues to have a very limited exposure to instruments or complex structured vehicles, reflecting a management culture one of hallmarks of which is prudence in risk management. At the end of 2010, the Group had:

•

CDOs/CLOs: the position remained insignificant at €486 million, 24% lower than in 2009. Most of this was due to the integration of the portfolio of Alliance & Leicester in 2008 (32% of the portfolio has an AAA rating and 77% A or higher).

288

•

Non-Agency CMOs and pass-throughs with underlying mortgage alt-A⁷: exposure of €639 million at the end of 2010 from the integration of Sovereign Bank in January 2009. The position was 17% lower than in 2009.

•

Hedge funds: the total exposure is not significant (€540 million at the end of 2010) and most of it is through financing these funds (€295 million), as the rest is direct participation in portfolio. This exposure has low levels of loan-to-value of around 35% (€1,543 million of collateral). The risk with this type of counterparty is analyzed case by case, establishing the percentages of collateral on the basis of the features and assets of each fund. The exposure was 2% lower than in 2009.

•

Conduits: The positions inherited from buying Alliance & Leicester were integrated, at market prices, into the Group’s balance sheet in the third quarter of 2010.

•

Monolines: Santander’s exposure to bond insurance companies was €274 million⁸at the end of 2010, €244 million of it indirect exposure by virtue of the guarantee provided by this type of entity to various financing or traditional securitization transactions. The exposure in this case is double default, as the primary underlying assets are of high credit quality (mainly AA). The small remaining amount is direct exposure (for example, via purchase of protection from the risk of non-payment by any of these insurance companies through a credit default swap). The exposure was 31% lower than in 2009.

Overall, it can be asserted that the exposure to these instruments arising from the Group’s ordinary transactions has decreased in 2010. The only increases are due to the integration of exposures at entities acquired by the Group, such as Alliance&Leicester and Sovereign (in 2008 and 2009, respectively). These exposures were known at the time of the purchase and adequate provisions were recognized. Since the integration of these positions in the Group, they have been significantly reduced with the final aim of their elimination from the balance sheet. Specifically, the A&L exposure in CDOs, CLOs, Alt-A and Conduits, has been reduced by approximately an 80% in 2010.

Santander’s policy for the approval of new transactions in these products continues to be very prudent and conservative, and is subject to strict supervision by the Group’s senior management. Before approval is given for a new transaction, product or underlying asset, the risk division checks:

•

whether there is an adequate valuation model (mark-to-market, mark-to-model or mark-to-liquidity) to monitor the value of each exposure.

•

whether the inputs enabling application of this valuation model are observable in the market.

Provided the two aforementioned conditions are met, the risk division ascertains:

•

the availability of adequate systems duly adapted for the calculation and daily monitoring of the results, positions and risks of the new transactions.

•

the degree of liquidity of the product or underlying asset, with a view to arranging the related hedge on a timely basis.


⁷		Alternative A-paper: mortgages originated in the US market which for various reasons are considered as having an intermediate risk level between prime and subprime mortgages (not having all the necessary information, loan-to-value levels higher than usual, etc).

⁸		Guarantees provided by monolines for bonds issued by US states (municipal bonds) are not considered as exposure. As a result of the acquisition of Sovereign Bank, the Group integrated as of December 31, 2010 a €1,328 million portfolio of these bonds.

289

E. Internal model

The Bank of Spain approved at the end of 2008 the use of our internal market risk model for calculating regulatory capital. Although the approval was first effective for treasury trading activity of the Parent bank, the Group’s objective is to gradually increase approval to the rest of the units.

As a result of this approval, the regulatory capital of trading activity is now calculated via advanced methods instead of the previous standard methods. The VaR calculated for the Market Risks Area is the fundamental metric and incorporates an incremental default risk.

We closely co-operate with the Bank of Spain in order to advance in the perimeter permitted to utilize the Internal Model (at the geographic and operational levels), as well as analysis of the impact of possible future changes, in line with the consultative documents published by the Basel Committee in December 2010 to strengthen the capital of banks.⁹

F. Capital Management

The objective of capital management is to optimize its structure and its cost, from the regulatory and economic perspectives. Therefore, different tools and policies are utilized, such as capital increases and computable issuances (preferred and subordinated), results, dividend policy and securitizations.

Our eligible stockholders’ equity was €69,347 million at December 31, 2010. The surplus over the minimum required by the Bank of Spain was €21,886 million. In accordance with the Basel II Accord criteria, at December 31, 2010, the BIS II ratio was 13.1% (as compared to 14.2% at December 31, 2009), Tier I Capital was 10.0% (10.1% a year earlier) and core capital was 8.8% (8.6% in December 2009).

The Group’s AA rating for long-term debt with the four main agencies was confirmed in the latest reviews.

G. Market Risk: VaR Consolidated Analysis

Our total daily VaR as of December 31, 2009, and December 31, 2010, broken down by trading and structural (non-trading) portfolios, were as set forth below.

Figures in millions of EUR


				*December 31, 2010*
	*December 31, 2009*			Low			Average			High			Period End

TOTAL		983.6			580.4			804.5			952.8			580.4

Trading		27.5			21.2			28.7			37.5			29.6
Non-Trading		1,015.0			582.1			812.2			974.5			582.1
Diversification Effect		(58.9	)		(22.8	)		(36.4	)		(59.2	)		(31.3	)


⁹		“Basel III: A global regulatory framework for more resilient banks and banking systems” and “Basel III: International framework for liquidity risk measurement, standards and monitoring.”

290

Item 12. Description of Securities Other than Equity Securities.

A. Debt Securities

Not Applicable

B. Warrants and Rights

Not Applicable

C. Other Securities

Not Applicable

D. American Depositary Shares

Our Depositary is J.P. Morgan Chase & Co., with its principal executive office located at 270 Park Avenue, New York, NY 10017-2070.

Each ADS represents the right to receive one share of Capital Stock of Banco Santander, S.A., par value €0.50 each.

•

Fees charged to investors as outlined in the deposit agreement are the following:


Category of Service	Depositary Actions	Associated Fee

(a) Deposit or substituting the underlying shares	Each person to whom ADSs are issued against deposits of shares, including deposits in respect of share distributions, rights and other distributions.¹ Each person surrendering ADRs for the withdrawal of deposited securities.	$5.00 for each 100 ADSs (or portion thereof) delivered or surrendered.

(b) Receiving or distributing dividends	Distribution of dividends.	$0.01 per ADS.

(c) Selling or Exercising Rights	Distribution or sale of securities, the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities.	$5.00 for each 100 ADSs (or portion thereof).

(d) Withdrawing an underlying security	Acceptance of ADRs surrendered for withdrawal of deposited securities.	$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs surrendered.

(d) Expenses of the Depositary	Expenses incurred on behalf of Holders in connection with:	Expenses payable at the sole discretion of the depositary.
	i) Stock transfer or other taxes and other governmental charges.
	ii) Cable, telex and facsimile transmission and delivery.
	iii) Expenses of the Depositary in connection with the conversion of foreign currency into US dollars (which are paid out of such foreign currency).
	iv) Such fees and expenses as are incurred by the Depositary (including without limitation expenses incurred on behalf of Holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in delivery of deposited securities or otherwise in connection with the Depositary’s or its Custodian’s compliance with applicable law, rule or regulation.


¹		The Depositary may sell (by public or private sale) sufficient securities and property received in respect of such share distributions, rights and other distributions prior to such deposit to cover such charge.

293

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

Not Applicable

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

A. Not Applicable

B. Not Applicable

C. Not Applicable

D. Not Applicable

E. Not Applicable

Item 15. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of December 31, 2010, Banco Santander, S.A., under the supervision and with the participation of its management, including its disclosure committee, its chief executive officer, chief financial officer, and chief accounting officer, performed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15 (e) under the Exchange Act). There are, as described below, inherent limitations to the effectiveness of any control system, including disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives.

Based on such evaluation, Banco Santander, S.A.’s chief executive officer, chief financial officer and chief accounting officer concluded that Banco Santander, S.A.’s disclosure controls and procedures are effective in ensuring that information Banco Santander, S.A. is required to disclose in the reports it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to Banco Santander, S.A.’s management, including its disclosure committee, chief executive officer, chief financial officer and the chief accounting officer, as appropriate to allow timely decisions regarding required disclosures.

(b) Management’s Report on Internal Control over Financial Reporting

The management of Banco Santander, S.A. is responsible for establishing and maintaining an adequate internal control over financial reporting as defined in Rule 13a-15 (f) under the Exchange Act.

Our internal control over financial reporting is a process designed by, or under the supervision of, the Bank’s principal executive and principal financial officers and effected by the Bank’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes, in accordance with generally accepted accounting principles. For Banco Santander, S.A., generally accepted accounting principles refer to the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”).

Our internal control over financial reporting includes those policies and procedures that:

•

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

295

•

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

•

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We have adapted our internal control over financial reporting to the most rigorous international standards and comply with the guidelines set by the Committee of Sponsoring Organizations of the Treadway Commission in its Enterprise Risk Management Integrated Framework. These guidelines have been extended and installed in our Group companies, applying a common methodology and standardizing the procedures for identifying processes, risks and controls, based on the Enterprise Risk Management Integrated Framework.

The documentation, update and maintenance processes in the Group’s companies have been constantly directed and monitored by a global coordination team, which set the guidelines for its development and supervised its execution at the unit level.

The general framework is consistent, as it assigns to management specific responsibilities regarding the structure and effectiveness of the processes related directly and indirectly with the production of consolidated financial statements, as well as the controls needed to mitigate the risks inherent in these processes.

Under the supervision and with the participation of the management of the Group, including our chief executive officer, our chief financial officer and our chief accounting officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Enterprise Risk Management — Integrated Framework. Based on this assessment, management believes that, as of December 31, 2010, its internal control over financial reporting was effective based on those criteria.

Our independent registered public accounting firm has issued an audit report on the effectiveness of our internal control over financial reporting as of December 31, 2010. This report follows below.

296

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Banco Santander, S.A.:

We have audited the internal control over financial reporting of Banco Santander, S.A. (the “Bank”) and Companies composing, together with the Bank, the Santander Group (the “Group”) as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the consolidated financial statements as of and for the year ended December 31, 2010 of the Group and our report dated June 6, 2011 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the retrospective adjustment to the consolidated statement of cash flows for the year ended December 31, 2009 as required by the amendment to International Accounting Standard 7.

/s/ Deloitte, S.L.

DELOITTE, S.L.

Madrid, Spain

June 6, 2011

(d) Changes in internal controls over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16. [Reserved]

Item 16A. Audit committee financial expert

The audit and compliance committee has five members, all of whom are non-executive independent directors (as defined by Article 6.2 c) of the Rules and Regulations of the Board). All members of the audit and compliance committee also meet the independence criteria set by the NYSE for foreign private issuers. Our Rules and Regulations of the Board provide that all members of the audit and compliance must have knowledge, aptitude and experience in the areas of accounting, auditing or risk management. Currently, the chairman of the audit and compliance committee is Manuel Soto. Our standards for director independence may not necessarily be consistent with, or as stringent as, the standards for director independence established by the NYSE.

Our board of directors has determined that Manuel Soto is an “Audit Committee Financial Expert” in accordance with SEC rules and regulations.

Item 16B. Code of Ethics

We have adopted a code of ethics (the “General Code of Conduct”) that is applicable to all members of the boards of the companies of the Group, to all employees subject to the Code of Conduct of the Securities Market, including the Bank’s chairman, chief executive officer, chief financial officer and chief accounting officer, and to all those employees designated by the Human Resources Division that have been specifically informed of their subjection to this General Code of Conduct. This Code establishes the principles that guide these officers’ and directors’ respective actions: ethical conduct, professional standards and confidentiality. It also establishes the limitations and defines the conflicts of interest arising from their status as senior executives or directors.

At its meeting of November 18, 2009, the audit and compliance committee was informed of and approved the corresponding proposal for amendment of the Group’s General Code of Conduct. The amendment primarily provided for the addition of a new Section II, which sets forth the ethical principles of the organization that must govern all acts by the employees. At its meeting of December 21, 2009, the board approved the proposed amendment submitted by the audit and compliance committee.

This Code is available on our website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—corporate governance—internal code of conduct”.

298

Item 16C. Principal Accountant Fees and Services

Amounts paid to the firms belonging to the Deloitte worldwide organization, the Group’s principal auditor, for statutory audit and other services were as follows:


	2010		2009		2008
	(in millions of euros)

Audit fees		21.6		19.6		18.3
Audit related fees (1)		10.7		11.0		10.4
Non-audit related fees (excluding tax services) (2)		1.7		1.5		3.4
Tax fees (3)		3.9		3.2		1.9
Other fees paid (4)		8.3		3.7		3.8

		46.2		39.0		37.8


(1)		Comprising €6.5 million in 2010, €6.8 million in 2009 and €5.9 million in 2008 for the audit of internal control pursuant to the requirements of the Sarbanes-Oxley Act and the review of the calculation of regulatory capital (Basel) and €4.2 million in 2010, €4.2 million in 2009 and €4.5 million in 2008 for other reports required by legal regulations issuing from the national supervisory bodies of the countries where the Group does business, notably the semi-annual audits and the reports prepared in compliance with the requirements of the US securities market (other than those required by the Sarbanes-Oxley Act). Additionally, the auditors were paid €5.4 million in 2010, €5.7 million in 2009 and €6.2 million in 2008, which related mainly to six monthly audits. The €6.2 million paid in 2008 were recognized as an increase in the cost of the business combination effected in that year.

(2)		The amounts invoiced for services other than audit which, during the past fiscal year, were principally those relating to securitization processes and financial studies.

(3)		All tax services have been approved by the audit and compliance committee of the board of directors.

(4)		Amounts invoiced for audits on purchases and other corporate transactions (due diligence).

The services commissioned from the Group’s auditors meet the independence requirements stipulated by the Account Auditing Act 19/1988, of July 12, as well as those included in the Sarbanes-Oxley Act of 2002, assumed by the Securities and Exchange Commission (SEC), and in the Rules and Regulations of the Board.

The audit and compliance committee proposes to the board the fees to be paid to the external auditor and the scope of its professional mandate.

The audit and compliance committee is required to pre-approve the main audit contract of the Bank or of any other company of the Group with its principal auditing firm. This main contract sets forth the scope of the audit services and audit-related services to be provided by the auditing firm, the term (typically, three years), the fees to be paid and the Group companies to which it will be applied. Once the term of the first contract expires, it can be rolled over by subsequent periods of one year upon approval by the audit and compliance committee.

If a new Group company is required to engage an auditing firm for audit and audit-related services, those services have to be pre-approved by the audit and compliance committee.

All non-audit services provided by the Group’s principal auditing firm or other auditing firms in 2010 were approved by the audit and compliance committee, and all such non-audit services to be provided in the future will also require approval from the audit and compliance committee.

The audit and compliance committee is regularly informed of all fees paid to the auditing firms by the Group companies.

299

Item 16D. Exemption from the Listing Standards for Audit Committees

Not applicable.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table shows the repurchases of shares made by the Bank or any of its Affiliated Purchasers during 2010:


					(c) Total number of		(d) Maximum number (or
					shares (or units)		approximate dollar value) of
	(a) Total number of		(b) Average		purchased as part of		shares (or units) that may yet be
	shares (or units)		price paid per		publicly announced		purchased under the plans or
2010	purchased		share (or unit)		plans or programs		programs
January		103,421,817		10.72		—		—
February		100,233,852		9.69		—		—
March		27,491,992		9.61		—		—
April		108,950,854		9.14		—		—
May		99,873,110		8.69		—		—
June		22,295,623		7.64		—		—
July		124,779,560		9.60		—		—
August		50,604,177		8.98		—		—
September		28,677,511		9.44		—		—
October		44,174,049		9.44		—		—
November		52,209,355		7.97		—		—
December		32,020,740		7.92		—		—

Total		794,732,640

During 2010, all purchases and sales of equity securities were made in open-market transactions.

Item 16F. Changes in Registrant’s Certifying Accountant

Not applicable

Item 16G. Corporate Governance

The following is a summary of the significant differences between our corporate governance practices and those applicable to domestic issuers under the New York Stock Exchange (“NYSE”) listing standards.

Independence of the directors on the board of directors

Under the NYSE corporate governance rules, a majority of the board of directors must be composed of independent directors, the independence of whom is determined in accordance with highly detailed rules promulgated by the NYSE. Spanish law does not contain any such requirements although there is a non-binding recommendation for listed companies in Spain that the number of independent directors be at least one third of the total size of the Board. Article 42.1 of our By-laws establishes that the shareholders at the general shareholders’ meeting shall endeavor to ensure that independent directors represent at least one-third of the total number of directors. Article 6.1 of the Rules and Regulations of the Board of Directors establishes likewise that the board shall endeavor that the number of independent directors represent at least one-third of all directors. The board of directors of Santander has nine independent directors (out of nineteen directors total), as defined in Article 6.2. c) of the Rules and Regulations of the Board. We have not

300

determined whether or not the directors on the Santander Board would be considered independent under the NYSE rules except in the case of the members of our audit and compliance committee where we have determined that all of them meet the NYSE independence criteria for foreign private issuers. Article 6.2. c) of the Rules and Regulations of the Board defines the concept of an independent director as follows:

“External or non-executive Directors who have been appointed based on their personal or professional status and who perform duties not conditioned by relationships with the Company, or with the significant shareholders or management thereof shall be considered independent directors.

In no event may there be a classification as independent directors of those who:

a) Have been employees or executive directors of the Group’s companies, except after the passage of 3 or 5 years, respectively, since the cessation of such relationship.

b) Receive from the Company, or from another Group company, any amount or benefit for something other than director compensation, unless it is immaterial. For purposes of the provisions of this sub-section, neither dividends nor pension supplements that a director receives by reason of the director’s prior professional or employment relationship shall be taken into account, provided that such supplements are unconditional and therefore, the Company paying them may not suspend, modify or revoke the accrual thereof without breaching its obligations.

c) Are, or have been during the preceding 3 years, a partner of the external auditor or the party responsible for auditing the Company or any other Group company during such period.

d) Are executive directors or senior managers of another company in which an executive director or senior manager of the Company is an external director.

e) Maintain, or have maintained during the last year, a significant business relationship with the Company or with any Group company, whether in their own name or as a significant shareholder, director or senior manager of an entity that maintains or has maintained such relationship. Business relationships shall be considered the relationships of a provider of goods or services, including financial, advisory or consulting services.

f) Are significant shareholders, executive directors or senior managers of an entity that receives, or has received during the preceding 3 years, significant donations from the Company or the Group. Those who are merely members of the board of a foundation that receives donations shall not be considered included in this letter.

g) Are spouses, persons connected by a similar relationship of affection, or relatives to the second degree of an executive director or senior manager of the Company.

h) Have not been proposed, whether for appointment or for renewal, by the appointments and remuneration committee.

i) Are, as regards a significant shareholder or shareholder represented on the board, in one of the circumstances set forth in letters (i), (v), (vi) or (vii) of this sub-section 2(c). In the event of a kinship relationship set forth in item (vii), the limitation shall apply not only with respect to the shareholder, but also with respect to the related proprietary directors thereof in the affiliate company”.

The above independence criteria are the same as those set forth by the Unified Code of Good Governance, which is a non-binding code approved by the Spanish CNMV in 2006.

Independence of the directors on the audit and compliance committee

Under the NYSE corporate governance rules, all members of the audit committee must be independent. Independence is determined in accordance with highly detailed rules promulgated by the NYSE. Such independence criteria are met by all members of our audit and compliance committee. The audit and compliance committee of the board of directors of Santander is composed of five directors. All members are non-executive independent directors and its chairman is independent in accordance with the standards set forth in the previously mentioned Article 6.2. c) of the Rules and Regulations of the Board. These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. Under Spanish law, a majority of the members and the chairman of the audit committee must be non-executive. The composition of the audit and compliance committee is described under “—Audit and compliance committee and appointments and remuneration committee”.

301

Independence of the directors on the appointments and remuneration committee

In accordance with the NYSE corporate governance rules, all US companies listed on the NYSE must have a compensation committee and a nominating and corporate governance committee and all members of such committees must be independent in accordance with highly detailed rules promulgated by the NYSE. Under Spanish law, these committees are not required, though there is a non-binding recommendation for listed companies in Spain to have these committees and for them to be composed of non-executive directors and chaired by a non-executive independent director. Santander satisfies this non-binding recommendation. The appointments and remuneration committee of the board of directors of Santander is composed of five directors. All members are non-executive independent directors and its chairman is independent in accordance with the standards set forth in the previously mentioned Article 6.2. c) of the Rules and Regulations of the Board. These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. The composition of the appointments and remuneration committee is described under “—Audit and compliance committee and appointments and remuneration committee”.

During the fiscal year 2010, none of the members of the appointments and remuneration committee was an executive director, member of senior management or a Bank employee, and no executive director or member of senior management has held a position on the board (or its remuneration committee) of companies that employ members of the appointments and remuneration committee.

Separate meetings for non-management directors

In accordance with the NYSE corporate governance rules, non-management directors must meet periodically outside of the presence of management. Under Spanish law, this practice is not required and as such, the non-management directors on the board of directors of Santander do not meet outside of the presence of the directors who also serve in a management capacity.

The audit and compliance committee and the appointments and remuneration committee of the Bank’s board of directors consist entirely of non-management independent directors.

The audit and compliance committee and the appointments and remuneration committee met 11 and 9 times, respectively, in 2010.

Code of ethics

Under the NYSE corporate governance rules, all US companies listed on the NYSE must adopt a Code of Business Conduct and Ethics which contains certain required topics. In March 2000, Santander adopted a General Code of Conduct, which applies to all members of the boards of the companies of the Group, to all employees subject to the Code of Conduct in the Securities Market, including the Bank’s chairman, chief executive officer, chief financial officer and chief accounting officer, and to all those employees designated by the human resources division that have been specifically informed of their subjection to this General Code of Conduct. On July 28, 2003, the board approved amendments to the General Code of Conduct to conform it to the requirements of Law 44/2002 (November 2, 2002) on reform measures of the financial system. The new Code came into force on August 1, 2003 and replaced the previous one. The General Code of Conduct establishes the principles that guide the actions of officers and directors including ethical conduct, professional standards and confidentiality.

302

PART III

Item 17. Financial Statements

We have responded to Item 18 in lieu of this item.

Item 18. Financial Statements

Reference is made to Item 19 for a list of all financial statements filed as part of this Form 20-F.

Item 19. Exhibits


(a) Index to Financial Statements	Page

Report of Deloitte, S.L.		F-1

Consolidated Balance Sheets at December 31, 2010, 2009 and 2008		F-2

Consolidated Income Statements for the Years Ended December 31, 2010, 2009 and 2008		F-3

Consolidated Statements of Recognized Income and Expense for the Years Ended December 31, 2010, 2009 and 2008		F-4

Consolidated Statements Of Changes In Total Equity for the Years Ended December 31, 2010, 2009 and 2008		F-5

Consolidated Cash Flow Statement for the Years Ended December 31, 2010, 2009 and 2008		F-8

Notes to the Consolidated Financial Statements		F-9

(b) List of Exhibits.


Exhibit
Number			Description
	1.1		By-laws (Estatutos) of Banco Santander, S.A. (incorporated by reference to Exhibit 1.1 to our Annual Report on Form 20-F for the year ended December 31, 2009, filed with the Securities and Exchange Commission on June 10, 2010).

	1.2		By-laws (Estatutos) of Banco Santander, S.A., (English translation of By-laws set forth in Exhibit 1.1 hereto) (incorporated by reference to Exhibit 1.2 to our Annual Report on Form 20-F for the year ended December 31, 2009, filed with the Securities and Exchange Commission on June 10, 2010).

	4.1	*	Restated Consortium and Shareholders Agreement dated April 1, 2010, among the Royal Bank of Scotland Group plc, Banco Santander, S.A., the State of the Netherlands and RFS Holdings B.V. (incorporated by reference to Exhibit 4.1 to our Annual Report on Form 20-F for the year ended December 31, 2009, filed with the Securities and Exchange Commission on June 10, 2010).

	8.1		List of Subsidiaries (incorporated by reference as Exhibits I, II and III of our Financial Statements filed with this Form 20-F).

	12.1		Section 302 Certification by the chief executive officer.

	12.2		Section 302 Certification by the chief financial officer.

	12.3		Section 302 Certification by the chief accounting officer.

	13.1		Section 906 Certification by the chief executive officer, the chief financial officer and the chief accounting officer.

	15.1		Consent of Deloitte, S.L.


*		Pursuant to a request for confidential treatment filed with the Security and Exchange Commission, the confidential portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission.

We will furnish to the Securities and Exchange Commission, upon request, copies of any unfiled instruments that define the rights of holders of long-term debt of Banco Santander, S.A.

304

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Banco Santander, S.A.:

We have audited the accompanying consolidated balance sheets of Banco Santander, S.A. (the “Bank”) and Companies composing, together with the Bank, the Santander Group (the “Group”), as of December 31, 2010, 2009 and 2008, and the related consolidated income statements, statements of recognized income and expense, changes in total equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Bank’s directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Group as of December 31, 2010, 2009, and 2008, and the results of its operations, its changes in equity, and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IFRS-IASB”).

As discussed in Note 1.h. to the consolidated financial statements, the Group has retrospectively adjusted the consolidated statement of cash flows for the year ended December 31, 2009 as required by the amendment to International Accounting Standard 7.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the Group’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 6, 2011 expressed an unqualified opinion on the Group’s internal control over financial reporting.

/s/ Deloitte, S.L.

DELOITTE, S.L.

Madrid, Spain

June 6, 2011

SANTANDER GROUP

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2010, 2009 AND 2008
(Thousands of Euros)

Note

2010

2009

2008

ASSETS

CASH AND BALANCES WITH CENTRAL BANKS

77,785,278

34,889,413

45,781,345

FINANCIAL ASSETS HELD FOR TRADING:

156,761,730

135,054,321

151,817,192

Loans and advances to credit institutions

16,216,136

5,952,956

5,149,584

Loans and advances to customers

755,175

10,076,412

684,348

Debt instruments

57,871,332

49,920,518

43,895,548

Equity instruments

8,850,318

9,248,022

6,272,403

Trading derivatives

73,068,769

59,856,413

95,815,309

OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS:

39,480,171

37,813,669

25,817,138

Loans and advances to credit institutions

18,831,109

16,242,609

8,911,906

Loans and advances to customers

7,777,403

8,328,516

8,972,707

Debt instruments

4,604,308

7,365,213

5,154,732

Equity instruments

8,267,351

5,877,331

2,777,793

AVAILABLE-FOR-SALE FINANCIAL ASSETS:

86,234,826

86,620,503

48,920,306

Debt instruments

79,688,813

79,289,337

42,547,677

Equity instruments

6,546,013

7,331,166

6,372,629

LOANS AND RECEIVABLES:

768,858,435

736,746,371

699,614,727

Loans and advances to credit institutions

44,808,106

57,641,042

64,730,787

Loans and advances to customers

715,621,319

664,145,998

617,231,380

Debt instruments

8,429,010

14,959,331

17,652,560

HELD-TO-MATURITY INVESTMENTS

—

CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK

1,464,203

1,419,841

2,402,736

HEDGING DERIVATIVES

8,227,013

7,833,850

9,698,132

NON-CURRENT ASSETS HELD FOR SALE

6,285,020

5,789,189

9,267,486

INVESTMENTS:

272,915

164,473

1,323,453

Associates

272,915

164,473

1,323,453

Jointly controlled entities

—

INSURANCE CONTRACTS LINKED TO PENSIONS

2,219,948

2,356,151

2,446,989

REINSURANCE ASSETS

546,392

416,822

458,388

TANGIBLE ASSETS:

11,141,637

8,995,735

8,501,552

Property, plant and equipment-

9,831,811

7,904,819

7,630,935

For own use

7,507,990

6,202,162

5,664,616

Leased out under an operating lease

2,323,821

1,702,657

1,966,319

Investment property

1,309,826

1,090,916

870,617

INTANGIBLE ASSETS:

28,064,379

25,643,414

20,623,267

Goodwill

24,622,345

22,865,056

18,836,199

Other intangible assets

3,442,034

2,778,358

1,787,068

TAX ASSETS:

22,572,333

20,654,815

16,953,613

Current

5,483,665

4,827,554

2,309,465

Deferred

17,088,668

15,827,261

14,644,148

OTHER ASSETS:

7,586,403

6,130,891

6,005,226

Inventories

455,107

518,833

620,774

Other

7,131,296

5,612,058

5,384,452

TOTAL ASSETS

1,217,500,683

1,110,529,458

1,049,631,550

LIABILITIES AND EQUITY

FINANCIAL LIABILITIES HELD FOR TRADING:

136,771,837

115,516,474

136,620,235

Deposits from central banks

12,605,204

2,985,488

9,109,857

Deposits from credit institutions

28,370,399

43,131,718

26,841,854

Customer deposits

7,848,954

4,658,372

4,896,065

Marketable debt securities

365,265

586,022

3,569,795

Trading derivatives

75,279,097

58,712,624

89,167,433

Short positions

12,302,918

5,139,730

3,035,231

Other financial liabilities

—

302,520

—

OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS:

51,019,749

42,371,301

28,639,359

Deposits from central banks

336,985

10,103,147

4,396,901

Deposits from credit institutions

19,263,029

12,744,848

9,733,268

Customer deposits

27,142,003

14,636,466

9,318,117

Marketable debt securities

4,277,732

4,886,840

5,191,073

Subordinated liabilities

—

Other financial liabilities

—

FINANCIAL LIABILITIES AT AMORTISED COST:

898,968,685

823,402,745

770,007,599

Deposits from central banks

8,644,043

22,345,110

9,211,957

Deposits from credit institutions

70,892,525

50,781,276

70,583,533

Customer deposits

581,384,862

487,681,399

406,015,268

Marketable debt securities

188,229,225

206,490,311

227,642,422

Subordinated liabilities

30,474,637

36,804,601

38,873,250

Other financial liabilities

19,343,393

19,300,048

17,681,169

CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK

810,376

806,418

440,136

HEDGING DERIVATIVES

6,633,628

5,191,077

5,957,611

LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE

54,584

293,512

49,688

LIABILITIES UNDER INSURANCE CONTRACTS

10,449,274

16,916,446

16,849,511

PROVISIONS:

15,659,853

17,532,739

17,736,259

Provisions for pensions and similar obligations

9,519,093

10,628,684

11,198,117

Provisions for taxes and other legal contingencies

3,670,184

3,283,339

2,363,706

Provisions for contingent liabilities and commitments

1,030,244

641,620

678,584

Other provisions

1,440,332

2,979,096

3,495,852

TAX LIABILITIES:

8,618,390

7,003,945

5,768,665

Current

4,306,246

3,337,444

2,304,599

Deferred

4,312,144

3,666,501

3,464,066

OTHER LIABILITIES

7,599,849

7,624,159

7,560,995

TOTAL LIABILITIES

1,136,586,225

1,036,658,816

989,630,058

EQUITY

SHAREHOLDERS’ EQUITY:

77,333,542

71,831,688

65,886,582

Share capital

4,164,561

4,114,413

3,997,030

Registered

4,164,561

4,114,413

3,997,030

Less: Uncalled capital

—

Share premium

29,457,152

29,305,257

28,103,802

Reserves

28,307,196

24,607,287

20,868,406

Accumulated reserves (losses)

28,254,649

24,539,624

21,158,869

Reserves (losses) of entities accounted for using the equity method

52,547

67,663

(290,463

)

Other equity instruments

8,686,000

7,188,465

7,155,566

Equity component of compound financial instruments

1,668,049

—

Other

7,017,951

7,188,465

7,155,566

Less: Treasury shares

(192,288

)

(29,755

)

(421,198

)

Profit for the year attributable to the Parent

8,180,909

8,942,538

8,876,414

Less: Dividends and remuneration

(1,269,988

)

(2,296,517

)

(2,693,438

)

VALUATION ADJUSTMENTS:

(2,315,203

)

(3,165,104

)

(8,299,696

)

Available-for-sale financial assets

(1,248,853

)

645,345

79,293

Cash flow hedges

(171,762

)

(255,498

)

(309,883

)

Hedges of net investments in foreign operations

(1,955,824

)

296,686

1,467,289

Exchange differences

1,061,407

(3,851,826

)

(9,424,871

)

Non-current assets held for sale

—

189

36,878

Entities accounted for using the equity method

(171

)

—

(148,402

)

Other valuation adjustments

—

NON-CONTROLLING INTERESTS:

5,896,119

5,204,058

2,414,606

Valuation adjustments

838,415

45,228

(371,310

)

Other

5,057,704

5,158,830

2,785,916

TOTAL EQUITY

80,914,458

73,870,642

60,001,492

TOTAL LIABILITIES AND EQUITY

1,217,500,683

1,110,529,458

1,049,631,550

MEMORANDUM ITEMS:

CONTINGENT LIABILITIES

59,795,253

59,256,076

65,323,194

CONTINGENT COMMITMENTS

203,709,393

163,530,756

131,725,006

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated balance sheet at December 31, 2010.

F-2

SANTANDER GROUP

CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(Thousands of Euros)


			(Debit) Credit
	Notes		2010			2009			2008

Interest and similar income		38		52,906,754			53,173,004			55,043,546
Interest expense and similar charges		39		(23,682,375	)		(26,874,462	)		(37,505,084	)
INTEREST INCOME / (CHARGES)				29,224,379			26,298,542			17,538,462
Income from equity instruments		40		362,068			436,474			552,757
Income from companies accounted for using the equity method		41		16,921			(520	)		791,754
Fee and commission income		42		11,679,702			10,726,368			9,741,400
Fee and commission expense		43		(1,945,552	)		(1,646,234	)		(1,475,105	)
Gains/losses on financial assets and liabilities (net)		44		2,164,423			3,801,645			2,892,249
Held for trading				1,311,812			2,098,449			566,828
Other financial instruments at fair value through profit or loss				70,028			197,993			607,309
Financial instruments not measured at fair value through profit or loss				791,430			1,630,858			1,722,651
Other				(8,847	)		(125,655	)		(4,539	)
Exchange differences (net)		45		441,148			444,127			582,215
Other operating income				8,195,567			7,928,538			9,436,308
Income from insurance and reinsurance contracts issued		46		7,162,076			7,112,856			8,385,788
Sales and income from the provision of non-financial services		46		340,371			377,800			586,872
Other		46		693,120			437,882			463,648
Other operating expenses				(8,089,330	)		(7,784,621	)		(9,164,487	)
Expenses of insurance and reinsurance contracts		46		(6,784,207	)		(6,773,996	)		(8,134,199	)
Changes in inventories		46		(204,920	)		(237,396	)		(469,154	)
Other		46		(1,100,203	)		(773,229	)		(561,134	)
TOTAL INCOME				42,049,326			40,204,319			30,895,553
Administrative expenses				(16,255,988	)		(14,824,605	)		(11,665,857	)
Personnel expenses		47		(9,329,556	)		(8,450,283	)		(6,813,351	)
Other general administrative expenses		48		(6,926,432	)		(6,374,322	)		(4,852,506	)
Depreciation and amortization	16 and 18			(1,939,984	)		(1,596,445	)		(1,239,590	)
Provisions (net)		25		(1,132,621	)		(1,792,123	)		(1,640,561	)
Impairment losses on financial assets (net)				(10,443,149	)		(11,578,322	)		(6,283,052	)
Loans and receivables		10		(10,266,899	)		(11,087,996	)		(5,896,888	)
Other financial instruments not measured at fair value through profit or loss		8		(176,250	)		(490,326	)		(386,164	)
Impairment losses on other assets (net)				(285,864	)		(164,630	)		(1,049,226	)
Goodwill and other intangible assets	17 and 18			(69,399	)		(31,249	)		(983,929	)
Other assets				(216,465	)		(133,381	)		(65,297	)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		49		350,323			1,565,013			101,156
Negative goodwill on business combinations				—			—			—
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations		50		(290,170	)		(1,225,407	)		1,730,902
OPERATING PROFIT / (LOSS) BEFORE TAX				12,051,873			10,587,800			10,849,325
Income tax		27		(2,923,190	)		(1,206,610	)		(1,836,052	)
PROFIT FROM CONTINUING OPERATIONS				9,128,683			9,381,190			9,013,273
PROFIT (LOSS) FROM DISCONTINUED OPERATIONS (Net)		37		(26,922	)		30,870			319,141
CONSOLIDATED PROFIT FOR THE YEAR				9,101,761			9,412,060			9,332,414
Profit attributable to the Parent				8,180,909			8,942,538			8,876,414
Profit attributable to non-controlling interests		28		920,852			469,522			456,000

EARNINGS PER SHARE
From continuing and discontinued operations
Basic earnings per share (euros)		4		0.9418			1.0454			1.2207
Diluted earnings per share (euros)		4		0.9356			1.0382			1.2133
From continuing operations
Basic earnings per share (euros)		4		0.9449			1.0422			1.1780
Diluted earnings per share (euros)		4		0.9387			1.0350			1.1709

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated income statement for the year ended December 31, 2010.

F-3

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF RECOGNIZED INCOME AND EXPENSE
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(Thousands of Euros)


	2010			2009			2008

CONSOLIDATED PROFIT FOR THE YEAR		9,101,761			9,412,060			9,332,414

OTHER RECOGNIZED INCOME AND EXPENSE		1,643,088			5,551,130			(9,319,420	)
Available-for-sale financial assets:		(2,719,375	)		1,253,709			(2,043,666	)
Revaluation gains/(losses)		(1,863,743	)		2,132,897			(3,539,079	)
Amounts transferred to income statement		(855,632	)		(777,149	)		1,571,044
Other reclassifications		—			(102,039	)		(75,631	)
Cash flow hedges:		117,103			73,172			(374,700	)
Revaluation gains/(losses)		(88,704	)		160,387			(479,905	)
Amounts transferred to income statement		205,807			(40,852	)		15,060
Amounts transferred to initial carrying amount of hedged items		—			—			—
Other reclassifications		—			(46,363	)		90,145
Hedges of net investments in foreign operations:		(2,252,510	)		(1,170,603	)		828,815
Revaluation gains/(losses)		(2,443,625	)		(1,221,590	)		828,815
Amounts transferred to income statement		191,115			50,987			—
Other reclassifications		—			—			—
Exchange differences:		5,704,027			5,914,974			(8,423,459	)
Revaluation gains/(losses)		5,986,471			5,943,755			(8,640,444	)
Amounts transferred to income statement		(282,444	)		(28,781	)		216,985
Other reclassifications		—			—			—
Non-current assets held for sale:		(48	)		(36,830	)		36,878
Revaluation gains/(losses)		(48	)		(36,830	)		—
Amounts transferred to income statement		—			—			—
Other reclassifications		—			—			36,878
Actuarial gains/(losses) on pension plans		—			—			—
Entities accounted for using the equity method:		(171	)		148,402			(146,562	)
Revaluation gains/(losses)		(171	)		—			(149,073	)
Amounts transferred to income statement		—			—			43,728
Other reclassifications		—			148,402			(41,217	)
Other recognized income and expense		—			—			—
Income tax		794,062			(631,694	)		803,274

TOTAL RECOGNIZED INCOME AND EXPENSE		10,744,849			14,963,190			12,994
Attributable to the Parent		9,030,810			14,077,130			(145,318	)
Attributable to non-controlling interests		1,714,039			886,060			158,312

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of recognized income and expense for the year ended December 31, 2010.

F-4

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(Thousands of Euros)


	Equity Attributable to the Parent
	Shareholders’ Equity
						Reserves
									Reserves
									(Losses)
									of Entities									Profit for			Less:
						Accumulated			Accounted for			Other			Less:			the Year			Dividends			Total									Non-
	Share		Share			Reserves			Using the Equity			Equity			Treasury			Attributable to			and			Shareholders’			Valuation						Controlling			Total
	Capital		Premium			(Losses)			Method			Instruments			Shares			the Parent			Remuneration			Equity			Adjustments			Total			Interests			Equity

Ending balance at 12/31/09		4,114,413		29,305,257			24,539,624			67,663			7,188,465			(29,755	)		8,942,538			(2,296,517	)		71,831,688			(3,165,104	)		68,666,584			5,204,058			73,870,642
Adjustments due to changes in accounting policies		—		—			—			—			—			—			—			—			—			—			—			—			—
Adjustments due to errors		—		—			—			—			—			—			—			—			—			—			—			—			—
Adjusted beginning balance		4,114,413		29,305,257			24,539,624			67,663			7,188,465			(29,755	)		8,942,538			(2,296,517	)		71,831,688			(3,165,104	)		68,666,584			5,204,058			73,870,642
Total recognized income and expense		—		—			—			—			—			—			8,180,909			—			8,180,909			849,901			9,030,810			1,714,039			10,744,849
Other changes in equity		50,148		151,895			3,715,025			(15,116	)		1,497,535			(162,533	)		(8,942,538	)		1,026,529			(2,679,055	)		—			(2,679,055	)		(1,021,978	)		(3,701,033	)
Capital increases		50,148		161,925			(44,357	)		—			(167,716	)		—			—			—			—			—			—			—			—
Capital reductions		—		—			—			—			—			—			—			—			—			—			—			—			—
Conversion of financial liabilities into equity		—		—			—			—			—			—			—			—			—			—			—			—			—
Increases in other equity instruments		—		—			—			—			1,820,869			—			—			—			1,820,869			—			1,820,869			—			1,820,869
Reclassification of financial liabilities to other equity instruments		—		—			—			—			—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—			—			—			—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—			(1,825,367	)		—			—			—			—			(1,269,988	)		(3,095,355	)		—			(3,095,355	)		(399,876	)		(3,495,231	)
Transactions involving own equity instruments (net)		—		—			(18,429	)		—			—			(162,533	)		—			—			(180,962	)		—			(180,962	)		—			(180,962	)
Transfers between equity items		—		(10,030	)		6,713,241			(15,116	)		(42,074	)		—			(8,942,538	)		2,296,517			—			—			—			—			—
Increases (decreases) due to business combinations		—		—			—			—			—			—			—			—			—			—			—			101,189			101,189
Equity-instrument-based payments		—		—			—			—			(113,560	)		—			—			—			(113,560	)		—			(113,560	)		—			(113,560	)
Other increases/(decreases) in equity		—		—			(1,110,063	)		—			16			—			—			—			(1,110,047	)		—			(1,110,047	)		(723,291	)		(1,833,338	)
Ending balance at 12/31/10		4,164,561		29,457,152			28,254,649			52,547			8,686,000			(192,288	)		8,180,909			(1,269,988	)		77,333,542			(2,315,203	)		75,018,339			5,896,119			80,914,458

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended December 31, 2010.

F-5

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(Thousands of Euros)


	Equity Attributable to the Parent
	Shareholders’ Equity
						Reserves
									Reserves
									(Losses)
									of Entities									Profit for			Less:
						Accumulated			Accounted for			Other			Less:			the Year			Dividends			Total									Non-
	Share		Share			Reserves			Using the Equity			Equity			Treasury			Attributable to			and			Shareholders’			Valuation						Controlling			Total
	Capital		Premium			(Losses)			Method			Instruments			Shares			the Parent			Remuneration			Equity			Adjustments			Total			Interests			Equity

Ending balance at 12/31/08		3,997,030		28,103,802			21,158,869			(290,463	)		7,155,566			(421,198	)		8,876,414			(2,693,438	)		65,886,582			(8,299,696	)		57,586,886			2,414,606			60,001,492
Adjustments due to changes in accounting policies		—		—			—			—			—			—			—			—			—			—			—			—			—
Adjustments due to errors		—		—			—			—			—			—			—			—			—			—			—			—			—
Adjusted beginning balance		3,997,030		28,103,802			21,158,869			(290,463	)		7,155,566			(421,198	)		8,876,414			(2,693,438	)		65,886,582			(8,299,696	)		57,586,886			2,414,606			60,001,492
Total recognized income and expense		—		—			—			—			—			—			8,942,538			—			8,942,538			5,134,592			14,077,130			886,060			14,963,190
Other changes in equity		117,383		1,201,455			3,380,755			358,126			32,899			391,443			(8,876,414	)		396,921			(2,997,432	)		—			(2,997,432	)		1,903,392			(1,094,040	)
Capital increases		117,383		1,224,930			(88,431	)		—			(3,769	)		—			—			—			1,250,113			—			1,250,113			2,187,547			3,437,660
Capital reductions		—		—			—			—			—			—			—			—			—			—			—			—			—
Conversion of financial liabilities into equity		—		—			—			—			—			—			—			—			—			—			—			—			—
Increases in other equity instruments		—		—			—			—			147,805			—			—			—			147,805			—			147,805			—			147,805
Reclassification of financial liabilities to other equity instruments		—		—			—			—			—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—			—			—			—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—			(2,118,895	)		—			—			—			—			(2,296,517	)		(4,415,412	)		—			(4,415,412	)		(232,948	)		(4,648,360	)
Transactions involving own equity instruments (net)		—		—			320,761			—			—			391,443			—			—			712,204			—			712,204			—			712,204
Transfers between equity items		—		(23,475	)		5,890,770			358,126			(42,445	)		—			(8,876,414	)		2,693,438			—			—			—			—			—
Increases (decreases) due to business combinations		—		—			—			—			—			—			—			—			—			—			—			(10,330	)		(10,330	)
Equity-instrument-based payments		—		—			—			—			(76,252	)		—			—			—			(76,252	)		—			(76,252	)		—			(76,252	)
Other increases/(decreases) in equity		—		—			(623,450	)		—			7,560			—			—			—			(615,890	)		—			(615,890	)		(40,877	)		(656,767	)
Ending balance at 12/31/09		4,114,413		29,305,257			24,539,624			67,663			7,188,465			(29,755	)		8,942,538			(2,296,517	)		71,831,688			(3,165,104	)		68,666,584			5,204,058			73,870,642

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended December 31, 2010.

F-6

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 (Continued)
(Thousands of Euros)


	Equity Attributable to the Parent
	Shareholders’ Equity
						Reserves
									Reserves
									(Losses)
									of Entities									Profit for			Less:
						Accumulated			Accounted for			Other			Less:			the Year			Dividends			Total									Non-
	Share		Share			Reserves			Using the Equity			Equity			Treasury			Attributable to			and			Shareholders’			Valuation						Controlling			Total
	Capital		Premium			(Losses)			Method			Instruments			Shares			the Parent			Remuneration			Equity			Adjustments			Total			Interests			Equity

Ending balance at 12/31/07		3,127,148		20,370,128			15,475,993			895,437			7,086,881			(192	)		9,060,258			(1,537,807	)		54,477,846			722,036			55,199,882			2,358,269			57,558,151
Adjustments due to changes in accounting policies		—		—			—			—			—			—			—			—			—			—			—			—			—
Adjustments due to errors		—		—			—			—			—			—			—			—			—			—			—			—			—
Adjusted beginning balance		3,127,148		20,370,128			15,475,993			895,437			7,086,881			(192	)		9,060,258			(1,537,807	)		54,477,846			722,036			55,199,882			2,358,269			57,558,151
Total recognized income and expense		—		—			—			—			—			—			8,876,414			—			8,876,414			(9,021,732	)		(145,318	)		158,312			12,994
Other changes in equity		869,882		7,733,674			5,682,876			(1,185,900	)		68,685			(421,006	)		(9,060,258	)		(1,155,631	)		2,532,322			—			2,532,322			(101,975	)		2,430,347
Capital increases		869,882		7,907,651			(134,197	)		—			—			—			—			—			8,643,336			—			8,643,336			73,975			8,717,311
Capital reductions		—		—			—			—			—			—			—			—			—			—			—			—			—
Conversion of financial liabilities into equity		—		—			—			—			—			—			—			—			—			—			—			—			—
Increases in other equity instruments		—		—			—			—			107,644			—			—			—			107,644			—			107,644			—			107,644
Reclassification of financial liabilities to other equity instruments		—		—			—			—			—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—			—			—			—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—			(4,070,179	)		—			—			—			—			(1,155,631	)		(5,225,810	)		—			(5,225,810	)		(240,620	)		(5,466,430	)
Transactions involving own equity instruments (net)		—		—			12,249			—			—			(421,006	)		—			—			(408,757	)		—			(408,757	)		—			(408,757	)
Transfers between equity items		—		(173,977	)		10,421,154			(1,185,900	)		(1,019	)		—			(9,060,258	)		—			—			—			—			—			—
Increases (decreases) due to business combinations		—		—			—			—			—			—			—			—			—			—			—			—			—
Equity-instrument-based payments		—		—			—			—			(37,940	)		—			—			—			(37,940	)		—			(37,940	)		—			(37,940	)
Other increases/(decreases) in equity		—		—			(546,151	)		—			—			—			—			—			(546,151	)		—			(546,151	)		64,670			(481,481	)
Ending balance at 12/31/08		3,997,030		28,103,802			21,158,869			(290,463	)		7,155,566			(421,198	)		8,876,414			(2,693,438	)		65,886,582			(8,299,696	)		57,586,886			2,414,606			60,001,492

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended December 31, 2010.

F-7

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(Thousands of Euros)


	2010			2009 (*)			2008

A. CASH FLOWS FROM OPERATING ACTIVITIES:		51,874,233			(18,035,526	)		15,827,165

Consolidated profit for the year		9,101,761			9,412,060			9,332,414
Adjustments made to obtain the cash flows from operating activities-		17,849,063			15,558,115			10,254,304
Depreciation and amortization		1,939,984			1,596,445			1,269,527
Other adjustments		15,909,079			13,961,670			8,984,777
Net increase/decrease in operating assets-		28,486,803			23,749,168			70,560,851
Financial assets held for trading		6,309,594			(10,145,789	)		(8,175,164	)
Other financial assets at fair value through profit or loss		412,899			11,553,038			(453,996	)
Available-for-sale financial assets		(3,144,943	)		30,417,303			(3,249,597	)
Loans and receivables		18,480,649			(11,195,718	)		79,907,831
Other operating assets		6,428,604			3,120,334			2,531,777
Net increase/decrease in operating liabilities-		55,488,257			(17,729,540	)		68,246,416
Financial liabilities held for trading		7,582,939			(14,436,807	)		11,080,000
Other financial liabilities at fair value through profit or loss		285,192			6,729,640			(11,078,643	)
Financial liabilities at amortized cost		47,274,149			(10,206,053	)		70,455,437
Other operating liabilities		345,977			183,680			(2,210,378	)
Income tax recovered/paid		(2,078,045	)		(1,526,993	)		(1,445,118	)

B. CASH FLOWS FROM INVESTING ACTIVITIES:		(2,634,789	)		2,884,124			950,026

Payments-		5,310,382			5,340,862			4,241,797
Tangible assets		3,634,889			1,879,565			2,737,784
Intangible assets		1,504,615			3,222,774			750,440
Investments		10,878			13,523			753,573
Subsidiaries and other business units		160,000			225,000			—
Non-current assets held for sale and associated liabilities		—			—			—
Held-to-maturity investments		—			—			—
Other payments related to investing activities		—			—			—
Proceeds-		2,675,593			8,224,986			5,191,823
Tangible assets		696,066			1,175,834			1,509,291
Intangible assets		9,706			1,320,677			—
Investments		104,197			13,888			44,607
Subsidiaries and other business units		32,777			756,112			828,346
Non-current assets held for sale and associated liabilities		1,832,847			4,958,475			2,809,579
Held-to-maturity investments		—			—			—
Other proceeds related to investing activities		—			—			—

C. CASH FLOWS FROM FINANCING ACTIVITIES:		(11,301,009	)		433,148			432,327

Payments-		21,470,012			18,281,063			14,321,999
Dividends		4,107,007			4,386,550			4,243,021
Subordinated liabilities		7,727,191			4,245,272			1,315,190
Redemption of own equity instruments		—			—			—
Acquisition of own equity instruments		7,372,022			9,263,615			7,842,820
Other payments related to financing activities		2,263,792			385,626			920,968
Proceeds-		10,169,003			18,714,211			14,754,326
Subordinated liabilities		286,701			3,653,548			311,835
Issuance of own equity instruments		—			—			7,020,677
Disposal of own equity instruments		7,191,060			9,975,819			7,421,814
Other proceeds related to financing activities		2,691,242			5,084,844			—
D. EFFECT OF FOREIGN EXCHANGE RATE CHANGES		4,957,430			3,826,322			(2,490,948	)
E. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		42,895,865			(10,891,932	)		14,718,570
F. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		34,889,413			45,781,345			31,062,775
G. CASH AND CASH EQUIVALENTS AT END OF YEAR		77,785,278			34,889,413			45,781,345
COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF YEAR:
Cash		5,515,130			5,171,858			4,407,124
Cash equivalents at central banks		72,270,148			29,717,555			41,374,221
Other financial assets		—			—			—
Less: Bank overdrafts refundable on demand		—			—			—

TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR		77,785,278			34,889,413			45,781,345

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of cash flows for the year ended December 31, 2010.


(*)		Cash flows for the year ended December 31, 2009 have been restated in accordance with the amendment to IAS 7. See Note 1.h to the consolidated financial statements.

F-8

Banco Santander, S.A. and Companies composing the Santander Group

Notes to the consolidated financial statements
for the year ended December 31, 2010

Introduction, basis of presentation of the consolidated financial statements and other information

Introduction

Banco Santander, S.A. (the Bank or Banco Santander) is a private-law entity subject to the rules and regulations applicable to banks operating in Spain. The Bylaws and other public information on the Bank can be consulted on the website of the Bank (www.santander.com) and at its registered office at Paseo de Pereda 9-12, Santander.

In addition to the operations carried on directly by it, the Bank is the head of a group of subsidiaries that engage in various business activities and which compose, together with it, Santander Group (“the Group” or “Santander Group”). Therefore, the Bank is obliged to prepare, in addition to its own separate financial statements, the Group’s consolidated financial statements, which also include the interests in joint ventures and investments in associates.

The Group’s consolidated financial statements for 2008 were approved by the shareholders at the Bank’s annual general meeting on June 19, 2009. The Group’s consolidated financial statements for 2009 were approved by the shareholders at the Bank’s annual general meeting on June 11, 2010. The 2010 consolidated financial statements of the Group and the 2010 financial statements of the Bank and of substantially all the Group companies have not yet been approved by their shareholders at the respective annual general meetings. However, the Bank’s board of directors considers that the aforementioned financial statements will be approved without any changes.

Basis of presentation of the consolidated financial statements

Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements for the years beginning on or after January 1, 2005 in conformity with the International Financial Reporting Standards (IFRS) previously adopted by the European Union.

In order to adapt the accounting system of Spanish credit institutions to the new standards, the Bank of Spain issued Circular 4/2004, of December 22, on Public and Confidential Financial Reporting Rules and Formats.

The Group’s consolidated financial statements for 2010, 2009 and 2008 were formally prepared by the Bank’s directors (at the board meeting on March 21, 2011) in accordance with International Financial Reporting Standards as adopted by the European Union and with Bank of Spain Circular 4/2004 and Spanish corporate and commercial law applicable to the Group and in compliance with IFRS as issued by the International Accounting Standards Board (“IFRS — IASB” and together with IFRS adopted by the European Union, “IFRS”), using the basis of consolidation, accounting policies and measurement bases set forth in Note 2 to these consolidated financial statements and, accordingly, they present fairly the Group’s equity and financial position at December 31, 2010 and the consolidated results of its operations, the changes in the consolidated equity and the consolidated cash flows in 2010. These consolidated financial statements were prepared from the separate accounting records of the Bank and of each of the companies composing the Group, and include the adjustments and reclassifications required to unify the accounting policies and measurement bases applied by the Group.

F-9

The notes to the consolidated financial statements contain supplementary information to that presented in the consolidated balance sheet, consolidated income statement, consolidated statement of recognized income and expense, consolidated statement of changes in total equity and consolidated statement of cash flows. The notes provide, in a clear, relevant, reliable and comparable manner, narrative descriptions and breakdowns of these financial statements.

Adoption of new standards and interpretations issued

The following standards and interpretations, which were adopted by the European Union, came into force in 2010:

	•		Revision of IFRS 3, Business Combinations and Amendment to IAS 27, Consolidated and Separate Financial Statements: introduce significant changes in several matters relating to accounting for business combinations. These changes include most notably the following: acquisition costs must be expensed, rather than recognized as an increase in the cost of the business combination; in step acquisitions the acquirer must remeasure at fair value the investment held prior to the date that control is obtained; transactions with non-controlling interests are accounted for as equity transactions while control is retained; and there is an option to measure at fair value the non-controlling interests of the acquiree, as opposed to the single current treatment of measuring them as the proportionate share of the fair value of the net assets acquired.

			The amendments to IAS 27 also revised certain aspect of IAS 7, Statements of Cash Flows, whereby the cash flows relating to changes in ownership of a subsidiary that do not give rise to a loss of control are classified as cash flows from financing activities. This amendment must be applied retrospectively.

			In 2010 the Group applied the aforementioned revised standards to the recognition of business combinations (acquisitions) performed in the year (see Note 3) and to the transactions carried out with non-controlling interests that did not result in a change in control of the corresponding units (see, in Note 3, the transactions performed with the non-controlling interests of Banco Santander México, Santander BanCorp and Santander Brasil).

	•		Amendment to IAS 39, Eligible Hedged Items: this amendment establishes that inflation may only be designated as a hedged item if it is a contractually specified portion of the cash flows to be hedged. Only the intrinsic value and not the time value of a purchased option may be used as a hedging instrument.

	•		Amendments to IFRS 2, Share-based Payment: these amendments relate to the recognition of share-based payment transactions among group entities. The main change is that the amendments supersede IFRIC 8 and IFRIC 11 and, accordingly, these interpretations will be repealed since their content is included in the main body of the standard. It is clarified that an entity that receives services from employees or suppliers should account for the transaction even if another group entity settles the arrangement and irrespective of whether it is cash-settled or equity-settled.

	•		IFRIC 12, Service Concession Arrangements: owing to the nature of this interpretation, its application does not affect the consolidated financial statements.

	•		IFRIC 17, Distributions of Non-Cash Assets to Owners: this interpretation applies to the accounting treatment of distributions of non-cash assets to an entity’s owners (“dividends in kind”), although its scope does not include distributions of assets within a group or between jointly controlled entities. The interpretation states that an entity must measure such liabilities at the fair value of the asset to be distributed and that any difference between the carrying amount of the dividend payable and the carrying amount of the asset distributed must be recognized in profit or loss.

F-10

•

IFRIC 18, Transfers of Assets from Customers: this interpretation clarifies the requirements for agreements in which an entity receives from customers items of property, plant or equipment (or cash to construct such items) that must be used to connect those customers to a network (e.g. electricity, gas or water supply).

The application of these accounting standards and interpretations did not have a material effect on the Group’s consolidated financial statements, except those indicated.

Various Bank of Spain Circulars relating to accounting aspects also came into force in 2010, notably the following:

	•		Bank of Spain Circular 3/2010, of June 29: building on the experience accumulated over recent years and taking into consideration the current economic situation, the Bank of Spain reviewed the references established in Circular 4/2004 for determining allowances and provisions for insolvency risk attributable to the borrower, and the consideration that must be made of guarantees received.

	•		Bank of Spain Circular 7/2010 on the implementation of certain aspects of the mortgage market establishes the essential data of the special accounting recognition that the issuer must include in its financial statements, and the minimum content of the note to the financial statements of activities, which includes the express representation of the board of directors or equivalent body of the credit institution with regard to the existence of express policies and procedures on its activity in the mortgage market in Spain.

	•		Bank of Spain Circular 8/2010, of 22 December, amends Bank of Spain Circular 4/2004, of December 22, in order to adapt it to the amendments introduced in the International Financial Reporting Standards adopted by the European Union, primarily the amendments to IFRS 3 and IAS 27.

Also, at the date of preparation of these consolidated financial statements the following standards and interpretations with effective dates subsequent to December 31, 2010 were in force:

	•		Amendment to IAS 32, Classification of Rights Issues (obligatory for years beginning on or after February 1, 2010): this amendment relates to the classification of foreign currency denominated rights issues (rights, options or warrants). Pursuant to this amendment, when these rights are to acquire a fixed number of shares in exchange for a fixed amount, they are equity instruments, irrespective of the currency in which that fixed amount is denominated and provided that other requirements of the standard are fulfilled.

	•		Revision of IAS 24, Related Party Disclosures (obligatory for years beginning on or after January 1, 2011): the revised IAS 24 addresses related party disclosures in financial statements. There are two new basic features. Firstly, it provides a partial exemption from certain disclosure requirements when the transactions are between state-controlled entities or government-related entities (or equivalent government institution) and, secondly, it simplifies the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition.

	•		Amendments to IFRIC 14, Prepayments of a Minimum Funding Requirement (obligatory for years beginning on or after January 1, 2011): these amendments remedy the fact that in some circumstances entities could not recognize certain voluntary prepayments as assets.

	•		IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments (obligatory for years beginning on or after July 1, 2010): this interpretation addresses the accounting by a debtor when all or part of a financial liability is extinguished through the issue of equity instruments to the creditor. The interpretation does not apply to transactions in situations where the counterparties in question are shareholders or related parties, acting in their capacity as such, or where extinguishing the financial liability by issuing equity shares is in accordance with the original terms of the financial liability. In this case, the equity instruments issued are measured at fair value at the date the liability is extinguished and any difference between this value and the carrying amount of the liability is recognized in profit or loss.

F-11

The application of these accounting standards and interpretations is not expected to have a material effect on the Group’s consolidated financial statements.

At the date of preparation of these consolidated financial statements, the following standards and interpretations with effective dates subsequent to December 31, 2010 had not yet been adopted by the European Union:

	•		IFRS 9, Financial Instruments: Classification and Measurement (obligatory as from January 1, 2013), which will in the future replace the part of the current IAS 39 relating to the classification and measurement of financial assets, has been postponed by the European Union. IFRS 9 presents significant differences with respect to the current standard, including the approval of a new classification model based on only two categories, namely instruments measured at amortized cost and those measured at fair value, the disappearance of the current Held-to-maturity investments and Available-for-sale financial assets categories, impairment analyses only for assets measured at amortized cost and the non-separation of embedded derivatives in financial contracts.

	•		Amendment to IFRS 7, Financial Instruments: Disclosures (obligatory for years beginning on or after July 1, 2011) — Transfers of Financial Assets. This amendment enhances disclosures about transfers of assets, both those in which the assets are not derecognized and mainly those that qualify for derecognition but for which the entity retains continuing involvement.

	•		Amendments to IAS 12, Income Taxes: these amendments incorporate the requirement to measure deferred tax assets and liabilities relating to investment property depending on whether the entity expects to recover the carrying amount of the asset through use or sale.

	•		Amendment to IFRS 1 relating to the presentation of financial statements following a period of hyperinflation.

	•		IFRS 10, Consolidated Financial Statements (obligatory as from January 1, 2013), which will replace the consolidation guidance in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation — Special Purpose Entities by introducing a single consolidation model for all entities based on control, irrespective of the nature of the investee. Under IFRS 10, control is based on whether an investor has 1) power over the investee; 2) exposure, or rights, to variable returns from its involvement with the investee; and 3) the ability to use its power over the investee to affect the amount of the returns. The requirements relating to separate financial statements remain unchanged and are included in the amended IAS 27 Separate Financial Statements. The other portions of IAS 27 will be replaced by IFRS 10.

	•		IFRS 11, Joint Arrangements (obligatory as from January 1, 2013): introduces new accounting requirements for joint arrangements, replacing IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities Non-monetary Contributions by Ventures. The option to apply the proportional consolidation method when accounting for jointly controlled entities is removed. Additionally, IFRS 11 eliminates jointly controlled assets and jointly controlled operations (as defined under IAS 31) to now only differentiate between joint operations and joint ventures. A joint operation is a joint arrangement whereby the parties that have joint control have rights to the assets and obligations for the liabilities. A joint venture is a joint arrangement whereby the parties that have joint control have rights to the net assets.

	•		IFRS 12, Disclosure of Interests in Other Entities (obligatory as from January 1, 2013): requires enhanced disclosures about both consolidated entities and unconsolidated entities in which an entity has involvement. The objective of IFRS 12 is to require information so that financial statement users may evaluate the basis of control, any restrictions on consolidated assets and liabilities, risk exposures arising from involvements with unconsolidated structured entities and non-controlling interest holders’ involvement in the activities of consolidated entities.

F-12

	•		As the amended IAS 27 Separate Financial Statements above mentioned, the Amendment to IAS 28, Investments in Associates and Joint Ventures (obligatory as from January 1, 2013): includes conforming changes based on the issuance of IFRS 10, IFRS 11 and IFRS 12.

	•		IFRS 13, Fair Value Measurement (obligatory as from January 1, 2013), which will replace the guidance on fair value measurement in existing IFRS accounting literature with a single standard.

The future impact that the adoption of these standards could have has not been determined as of the date of this report.

All accounting policies and measurement bases with a material effect on the 2010 consolidated financial statements were applied in their preparation.

	c)		*Use of estimates*

			The consolidated results and the determination of consolidated equity are sensitive to the accounting policies, measurement bases and estimates used by the directors of the Bank in preparing the consolidated financial statements. The main accounting policies and measurement bases are set forth in Note 2.

			In the consolidated financial statements estimates were occasionally made by the senior management of the Bank and of the consolidated entities in order to quantify certain of the assets, liabilities, income, expenses and commitments reported herein. These estimates, which were made on the basis of the best information available, relate basically to the following:

	•		The impairment losses on certain assets (see Notes 6, 7, 8, 10, 12, 13, 16, 17 and 18);

	•		The assumptions used in the actuarial calculation of the post-employment benefit liabilities and commitments and other obligations (see Note 25);

	•		The useful life of the tangible and intangible assets (see Notes 16 and 18);

	•		The measurement of goodwill arising on consolidation (see Note 17); and

	•		The fair value of certain unquoted assets (see Notes 7, 8, 9 and 11).

Other matters

i. Disputed corporate resolutions

The directors of the Bank and their legal advisers consider that the objection to certain resolutions adopted by the Bank’s shareholders at the general meetings on January 18, 2000, March 4, 2000, March 10 2001, February 9, 2002, June 24, 2002, June 21, 2003, June 19, 2004, June 18, 2005 and June 11, 2010 will have no effect on the financial statements of the Bank and the Group.

The status of these matters at the date of preparation of the consolidated financial statements is detailed below:

On April 25, 2002, the Santander Court of First Instance number 1 dismissed in full the claim contesting the resolutions adopted by the shareholders at the general meeting on January 18, 2000. The plaintiff filed an appeal against the judgment. On December 2, 2002, the Cantabria Provincial Appellate Court dismissed the appeal. The Bank appeared as a party to the cassation appeal and filed pleadings with respect to the inadmissibility of the appeal. In the order dated November 4, 2008 the Supreme Court considered the appeal to have been withdrawn in view of the decease of the appellant and the failure to appear of his heirs.

F-13

On November 29, 2002, the Santander Court of First Instance number 2 dismissed in full the claims contesting the resolutions adopted by the shareholders at the general meeting on March 4, 2000. The plaintiffs filed an appeal against the judgment. On July 5, 2004, the Cantabria Provincial Appellate Court dismissed the appeal. One of the appellants prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of July 31, 2007.

On March 12, 2002, the Santander Court of First Instance number 4 dismissed in full the claims contesting the resolutions adopted by the shareholders at the general meeting on March 10, 2001. The plaintiffs filed an appeal against the judgment. On April 13, 2004, the Cantabria Provincial Appellate Court dismissed the appeals. One of the appellants prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of November 6, 2007.

On September 9, 2002, the Santander Court of First Instance number 5 dismissed in full the claim contesting the resolutions adopted by the shareholders at the general meeting on February 9, 2002. The plaintiff filed an appeal against the judgment. On January 14, 2004, the Cantabria Provincial Appellate Court dismissed the appeal. The appellant prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of May 8, 2007.

On May 29, 2003, the Santander Court of First Instance number 6 dismissed in full the claim contesting the resolutions adopted by the shareholders at the general meeting on June 24, 2002. The plaintiffs filed an appeal against the judgment. On November 15, 2005, the Cantabria Provincial Appellate Court dismissed the appeal in full. The appellants filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment. The Bank appeared as a party to the two appeals and filed pleadings with respect to the inadmissibility thereof. In the order dated September 23, 2008 the Supreme Court refused leave to proceed with the aforementioned appeals.

On November 23, 2007, the Santander Court of First Instance number 7 dismissed in full the claims contesting the resolutions adopted by the shareholders at the annual general meeting on June 21, 2003. The plaintiffs filed an appeal against the judgment. The court was notified of the decease of one of the appellants and the court considered his appeal to have been withdrawn on the grounds of his decease and the failure to appear of his heirs. The other three appeals filed were dismissed in full by the Cantabria Provincial Appellate Court on June 30, 2009. The appellants filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against this judgment, and the appeal filed by one of the three appellants was refused leave to proceed by the Provincial Appellate Court. The cassation appeals filed against the judgments that dismissed the claims contesting the resolutions adopted at the annual general meeting on June 21, 2003 were not given leave to proceed by order of the Supreme Court of January 25, 2011.

On October 28, 2005, the Santander Court of First Instance number 8 dismissed in full the claims contesting the resolutions adopted by the shareholders at the general meeting on June 19, 2004. The plaintiffs filed an appeal against the judgment. In a Judgment dated June 28, 2007 the Cantabria Provincial Appellate Court dismissed the appeals in full. Against this judgment the plaintiffs prepared and filed cassation appeals and extraordinary appeals on the grounds of procedural infringements. The cassation appeal and extraordinary appeal for procedural infringement filed by one of the appellants were refused leave to proceed due to the decease of the appellant and the failure to appear of his heirs. The other two appeals were refused leave to proceed by order of the Supreme Court of October 27, 2009.

On July 13, 2007, the Santander Court of First Instance number 10 dismissed in full the claims contesting the resolutions adopted by the shareholders at the general meeting on June 18, 2005. The plaintiffs filed an appeal against the judgment. In a judgment dated May 14, 2009 the Cantabria Provincial Appellate Court dismissed the appeals in full. Against this judgment the plaintiffs prepared and filed a cassation appeal and an extraordinary appeal on the grounds of procedural infringements, and these appeals are still being processed at the Supreme Court.

Proceeding under Civil Procedure Law (case no. 5/2011) conducted before the Mercantile Court no. 1 of Santander following a claim contesting the resolutions adopted by the shareholders at the general meeting held on June 11, 2010. The Bank filed the statement of defense on May 20, 2011.

F-14

In an interlocutory order of April 15, 2008, the Supreme Court dismissed the request filed by the Association for the Defense of Investors and Customers for the decision handed down in the judgment of December 17, 2007 to be set aside.

The appeal filed by the Association for the Defense of Investors and Customers against the aforementioned Supreme Court decision was given leave to proceed by the Spanish Constitutional Court.

Capital management

The Group’s capital management is performed at regulatory and economic levels.

Regulatory capital management is based on the analysis of the capital base and the capital ratios using the criteria of Bank of Spain Circular 3/2008. The aim is to achieve a capital structure that is as efficient as possible in terms of both cost and compliance with the requirements of regulators, ratings agencies and investors. Active capital management includes securitizations, sales of assets, issues of equity instruments (preference shares and subordinated debt) and hybrid instruments.

From an economic standpoint, capital management seeks to optimize value creation at the Group and at its constituent business units. To this end, the economic capital, RORAC (Return on Risk Adjusted Capital) and value creation data for each business unit are generated, analyzed and reported to the management committee on a quarterly basis. Within the framework of the internal capital adequacy assessment process (Pillar II of the Basel Capital Accord), the Group uses an economic capital measurement model with the objective of ensuring that there is sufficient capital available to support all the risks of its activity in various economic scenarios, with the solvency levels agreed upon by the Group.

In order to adequately manage the Group’s capital, it is essential to estimate and analyze future needs, in anticipation of the various phases of the business cycle. Projections of regulatory and economic capital are made based on the budgetary information (balance sheet, income statement, etc.) and on macroeconomic scenarios defined by the Economic Research Service. These estimates are used by the Group as a reference to plan the management actions (issues, securitizations, etc.) required to achieve its capital targets.

In addition, certain stress scenarios are simulated in order to assess the availability of capital in adverse situations. These scenarios are based on sharp fluctuations in macroeconomic variables, GDP, interest rates, stock market indexes, etc. that mirror historical crises that could happen again.

Bank of Spain Circular 3/2008 on the calculation and control of minimum capital requirements, which has been in force since June 2008, was partially amended in certain aspects by Circular 9/2010. Prior to the implementation of the new capital regulations known as Basel III, which will be carried out progressively from 2013 to 2019 through the corresponding European Directive, the current Bank of Spain Circular introduces new developments with regard to capital requirements (Pillar I), the possibility of using internal ratings-based (IRB) classifications and methods for calculating risk-weighted exposures, and the inclusion therein of operational risk. The objective is to render the regulatory requirements more sensitive to the risks actually borne by the entities in the performance of their business activities. Also, the new Circular established a supervisory review system to improve internal risk management and internal capital adequacy assessment based on the risk profile (Pillar II), and incorporates elements relating to disclosures and market discipline (Pillar III).

F-16

Santander Group intends to adopt, over the next few years, the advanced internal ratings-based (AIRB) approach under Basel II for substantially all its banks, until the percentage of net exposure of the loan portfolio covered by this approach exceeds 90%. The attainment of this short-term objective also depends on the acquisitions of new entities and the need for the various supervisors to coordinate the validation processes of these internal approaches. The Group is present in geographical areas where there is a common legal framework among supervisors, as is the case in Europe through the Capital Requirements Directive. However, in other jurisdictions, the same process is subject to the framework of cooperation between the home and host country supervisors under different legislations, which in practice entails adapting to the different criteria and timetables in order to obtain authorization to use the advanced approaches on a consolidated basis.

Accordingly, Santander Group continued in 2010 with the project for the progressive implementation of the technology platforms and methodological improvements required for the roll-out of the AIRB approaches for regulatory capital calculation purposes at the remaining Group units. Santander Group has obtained authorization from the supervisory authorities to use advanced approaches for the calculation of regulatory capital requirements for credit risk for the Parent and the main subsidiaries in Spain, the United Kingdom and Portugal, which represents nearly two thirds of its total exposure at 2010 year-end. The Group’s Basel implementation strategy is focused on obtaining authorization for the use of AIRB approaches at the main entities in the Americas and at consumer banking entities in Europe.

As regards the other risks explicitly addressed in Pillar I of the Basel Capital Accord, Santander Group was authorized to use its internal model for market risk with respect to the treasury area’s trading activities in Madrid and in 2010 it obtained authorization for the Chile and Portugal units, thus continuing implementation of the roll-out plan it submitted to the Bank of Spain for the other units.

With regard to operational risk, the Group considers that the internal model should be developed primarily on the basis of the experience accumulated in managing the entity through the corporate guidelines and criteria established after assuming control, which are a distinctive feature of Santander Group. The Group has performed numerous acquisitions in recent years and, as a result, a longer maturity period will be required in order to develop the internal model based on its own management experience of the various acquired entities. However, although the Group has decided to use the standardized approach for regulatory capital calculation purposes, it is considering the possibility of adopting AMA approaches once it has collated sufficient data using its own management model in order to make full use of the positive qualities that are characteristic of the Group.

Throughout 2010 Santander Group took part in the impact studies steered by the Basel Committee and CEBS, and coordinated locally by the Bank of Spain to gauge the impact of the new Basel III regulations which, when implemented, will establish new capital and liquidity standards with stricter and more standardized criteria at international level.

Santander Group’s eligible capital at 2010, 2009 and 2008 year-end exceeded the minimum requirements.

Royal Decree-Law 2/2011, approved on February 18, 2011, establishes the implementing regulations of the “Plan for Strengthening the Financial Sector” published in January 2011 by the Ministry of Economy and Finance, which aims, inter alia, to establish certain minimum requirements for core capital, in advance of those established by Basel III, to be met before autumn 2011. At the date of these financial statements, the Group met these minimum requirements for core capital.

	f)		*Environmental impact*

			In view of the business activities carried on by the Group entities, the Group does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its consolidated equity, financial position or results. Therefore, no specific disclosures relating to environmental issues are included in these notes to the consolidated financial statements.

F-17

Events after the reporting period

It should be noted that from January 1, 2011 to the date on which these financial statements were authorized for issue, the following significant events occurred in Santander Group:

	•		At its meeting of January 13, 2011, the Bank’s executive committee resolved to apply the Santander Dividendo Elección programme on the dates on which the third interim dividend is traditionally paid, whereby the shareholders were offered the option of receiving an amount equivalent to said dividend, the gross amount of which was EUR 0.117 per share, in shares or cash. Accordingly, an amount equal to the third interim dividend was paid in part in February 2011 in the form of a cash payment of EUR 129,189 thousand and the remainder through the delivery of bonus shares valued at EUR 845,318 thousand.

	•		On February 3, 2011, the Bank announced the payment of the fourth dividend for 2010 for a gross amount of EUR 0.228766 per share, which was paid in cash on May 1, 2011. With this dividend, which was the final dividend if the proposed distribution of profit to be submitted to the shareholders at the general meeting is approved, the total remuneration per share for 2010 was EUR 0.60 and the total remuneration distributed to the shareholders was EUR 4,999 million.

	•		On February 7, 2011, a takeover bid was announced in Poland for 100% of the Polish entity Bank Zachodni WBK (BZ WBK), which Allied Irish Bank (AIB), owner of 70.36% of BZ WBK, is obliged to accept, by virtue of the agreement entered into with Banco Santander in September 2010.

			Banco Santander’s bid entails a maximum consideration of approximately EUR 4,293 million in cash for 100% of BZ WBK. Its acceptance period runs from February 24, 2011 to March 25, 2011 and it is expected to be settled on April 1, 2011.

			On February 18, 2011, a notice of non-opposition was received from the Polish financial regulator -KNF- to the Group’s acquisition of a significant stake.

			On March 29, 2011, we announced that the acceptance period of the tender offer ended on Friday March 25, 2011, having commenced on February 24, 2011.

			According to information provided by the agent bank in the transaction, 69,912,653 BZ WBK shares were tendered, representing 95.67% of BZ WBK’s capital. Since the tender offer was made at a cash price of 226.89 PLN per share (approximately €57.05), the purchase of the shares tendered in the offer resulted in a payment of 15,862.48 million PLN (approximately €3,988.6 million).

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

			Additionally, on the same date of April 1, 2011 we acquired AIB’s 50% stake in BZ WBK Asset Management for €150 million in cash.

			At the date of preparation of these consolidated financial statements, we are still working in the initial accounting for this business combination. Accordingly, we have not been able to include detailed information about assets and liabilities acquired and goodwill corresponding to this transaction. We will include this information in next financial statements.

F-18

	•		On February 17, 2011, the sale of shares representing 1.9% of the share capital of Banco Santander Chile was performed for USD 291 million in total. The transaction gave rise to a gain of approximately EUR 110 million, which will be fully recognized in reserves. Following this transaction, the Group holds a 75% ownership interest in the share capital of Banco Santander Chile.

	•		On February 22, 2011, Banco Santander and the insurance company Zurich Financial Services Group entered into an agreement to create a strategic alliance that will boost Santander Group’s bancassurance business in five key Latin American markets: Brazil, Chile, Mexico, Argentina and Uruguay.

			Santander will create a holding company for the insurance “units” in Latin America. Zurich will acquire 51% of the share capital and will be responsible for managing the companies. Santander will own 49% of the share capital of the holding company and will enter into a distribution agreement for the sale of insurance products in each country for 25 years.

			The close of this transaction is subject to the final documentation and relevant authorizations from the various regulators.

	•		On December 3, 2010, for purely commercial reasons, the Group decided to contribute resources to the Santander Banif Inmobiliario, FII property investment fund (“the Fund”) through the subscription of new units and the granting of a two-year liquidity guarantee in order to meet any outstanding redemption claims by the unit holders and to avoid winding up the Fund. The Group offered the unit holders of the Fund the possibility, before February 16, 2011, to submit new requests for the total or partial redemption of their units or for the total or partial revocation of any redemption requests that they had previously submitted and had not been met.

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

			On March 1, 2011, the Group paid the full amount of the redemptions requested by the Fund’s unit holders, i.e. EUR 2,501 million (93.01% of the Fund’s net assets), through the subscription of the related units by the Group at their redemption value at February 28, 2011.

			Following the aforementioned acquisition, the Group owns 96.62% of the Fund. Furthermore, the suspension of redemptions was lifted from said date and the Fund is operating normally.

	•		On May 26, 2011, the Group announced that Banco Santander Río, S.A. had initiated proceedings to obtain authorization from the National Securities Commission of the Republic of Argentina and the U.S. Securities and Exchange Commission for a public offering of its Class B shares. No shares may be offered to the public until the aforementioned regulators have granted their respective authorizations.

			The Group has notified Banco Santander Río of its intention to sell a yet undetermined number of Banco Santander Río shares as part of the public offering.

Comparative information

The consolidated income statement for 2008 included in these consolidated financial statements differs from that published in the statutory consolidated financial statements for that year, since, as a result of the Group’s divestment in 2009 of the business in Venezuela through the sale of Banco de Venezuela, S.A., Banco Universal (see Note 3), the results arising from the consolidation of this company (EUR 332 million in 2008) were reclassified, pursuant to the accounting regulations in force, from each of the line items in which they were previously recognized to Profit/(loss) from discontinued operations.

Also, the consolidated statement of cash flows for 2009 included in these consolidated financial statements differs from that published in the statutory consolidated financial statements for that year since, in accordance with IAS 7 as revised in 2010 (see Note 1.b), in the 2009 statement of cash flows the Group reclassified EUR 5,084 million, relating to the cash flow arising from the sale to third parties of 14.45% of Banco Santander Brasil S.A. in 2009, from Cash flows from investing activities — Proceeds — Subsidiaries and other business units to Cash flows from financing activities — Proceeds — Other proceeds related to financing activities. The amendment to IAS 7 has no effect on the 2008 cash flow statement.

F-19

Additionally, in order to facilitate the comparison of information, mention should be made of the following:

	•		Banco Real has been fully consolidated in the Group’s consolidated financial statements since the fourth quarter of 2008; until then, it had been accounted for using the equity method through the ownership interest in RFS Holdings. Also, in the second half of 2008 the Group acquired, inter alia, Alliance & Leicester and the distribution channels and retail deposits of Bradford & Bingley, and in the first half of 2009 it acquired various companies (see Note 3), including most notably Sovereign Bancorp (which changed its name to Santander Holdings USA, Inc. on February 1, 2010), all of which have been fully consolidated since their respective acquisition dates.

	•		In 2009 the Group obtained extraordinary gains totalling EUR 2,587 million, net of tax, which were allocated in full to extraordinary write-downs. Accordingly, the net gains arising from the public offering of Banco Santander Brasil S.A. (EUR 1,499 million, recognised under Gains/(losses) on disposal of assets not classified as non-current assets held for sale — see Note 49) and from the exchange of issues (EUR 724 million — see Note 44), and other gains on the sale of 10% of Attijariwafa Bank Société Anonyme and other transactions (EUR 364 million) were allocated to provisions to credit loss allowances (EUR 1,041 million), to the write-down of assets acquired (EUR 554 million — see Note 50), to the write-down of the ownership interest held in Metrovacesa (EUR 269 million — see Note 8), to additions to the provision for restructuring costs (EUR 260 million, recognised under Provisions (net)) and to other provisions and write-downs (EUR 463 million, including provisions for pre-retirement benefits recognised under Provisions (net)), all net of taxes and non-controlling interests.

	•		In 2008 the Group obtained extraordinary gains totalling EUR 3,572 million, net of tax, which were allocated in full to extraordinary write-downs. Accordingly, the net gains arising from the sale of the Business Campus (EUR 586 million, recognised gross under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations — see Note 50), ABN’s liabilities (EUR 741 million, recognised under Gains/losses on financial assets and liabilities (net) — see Note 44) and the Italian businesses acquired from ABN (EUR 2,245 million, recognised gross under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations — see Note 50) were allocated to the write-down of the ownership interests in Fortis and The Royal Bank of Scotland (EUR 1,430 million, recognised gross under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations — see Note 50), to the write-down of the intangible assets of Santander UK (EUR 904 million, recognised under Impairment losses on other assets (net) — see Note 18), to additions to provisions for restructuring costs and for pre-retirement benefits (EUR 386 million and EUR 382 million, respectively, recognised under Provisions (net)), to the amortisation of goodwill at the Santander Consumer Finance Group and portfolio write-downs (EUR 295 million) and to other period provisions (EUR 175 million).

Accounting policies and measurement bases

The accounting policies and measurement bases applied in preparing the consolidated financial statements were as follows:

Foreign currency transactions

i. Functional currency

The Group’s functional currency is the euro. Therefore, all balances and transactions denominated in currencies other than the euro are deemed to be denominated in foreign currency.

F-20

ii. Translation of foreign currency balances

Foreign currency balances are translated to euros in two consecutive stages:

	•		Translation of foreign currency to the functional currency (currency of the main economic environment in which the entity operates), and

	•		Translation to euros of the balances held in the functional currencies of entities whose functional currency is not the euro.

Translation of foreign currency to the functional currency

Foreign currency transactions performed by consolidated entities (or entities accounted for using the equity method) not located in EMU countries are initially recognized in their respective currencies. Monetary items in foreign currency are subsequently translated to their functional currencies using the closing rate.

Furthermore:

	•		Non-monetary items measured at historical cost are translated to the functional currency at the exchange rate at the date of acquisition.

	•		Non-monetary items measured at fair value are translated at the exchange rate at the date when the fair value was determined.

	•		Income and expenses are translated at the average exchange rates for the year for all the transactions performed during the year. When applying this criterion, the Group considers whether there have been significant changes in the exchange rates in the year which, in view of their materiality with respect to the consolidated financial statements taken as a whole, would make it necessary to use the exchange rates at the transaction date rather than the aforementioned average exchange rates.

	•		The balances arising from non-hedging forward foreign currency/foreign currency and foreign currency/euro purchase and sale transactions are translated at the closing rates prevailing in the forward foreign currency market for the related maturity.

Translation of functional currencies to euros

If the functional currency is not the euro, the balances in the financial statements of the consolidated entities (or entities accounted for using the equity method) are translated to euros as follows:

	•		Assets and liabilities, at the closing rates.

	•		Income and expenses, at the average exchange rates for the year.

	•		Equity items, at the historical exchange rates.

iii. Recognition of exchange differences

The exchange differences arising on the translation of foreign currency balances to the functional currency are generally recognized at their net amount under Exchange differences in the consolidated income statement, except for exchange differences arising on financial instruments at fair value through profit or loss, which are recognized in the consolidated income statement without distinguishing them from other changes in fair value, and for exchange differences arising on non-monetary items measured at fair value through equity, which are recognized under Valuation adjustments — Exchange differences.

F-21

The exchange differences arising on the translation to euros of the financial statements denominated in functional currencies other than the euro are recognized under Valuation adjustments — Exchange differences in the consolidated balance sheet, whereas those arising on the translation to euros of the financial statements of entities accounted for using the equity method are recognized under Valuation adjustments — Entities accounted for using the equity method, until the related item is derecognized, at which time they are recognized in the consolidated income statement.

iv. Entities located in hyperinflationary economies

As indicated in Note 3, in 2009 the Group sold substantially all its businesses in Venezuela and at December 31, 2010 its net assets in that country amounted to only EUR 18 million (December 31, 2009: EUR 27 million).

In view of the foregoing, at December 31, 2010, 2009 and 2008 none of the functional currencies of the consolidated entities and associates located abroad related to hyperinflationary economies as defined by International Financial Reporting Standards as adopted by the European Union. Accordingly, at 2010, 2009 and 2008 year-end it was not necessary to adjust the financial statements of any of the consolidated entities or associates to correct for the effect of inflation.

v. Exposure to foreign currency risk

At December 31, 2010, the Group’s largest exposures on temporary positions (with a potential impact on the income statement) were concentrated, in descending order, on the pound sterling, Mexican peso and the Chilean peso. At that date, its largest exposures on permanent positions (with a potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso, the US dollar and the Chilean peso. The Group hedges a portion of these permanent positions using foreign exchange derivative financial instruments (see Note 36).

At December 31, 2009, the Group’s largest exposures on temporary positions (with a potential impact on the income statement) were concentrated, in descending order, on the pound sterling and the Chilean peso. At that date, its largest exposures on permanent positions (with a potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso and the Chilean peso. The Group hedges a portion of these permanent positions using foreign exchange derivative financial instruments (see Note 36).

At December 31, 2008, the Group’s largest exposures on temporary positions (with a potential impact on the income statement) were concentrated, in descending order, on the pound sterling and the Brazilian real. At that date, its largest exposures on permanent positions (with a potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso and the Chilean peso. The Group hedges a portion of these permanent positions using foreign exchange derivative financial instruments (see Note 36).

The following tables show the sensitivity of consolidated profit and consolidated equity to changes in the Group’s foreign currency positions due to 1% variations in the various foreign currencies in which the Group has material balances.

F-22

The estimated effect on the Group’s consolidated equity and consolidated profit of a 1% appreciation of the euro against the related currency is as follows:


	Millions of euros
	Effect on consolidated equity									Effect on consolidated profit
Currency	2010			2009			2008			2010		2009		2008

US dollar		(39.1	)		—			—			—		2.8		3.9
Chilean peso		(11.7	)		(12.7	)		(12.4	)		7.6		7.0		3.1
Pound sterling		(62.0	)		(21.5	)		(5.2	)		20.3		16.2		14.4
Mexican peso		(42.9	)		(20.5	)		(23.1	)		9.1		4.7		3.6
Brazilian real		(89.2	)		(111.4	)		(60.1	)		—		—		13.6

Similarly, the estimated effect on the Group’s consolidated equity and consolidated profit of a 1% depreciation of the euro against the related currency is as follows:


	Millions of euros
	Effect on consolidated equity						Effect on consolidated profit
Currency	2010		2009		2008		2010			2009			2008

US dollar		39.9		—		—		—			(2.8	)		(4.0	)
Chilean peso		11.9		12.9		12.6		(7.8	)		(7.2	)		(3.0	)
Pound sterling		63.2		21.9		5.3		(20.7	)		(16.5	)		(14.7	)
Mexican peso		42.0		16.5		26.8		(9.3	)		(4.8	)		(3.6	)
Brazilian real		81.0		81.9		65.2		—			—			(13.4	)

The foregoing data were obtained by calculating the possible effect of a variation in exchange rates on the various asset and liability items, excluding the foreign exchange positions arising from goodwill, and on other foreign currency-denominated items, such as the Group’s derivative instruments, considering the offsetting effect of the various hedging transactions on these items. This effect was estimated using the exchange difference recognition methods set forth in Note 2.a.iii above.

Also, the estimated effect on the Group’s consolidated equity of a 1% appreciation or depreciation of the euro against the foreign currencies in which goodwill is denominated at December 31, 2010 would be a decrease or increase, respectively, in equity due to valuation adjustments of EUR 85.5 million and EUR 87.2 million in the case of the pound sterling (2009: EUR 82.8 million and EUR 84.5 million), EUR 86.7 million and 88.4 million in the case of the Brazilian real (2009: EUR 76.3 million and EUR 77.8 million), EUR 21.8 million and EUR 22.3 million in the case of the US dollar (2009: EUR 20.3 million and EUR 20.7 million), and EUR 15.1 million and EUR 15.4 million for the other currencies (2009: EUR 11.0 million and EUR 11.3 million). These changes are offset by a decrease or increase, respectively, in the balance of goodwill at that date and, therefore, they have no impact on the calculation of the Group’s equity.

The estimates used to obtain the foregoing data were performed considering the effects of the exchange rate fluctuations in isolation from the effect of the performance of other variables, the changes in which would affect equity and profit, such as variations in the interest rates of the reference currencies or other market factors. Accordingly, all variables other than the exchange rate fluctuations were kept constant with respect to their positions at December 31, 2010, 2009 and 2008.

F-23

Basis of consolidation

i. Subsidiaries

Subsidiaries are defined as entities over which the Bank has the capacity to exercise control; control is, in general but not exclusively, presumed to exist when the Parent owns directly or indirectly half or more of the voting power of the investee or, even if this percentage is lower or zero, when, as in the case of agreements with shareholders of the investee, the Bank is granted control. Control is the power to govern the financial and operating policies of an entity, as stipulated by the law, the Bylaws or agreement, so as to obtain benefits from its activities.

The financial statements of the subsidiaries are fully consolidated with those of the Bank. Accordingly, all balances and effects of the transactions between consolidated entities are eliminated on consolidation.

On acquisition of control of a subsidiary, its assets, liabilities and contingent liabilities are recognized at fair value at the date of acquisition. Any positive differences between the acquisition cost and the fair values of the identifiable net assets acquired are recognized as goodwill (see Note 17). Negative differences are recognized in profit or loss on the date of acquisition.

Additionally, the share of third parties of the Group’s equity is presented under Non-controlling interests in the consolidated balance sheet (see Note 28). Their share of the profit for the year is presented under Profit attributable to non-controlling interests in the consolidated income statement.

The results of subsidiaries acquired during the year are included in the consolidated income statement from the date of acquisition to year-end. Similarly, the results of subsidiaries disposed of during the year are included in the consolidated income statement from the beginning of the year to the date of disposal.

The Appendices contain significant information on these entities.

ii. Interests in joint ventures (jointly controlled entities)

Joint ventures are deemed to be ventures that are not subsidiaries but which are jointly controlled by two or more unrelated entities. This is evidenced by contractual arrangements whereby two or more entities (venturers) acquire interests in entities (jointly controlled entities) or undertake operations or hold assets so that strategic financial and operating decisions affecting the joint venture require the unanimous consent of the venturers.

The financial statements of investees classified as joint ventures are proportionately consolidated with those of the Bank and, therefore, the aggregation of balances and subsequent eliminations are made only in proportion to the Group’s ownership interest in the capital of these entities.

The Appendices contain significant information on these entities.

iii. Associates

Associates are entities over which the Bank is in a position to exercise significant influence, but not control or joint control, usually because it holds 20% or more of the voting power of the investee.

In the consolidated financial statements, investments in associates are accounted for using the equity method, i.e. at the Group’s share of net assets of the investee, after taking into account the dividends received therefrom and other equity eliminations. The profits and losses resulting from transactions with an associate are eliminated to the extent of the Group’s interest in the associate.

F-24

The Appendices contain significant information on these entities.

iv. Special purpose entities

When the Group incorporates special purpose entities, or holds ownership interests therein, to enable its customers to access certain investments, or for the transfer of risks or other purposes, it determines, using internal criteria and procedures, and taking into consideration the applicable legislation, whether control (as defined above) exists and, therefore, whether these entities should be consolidated. These criteria and procedures take into account, inter alia, the risks and rewards retained by the Group and, accordingly, all relevant matters are taken into consideration, including any guarantees granted or any losses associated with the collection of the related assets retained by the Group. These entities include the securitization special purpose vehicles, which are fully consolidated in the case of the SPVs over which, based on the aforementioned analysis, it is considered that the Group continues to exercise control.

v. Other matters

At December 31, 2010, the Group controlled and, therefore, consolidated the following companies in which it held an ownership interest of less than 50% of the share capital: (i) Luri 1, S.A., (ii) Luri 2, S.A. and (iii) Luri Land, S.A. The percentage ownership interest in the aforementioned companies was 5.58%, 4.81% and 5.15%, respectively (see Appendix I). Although the Group holds less than half the voting power, it is empowered to choose the sole director and, as a result, it exercises control over these entities.

In addition, at December 31, 2010 the Group exercised joint control of Luri 3, S.A., which was therefore proportionately consolidated, despite holding 9.62% of its share capital (see Appendix II). This decision is based on the Group’s presence on the company’s board of directors, in which the agreement of all members is required for decision-making.

The impact of the consolidation of these companies on the Group’s consolidated financial statements is immaterial.

The Company’s objective of these entities is the acquisition of real estate and other general operations relating thereto, including the rental, purchase and sale of properties (see Appendices I and II).

vi. Business combinations

A business combination is the bringing together of two or more separate entities or economic units into one single entity or group of entities.

Business combinations whereby the Group obtains control over an entity are recognized for accounting purposes as follows:

•

The Group measures the cost of the business combination, defined as the fair value of the assets given, the liabilities incurred and the equity instruments issued, if any, by the acquirer. Until December 31, 2009, under applicable legislation, the cost of a business combination was considered to include any cost directly attributable to the business combination, such as fees paid to auditors, legal advisers, investment banks and other consultants. In 2010, 2009 and 2008, the auditors were paid EUR 5.4 million, EUR 5.7 million and EUR 6.2 million, respectively, relating mainly to half-yearly audits, of which EUR 6.2 million were recognized in 2008 as an increase in the cost of the business combinations effected in that year (see Note 3).

F-25

	•		The fair values of the assets, liabilities and contingent liabilities of the acquired entity or business, including any intangible assets which might not have been recognized by the acquiree, are estimated and recognized in the consolidated balance sheet; the Group also estimates the amount of any non-controlling interests and the fair value of the previously held equity interest in the acquiree.

	•		Any positive difference between the aforementioned items is recognized as discussed in Note 2.m. Any negative difference is recognized under Negative goodwill on business combinations in the consolidated income statement.

			Lastly, as from January 1, 2010, any acquisitions of non-controlling interests carried out after the date on which control of the entity is obtained are accounted for as equity transactions, i.e. the difference between the price paid and the carrying amount of the percentage acquired of the non-controlling interests is recognized directly in consolidated equity.

vii. Acquisitions and disposals

Note 3 provides information on the most significant acquisitions and disposals in 2010, 2009 and 2008.

Definitions and classification of financial instruments

i. Definitions

A financial instrument is any contract that gives rise to a financial asset of one entity and, simultaneously, to a financial liability or equity instrument of another entity.

An equity instrument is any agreement that evidences a residual interest in the assets of the issuing entity after deducting all of its liabilities.

A financial derivative is a financial instrument whose value changes in response to the change in an observable market variable (such as an interest rate, foreign exchange rate, financial instrument price, market index or credit rating), whose initial investment is very small compared with other financial instruments with a similar response to changes in market factors, and which is generally settled at a future date.

Hybrid financial instruments are contracts that simultaneously include a non-derivative host contract together with a derivative, known as an embedded derivative, that is not separately transferable and has the effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone derivative.

Compound financial instruments are contracts that simultaneously create for their issuer a financial liability and an own equity instrument (such as convertible bonds, which entitle their holders to convert them into equity instruments of the issuer).

The following transactions are not treated for accounting purposes as financial instruments:

	•		Investments in associates (see Note 13).

	•		Rights and obligations under employee benefit plans (see Note 25).

	•		Rights and obligations under insurance contracts (see Note 15).

	•		Contracts and obligations relating to employee remuneration based on own equity instruments (see Note 34).

F-26

ii. Classification of financial assets for measurement purposes

Financial assets are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Non-current assets held for sale or they relate to Cash and balances with central banks, Changes in the fair value of hedged items in portfolio hedges of interest rate risk (asset side), Hedging derivatives and Investments, which are reported separately.

Financial assets are included for measurement purposes in one of the following categories:

	•		Financial assets held for trading (at fair value through profit or loss): this category includes the financial assets acquired for the purpose of generating a profit in the near term from fluctuations in their prices and financial derivatives that are not designated as hedging instruments.

	•		Other financial assets at fair value through profit or loss: this category includes hybrid financial assets not held for trading that are measured entirely at fair value and financial assets not held for trading that are included in this category in order to obtain more relevant information, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial assets or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Group’s key management personnel. Financial assets may only be included in this category on the date they are acquired or originated.

	•		Available-for-sale financial assets: this category includes debt instruments not classified as Held-to-maturity investments, Loans and receivables or Financial assets at fair value through profit or loss, and equity instruments issued by entities other than subsidiaries, associates and jointly controlled entities, provided that such instruments have not been classified as Financial assets held for trading or as Other financial assets at fair value through profit or loss.

	•		Loans and receivables: this category includes the investment arising from ordinary lending activities, such as the cash amounts of loans drawn down and not yet repaid by customers or the deposits placed with other institutions, whatever the legal instrument, unquoted debt securities and receivables from the purchasers of goods, or the users of services, constituting part of the Group’s business.

			The consolidated entities generally intend to hold the loans and credits granted by them until their final maturity and, therefore, they are presented in the consolidated balance sheet at their amortized cost (which includes any reductions required to reflect the estimated losses on their recovery).

	•		Held-to-maturity investments: this category includes debt instruments traded in an active market, with fixed maturity and with fixed or determinable payments, for which the Group has both the intention and proven ability to hold to maturity.

iii. Classification of financial assets for presentation purposes

Financial assets are classified by nature into the following items in the consolidated balance sheet:

•

Cash and balances with central banks: cash balances and balances receivable on demand relating to deposits with the Bank of Spain and other central banks.

F-27

•

Loans and advances: includes the debit balances of all credit and loans granted by the Group, other than those represented by securities, as well as finance lease receivables and other debit balances of a financial nature in favor of the Group, such as cheques drawn on credit institutions, balances receivable from clearing houses and settlement agencies for transactions on the stock exchange and organized markets, bonds given in cash, capital calls, fees and commissions receivable for financial guarantees and debit balances arising from transactions not originating in banking transactions and services, such as the collection of rentals and similar items. They are classified, depending on the institutional sector to which the debtor belongs, under:

•

Loans and advances to credit institutions: credit of any nature, including deposits and money market operations, in the name of credit institutions.

•

Loans and advances to customers: includes the remaining credit, including money market operations through central counterparties.

•

Debt instruments: bonds and other securities that represent a debt for their issuer, that generate an interest return, and that are in the form of certificates or book entries.

	•		Equity instruments: financial instruments issued by other entities, such as shares, which have the nature of equity instruments for the issuer, unless they are investments in subsidiaries, jointly controlled entities or associates. Investment fund units are included in this item.

	•		Trading derivatives: includes the fair value in favor of the Group of derivatives which do not form part of hedge accounting, including embedded derivatives separated from hybrid financial instruments.

	•		Changes in the fair value of hedged items in portfolio hedges of interest rate risk: this item is the balancing entry for the amounts credited to the consolidated income statement in respect of the measurement of the portfolios of financial instruments which are effectively hedged against interest rate risk through fair value hedging derivatives.

	•		Hedging derivatives: includes the fair value in favor of the Group of derivatives, including embedded derivatives separated from hybrid financial instruments, designated as hedging instruments in hedge accounting.

	•		Investments: includes the investments in the share capital of associates.

iv. Classification of financial liabilities for measurement purposes

Financial liabilities are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Liabilities associated with non-current assets held for sale or they relate to Hedging derivatives or Changes in the fair value of hedged items in portfolio hedges of interest rate risk (liability side), which are reported separately.

Financial liabilities are classified for measurement purposes into one of the following categories:

•

Financial liabilities held for trading (at fair value through profit or loss): this category includes the financial liabilities issued for the purpose of generating a profit in the near term from fluctuations in their prices, financial derivatives not considered to qualify for hedge accounting and financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements or borrowed (short positions).

F-28

	•		Other financial liabilities at fair value through profit or loss: financial liabilities are included in this category when more relevant information is obtained, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial liabilities or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Group’s key management personnel.

	•		Financial liabilities at amortized cost: financial liabilities, irrespective of their instrumentation and maturity, not included in any of the above-mentioned categories which arise from the ordinary borrowing activities carried on by financial institutions.

v. Classification of financial liabilities for presentation purposes

Financial liabilities are classified by nature into the following items in the consolidated balance sheet:

•

Deposits: includes all repayable balances received in cash by the Group, other than those instrumented as marketable securities and those having the substance of subordinated liabilities. This item also includes cash bonds and cash consignments received the amount of which may be invested without restriction. Deposits are classified on the basis of the creditor’s institutional sector into:

	•		Deposits from central banks: deposits of any nature, including credit received and money market operations received from the Bank of Spain or other central banks.

	•		Deposits from credit institutions: deposits of any nature, including credit received and money market operations in the name of credit institutions.

	•		Customer deposits: includes the remaining deposits, including money market operations through central counterparties.

	•		Marketable debt securities: includes the amount of bonds and other debt represented by marketable securities, other than those having the substance of subordinated liabilities. This item includes the component considered to be a financial liability of issued securities that are compound financial instruments.

	•		Trading derivatives: includes the fair value, with a negative balance for the Group, of derivatives, including embedded derivatives separated from the host contract, which do not form part of hedge accounting.

	•		Short positions: includes the amount of financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements or borrowed.

	•		Subordinated liabilities: amount of financing received which, for the purposes of payment priority, ranks behind ordinary debt. This category also includes the financial instruments issued by the Group which, although capital for legal purposes, do not meet the requirements for classification as equity, such as certain preference shares issued.

	•		Other financial liabilities: includes the amount of payment obligations having the nature of financial liabilities not included in other items, and liabilities under financial guarantee contracts, unless they have been classified as doubtful.

	•		Changes in the fair value of hedged items in portfolio hedges of interest rate risk: this item is the balancing entry for the amounts charged to the consolidated income statement in respect of the measurement of the portfolios of financial instruments which are effectively hedged against interest rate risk through fair value hedging derivatives.

	•		Hedging derivatives: includes the fair value of the Group’s liability in respect of derivatives, including embedded derivatives separated from hybrid financial instruments, designated as hedging instruments in hedge accounting.

F-29

Measurement of financial assets and liabilities and recognition of fair value changes

In general, financial assets and liabilities are initially recognized at fair value which, in the absence of evidence to the contrary, is deemed to be the transaction price. Financial instruments not measured at fair value through profit or loss are adjusted by the transaction costs. Financial assets and liabilities are subsequently measured at each period-end as follows:

i. Measurement of financial assets

Financial assets are measured at fair value, without deducting any transaction costs that may be incurred on their disposal, except for loans and receivables, held-to-maturity investments, equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those equity instruments as their underlying and are settled by delivery of those instruments.

The fair value of a financial instrument on a given date is taken to be the amount for which it could be bought or sold on that date by two knowledgeable, willing parties in an arm’s length transaction acting prudently. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active, transparent and deep market (quoted price or market price).

If there is no market price for a given financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.

All derivatives are recognized in the balance sheet at fair value from the trade date. If the fair value is positive, they are recognized as an asset and if the fair value is negative, they are recognized as a liability. The fair value on the trade date is deemed, in the absence of evidence to the contrary, to be the transaction price. The changes in the fair value of derivatives from the trade date are recognized in Gains/losses on financial assets and liabilities in the consolidated income statement. Specifically, the fair value of financial derivatives traded in organized markets included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price and if, for exceptional reasons, the quoted price cannot be determined on a given date, these financial derivatives are measured using methods similar to those used to measure OTC derivatives.

The fair value of OTC derivatives is taken to be the sum of the future cash flows arising from the instrument, discounted to present value at the date of measurement (present value or theoretical close) using valuation techniques commonly used by the financial markets: net present value (NPV), option pricing models and other methods.

Loans and receivables and Held-to-maturity investments are measured at amortized cost using the effective interest method. Amortized cost is understood to be the acquisition cost of a financial asset or liability plus or minus, as appropriate, the principal repayments and the cumulative amortization (taken to the income statement) of the difference between the initial cost and the maturity amount. In the case of financial assets, amortized cost furthermore includes any reductions for impairment or uncollectibility. In the case of loans and receivables hedged in fair value hedges, the changes in the fair value of these assets related to the risk or risks being hedged are recognized.

F-30

The effective interest rate is the discount rate that exactly matches the carrying amount of a financial instrument to all its estimated cash flows of all kinds over its remaining life. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date plus, where applicable, the fees and transaction costs that, because of their nature, form part of their financial return. In the case of floating rate financial instruments, the effective interest rate coincides with the rate of return prevailing in all connections until the next benchmark interest reset date.

Equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those instruments as their underlying and are settled by delivery of those instruments are measured at acquisition cost adjusted, where appropriate, by any related impairment loss.

The amounts at which the financial assets are recognized represent, in all material respects, the Group’s maximum exposure to credit risk at each reporting date. Also, the Group has received collateral and other credit enhancements to mitigate its exposure to credit risk, which consist mainly of mortgage guarantees, cash collateral, equity instruments and personal security, assets leased out under finance lease and full-service lease agreements, assets acquired under repurchase agreements, securities loans and credit derivatives.

ii. Measurement of financial liabilities

In general, financial liabilities are measured at amortized cost, as defined above, except for those included under Financial liabilities held for trading and Other financial liabilities at fair value through profit or loss and financial liabilities designated as hedged items (or hedging instruments) in fair value hedges, which are measured at fair value.

iii. Valuation techniques

The following table shows a summary of the fair values, at 2010, 2009 and 2008 year-end, of the financial assets and liabilities indicated below, classified on the basis of the various measurement methods used by the Group to determine their fair value:


	Millions of euros
	2010						2009						2008
	Published						Published						Published
	price						price						price
	quotations in						quotations in						quotations in
	active		Internal				active		Internal				active		Internal
	markets		models		Total		markets		models		Total		markets		models		Total

Financial assets held for trading		65,009		91,753		156,762		61,056		73,998		135,054		51,947		99,870		151,817
Other financial assets at fair value through profit or loss		9,446		30,034		39,480		8,938		28,876		37,814		6,137		19,680		25,817
Available-for-sale financial assets		69,337		16,898		86,235		75,469		11,152		86,621		43,747		5,173		48,920
Hedging derivatives (assets)		1,226		7,001		8,227		1,226		6,608		7,834		244		9,454		9,698
Financial liabilities held for trading		18,027		118,745		136,772		12,013		103,503		115,516		12,265		124,355		136,620
Other financial liabilities at fair value through profit or loss		—		51,020		51,020		—		42,371		42,371		—		28,639		28,639
Hedging derivatives (liabilities)		509		6,125		6,634		318		4,873		5,191		261		5,697		5,958
Liabilities under insurance contracts		4,163		6,286		10,449		5,006		11,910		16,916		5,286		11,564		16,850

F-31

Financial instruments at fair value, determined on the basis of published price quotations in active markets (Level 1), include government debt securities, private-sector debt securities, derivatives traded in organized markets, securitized assets, shares, short positions and fixed-income securities issued.

In cases where price quotations cannot be observed, management makes its best estimate of the price that the market would set using its own internal models. In most cases, these models use data based on observable market parameters as significant inputs (Level 2) and, in very specific cases, they use significant inputs not observable in market data (Level 3). In order to make these estimates, various techniques are employed, including the extrapolation of observable market data. The best evidence of the fair value of a financial instrument on initial recognition is the transaction price, unless the fair value of the instrument can be obtained from other market transactions performed with the same or similar instruments or can be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates. In accordance with the standards in force (EU-IFRSs), any difference between the transaction price and the fair value based on valuation techniques is not initially recognized in the income statement.

The Group did not make any material transfers of financial instruments between one measurement method and another in 2010.

The main techniques used at December 31, 2010 by the Group’s internal models to determine the fair value of the financial instruments detailed in the foregoing table are as follows:

	•		In the valuation of financial instruments permitting static hedging (basically forwards and swaps) and in the valuation of loans and advances to customers classified as Other financial assets at fair value through profit or loss, the present value method is used. Estimated future cash flows are discounted using the yield curves of the related currencies. The yield curves are generally observable market data.

	•		In the valuation of financial instruments requiring dynamic hedging (basically structured options and other structured instruments), the Black-Scholes model is normally used; for more complex instruments, the Dupire (local volatility) and Heston (stochastic volatility) models are used. Where appropriate, observable market inputs are used to obtain factors such as the bid-offer spread, exchange rates, volatility, correlation between indices and market liquidity. In certain very specific cases, unobservable market inputs can be used, such as the volatility of the UK Halifax House Price Index (HPI), the estimated future HPI growth, the HPI spot rate, and mortality.

F-32

	•		In the valuation of certain financial instruments exposed to interest rate risk, such as interest rate futures, caps and floors, the present value method (futures) and the Black-Scholes model (plain vanilla options) are used; in the case of more structured instruments requiring dynamic hedging, the Heath-Jarrow-Morton and Hull-White models, and the Markov Functional Model are used. The main inputs used in these models are basically observable market data, including the related yield curves, volatilities, correlations and exchange rates. In certain very specific cases, unobservable market inputs can be used, such as the volatility of the UK Halifax House Price Index (HPI), the estimated future HPI growth, the HPI spot rate, mortality, and the credit spread for the specific financial instrument.

	•		In the case of linear instruments (e.g. credit risk and fixed-income derivatives), credit risk is measured using dynamic models similar to those used in the measurement of interest rate risk. In the case of non-linear instruments, if the portfolio is exposed to credit risk (e.g. credit derivatives), the joint probability of default is determined using the Standard Gaussian Copula model. The main inputs used to determine the underlying cost of credit of credit derivatives are quoted credit risk premiums and the correlation between the quoted credit derivatives of various issuers.

The fair value of financial instruments not traded on active markets obtained from the aforementioned internal models takes into account, inter alia, the contract terms and observable market data, which include interest rates, credit risk, exchange rates, the quoted market price of commodities and shares, volatility and prepayments. The valuation models are not significantly subjective, since they can be adjusted and recalibrated, where appropriate, through the internal calculation of the fair value of actively traded instruments and the subsequent comparison with the related price observable in the market.

F-33

Set forth below are the financial instruments at fair value whose measurement was based on internal models (Levels 2 and 3) at December 31, 2010, 2009 and 2008 and the potential effect on their measurement at December 31, 2010 of a shift towards other reasonably probable scenarios in the main assumptions that are not based on observable market data:

Figures in millions of euros

Fair

values

Effect of reasonable

calculated

assumptions on fair values

using internal

at 12/31/10

models at

Less

12/31/10

12/31/09

12/31/08

Valuation techniques

Main assumptions

favorable

ASSETS:

Financial assets held for trading

91,753

73,998

99,870

307.1

(295.0

)

Loans and advances to credit institutions

16,216

5,953

5,150

Present Value Method

Observable market data

—

Loans and advances to customers (b)

755

10,076

684

Present Value Method

Observable market data

—

Debt and equity interests

10,983

4,898

6,074

Present Value Method

Observable market data, HPI

4.3

(4.3

)

Trading derivatives

63,799

53,070

87,962

302.8

(290.7

)

Swaps

46,562

26,390

72,693

Present Value Method, Gaussian Copula (c)

Observable market data, liquidity

33.4

(e)

(33.4

) (e)

Exchange rate options

727

818

3,524

Black-Scholes Model

Observable market data, liquidity

0.2

(e)

(0.2

) (e)

Interest rate options

6,632

17,185

4,926

Black-Scholes Model, Heath-Jarrow-Morton Model

Observable market data, liquidity, correlation

109.2

(e)

(111.1

) (e)

Interest rate futures

2,109

339

Present Value Method

Observable market data

68.1

(74.3

)

Index and securities options

5,248

3,849

6,127

Black-Scholes Model

Observable market data, dividends, correlation, liquidity, HPI

68.1

(74.3

)

Other

4,577

2,720

353

N/A

99.9

(71.7

)

Hedging derivatives

7,001

6,608

9,454

1.2

(1.2

)

Swaps

6,886

6,465

9,029

Present Value Method

Observable market data

—

Exchange rate options

265

Black-Scholes Model

Observable market data

1.2

(1.2

)

Interest rate options

157

Black-Scholes Model

Observable market data

—

Other

N/A

—

Other financial assets at fair value through profit or loss

30,034

28,876

19,681

—

Loans and advances to credit institutions

18,831

16,243

8,912

Present Value Method

Observable market data

—

Loans and advances to customers (d)

7,777

8,329

8,973

Present Value Method

Observable market data, HPI

—

Debt and equity interests

3,426

4,304

1,796

Present Value Method

Observable market data

—

Available-for-sale financial assets

16,898

11,152

5,173

142.1

(133.9

)

Debt and equity interests

16,898

11,152

5,173

Present Value Method

Observable market data

142.1

(133.9

)

LIABILITIES:

Financial liabilities held for trading

118,745

103,503

124,355

47.7

(46.5

)

Deposits from central banks

12,605

2,985

9,110

Present Value Method

Observable market data

—

Deposits from credit institutions

28,370

43,132

26,842

Present Value Method

Observable market data

—

Customer deposits

7,849

4,658

4,896

Present Value Method

Observable market data

—

Debt and equity interests

365

586

1,075

Present Value Method

Observable market data, liquidity

)

Trading derivatives

69,556

52,141

82,432

47.7

(45.6

)

Swaps

48,533

35,916

67,288

Present Value Method, Gaussian Copula (c)

Observable market data, liquidity, HPI

—

(e)

—

(e)

Exchange rate options

915

898

3,515

Black-Scholes Model

Observable market data, liquidity

—

(e)

—

(e)

Interest rate options

7,356

3,974

5,402

Black-Scholes Model, Heath-Jarrow-Morton Model

Observable market data, liquidity, correlation

—

(e)

—

(e)

Index and securities options

6,189

4,518

4,694

Black-Scholes Model

Observable market data, dividends, correlation, liquidity, HPI

47.7

(45.6

)

Forward purchase and sale contracts

—

N/A

—

Interest rate and equity futures

181

2,596

1,189

Present Value Method

Observable market data

—

Other

6,382

4,239

344

N/A

—

Hedging derivatives

6,125

4,873

5,697

Swaps

5,723

4,558

5,586

Present Value Method

Observable market data

—

Exchange rate options

363

175

Black-Scholes Model

Observable market data

—

Interest rate options

Black-Scholes Model

Observable market data

—

Other

—

N/A

—

Other financial liabilities at fair value through profit or loss

51,020

42,371

28,639

Present Value Method

Observable market data

—

Liabilities under insurance contracts

6,286

11,910

11,564

Note 15

—

TOTAL

327,862

283,290

304,433

498

(475.7

)


(a)		The sensitivity of the issued debt and equity instruments in liabilities calculated using HPI assumptions is not detailed, since these instruments are perfectly hedged. Consequently, any change in the valuation of these issued instruments would be offset exactly by an equal and opposite change in the valuation of the associated foreign currency derivatives.

(b)		Includes mainly short-term loans and reverse repurchase agreements with corporate customers (mainly brokerage and investment companies).

F-34


(c)		Includes credit risk derivatives with a negative net fair value of EUR 65 million recognized in the consolidated balance sheet. These assets and liabilities are measured using the aforementioned Standard Gaussian Copula Model.

(d)		Includes home mortgage loans to financial institutions in the UK (which are regulated and partly financed by the Government). The fair value of these loans was obtained using observable market variables, including current market transactions with similar amounts and collateral facilitated by the UK Housing Association. Since the Government is involved in these financial institutions, the credit risk spreads have remained stable and are homogenous in this sector. The results arising from the valuation model are checked against current market transactions.

(e)		The Group calculates the potential impact on the measurement of each instrument on a joint basis, regardless of whether the individual value is positive (assets) or negative (liabilities), and discloses the joint effect associated with the related instruments classified on the asset side of the consolidated balance sheet.

The use of observable market data assumes that the markets in which the Group operates are functioning efficiently and, therefore, that these data are representative. The main assumptions used in the measurement of the financial instruments included in the foregoing table that were valued by means of internal models employing unobservable market data are as follows:

	•		Correlation: the assumptions relating to the correlation between the value of quoted and unquoted assets are based on historical correlations between the impact of adverse changes in market variables and the corresponding valuation of the associated unquoted assets. The measurement of the assets will vary depending on whether a more or less conservative scenario is selected.

	•		Dividends: the estimates of the dividends used as inputs in the internal models are based on the expected dividend payments of the issuers. Since the dividend expectations can change or vary depending on the source of the price (normally historical data or market consensus for option pricing) and the companies’ dividend policies can vary, the valuation is adjusted to the best estimate of the reasonable dividend level expected in more or less conservative scenarios.

	•		Liquidity: the assumptions include estimates in response to market liquidity. For example, they take market liquidity into consideration when very long-term estimates of exchange rates or interest rates are used, or when the instrument is part of a new or developing market where, due to the absence of market prices that reflect a reasonable price for these products, the standard valuation methods and the estimates available might give rise to less precise results in the measurement of these instruments at that time.

	•		Halifax House Price Index (HPI): the assumptions include estimates of the future growth and the volatility of the HPI, mortality and the credit spreads of the specific financial instruments in relation to home mortgage loans to financial institutions in the UK (which are regulated and partially financed by the Government), credit derivatives and property asset derivatives.

F-35

The unobservable market data that constitute significant inputs of the internal models (Level 3) are, basically, those related to the House Price Index. The detail of the financial assets and liabilities measured using these models, included in the foregoing table, is as follows:


	Fair values calculated
	using internal
	models
	Millions of euros
	2010		2009		2008

ASSETS:
Level 2		143,494		118,001		132,861
Level 3		2,192		2,632		1,316

		145,686		120,633		134,177

LIABILITIES:
Level 2		181,879		162,179		169,630
Level 3		297		477		626

		182,176		162,656		170,256

		327,862		283,290		304,433

The measurements obtained using the internal models might have been different had other methods or assumptions been used with respect to interest rate risk, to credit risk, market risk and foreign currency risk spreads, or to their related correlations and volatilities. Nevertheless, Group management considers that the fair value of the financial assets and liabilities recognized in the consolidated balance sheet and the gains and losses arising from these financial instruments are reasonable.

The increase in 2009 in the assets classified as Level 3 arose as a result of the inclusion of Santander Holdings USA, Inc (formerly Sovereign Bancorp, Inc) as a Group company. This subsidiary contributed certain mortgage securitization SPV units not traded on deep markets and, accordingly, the Group determines their fair value by analyzing the prices obtained from various sources, such as prices given by third parties (brokers, rating agencies, etc.). In order to analyze the reasonableness of these valuations, they are compared with the quoted price of other securities with similar characteristics that are traded on more active markets. The fair value ultimately assigned by the Group to these assets assumes the orderly settlement of these assets in normal circumstances. Given the current situation in the credit and liquidity markets, the market value of these assets is sensitive to changes in market assumptions and volatility.

As detailed in the foregoing tables, at December 31, 2010 the potential effect on the measurement of the financial instruments of a change in the main assumptions (liquidity, correlations, dividends and HPI) to less favorable reasonably probable assumptions, taking the lowest value within the range that is considered probable, would be to reduce gains or increase losses by EUR 476 million (December 31, 2009: EUR 449 million; December 31, 2008: EUR 169 million). The effect of using other more favorable reasonably probable assumptions, taking the highest value within the range that is considered probable, would be to increase gains or reduce losses by EUR 498 million (December 31, 2009: EUR 574 million; December 31, 2008: EUR 218 million).

The net gain recognized in the consolidated income statement for 2010 arising from the aforementioned valuation models amounted to EUR 486 million (2009: net loss of EUR 1,133 million), of which a gain of EUR 338 million related to models whose significant inputs are unobservable market data.

iv. Recognition of fair value changes

As a general rule, changes in the carrying amount of financial assets and liabilities are recognized in the consolidated income statement. A distinction is made between the changes resulting from the accrual of interest and similar items, which are recognized under Interest and similar income or Interest expense and similar charges, as appropriate, and those arising for other reasons, which are recognized at their net amount under Gains/losses on financial assets and liabilities.

F-36

Adjustments due to changes in fair value arising from:

	•		Available-for-sale financial assets are recognized temporarily in equity under Valuation adjustments — Available-for-sale financial assets, unless they relate to exchange differences, in which case they are recognized in Valuation adjustments — Exchange differences (exchange differences arising on monetary financial assets are recognized in Exchange differences in the consolidated income statement).

	•		Items charged or credited to Valuation adjustments — Available-for-sale financial assets and Valuation adjustments — Exchange differences remain in the Group’s consolidated equity until the asset giving rise to them is impaired or derecognized, at which time they are recognized in the consolidated income statement.

	•		Unrealized gains on available-for-sale financial assets classified as Non-current assets held for sale because they form part of a disposal group or a discontinued operation are recognized under Valuation adjustments — Non-current assets held for sale.

v. Hedging transactions

The consolidated entities use financial derivatives for the following purposes: i) to facilitate these instruments to customers who request them in the management of their market and credit risks; ii) to use these derivatives in the management of the risks of the Group entities’ own positions and assets and liabilities (hedging derivatives); and iii) to obtain gains from changes in the prices of these derivatives (trading derivatives).

Financial derivatives that do not qualify for hedge accounting are treated for accounting purposes as trading derivatives.

A derivative qualifies for hedge accounting if all the following conditions are met:

The derivative hedges one of the following three types of exposure:

	a.		Changes in the fair value of assets and liabilities due to fluctuations, among others, in the interest rate and/or exchange rate to which the position or balance to be hedged is subject (fair value hedge);

	b.		Changes in the estimated cash flows arising from financial assets and liabilities, commitments and highly probable forecast transactions (cash flow hedge);

	c.		The net investment in a foreign operation (hedge of a net investment in a foreign operation).

It is effective in offsetting exposure inherent in the hedged item or position throughout the expected term of the hedge, which means that:

	a.		At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (prospective effectiveness).

	b.		There is sufficient evidence that the hedge was actually effective during the whole life of the hedged item or position (retrospective effectiveness). To this end, the Group checks that the results of the hedge were within a range of 80% to 125% of the results of the hedged item.

F-37

	3.		There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this hedge was expected to be achieved and measured, provided that this is consistent with the Group’s management of own risks.

			The changes in value of financial instruments qualifying for hedge accounting are recognized as follows:

	a.		In fair value hedges, the gains or losses arising on both the hedging instruments and the hedged items attributable to the type of risk being hedged are recognized directly in the consolidated income statement.

			In fair value hedges of interest rate risk on a portfolio of financial instruments, the gains or losses that arise on measuring the hedging instruments are recognized directly in the consolidated income statement, whereas the gains or losses due to changes in the fair value of the hedged amount (attributable to the hedged risk) are recognized in the consolidated income statement with a balancing entry under Changes in the fair value of hedged items in portfolio hedges of interest rate risk on the asset or liability side of the balance sheet, as appropriate.

	b.		In cash flow hedges, the effective portion of the change in value of the hedging instrument is recognized temporarily in equity under Valuation adjustments — Cash flow hedges until the forecast transactions occur, when it is recognized in the consolidated income statement, unless, if the forecast transactions result in the recognition of non-financial assets or liabilities, it is included in the cost of the non-financial asset or liability.

	c.		In hedges of a net investment in a foreign operation, the gains and losses attributable to the portion of the hedging instruments qualifying as an effective hedge are recognized temporarily in equity under Valuation adjustments — Hedges of net investments in foreign operations until the gains or losses on the hedged item are recognized in the consolidated income statement.

	d.		The ineffective portion of the gains and losses on the hedging instruments of cash flow hedges and hedges of a net investment in a foreign operation are recognized directly under Gains/losses on financial assets and liabilities in the consolidated income statement.

If a derivative designated as a hedge no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, the derivative is classified for accounting purposes as a trading derivative.

When fair value hedge accounting is discontinued, the adjustments previously recognized on the hedged item are transferred to profit or loss at the effective interest rate re-calculated at the date of hedge discontinuation. The adjustments must be fully amortized at maturity.

When cash flow hedges are discontinued, any cumulative gain or loss on the hedging instrument recognized in equity under Valuation adjustments (from the period when the hedge was effective) remains in this equity item until the forecast transaction occurs, at which time it is recognized in profit or loss, unless the transaction is no longer expected to occur, in which case the cumulative gain or loss is recognized immediately in profit or loss.

vi. Derivatives embedded in hybrid financial instruments

Derivatives embedded in other financial instruments or in other host contracts are accounted for separately as derivatives if their risks and characteristics are not closely related to those of the host contracts, provided that the host contracts are not classified as Other financial assets/liabilities at fair value through profit or loss or as Financial assets/liabilities held for trading.

F-38

Derecognition of financial assets and liabilities

The accounting treatment of transfers of financial assets depends on the extent to which the risks and rewards associated with the transferred assets are transferred to third parties:

	1.		If the Group transfers substantially all the risks and rewards to third parties -unconditional sale of financial assets, sale of financial assets under an agreement to repurchase them at their fair value at the date of repurchase, sale of financial assets with a purchased call option or written put option that is deeply out of the money, securitization of assets in which the transferor does not retain a subordinated debt or grant any credit enhancement to the new holders, and other similar cases-, the transferred financial asset is derecognized and any rights or obligations retained or created in the transfer are recognized simultaneously.

	2.		If the Group retains substantially all the risks and rewards associated with the transferred financial asset -sale of financial assets under an agreement to repurchase them at a fixed price or at the sale price plus interest, a securities lending agreement in which the borrower undertakes to return the same or similar assets, and other similar cases-, the transferred financial asset is not derecognized and continues to be measured by the same criteria as those used before the transfer. However, the following items are recognized:

	a.		An associated financial liability, which is recognized for an amount equal to the consideration received and is subsequently measured at amortized cost, unless it meets the requirements for classification under Other financial liabilities at fair value through profit or loss.

	b.		The income from the transferred financial asset not derecognized and any expense incurred on the new financial liability, without offsetting.

If the Group neither transfers nor retains substantially all the risks and rewards associated with the transferred financial asset -sale of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitization of assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases- the following distinction is made:

	a.		If the transferor does not retain control of the transferred financial asset, the asset is derecognized and any rights or obligations retained or created in the transfer are recognized.

	b.		If the transferor retains control of the transferred financial asset, it continues to recognize it for an amount equal to its exposure to changes in value and recognizes a financial liability associated with the transferred financial asset. The net carrying amount of the transferred asset and the associated liability is the amortized cost of the rights and obligations retained, if the transferred asset is measured at amortized cost, or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value.

Accordingly, financial assets are only derecognized when the rights on the cash flows they generate have been extinguished or when substantially all the inherent risks and rewards have been transferred to third parties. Similarly, financial liabilities are only derecognized when the obligations they generate have been extinguished or when they are acquired, with the intention either to cancel them or to resell them.

Offsetting of financial instruments

Financial asset and liability balances are offset, i.e. reported in the consolidated balance sheet at their net amount, only if the subsidiaries currently have a legally enforceable right to set off the recognized amounts and intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

F-39

Impairment of financial assets

i. Definition

A financial asset is considered to be impaired -and therefore its carrying amount is adjusted to reflect the effect of impairment- when there is objective evidence that events have occurred which:

	•		In the case of debt instruments (loans and debt securities), give rise to an adverse impact on the future cash flows that were estimated at the transaction date.

	•		In the case of equity instruments, mean that their carrying amount may not be fully recovered.

As a general rule, the carrying amount of impaired financial instruments is adjusted with a charge to the consolidated income statement for the period in which the impairment becomes evident, and the reversal, if any, of previously recognized impairment losses is recognized in the consolidated income statement for the period in which the impairment is reversed or reduced.

Balances are deemed to be impaired, and the interest accrual is suspended, when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts and on the dates initially agreed upon, after taking into account the guarantees received by the consolidated entities to secure (fully or partially) collection of the related balances. Collections relating to impaired loans and advances are used to recognize the accrued interest and the remainder, if any, to reduce the principal amount outstanding. The amount of the financial assets that would be deemed to be impaired had the conditions thereof not been renegotiated is not material with respect to the Group’s financial statements taken as a whole.

When the recovery of any recognized amount is considered unlikely, the amount is written off, without prejudice to any actions that the consolidated entities may initiate to seek collection until their contractual rights are extinguished due to expiry of the statute-of-limitations period, forgiveness or any other cause.

ii. Debt instruments carried at amortized cost

The amount of an impairment loss incurred on a debt instrument carried at amortized cost is equal to the difference between its carrying amount and the present value of its estimated future cash flows, and is presented as a reduction of the balance of the asset adjusted.

In estimating the future cash flows of debt instruments the following factors are taken into account:

	•		All the amounts that are expected to be obtained over the remaining life of the instrument; including, where appropriate, those which may result from the collateral provided for the instrument (less the costs for obtaining and subsequently selling the collateral). The impairment loss takes into account the likelihood of collecting accrued past-due interest receivable;

	•		The various types of risk to which each instrument is subject; and

	•		The circumstances in which collections will foreseeably be made.

These cash flows are subsequently discounted using the instrument’s effective interest rate (if its contractual rate is fixed) or the effective contractual rate at the discount date (if it is variable).

F-40

Specifically as regards impairment losses resulting from materialization of the insolvency risk of the obligors (credit risk), a debt instrument is impaired due to insolvency:

	•		When there is evidence of a deterioration of the obligor’s ability to pay, either because it is in arrears or for other reasons, and/or

	•		When country risk materializes: country risk is considered to be the risk associated with debtors resident in a given country due to circumstances other than normal commercial risk.

* * * * *

The Group has certain policies, methods and procedures for covering its credit risk arising both from insolvency allocable to counterparties and from country risk.

These policies, methods and procedures are applied in the granting, examination and documentation of debt instruments, and contingent liabilities and commitments, the identification of their impairment and the calculation of the amounts required to cover the related credit risk.

With respect to the coverage of loss arising from credit risk, the Group makes the following distinction:

Specific credit risk coverage:

Specific allowance:

The allowance for debt instruments not measured at fair value through profit or loss that are classified as doubtful is generally recognized in accordance with the criteria set forth below:

i. Assets classified as doubtful due to counterparty arrears:

Debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually, taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors.

ii. Assets classified as doubtful for reasons other than counterparty arrears:

Debt instruments which are not classifiable as doubtful due to arrears but for which there are reasonable doubts as to their repayment under the contractual terms are assessed individually, and their allowance is the difference between the amount recognized in assets and the present value of the cash flows expected to be received.

b. Allowance for inherent losses:

The Group covers its losses inherent in debt instruments not measured at fair value through profit or loss and in contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, inherent losses are losses incurred at the reporting date, calculated using statistical methods that have not yet been allocated to specific transactions.

F-41

The Group uses the concept of incurred loss to quantify the cost of the credit risk and include it in the calculation of the risk-adjusted return of its transactions. The parameters necessary for its calculation are also used to calculate economic capital and to calculate BIS II regulatory capital under internal models (see Note 1.e).

The incurred loss is the expected cost, which will be disclosed in the one-year period after the reporting date, of the credit risk of a transaction, considering the characteristics of the counterparty and the guarantees and collateral associated with the transaction.

The loss is calculated by multiplying three factors: exposure at default, probability of default and loss given default.

	•		Exposure at default (EAD) is the amount of risk exposure at the date of default by the counterparty.

	•		Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The probability of default is associated with the rating/scoring of each counterparty/transaction.

PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year. The definition of default used includes amounts past due by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective doubtful assets).

•

Loss given default (LGD) is the loss arising in the event of default. It depends mainly on the guarantees associated with the transaction.

The calculation of the expected loss also takes into account the adjustment to the cycle of the aforementioned factors, especially PD and LGD.

The methodology for determining the allowance for inherent losses seeks to identify the amounts of losses which, although incurred at the reporting date, have not yet been disclosed and which the Group knows, on the basis of historical experience and other specific information, will arise in the one-year period following the reporting date.

This approach described above is used as a general rule. However, in certain cases, as a result of its particular characteristics, this approach is not applied and alternative rules are used:

	1.		Low default portfolios:

			In certain portfolios (sovereign risk, credit institutions or large corporations) the number of defaults observed is very small or zero. In these cases, the Group opted to use the data contained in the credit derivative spreads to estimate the expected loss discounted by the market and break it down into PD and LGD.

	2.		Top-down units:

			In the exceptional cases in which the Group does not have sufficient data to construct a sufficiently robust credit risk measurement model, the expected loss on the loan portfolios is estimated based on a top-down approximation in which the historically observed average cost of the loan portfolios is used as the best estimate of the expected loss. As the credit models are developed and bottom-up measurements are obtained, the top-down measurements used for these portfolios are gradually replaced.

* * * * *

F-42

However, as required by the Bank of Spain, until the Spanish regulatory authority has verified and approved these internal models for the calculation of the allowance for inherent losses (to date it has only approved the internal models to be used to calculate regulatory capital), the inherent losses must be calculated as set forth below.

Based on its experience and on the information available to it on the Spanish banking industry, the Bank of Spain has established various categories of debt instruments and contingent liabilities, classified as standard risk, which are recognized at Spanish entities or relate to transactions performed on behalf of residents in Spain which are recognized in the accounting records of foreign subsidiaries, and has applied a range of required allowances to each category.

Country risk allowance:

Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, the Group classifies all the transactions performed with third parties into six different groups, from group 1 (transactions with ultimate obligors resident in European Union countries, Norway, Switzerland, Iceland, the United States, Canada, Japan, Australia and New Zealand) to group 6 (transactions the recovery of which is considered remote due to circumstances attributable to the country), assigning to each group the credit loss allowance percentages resulting from the aforementioned analyses.

However, due to the size of the Group and to the proactive management of its country risk exposure, the allowances recognized in this connection are not material with respect to the credit loss allowances recognized.

iii. Debt or equity instruments classified as available for sale

The amount of the impairment losses on these instruments is the positive difference between their acquisition cost (net of any principal repayment or amortization in the case of debt instruments) and their fair value, less any impairment loss previously recognized in the consolidated income statement.

When there is objective evidence at the date of measurement of these instruments that the aforementioned differences are due to permanent impairment, they are no longer recognized in equity under Valuation adjustments — Available-for-sale financial assets and are reclassified, for the cumulative amount at that date, to the consolidated income statement.

If all or part of the impairment losses are subsequently reversed, the reversed amount is recognized, in the case of debt instruments, in the consolidated income statement for the year in which the reversal occurs (or in equity under Valuation adjustments — Available-for-sale financial assets in the case of equity instruments).

iv. Equity instruments carried at cost

The amount of the impairment losses on equity instruments carried at cost is the difference between their carrying amount and the present value of the expected future cash flows discounted at the market rate of return for similar securities.

Impairment losses are recognized in the consolidated income statement for the period in which they arise as a direct reduction of the cost of the instrument. These losses can only be reversed subsequently if the related assets are sold.

F-43

Repurchase agreements and reverse repurchase agreements

Purchases (sales) of financial instruments under a non-optional resale (repurchase) agreement at a fixed price (repos) are recognized in the consolidated balance sheet as financing granted (received), based on the nature of the debtor (creditor), under Balances with central banks, Loans and advances to credit institutions or Loans and advances to customers (Deposits from central banks, Deposits from credit institutions or Customer deposits).

Differences between the purchase and sale prices are recognized as interest over the contract term.

Non-current assets held for sale and Liabilities associated with non-current assets held for sale

Non-current assets held for sale includes the carrying amount of individual items, disposal groups or items forming part of a business unit earmarked for disposal (discontinued operations), whose sale in their present condition is highly likely to be completed within one year from the reporting date. Therefore, the carrying amount of these items -which can be of a financial nature or otherwise- will foreseeably be recovered through the proceeds from their disposal. Specifically, property or other non-current assets received by the consolidated entities as total or partial settlement of their debtors’ payment obligations to them are deemed to be non-current assets held for sale, unless the consolidated entities have decided to make continuing use of these assets.

Liabilities associated with non-current assets held for sale includes the balances payable arising from the assets held for sale or disposal groups and from discontinued operations.

Non-current assets held for sale are generally measured at the lower of fair value less costs to sell and their carrying amount at the date of classification in this category. Non-current assets held for sale are not depreciated as long as they remain in this category.

Impairment losses on an asset or disposal group arising from a reduction in its carrying amount to its fair value (less costs to sell) are recognized under Gains/(Losses) on disposal of non-current assets held for sale not classified as discontinued operations in the consolidated income statement. The gains on a non-current asset held for sale resulting from subsequent increases in fair value (less costs to sell) increase its carrying amount and are recognized in the consolidated income statement up to an amount equal to the impairment losses previously recognized.

Reinsurance assets and Liabilities under insurance contracts

Insurance contracts involve the transfer of a certain quantifiable risk in exchange for a periodic or one-off premium. The effects on the Group’s cash flows will arise from a deviation in the payments forecast and/or an insufficiency in the premium set.

The Group controls its insurance risk as follows:

	•		By applying a strict methodology in the launch of products and in the assignment of value thereto.

	•		By using deterministic and stochastic models for measuring commitments.

	•		By using reinsurance as a risk mitigation technique as part of the credit quality guidelines in line with the Group’s general risk policy.

	•		By establishing an operating framework for credit risks.

	•		By actively managing asset and liability matching.

	•		By applying security measures in processes.

F-44

Reinsurance assets includes the amounts that the consolidated entities are entitled to receive for reinsurance contracts with third parties and, specifically, the reinsurer’s share of the technical provisions recorded by the consolidated insurance entities.

At least once a year these assets are reviewed to ascertain whether they are impaired (i.e. there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract and the amount that will not be received can be reliably measured), and any impairment loss is recognized in the consolidated income statement and the assets are written down.

Liabilities under insurance contracts includes the technical provisions recorded by the consolidated entities to cover claims arising from insurance contracts in force at year-end.

Insurers’ results relating to their insurance business are recognized, according to their nature, under the related consolidated income statement items.

In accordance with standard accounting practice in the insurance industry, the consolidated insurance entities credit to the income statement the amounts of the premiums written and charge to income the cost of the claims incurred on final settlement thereof. Insurance entities are therefore required to accrue at period-end the unearned revenues credited to their income statements and the accrued costs not charged to income.

At least at each reporting date the Group assesses whether the insurance contract liabilities recognized in the consolidated balance sheet are adequate. For this purpose, it calculates the difference between the following amounts:

	•		Current estimates of future cash flows under the insurance contracts of the consolidated entities. These estimates include all contractual cash flows and any related cash flows, such as claims handling costs; and

	•		The carrying amount recognized in the consolidated balance sheet of its insurance contract liabilities (see Note 15), less any related deferred acquisition costs or related intangible assets, such as the amount paid to acquire, in the event of purchase by the entity, the economic rights held by a broker deriving from policies in the entity’s portfolio.

If the calculation results in a positive amount, this deficiency is charged to the consolidated income statement. When unrealized gains or losses on assets of the Group’s insurance companies affect the measurement of liabilities under insurance contracts and/or the related deferred acquisition costs and/or the related intangible assets, these gains or losses are recognized directly in equity. The corresponding adjustment in the liabilities under insurance contracts (or in the deferred acquisition costs or in intangible assets) is also recognized in equity.

Tangible assets

Tangible assets includes the amount of buildings, land, furniture, vehicles, computer hardware and other fixtures owned by the consolidated entities or acquired under finance leases. Tangible assets are classified by use as follows:

i. Property, plant and equipment for own use

Property, plant and equipment for own use -including tangible assets received by the consolidated entities in full or partial satisfaction of financial assets representing receivables from third parties which are intended to be held for continuing use and tangible assets acquired under finance leases- are presented at acquisition cost, less the related accumulated depreciation and any estimated impairment losses (carrying amount higher than recoverable amount).

F-45

Depreciation is calculated, using the straight-line method, on the basis of the acquisition cost of the assets less their residual value. The land on which the buildings and other structures stand has an indefinite life and, therefore, is not depreciated.

The period tangible asset depreciation charge is recognized in the consolidated income statement and is calculated using the following depreciation rates (based on the average years of estimated useful life of the various assets):


	Annual
	rate

Buildings for own use		2.0	%
Furniture		7.7	%
Fixtures		7.0	%
Office and IT equipment		25.0	%
Leasehold improvements		7.0	%

The consolidated entities assess at the reporting date whether there is any indication that an asset may be impaired (i.e. its carrying amount exceeds its recoverable amount). If this is the case, the carrying amount of the asset is reduced to its recoverable amount and future depreciation charges are adjusted in proportion to the revised carrying amount and to the new remaining useful life (if the useful life has to be re-estimated).

Similarly, if there is an indication of a recovery in the value of a tangible asset, the consolidated entities recognize the reversal of the impairment loss recognized in prior periods and adjust the future depreciation charges accordingly. In no circumstances may the reversal of an impairment loss on an asset raise its carrying amount above that which it would have if no impairment losses had been recognized in prior years.

The estimated useful lives of the items of property, plant and equipment for own use are reviewed at least at the end of the reporting period with a view to detecting significant changes therein. If changes are detected, the useful lives of the assets are adjusted by correcting the depreciation charge to be recognized in the consolidated income statement in future years on the basis of the new useful lives.

Upkeep and maintenance expenses relating to property, plant and equipment for own use are recognized as an expense in the period in which they are incurred, since they do not increase the useful lives of the assets.

ii. Investment property

Investment property reflects the net values of the land, buildings and other structures held either to earn rentals or for capital appreciation.

The criteria used to recognize the acquisition cost of investment property, to calculate its depreciation and its estimated useful life and to recognize any impairment losses thereon are consistent with those described in relation to property, plant and equipment for own use.

F-46

iii. Assets leased out under an operating lease

Property, plant and equipment — Leased out under an operating lease reflects the amount of the tangible assets, other than land and buildings, leased out by the Group under an operating lease.

The criteria used to recognize the acquisition cost of assets leased out under operating leases, to calculate their depreciation and their respective estimated useful lives and to recognize the impairment losses thereon are consistent with those described in relation to property, plant and equipment for own use.

Accounting for leases

i. Finance leases

Finance leases are leases that transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee.

When the consolidated entities act as the lessors of an asset, the sum of the present value of the lease payments receivable from the lessee plus the guaranteed residual value -which is generally the exercise price of the lessee’s purchase option at the end of the lease term- is recognized as lending to third parties and is therefore included under Loans and receivables in the consolidated balance sheet.

When the consolidated entities act as the lessees, they present the cost of the leased assets in the consolidated balance sheet, based on the nature of the leased asset, and, simultaneously, recognize a liability for the same amount (which is the lower of the fair value of the leased asset and the sum of the present value of the lease payments payable to the lessor plus, if appropriate, the exercise price of the purchase option). The depreciation policy for these assets is consistent with that for property, plant and equipment for own use.

In both cases, the finance income and finance charges arising under finance lease agreements are credited and debited, respectively, to Interest and similar income and Interest expense and similar charges in the consolidated income statement so as to produce a constant rate of return over the lease term.

ii. Operating leases

In operating leases, ownership of the leased asset and substantially all the risks and rewards incidental thereto remain with the lessor.

When the consolidated entities act as the lessors, they present the acquisition cost of the leased assets under Tangible assets (see Note 16). The depreciation policy for these assets is consistent with that for similar items of property, plant and equipment for own use, and income from operating leases is recognized on a straight-line basis under Other operating income in the consolidated income statement.

When the consolidated entities act as the lessees, the lease expenses, including any incentives granted by the lessor, are charged on a straight-line basis to Other general administrative expenses in their consolidated income statements.

iii. Sale and leaseback transactions

In sale and leaseback transactions where the sale is at fair value and the leaseback is an operating lease, any profit or loss is recognized at the time of sale. In the case of finance leasebacks, any profit or loss is amortized over the lease term.

F-47

In accordance with IFRSs (IAS 17), in determining whether a sale and leaseback transaction results in an operating lease, the Group should analyze, inter alia, whether at the inception of the lease there are purchase options whose terms and conditions make it reasonably certain that they will be exercised, and to whom the gains or losses from the fluctuations in the fair value of the residual value of the related asset will accrue. In this connection, when the Group performed the transactions described in Note 16, it carried out the aforementioned analysis and concluded that there was no reasonable certainty that the related options would be exercised, since their exercise price was linked to fair value and there were no other indicators that could force the Group to exercise these options; therefore, under IFRSs, it was required to recognize the gain or loss on the sale.

Intangible assets

Intangible assets are identifiable non-monetary assets (separable from other assets) without physical substance which arise as a result of a legal transaction or which are developed internally by the consolidated entities. Only assets whose cost can be estimated reliably and from which the consolidated entities consider it probable that future economic benefits will be generated are recognized.

Intangible assets are recognized initially at acquisition or production cost and are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses.

i. Goodwill

Any excess of the cost of the investments in the consolidated entities and entities accounted for using the equity method over the corresponding underlying carrying amounts acquired, adjusted at the date of first-time consolidation, is allocated as follows:

	•		If it is attributable to specific assets and liabilities of the companies acquired, by increasing the value of the assets (or reducing the value of the liabilities) whose fair values were higher (lower) than the carrying amounts at which they had been recognized in the acquired entities’ balance sheets.

	•		If it is attributable to specific intangible assets, by recognizing it explicitly in the consolidated balance sheet provided that the fair value of these assets within 12 months following the date of acquisition can be measured reliably.

	•		The remaining amount is recognized as goodwill, which is allocated to one or more cash-generating units (a cash generating unit is the smallest identifiable group of assets that, as a result of continuing operation, generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets). The cash-generating units represent the Group’s geographical and/or business segments.

Goodwill is only recognized when it has been acquired for consideration and represents, therefore, a payment made by the acquirer in anticipation of future economic benefits from assets of the acquired entity that are not capable of being individually identified and separately recognized.

At the end of each reporting period or whenever there is any indication of impairment goodwill is reviewed for impairment (i.e. a reduction in its recoverable amount to below its carrying amount) and, if there is any impairment, the goodwill is written down with a charge to Impairment losses on other assets (net) — Goodwill and other intangible assets in the consolidated income statement.

An impairment loss recognized for goodwill is not reversed in a subsequent period.

F-48

ii. Other intangible assets

Other intangible assets includes the amount of identifiable intangible assets (such as purchased customer lists and computer software).

Other intangible assets can have an indefinite useful life -when, based on an analysis of all the relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the consolidated entities- or a finite useful life, in all other cases.

Intangible assets with indefinite useful lives are not amortized, but rather at the end of each reporting period or whenever there is any indication of impairment the consolidated entities review the remaining useful lives of the assets in order to determine whether they continue to be indefinite and, if this is not the case, to take the appropriate steps.

Intangible assets with finite useful lives are amortized over those useful lives using methods similar to those used to depreciate tangible assets.

The intangible asset amortization charge is recognized under Depreciation and amortization in the consolidated income statement.

In both cases the consolidated entities recognize any impairment loss on the carrying amount of these assets with a charge to Impairment losses on other assets in the consolidated income statement. The criteria used to recognize the impairment losses on these assets and, where applicable, the reversal of impairment losses recognized in prior years are similar to those used for tangible assets (see Note 2.k).

Internally developed computer software

Internally developed computer software is recognized as an intangible asset if, among other requisites (basically the Group’s ability to use or sell it), it can be identified and its ability to generate future economic benefits can be demonstrated.

Expenditure on research activities is recognized as an expense in the year in which it is incurred and cannot be subsequently capitalized.

Other assets

Other assets in the consolidated balance sheet includes the amount of assets not recorded in other items, the breakdown being as follows:

	•		Inventories: this item includes the amount of assets, other than financial instruments, that are held for sale in the ordinary course of business, that are in the process of production, construction or development for such purpose, or that are to be consumed in the production process or in the provision of services. Inventories includes land and other property held for sale in the property development business.

			Inventories are measured at the lower of cost and net realizable value, which is the estimated selling price of the inventories in the ordinary course of business, less the estimated costs of completion and the estimated costs required to make the sale.

			Any write-downs of inventories -such as those due to damage, obsolescence or reduction of selling price- to net realizable value and other impairment losses are recognized as expenses for the year in which the impairment or loss occurs. Subsequent reversals are recognized in the consolidated income statement for the year in which they occur.

			The carrying amount of inventories is derecognized and recognized as an expense in the period in which the revenue from their sale is recognized.

F-49

•

Other: this item includes the balance of all prepayments and accrued income (excluding accrued interest, fees and commissions), the net amount of the difference between pension plan obligations and the value of the plan assets with a balance in the entity’s favor, when this net amount is to be reported in the consolidated balance sheet, and the amount of any other assets not included in other items.

	ñ)		*Other liabilities*

			Other liabilities includes the balance of all accrued expenses and deferred income, excluding accrued interest, and the amount of any other liabilities not included in other categories.

Provisions and contingent assets and liabilities

When preparing the financial statements of the consolidated entities, their respective directors made a distinction between:

	•		Provisions: credit balances covering present obligations at the reporting date arising from past events which could give rise to a loss for the consolidated entities, which is considered to be likely to occur and certain as to its nature but uncertain as to its amount and/or timing.

	•		Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the control of the consolidated entities. They include the present obligations of the consolidated entities when it is not probable that an outflow of resources embodying economic benefits will be required to settle them.

	•		Contingent assets: possible assets that arise from past events and whose existence is conditional on, and will be confirmed only by, the occurrence or non-occurrence of events beyond the control of the Group. Contingent assets are not recognized in the consolidated balance sheet or in the consolidated income statement, but rather are disclosed in the notes, provided that it is probable that these assets will give rise to an increase in resources embodying economic benefits.

The Group’s consolidated financial statements include all the material provisions with respect to which it is considered that it is more likely than not that the obligation will have to be settled. In accordance with accounting standards, contingent liabilities must not be recognized in the consolidated financial statements, but must rather be disclosed in the notes.

Provisions, which are quantified on the basis of the best information available on the consequences of the event giving rise to them and are reviewed and adjusted at the end of each year, are used to cater for the specific obligations for which they were originally recognized. Provisions are fully or partially reversed when such obligations cease to exist or are reduced.

Provisions are classified according to the obligations covered as follows:

	•		Provisions for pensions and similar obligations: includes the amount of all the provisions made to cover post-employment benefits, including obligations to pre-retirees and similar obligations.

	•		Provisions for contingent liabilities and commitments: includes the amount of the provisions made to cover contingent liabilities -defined as those transactions in which the Group guarantees the obligations of a third party, arising as a result of financial guarantees granted or contracts of another kind- and contingent commitments -defined as irrevocable commitments that may give rise to the recognition of financial assets.

F-50

•

Provisions for taxes and other legal contingencies and Other provisions: include the amount of the provisions recognized to cover tax and legal contingencies and litigation and the other provisions recognized by the consolidated entities. Other provisions includes, inter alia, any provisions for restructuring costs and environmental measures (see Note 25).

Litigation and/or claims in process

In addition to the disclosures made in Note 1, at the end of 2010 certain litigation and claims were in process against the consolidated entities arising from the ordinary course of their operations (see Note 25).

Own equity instruments

Own equity instruments are those meeting both of the following conditions:

	•		The instruments do not include any contractual obligation for the issuer: (i) to deliver cash or another financial asset to a third party; or (ii) to exchange financial assets or financial liabilities with a third party under conditions that are potentially unfavorable to the issuer.

	•		The instruments will or may be settled in the issuer’s own equity instruments and are: (i) a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or (ii) a derivative that will be settled by the issuer through the exchange of a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.

Transactions involving own equity instruments, including their issuance and cancellation, are deducted directly from equity.

Changes in the value of instruments classified as own equity instruments are not recognized in the consolidated financial statements. Consideration received or paid in exchange for such instruments is directly added to or deducted from equity.

Equity-instrument-based employee remuneration

Own equity instruments delivered to employees in consideration for their services, if the instruments are delivered once the specific period of service has ended, are recognized as an expense for services (with the corresponding increase in equity) as the services are rendered by employees during the service period. At the grant date the services received (and the related increase in equity) are measured at the fair value of the equity instruments granted. If the equity instruments granted are vested immediately, the Group recognizes in full, at the grant date, the expense for the services received.

When the requirements stipulated in the remuneration agreement include external market conditions (such as equity instruments reaching a certain quoted price), the amount ultimately to be recognized in equity will depend on the other conditions being met by the employees (normally length of service requirements), irrespective of whether the market conditions are satisfied. If the conditions of the agreement are met but the external market conditions are not satisfied, the amounts previously recognized in equity are not reversed, even if the employees do not exercise their right to receive the equity instruments.

F-51

Recognition of income and expenses

The most significant criteria used by the Group to recognize its income and expenses are summarized as follows:

i. Interest income, interest expenses and similar items

Interest income, interest expenses and similar items are generally recognized on an accrual basis using the effective interest method. Dividends received from other companies are recognized as income when the consolidated entities’ right to receive them arises.

However, the recognition of accrued interest in the consolidated income statement is suspended for debt instruments individually classified as impaired and for the instruments for which impairment losses have been assessed collectively because they have payments more than three months past due. This interest is recognized as income, when collected, as a reversal of the related impairment losses.

ii. Commissions, fees and similar items

Fee and commission income and expenses are recognized in the consolidated income statement using criteria that vary according to their nature. The main criteria are as follows:

	•		Fee and commission income and expenses relating to financial assets and financial liabilities measured at fair value through profit or loss are recognized when paid.

	•		Those arising from transactions or services that are performed over a period of time are recognized over the life of these transactions or services.

	•		Those relating to services provided in a single act are recognized when the single act is carried out.

iii. Non-finance income and expenses

These are recognized for accounting purposes on an accrual basis.

iv. Deferred collections and payments

These are recognized for accounting purposes at the amount resulting from discounting the expected cash flows at market rates.

v. Loan arrangement fees

Loan arrangement fees, mainly loan origination, application and information fees, are accrued and recognized in income over the term of the loan. In the case of loan origination fees, the portion relating to the associated direct costs incurred in the loan arrangement is recognized immediately in the consolidated income statement.

Financial guarantees

Financial guarantees are defined as contracts whereby an entity undertakes to make specific payments on behalf of a third party if the latter fails to do so, irrespective of the various legal forms they may have, such as guarantees, insurance policies or credit derivatives.

F-52

The Group initially recognizes the financial guarantees provided on the liability side of the consolidated balance sheet at fair value, which is generally the present value of the fees, commissions and interest receivable from these contracts over the term thereof, and simultaneously the Group recognizes a credit on the asset side of the consolidated balance sheet for the amount of the fees, commissions and similar interest received at the inception of the transactions and the amounts receivable at the present value of the fees, commissions and interest outstanding.

Financial guarantees, regardless of the guarantor, instrumentation or other circumstances, are reviewed periodically so as to determine the credit risk to which they are exposed and, if appropriate, to consider whether a provision is required. The credit risk is determined by application of criteria similar to those established for quantifying impairment losses on debt instruments carried at amortized cost (described in Note 2.g above).

The provisions made for these transactions are recognized under Provisions — Provisions for contingent liabilities and commitments in the consolidated balance sheet (see Note 25). These provisions are recognized and reversed with a charge or credit, respectively, to Provisions (net) in the consolidated income statement.

If a specific provision is required for financial guarantees, the related unearned commissions recognized under Financial liabilities at amortized cost — Other financial liabilities in the consolidated balance sheet are reclassified to the appropriate provision.

Assets under management and investment and pension funds managed by the Group

Assets owned by third parties and managed by the consolidated entities are not presented on the face of the consolidated balance sheet. Management fees are included in Fee and commission income in the consolidated income statement. Note 35.c contains information on the third-party assets managed by the Group.

The investment funds and pension funds managed by the consolidated entities are not presented on the face of the Group’s consolidated balance sheet since the related assets are owned by third parties. The fees and commissions earned in the year for the services rendered by the Group entities to these funds (asset management and custody services) are recognized under Fee and commission income in the consolidated income statement.

Post-employment benefits

Under the collective agreements currently in force and other arrangements, the Spanish banks included in the Group and certain other Spanish and foreign consolidated entities have undertaken to supplement the public social security system benefits accruing to certain employees, and to their beneficiary right holders, for retirement, permanent disability or death, the benefits and indemnity payments payable, the contributions to employee welfare systems for pre-retirees and the post-employment welfare benefits.

The Group’s post-employment obligations to its employees are deemed to be defined contribution plans when the Group makes pre-determined contributions (recognized in Personnel expenses in the consolidated income statement) to a separate entity and will have no legal or effective obligation to make further contributions if the separate entity cannot pay the employee benefits relating to the service rendered in the current and prior periods. Post-employment obligations that do not meet the aforementioned conditions are classified as defined benefit plans (see Note 25).

Defined contribution plans

The contributions made in this connection in each year are recognized under Personnel expenses in the consolidated income statement. The amounts not yet contributed at each year-end are recognized, at their present value, under Provisions — Provisions for pensions and similar obligations on the liability side of the consolidated balance sheet.

F-53

Defined benefit plans

The Group recognizes under Provisions — Provisions for pensions and similar obligations on the liability side of the consolidated balance sheet (or under Other assets on the asset side, as appropriate) the present value of its defined benefit post-employment obligations, net of the fair value of the plan assets, of the net unrecognized cumulative actuarial gains and/or losses disclosed on measurement of these obligations, which are deferred using a corridor approach, and of the past service cost, which is deferred over time, as explained below.

Plan assets are defined as those that will be directly used to settle obligations and that meet the following conditions:

	•		They are not owned by the consolidated entities, but by a legally separate third party that is not a party related to the Group.

	•		They are only available to pay or fund post-employment benefits and they cannot be returned to the consolidated entities unless the assets remaining in the plan are sufficient to meet all the benefit obligations of the plan and of the entity to current and former employees, or they are returned to reimburse employee benefits already paid by the Group.

If the Group can look to an insurer to pay part or all of the expenditure required to settle a defined benefit obligation, and it is practically certain that said insurer will reimburse some or all of the expenditure required to settle that obligation, but the insurance policy does not qualify as a plan asset, the Group recognizes its right to reimbursement -which, in all other respects, is treated as a plan asset- under Insurance contracts linked to pensions on the asset side of the consolidated balance sheet.

Actuarial gains and losses are defined as those arising from differences between the previous actuarial assumptions and what has actually occurred and from the effects of changes in actuarial assumptions. The Group uses, on a plan-by-plan basis, the corridor approach and recognizes in the consolidated income statement the amount resulting from dividing by five the net amount of the cumulative actuarial gains and/or losses not recognized at the beginning of each year which exceeds 10% of the present value of the obligations or 10% of the fair value of the plan assets at the beginning of the year, whichever amount is higher. The maximum five-year allocation period, which is required by the Bank of Spain for all Spanish financial institutions, is shorter than the average number of remaining years of active service relating to the employees participating in the plans, and is applied systematically.

The past service cost -which arises from changes to existing post-employment benefits or from the introduction of new benefits- is recognized on a straight-line basis in the consolidated income statement over the period from the time the new obligations arise to the date on which the employee has an irrevocable right to receive the new benefits.

Post-employment benefits are recognized in the consolidated income statement as follows:

	•		Current service cost, i.e. the increase in the present value of the obligations resulting from employee service in the current period, under Personnel expenses.

	•		Interest cost, i.e. the increase during the year in the present value of the obligations as a result of the passage of time, under Interest expense and similar charges. When obligations are presented on the liability side of the consolidated balance sheet, net of the plan assets, the cost of the liabilities recognized in the consolidated income statement relates exclusively to the obligations recognized as liabilities.

	•		The expected return on plan assets and the gains or losses on the value of the plan assets, under Interest and similar income.

	•		The actuarial gains and losses calculated using the corridor approach and the unrecognized past service cost, under Provisions (net) in the consolidated income statement.

F-54

Other long-term employee benefits

Other long-term employee benefits, defined as obligations to pre-retirees -taken to be those who have ceased to render services at the entity but who, without being legally retired, continue to have economic rights vis-à-vis the entity until they acquire the legal status of retiree-, long-service bonuses, obligations for death of spouse or disability before retirement that depend on the employee’s length of service at the entity and other similar items, are treated for accounting purposes, where applicable, as established above for defined benefit post-employment plans, except that all past service costs and actuarial gains and losses are recognized immediately (see Note 25).

Termination benefits

Termination benefits are recognized when there is a detailed formal plan identifying the basic changes to be made, provided that implementation of the plan has begun, its main features have been publicly announced or objective facts concerning its implementation have been disclosed.

Income tax

The expense for Spanish corporation tax and other similar taxes applicable to the foreign consolidated entities is recognized in the consolidated income statement, except when it results from a transaction recognized directly in equity, in which case the tax effect is also recognized in equity.

The current income tax expense is calculated as the sum of the current tax resulting from application of the appropriate tax rate to the taxable profit for the year (net of any deductions allowable for tax purposes), and of the changes in deferred tax assets and liabilities recognized in the consolidated income statement.

Deferred tax assets and liabilities include temporary differences, which are identified as the amounts expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their related tax bases, and tax loss and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled.

Tax assets includes the amount of all tax assets, which are broken down into current -amounts of tax to be recovered within the next twelve months- and deferred -amounts of tax to be recovered in future years, including those arising from tax loss or tax credit carryforwards.

Tax liabilities includes the amount of all tax liabilities (except provisions for taxes), which are broken down into current -the amount payable in respect of the income tax on the taxable profit for the year and other taxes in the next twelve months- and deferred -the amount of income tax payable in future years.

Deferred tax liabilities are recognized in respect of taxable temporary differences associated with investments in subsidiaries, associates or joint ventures, except when the Group is able to control the timing of the reversal of the temporary difference and, in addition, it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets are only recognized for temporary differences to the extent that it is considered probable that the consolidated entities will have sufficient future taxable profits against which the deferred tax assets can be utilized, and the deferred tax assets do not arise from the initial recognition (except in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit nor accounting profit. Other deferred tax assets (tax loss and tax credit carryforwards) are only recognized if it is considered probable that the consolidated entities will have sufficient future taxable profits against which they can be utilized.

F-55

Income and expenses recognized directly in equity are accounted for as temporary differences.

The deferred tax assets and liabilities recognized are reassessed at each reporting date in order to ascertain whether they still exist, and the appropriate adjustments are made on the basis of the findings of the analyses performed.

	z)		*Residual maturity periods and average interest rates*

			The analysis of the maturities of the balances of certain items in the consolidated balance sheet and the average interest rates at 2010, 2009 and 2008 year-end is provided in Note 51.

	*aa)*		*Consolidated statements of cash flows*

The following terms are used in the consolidated statements of cash flows with the meanings specified:

	•		Cash flows: inflows and outflows of cash and cash equivalents, which are short-term, highly liquid investments that are subject to an insignificant risk of changes in value, irrespective of the portfolio in which they are classified.

			The Group classifies as cash and cash equivalents the balances recognized under Cash and balances with central banks in the consolidated balance sheet.

	•		Operating activities: the principal revenue-producing activities of credit institutions and other activities that are not investing or financing activities.

	•		Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents.

	•		Financing activities: activities that result in changes in the size and composition of the equity and liabilities that are not operating activities.

			As indicated in Note 1.h, the amendments to IAS 27, which came into effect in 2010, also revised certain aspect of IAS 7, Statement of Cash Flows, whereby cash flows arising from changes in ownership interests in a subsidiary that do not result in a loss of control are classified as cash flows from financing activities. This amendment was applied retrospectively.

	*ab)*		*Consolidated statement of recognized income and expense*

			This statement presents the income and expenses generated by the Group as a result of its business activity in the year, and a distinction is made between the income and expenses recognized in the consolidated income statement for the year and the other income and expenses recognized directly in consolidated equity.

			Accordingly, this statement presents:

	a.		Consolidated profit for the year.

	b.		The net amount of the income and expenses recognized temporarily in consolidated equity under Valuation adjustments.

F-56

	c.		The net amount of the income and expenses recognized definitively in consolidated equity.

	d.		The income tax incurred in respect of the items indicated in b) and c) above, except for the valuation adjustments arising from investments in associates or jointly controlled entities accounted for using the equity method, which are presented net.

	e.		Total consolidated recognized income and expense, calculated as the sum of a) to d) above, presenting separately the amount attributable to the Parent and the amount relating to non-controlling interests.

The amount of the income and expenses relating to entities accounted for using the equity method recognized directly in equity is presented in this statement, irrespective of the nature of the related items, under Entities accounted for using the equity method.

	*ac)*		*Consolidated statement of changes in total equity*

			This statement presents all the changes in equity, including those arising from changes in accounting policies and from the correction of errors. Accordingly, this statement presents a reconciliation of the carrying amount at the beginning and end of the year of all the consolidated equity items, and the changes are grouped together on the basis of their nature into the following items:

	a.		Adjustments due to changes in accounting policies and to errors: include the changes in consolidated equity arising as a result of the retrospective restatement of the balances in the consolidated financial statements, distinguishing between those resulting from changes in accounting policies and those relating to the correction of errors.

	b.		Income and expense recognized in the year: includes, in aggregate form, the total of the aforementioned items recognized in the consolidated statement of recognized income and expense.

	c.		Other changes in equity: includes the remaining items recognized in equity, including, inter alia, increases and decreases in capital, distribution of profit, transactions involving own equity instruments, equity-instrument-based payments, transfers between equity items and any other increases or decreases in consolidated equity.

Santander Group

Banco Santander, S.A. and international Group structure

The growth of the Group in the last decade has led the Bank to also act, in practice, as a holding entity of the shares of the various companies in its Group, and its results are becoming progressively less representative of the performance and earnings of the Group. Therefore, each year the Bank determines the amount of the dividends to be distributed to its shareholders on the basis of the consolidated net profit, while maintaining the Group’s traditionally high level of capitalization and taking into account that the transactions of the Bank and of the rest of the Group are managed on a consolidated basis (notwithstanding the allocation to each company of the related net worth effect).

F-57

At international level, the various banks and other subsidiaries, jointly controlled entities and associates of the Group are integrated in a corporate structure comprising various holding companies which are the ultimate shareholders of the banks and subsidiaries abroad.

The purpose of this structure, all of which is controlled by the Bank, is to optimize the international organization from the strategic, economic, financial and tax standpoints, since it makes it possible to define the most appropriate units to be entrusted with acquiring, selling or holding stakes in other international entities, the most appropriate financing method for these transactions and the most appropriate means of remitting the profits obtained by the Group’s various operating units to Spain.

The Appendices provide relevant data on the consolidated Group companies and on the companies accounted for using the equity method.

Acquisitions and disposals

Following is a summary of the main acquisitions and disposals of ownership interests in the share capital of other entities and other significant corporate transactions performed by the Group in the last three years:

i. ABN AMRO Holding N.V. (ABN AMRO)

On July 20, 2007, having obtained the regulatory authorizations required to publish the documentation on the takeover bid for ABN AMRO, the Bank, together with the Royal Bank of Scotland Group plc, Fortis N.V. and Fortis S.A./N.V. (together, the Banks) formally launched, through RFS Holdings B.V., the offer for all the ordinary shares, ADSs and previously convertible preference shares of ABN AMRO.

98.8% of the ordinary share capital of ABN AMRO (excluding its treasury shares) had definitively accepted the Offer.

At December 31, 2007, the investment made by the Bank amounted to EUR 20,615 million and consisted of the Bank’s 27.9% ownership interest in the share capital of RFS Holdings B.V., the holding entity of the shares of ABN AMRO.

Following all these actions, the spin-off of the business lines of ABN AMRO commenced with a view to their subsequent integration into each of the Banks. The following correspond to Banco Santander: the Latin American Business Unit of ABN AMRO -basically Banco ABN AMRO Real S.A. (Banco Real) in Brazil-, the Banca Antoniana Popolare Veneta Spa Banking Group (Antonveneta), the cash relating to the sale of the consumer banking unit of ABN AMRO in the Netherlands -Interbank and DMC Consumer Finance, plus 27.9% of the assets that were not allocated to any of the Banks of the consortium and which are intended to be disposed of. The spin-off process continued in 2008.

Accordingly, on March 4, 2008 the Dutch Central Bank expressed its acceptance of the overall spin-off plan, and in July 2008 it approved the individual spin-off plan for Banco Real and the business activities in Brazil. Subsequently, the Central Bank of Brazil approved the acquisition by Banco Santander, whereby it became effective.

The Group’s assets in Brazil also comprised those corresponding to the asset management business of ABN AMRO in Brazil, which were initially allocated to Fortis in the process of spinning off and integrating the assets of ABN AMRO and which were acquired therefrom by the Bank in the first half of 2008 for EUR 209 million.

F-58

As part of the asset spin-off, in December 2008 Banco Santander Uruguay acquired the assets and liabilities of the Montevideo branch of ABN AMRO, and subsequently proceeded to merge the businesses.

Also, on 30 May 2008 Banco Santander and Banca Monte dei Paschi di Siena announced the completion of the purchase and sale of Antonveneta (excluding Interbanca, its corporate banking subsidiary) for EUR 9,000 million, in execution of the agreement announced on November 8, 2007.

On June 2, 2008, Banco Santander entered into a definitive agreement with General Electric whereby a General Electric Group company would acquire Interbanca and various Santander Group entities would acquire the GE Money units in Germany, Finland and Austria, GE’s card units in the UK and Ireland and its car finance unit in the UK. The base price agreed for the two transactions was EUR 1,000 million each, subject to various adjustments. These transactions were completed with the acquisition of GE Germany in the fourth quarter of 2008 and the acquisition of the remaining GE units and the sale of Interbanca in the first quarter of 2009 (see Section.x. below).

In the third quarter of 2008 the Group sold 45% of ABN Amro Asset Management Italy SGR S.p.A. to Banca Monte di Paschi di Siena for EUR 35 million; Banca Monte di Paschi di Siena had already acquired the remaining 55% through the acquisition of Antonveneta.

The businesses shared by the members of the consortium included subordinated liabilities issued by ABN AMRO. The portion of these liabilities relating to Santander was transferred to RBS and Fortis at market prices, giving rise to gains for the Group amounting to EUR 741 million which were recognized under Gains/losses on financial assets and liabilities (net) in the income statement for 2008.

On September 22, 2008, RFS completed the squeeze-out of the non-controlling shareholders of ABN AMRO through the payment of EUR 712 million to these shareholders. Consequently, from that date RFS has been the sole shareholder of ABN AMRO. Banco Santander had to pay EUR 200 million to complete this process, on the basis of its ownership interest in RFS.

Banco Real was fully consolidated in the Group’s financial statements in the fourth quarter of 2008; previously it had been accounted for using the equity method through the ownership interest in RFS Holdings. Accordingly, the Group’s income statement for 2008 included all the results contributed to the Group by this entity from January 1, 2008. The volume of assets that Banco Real contributed to the Group amounted to approximately EUR 44,000 million, based on the exchange rate ruling at 2008 year-end. The amounts of the main assets, liabilities and contingent liabilities contributed to the Group by this entity are detailed in the related notes to these consolidated financial statements.

The goodwill at the date of acquisition assigned to Banco Real following all the aforementioned transactions amounted to EUR 8,000 million (EUR 6,446 million at the exchange rate prevailing at 2008 year-end).

In April 2009, ABN AMRO sold its branch in Asunción (Paraguay), after converting it into a subsidiary, to Banco Regional (40%-owned by the Rabobank group) for EUR 42.2 million, giving rise to a net gain of approximately EUR 5 million.

On April 1, 2010, the name of ABN AMRO was changed to The Royal Bank of Scotland Holding N.V.

On the same date, ABN AMRO Bank N.V., a company recently incorporated for the purpose of acting as the holding company for most of the assets and liabilities that belonged to the Netherlands state, became a wholly-owned subsidiary of said state. Also on April 1, 2010, the Royal Bank of Scotland Group plc, Banco Santander, S.A., the Netherlands state and RFS Holdings B.V. entered into a new “Restated Consortium and Shareholders Agreement”.

F-59

At the date on which these consolidated financial statements were authorized for issue, Banco Santander had a small economic interest in RFS Holdings B.V., which in turn owns a residual amount of the assets and liabilities shared with the Royal Bank of Scotland Group plc and the Netherlands state.

ii. Compañía Española de Petróleos, S.A. (Cepsa)

In 2003 the Bank launched a takeover bid for up to 42,811,991 Cepsa shares, and the offer was accepted for 32,461,948 shares, representing an investment of EUR 909 million.

Total, S.A. considered that the takeover bid breached historical shareholder agreements between it (or its subsidiary, Elf Aquitaine, S.A.-Elf) and the Bank in relation to Cepsa and, accordingly, filed a request for arbitration at the Netherlands Court of Arbitration.

On April 3, 2006, the partial award rendered by the Arbitral Tribunal which, in the framework of the Netherlands Arbitration Institute, resolved the request for arbitration filed by Total, S.A. against the Bank was notified to the parties. The Tribunal considered that the shareholder agreements contained in the agreements relating to Cepsa between the Bank and Total, S.A. (or its subsidiary, Elf) were rendered invalid by application of Transitional Provision Three of Law 26/2003, of July 17. However, the fact that the Bank launched the aforementioned takeover bid without prior consultation with Total, S.A. caused, in the opinion of the Tribunal, an insurmountable disagreement between the two parties which, in application of the part of the agreements that was not rendered invalid, entitled Total, S.A. to repurchase from the Bank a 4.35% ownership interest in Cepsa at the price established in the agreements.

Also, the aforementioned partial award ordered the dissolution of Somaen Dos, S.L. (Sole-Shareholder Company), the sole company object of which was the holding of ownership interests in Cepsa, with a view to each shareholder recovering direct ownership of their respective Cepsa shares, in accordance with the agreements entered into between the Bank and Total, S.A. (or its subsidiary, Elf). To this end, on August 2, 2006, Banco Santander, S.A. and Riyal, S.L. entered into two agreements with Elf Aquitaine, S.A. and Odival, S.A., on the one hand, and with Unión Fenosa, S.A., on the other, to enforce the partial award and separate the ownership interests that they each held in Cepsa through Somaen-Dos, S.L.

On October 13, 2006, Elf received notification from the European Commission communicating the authorization of the concentration resulting from the acquisition by Elf of shares representing 4.35% of the share capital of Cepsa. Consequently, the Group sold 11,650,893 Cepsa shares to Elf for EUR 53 million. This disposal gave rise to a loss of EUR 158 million which was covered by a provision recognized for this purpose.

At December 31, 2008, the directors of the Bank classified the 32.5% ownership interest held in Compañía Española de Petróleos, S.A. (Cepsa) as a non-current asset held for sale, since it intended to recover the value of the investment through the sale thereof in the short term. This ownership interest was sold in 2009 (see Note 12).

iii. Drive Consumer USA, Inc. (Drive) (Santander Consumer USA Inc.)

In 2006 the Group entered into an agreement to acquire 90% of Drive for USD 637 million in cash (approximately EUR 494 million), which is 6.8 times the estimated profit for 2006.

The transaction gave rise to goodwill of USD 544 million.

The agreement established that the price paid by the Group could be increased by up to USD 175 million if the company met certain profit targets for 2007 and 2008. In July 2007, an agreement was reached for this payment to be made early in exchange for a reduction in its amount from USD 175 million to USD 135 million (EUR 97 million), giving rise to additional goodwill for the amount disbursed.

F-60

The owners of Santander Consumer USA Inc. (formerly Drive Consumer USA, Inc.) were HBOS, plc with 64.5% and the management team with 35.5%. Following the acquisition, the current chairman and COO of Drive performs the functions of CEO and holds an ownership interest in the company of 9%, a percentage on which there are certain purchase and sale options which might lead to the Group acquiring a further 9% stake by 2013 at prices linked to the company’s earnings performance. In 2009 the Group acquired a further 0.5%.

iv. Acquisition of the European consumer finance business from The Royal Bank of Scotland (RBS)

On July 1, 2008, the Group completed the acquisition (announced in the first quarter of 2008) of the consumer finance business of The Royal Bank of Scotland (RBS) in continental Europe, including its business activities in Germany, the Netherlands, Belgium and Austria. The price of this transaction amounted to EUR 306 million, giving rise to goodwill of EUR 85 million.

At the time of the acquisition, the RBS consumer finance unit in Europe (RBS ECF) provided services to 2.3 million customers. RBS ECF facilitated installment sales directly and through its partners. It had a significant presence in the credit card business in terms of both individual and corporate customers, and provided consumer finance through various distribution channels. The business acquired in Germany was included in Santander Consumer Bank in December 2008.

v. Alliance & Leicester plc

On July 14, 2008, Banco Santander, S.A. and Alliance & Leicester plc entered into an agreement in relation to the terms of a recommended acquisition by Banco Santander, S.A. of the entire share capital, whether issued or yet to be issued, of Alliance & Leicester plc.

Under the aforementioned terms, the shareholders of Alliance & Leicester plc received one Banco Santander share for every three shares of Alliance & Leicester plc. Prior to the share exchange date, Alliance & Leicester approved and paid an interim dividend in cash amounting to 18 pence per share.

Key features of the acquisition:

	•		At the time of the announcement each Alliance & Leicester plc share was worth 299 pence, and the total issued share capital, approximately GBP 1,259 million, whereby the proposed exchange represented a premium of approximately 36.4% on the closing price at July 11, 2008. Considering the above interim dividend, the premium amounted to approximately 44.6% on the aforementioned closing price.

	•		The acquisition affords the integration of the ancillary businesses of Alliance & Leicester and Santander UK, thereby strengthening the competitive positioning of the products and services offered by the Group and benefiting its customers.

	•		It increased the critical mass of the Group’s business in the UK market, as part of our vertical strategy.

	•		In-market cost synergies through the Group’s presence in the UK, estimated at GBP 180 million per year (before tax) at the end of 2011.

	•		Complementary geographical nature of both distribution networks (Alliance & Leicester has a major presence in the Midlands and Santander UK in the London area).

	•		Santander UK’s expansion process in the SMEs and retail business will be speeded up by two to three years.

F-61

The acquisition was completed on October 10, 2008 through the issuance of 140,950,944 new Banco Santander shares of EUR 0.50 par value each, with a share premium of EUR 10.73 per share, and the capital increase amounted to EUR 1,583 million (share capital: EUR 70 million; share premium: EUR 1,513 million), giving rise to initial goodwill of GBP 442 million (EUR 554 million based on the exchange rate at the acquisition date).

This acquisition was performed by means of a scheme of arrangement and was approved by the shareholders of Banco Santander, S.A. (with respect to the capital increase) and of Alliance & Leicester plc. Additionally, the scheme of arrangement through which the acquisition was performed was approved by the competent UK court and the appropriate authorizations were obtained from the UK Financial Services Authority and the Bank of Spain.

Alliance & Leicester contributed total assets of approximately EUR 79,000 million at 2008 year-end. The amounts of the main assets, liabilities and contingent liabilities contributed to the Group by this entity are detailed in the related notes to these consolidated financial statements.

In 2008 Alliance & Leicester did not contribute any results to the Group. The information on the results that this entity would have contributed to the Group had it been acquired on January 1, 2008 is not considered to be representative and, therefore, is not disclosed in these notes to the financial statements.

vi. Acquisition of the distribution channels and retail deposits of Bradford & Bingley

On September 29, 2008, further to the notification by the UK Treasury that Bradford & Bingley plc (B&B) would be taken into public ownership, the Group announced that the retail deposits, the branch network and the related employees would be acquired by Santander UK, under the terms and conditions of the Banking (Special Provisions) Act 2008.

According to the statements made by the UK Treasury, all the loans and advances to customers and treasury assets of B&B, including mortgage assets of GBP 41,000 million, have been taken into public ownership.

The following were transferred to Santander UK:

	•		Retail deposits totaling GBP 20,000 million

	•		The direct distribution channels, including 197 commercial branches, 141 agencies (distribution points in third-party premises) and the related employees.

The acquisition price was GBP 612 million, including the transfer of GBP 208 million of capital relating to off-shore companies. The goodwill initially assigned to this business amounted to GBP 160 million (EUR 202 million based on the exchange rate at the transaction date).

vii. Sale of Porterbrook Leasing Company

On December 8, 2008, Santander UK completed the disposal of Porterbrook, its leasing business, through the sale of all the shares of Porterbrook Leasing Company and its subsidiaries to a consortium of investors including Antin Infrastructure Partners (the infrastructure fund sponsored by BNP Paribas), Deutsche Bank and Lloyds TSB, and received approximately GBP 1,600 million in cash. This disposal gave rise to a gain of EUR 50 million (GBP 40 million) recognized under Gains/(losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement for 2008 (see Note 49).

F-62

viii. Sovereign Bancorp Inc. (Sovereign)

On October 13, 2008, Banco Santander, S.A. (Santander) and Sovereign Bancorp Inc., the parent of Sovereign Bank, announced that Santander would acquire Sovereign through a share exchange. At the date of the announcement Santander held 24.35% of the outstanding ordinary shares of Sovereign, which were classified as Investments in the 2008 consolidated balance sheet (see Note 13). The capital and finance committee of Sovereign, composed of independent directors, requested that Santander consider acquiring the 75.65% of the company that it did not own. The committee assessed the transaction and recommended it to the company’s board of directors.

On January 26, 2009, Banco Santander held an extraordinary general meeting at which the shareholders approved the capital increase to cater for the acquisition of 75.65% of the US entity Sovereign Bancorp Inc., which was agreed upon in October 2008. The resolution was agreed with the vote of 96.9% of the capital present in person or by proxy.

On January 28, 2009, the shareholders at the general meeting of Sovereign approved the acquisition.

On January 30, 2009, the acquisition of Sovereign was completed and Sovereign became a wholly-owned subsidiary of Santander Group. The transaction involved the issue of 0.3206 ordinary shares of Banco Santander for each ordinary share of Sovereign (equivalent to the approved exchange of 0.2924 ADSs adjusted for the dilution arising from the capital increase carried out in December 2008). To this end, 161,546,320 ordinary shares were issued for a cash amount (par value plus share premium) of EUR 1,302 million.

The volume of assets contributed by the Sovereign business unit to the Group amounted to approximately EUR 48,791 million at the 2009 closing exchange rate, of which approximately EUR 9,568 million related to Available-for-sale financial assets and EUR 34,605 million to Loans and receivables. Also, at December 31, 2009 Sovereign contributed to the Group financial liabilities amounting to approximately EUR 45,364 million and provisions amounting to EUR 401 million. In the process of allocation of the purchase price, the Group recognized initial goodwill of USD 2,053 million (EUR 1,601 million at the exchange rate at the date of acquisition- EUR 1,425 million at the 2009 closing exchange rate-). Additionally, various notes to these consolidated financial statements disclose the amounts of the main assets, liabilities and contingent liabilities contributed to the Group by this entity.

Since the Group obtained control over Sovereign at the end of January 2009, the Group’s income statement for 2009 included substantially all the losses generated by Sovereign in the year (EUR 25 million).

ix. Acquisition of Real Tokio Marine Vida e Previdência

In March 2009 the Santander Brasil Group acquired the 50% of the insurance company Real Seguros Vida e Previdência (formerly Real Tokio Marine Vida e Previdência) that it did not already own from Tokio Marine for BRL 678 million (EUR 225 million).

x. General Electric Money and Interbanca

The first quarter of 2009 saw the completion of the agreement reached by Banco Santander and GE in March 2008 (see Section i. above) whereby Banco Santander would acquire the units of GE Money in Germany (already acquired in the fourth quarter of 2008), Finland and Austria and its card (Santander Cards UK Limited) and vehicle financing units in the UK, and GE Commercial Finance would acquire Interbanca, an entity specializing in wholesale banking which was assigned to Banco Santander in the distribution of ABN AMRO’s assets. The initial goodwill arising from the acquisition of the GE business amounted to EUR 558 million at December 2009. The assets contributed by these units consisted mainly of loans and advances to customers and represent approximately 1% of the Group’s lending.

F-63

xi. Banco de Venezuela, S.A., Banco Universal

On 22 May 2009, Banco Santander announced that it had reached an agreement in principle for the sale of its stake in Banco de Venezuela, S.A., Banco Universal to the Bolivarian Republic of Venezuela. On July 6, 2009 Banco Santander announced that it had closed the sale of the stake in Banco de Venezuela, S.A., Banco Universal to Banco de Desarrollo Económico y Social de Venezuela, a public institution of the Bolivarian Republic of Venezuela, for USD 1,050 million, of which USD 630 million were received in cash on that date and the remainder was received before year-end. This sale did not have a material impact on the Group’s consolidated income statement.

xii. Triad Financial Corporation

In June 2008, Banco Santander’s executive committee authorized the acquisition by Santander Consumer USA Inc. (formerly Drive Consumer USA Inc.) of the vehicle purchase loan portfolio and an Internet-based direct loan platform (roadloans.com) belonging to the US group Triad Financial Corporation. The acquisition price, USD 615 million, was determined on the basis of an analysis of each individual loan. In July 2009 the aforementioned executive committee authorized Santander Consumer USA Inc. to acquire Triad Financial Corporation SM LLC with its remaining portfolio for USD 260 million.

xiii. Banco Santander (Brasil) S.A.

On October 13, 2009, the Group subsidiary Banco Santander (Brasil) S.A. (Santander Brasil) closed its initial public offering of 525,000,000 units, each unit representing 55 ordinary shares and 50 preference shares, without par value. The offered securities (units) are share deposit certificates. The units were offered in a global offering consisting of an international tranche in the United States and in other countries other than Brazil, in the form of American depositary shares (ADSs), in which each ADS represented a unit, and a domestic tranche of units in Brazil.

The initial public offering price was BRL 23.50 per unit and USD 13.4033 per ADS.

Once the global offering was completed and after the underwriters exercised their options, the capital increase amount was BRL 13,182 million (EUR 5,092 million). The free float of Santander Brasil rose to approximately 16.45% of its share capital, from only 2.0% before the IPO. Santander Brasil undertook to raise the free float to at least 25% of its share capital within three years from the date of the initial public offering in order to maintain its listing on Level 2 of the Bolsa de Valores, Mercadorias e Futuros (BM&FBOVESPA). The ADSs are listed on the New York Stock Exchange.

Santander Group’s net gains from the placement amounted to EUR 1,499 million (see Note 1.h).

F-64

Prior to the public offering, on August 14, 2009, the Group transferred to Santander Brasil, through share exchange transactions, all the share capital of certain Brazilian asset management, insurance and banking companies (including Santander Seguros S.A. and Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A.) which were owned by Santander Group and certain non-controlling shareholders. The total equity of the transferred businesses was valued at BRL 2,500 million. The purpose of these transactions was to consolidate in a single entity Santander Group’s investments in Brazil, thus streamlining the current corporate structure and grouping the ownership interests held by Santander Group and by the non-controlling shareholders in those entities in the share capital of Santander Brasil. As a result of these transactions, the share capital of Santander Brasil was increased by approximately BRL 2,500 million through the issuance of 14,410,886,181 shares, of which 7,710,342,899 were ordinary shares and 6,700,543,282 were preference shares. Additionally, on September 17, 2009, Banco Santander sold to Santander Brasil a loan portfolio consisting of loans to Brazilian companies and their associates abroad for USD 806.3 million.

Santander Brasil agreed with the underwriters, subject to certain exceptions, not to offer, sell or dispose of any of its own shares or securities convertible into or exchangeable for its shares for a 180-day period from the date of the prospectus. Also, Banco Santander and the board members and senior management of Santander Brasil undertook to accept substantially similar lock-up provisions, subject to certain exceptions.

In August 2008, Santander Brasil acquired Banco Real, which was then the fourth largest private-sector Brazilian bank in terms of volume of assets. At the time of the purchase, Santander Brasil was the fifth largest private-sector bank in Brazil in terms of volume of assets. The businesses of Banco Real and Santander Brasil were highly complementary before the acquisition. Santander Brasil considers that the acquisition provides considerable opportunities in terms of operational, commercial and technology synergies, building on the best practices of each bank. Banco Real’s strong representation in the states of Rio de Janeiro and Minas Gerais has further enhanced Santander Brasil’s position in the Southern and South Eastern regions of the country, adding to this entity’s already significant presence in those regions, particularly in the State of São Paulo. The acquisition of Banco Real consolidated Santander Brasil’s position as a full-service bank with nationwide coverage, whose size enables it to compete efficiently in its target markets.

In the third quarter of 2010, the Group sold 2.616% of the share capital of Santander Brasil. The sale price amounted to EUR 867 million, which gave rise to increases of EUR 162 million in Reserves and EUR 790 million in Non-controlling interests, and a decrease of EUR 85 million in Valuation adjustments — Exchange differences.

xiv. Acquisition of 75% of AIG Bank Polska Spólka Akcyina

On June 8, 2010, Santander Consumer Bank S.A. (Poland) carried out a capital increase through the issue of 1,560,000 new shares, fully subscribed by AIG Consumer Finance Group Inc., through a non-monetary contribution of 11,177,088 shares of AIG Bank Polska S.A., representing 99.92% of its share capital. The increase amounted to PLN 452 million (approximately EUR 109 million at the transaction date).

Following this capital increase, the ownership interest held by the Group in Santander Consumer Bank, S.A. (Poland) was diluted to 70% of the share capital.

F-65

xv. Sale of James Hay Holdings Limited

xvi. Sale of Companhia Brasileira de Soluções e Serviços

In July 2010 the agreement entered into with Banco do Brasil S.A. and Banco Bradesco S.A. for the sale to these two entities of Santander Group’s ownership interest in Companhia Brasileira de Soluções e Serviços-CBSS (15.32% of the share capital) was executed. The sale price was approximately EUR 88.9 million, giving rise to a gain of EUR 80 million, recognized under Gains/(losses) on disposal of assets not classified as non-current assets held for sale (EUR 33 million net of tax and non-controlling interests).

xvii. Acquisition of 24.9% of Banco Santander México

On June 9, 2010, Banco Santander announced that it had entered into an agreement with Bank of America whereby it would acquire the 24.9% ownership interest that the latter held in Grupo Financiero Santander (Banco Santander México) for USD 2,500 million. The transaction, which was completed in the third quarter of 2010, entailed a decrease of EUR 1,177 million in Non-controlling interests and EUR 843 million in Reserves. Following the transaction, Santander’s ownership interest in Banco Santander México stands at 99.9%.

xviii. Bid for Santander BanCorp

The bid launched by Administración de Bancos Latinoamericanos Santander, S.L. (Ablasa), a wholly-owned subsidiary of Santander, for the portion of the share capital of Santander BanCorp (Puerto Rico) that it did not control, ended on July 22, 2010. The bid was accepted by shareholders representing 7.8% of the share capital and, accordingly, following the bid, Ablasa’s ownership interest in Santander BanCorp rose to 98.4%.

Ablasa acquired the remaining shares through a transaction performed in Puerto Rico on July 29, 2010 known as a short form merger, whereby the shares held by the shareholders who did not accept the bid were redeemed and these shareholders received in exchange the same amount in cash that was paid in the bid (USD 12.69 per share), without interest and net of any applicable tax withholding.

The total amount of the transaction was approximately USD 56 million (EUR 44 million), which was recognized through a decrease in Non-controlling interests of EUR 45 million and an increase in Reserves of EUR 1 million.

After the short form merger was completed, Santander BanCorp is now a wholly-owned subsidiary of Banco Santander. Its shares are no longer listed on the New York and Latibex stock exchanges and it is no longer required to file certain periodic information with the US Securities and Exchange Commission.

Following is a description of other transactions in progress at 2010 year-end:

xix. Agreement to buy Royal Bank of Scotland branches

On June 18, 2010, the Bank announced that its subsidiary Santander UK had submitted a bid for approximately 300 Royal Bank of Scotland (RBS) branches in the United Kingdom.

In August 2010 Santander UK entered into an agreement to acquire the portion of the banking business that Royal Bank of Scotland carries on through its branches in England and Wales and through the NatWest network in Scotland. The price, subject to adjustments, amounts to GBP 1,650 million (approximately EUR 1,987 million), including goodwill estimated at GBP 350 million (approximately EUR 421 million).

F-66

The acquisition includes 311 RBS branches in England and Wales and 7 NatWest branches in Scotland, 40 SME banking centers and more than 400 business banking managers, 4 corporate banking centers and 3 private banking centers. The transaction affects 1.8 million private customers, 244,000 SMEs and approximately 1,200 medium-sized business banking customers.

Completion of this transaction is scheduled in 2012, after obtaining the required authorizations. The European Commission has already authorized the transaction.

xx. Agreement with Skandinaviska Enskilda Banken (SEB Group) for the acquisition of its commercial banking business in Germany

On July 12, 2010, an announcement was made regarding the agreement entered into with Skandinaviska Enskilda Banken (SEB Group) for the acquisition by the German subsidiary Santander Consumer Bank AG of SEB’s commercial banking business in Germany for approximately EUR 555 million. As a result of the acquisition of SEB’s commercial banking business in Germany, which comprises 173 branches and offers services to a million customers, the number of Santander Consumer Bank branches in Germany will almost double. The transaction was completed on January 31, 2011, once the relevant regulatory approvals were obtained.

xxi. Agreement with Allied Irish Banks to acquire Polish entity Bank Zachodni WBK

On September 10, 2010, Santander Group announced that it had entered into an agreement with Allied Irish Banks (AIB) to acquire 70.36% of Polish entity Bank Zachodni WBK (BZ WBK) for approximately EUR 2,938 million in cash. The acquisition of BZ WBK would be implemented through a takeover bid of 100% of the share capital, which AIB would be obliged to accept. In addition, Santander would acquire the 50% ownership interest that AIB holds in BZ WBK Asset Management for EUR 150 million in cash.

As indicated in Note 1.g), on February 7, the aforementioned takeover bid was announced for 100% of the Polish entity BZ WBK, which AIB, owner of 70.36% of BZ WBK, is obliged to accept, by virtue of the agreement entered into with the Bank.

Banco Santander’s bid entails a maximum consideration of approximately EUR 4,293 million in cash for 100% of BZ WBK, its acceptance period runs from February 24, 2011 to March 25, 2011 and it is expected to be settled on April 1, 2011.

On February 18, 2011, a notice of non-opposition was received from the Polish financial regulator -KNF- to the Group’s acquisition of a significant stake.

* * * * *

The cost, total assets and total income of the other consolidated companies acquired and disposed of in the last three years were not material with respect to the related consolidated totals.

Off-shore entities

The Group currently has 18 subsidiaries resident in off-shore territories, including the remaining entities of Santander UK (formerly Abbey, Alliance & Leicester and Bradford & Bingley) and the entities included in the Group as a result of the acquisition of Santander Holdings USA (formerly Sovereign Bancorp). These territories are not considered tax havens according to the list published by the OECD in March 2011.

F-67

At present two of these subsidiaries are in liquidation, and the liquidation of a further three subsidiaries is expected to commence in 2011.

Following the above-mentioned planned disposals, the Group will have a total of 13 off-shore subsidiaries. These entities have 193 employees, located mainly in Jersey and the Isle of Man, and are classified by activity as detailed below:

i. Operating subsidiaries engaging in banking or financial activities or in services:

	•		Santander Trade Services Limited (Hong Kong), an intermediary in export documentary credits.

	•		Abbey National International Limited in Jersey, which engages in remote banking for British customers not resident in the UK, to whom it offers traditional savings products.

	•		Alliance & Leicester International Limited and Bradford & Bingley International Limited, two banks located in the Isle of Man which focus on attracting funds through savings accounts and deposits.

ii. Scantly active, inactive or mere asset holding subsidiaries:

	•		Alliance & Leicester International Holdings Limited, in the Isle of Man, whose only assets are the shares of Alliance & Leicester International Limited.

	•		Serfin International Bank and Trust, Limited (Cayman Islands), a bank which is virtually inactive.

	•		Baker Street Risk and Insurance (Guernsey) Limited, an insurance company located in Guernsey which has a residual portfolio and is expected to be liquidated in the medium term.

	•		Whitewick Limited, an inactive company located in Jersey.

iii. Issuing companies

The Group has five issuing companies located in the following jurisdictions:

Issuers of preference shares:

	•		Banesto Holdings, Ltd. (Guernsey)

	•		Totta & Açores Financing, Limited (Cayman Islands)

Issuers of debt:

	•		Santander Central Hispano Financial Services, Ltd. (Cayman Islands)

	•		Santander Central Hispano International, Ltd. (Cayman Islands)

	•		Santander Central Hispano Issuances, Ltd. (Cayman Islands)

F-68

The preference share and subordinated debt issues launched by the aforementioned issuers were authorized by the Bank of Spain or the Bank of Portugal as computable for eligible capital calculation purposes. Once the issues launched by these issuers have been redeemed, these entities will be liquidated.

The individual results of these subsidiaries, calculated in accordance with local accounting principles, are shown in the Appendices to these notes to the consolidated financial statements together with other data thereon.

It should be noted that the individual results include transactions performed with other Group companies, such as dividend collection, recognition and reversal of provisions and corporate restructuring results which, in accordance with accounting standards, are eliminated on consolidation in order to avoid the duplication of profit or the recognition of intra-Group results. Individual results also include the profit attributable to the holders of preference shares. Therefore, they are not representative of the Group’s operations in these countries or of the results contributed to Santander Group.

The banks and companies, whose activities are detailed above, contributed a profit of approximately EUR 28 million to the Group’s consolidated profit in 2010.

Additionally, the Group has five branches, one located in Hong Kong, three in the Cayman Islands and one in the Isle of Man. The Group plans to open a branch in Singapore in 2011. These branches report to, and consolidate their balance sheets and income statements with, their respective parents, and have 87 employees.

Spain is expected to enter into information exchange agreements with the Cayman Islands, Hong Kong and Singapore, as a result of which these countries and territories would cease to be considered tax havens for the purposes of Spanish legislation. Once these agreements become effective, the Group will have eight units (seven subsidiaries and one branch) resident for tax purposes in off-shore territories, namely the Isle of Man, Jersey and Guernsey. Although it is possible that agreements will also be entered into with these last-mentioned jurisdictions, it should be noted that, according to the list published by the OECD, none of these three jurisdictions is considered a tax haven.

Also, the Group controls, from Brazil, a securitization special-purpose vehicle in the Cayman Islands, called Brazil Foreign Diversified Payment Rights Finance Company, and it manages a protected cell company in Guernsey, called Guaranteed Investment Product 1 PCC, Ltd. Additionally, the Group has, directly or indirectly, various financial investments located in tax havens including, inter alia, Asiabridge Fund I LLC in Mauritius, The HSH Coinvest (Cayman) Trust -B in the Cayman Islands, Olivant Limited in Guernsey, Algebris Global Financials Fund in the Cayman Islands and JC Flowers III in the Cayman Islands.

The Group has seven subsidiaries domiciled in off-shore territories that are not considered to be off-shore entities since they are resident for tax purposes in, and operate exclusively from, the UK (two of these subsidiaries are in liquidation).

The Group also has six subsidiaries and one branch located in the Bahamas (three of which engage in banking activities) and it has financial investments in this country, which ceased to be considered a tax haven for the purposes of Spanish legislation as a result of the information exchange agreement entered into between the Kingdom of Spain and the Commonwealth of The Bahamas. These subsidiaries contributed a profit of approximately EUR 160 million to the Group’s consolidated profit in 2010.

Lastly, it has a subsidiary in Panama that conducts a scant banking activity. This country has entered into an international tax treaty with Spain containing an information exchange clause and, accordingly, this territory will cease to be considered a tax haven.

* * * * *

F-69

The Group has established the proper procedures and controls (risk management, supervision, verification and review plans and periodic reports) to prevent reputational and legal risk arising at these entities. Also, the Group has continued to implement its policy to reduce the number of off-shore units. The financial statements of the Group’s off-shore units are audited by member firms of Deloitte.

Distribution of the Bank’s profit and Earnings per share

Distribution of the Bank’s profit

The distribution of the Bank’s net profit for 2010 that the board of directors will propose for approval by the shareholders at the annual general meeting is as follows:


	Millions
	of euros

Distribution of dividends already paid prior to the annual general meeting -EUR 3,044 million- and acquisition of bonus share rights from the shareholders which, under the Santander Dividendo Elección programme, opted to receive in cash remuneration equivalent to the second and third interim dividends -EUR 286 million-:		3,330
Of which:
Distributed at December 31, 2010 ()*		1,270
Third interim dividend		129
Fourth interim dividend		1,931

To voluntary reserves		2

Net profit for the year		3,332


(*)		Recognized under Shareholders’ equity — Dividends and remuneration.

In addition to the EUR 3,330 million indicated above, a further EUR 1,669 million in shares were allocated to the remuneration of shareholders under the shareholder remuneration scheme (Santander Dividendo Elección) approved by the shareholders at the annual general meeting held on June 11, 2010, whereby the Bank offered shareholders the possibility to opt to receive an amount equivalent to the second and third interim dividends out of 2010 profit in cash or new shares. For these purposes, the executive committee of Banco Santander, at its meetings held on November 2, 2010 and January 13, 2011, resolved to carry out capital increases with a charge to voluntary reserves arising from unappropriated profits, as approved by the shareholders at the annual general meeting of June 11, 2010 (see Note 31).

F-70

The provisional accounting statements prepared by the Bank pursuant to legal requirements evidencing the existence of sufficient funds for the distribution of the interim dividends were as follows:


	Millions of euros
	05/31/10		09/30/10			12/31/10			12/31/10
	First		Second			Third (*)			Fourth (*)

Profit after tax		1,246		1,626			3,332			3,332
Dividends paid		—		(1,113	)		(1,270	)		(1,270	)

		1,246		513			2,062			2,062

Interim dividends in cash		1,113		157			129			1,931
Accumulated interim dividends		1,113		1,270			1,399			3,330
Gross dividend per share (euros)		0.135234		0.119000			0.117000			0.228766
Date of payment		01/08/10		01/11/10			01/02/11			01/05/11


(*)		Dividends not distributed at December 31, 2010.

The board of directors will propose to the shareholders at the annual general meeting that remuneration of EUR 0.60 per share be paid out of 2010 profit.

Earnings per share from continuing operations and discontinued operations

i. Basic earnings per share

Basic earnings per share are calculated by dividing the net profit attributable to the Parent by the weighted average number of ordinary shares outstanding during the year, excluding the average number of treasury shares held in the year.

Accordingly:


	12/31/10			12/31/09		12/31/08

Profit attributable to the Parent (thousands of euros)		8,180,909			8,942,538		8,876,414
Profit (Loss) from discontinued operations (net of non-controlling interests) (thousands of euros)		(26,922	)		27,431		310,804
Profit from continuing operations (net of non-controlling interests) (thousands of euros)		8,207,831			8,915,107		8,565,610

Weighted average number of shares outstanding		8,210,983,846			8,075,814,950		6,802,545,788
Assumed conversion of convertible debt		475,538,339			478,409,443		468,923,871

Adjusted number of shares		8,686,522,185			8,554,224,393		7,271,469,659

Basic earnings per share (euros)		0.9418			1.0454		1.2207
Basic earnings per share from discontinued operations (euros)		(0.0031	)		0.0032		0.0427
Basic earnings per share from continuing operations (euros)		0.9449			1.0422		1.1780

F-71

ii. Diluted earnings per share

In calculating diluted earnings per share, the amount of profit attributable to ordinary shareholders and the weighted average number of shares outstanding, net of treasury shares, are adjusted to take into account all the dilutive effects inherent to potential ordinary shares (share options, warrants and convertible debt instruments).

Accordingly, diluted earnings per share were determined as follows:


	12/31/10			12/31/09		12/31/08

Profit attributable to the Parent (thousands of euros)		8,180,909			8,942,538		8,876,414
Profit (Loss) from discontinued operations (net of non-controlling interests) (thousands of euros)		(26,922	)		27,431		310,804
Profit from continuing operations (net of non-controlling interests) (thousands of euros)		8,207,831			8,915,107		8,565,610
Dilutive effect of changes in profit for the year arising from potential conversion of ordinary shares		—			—		—

Weighted average number of shares outstanding		8,210,983,846			8,075,814,950		6,802,545,788
Assumed conversion of convertible debt		475,538,339			478,409,443		468,923,871
Dilutive effect of options/rights on shares		57,607,691			59,108,134		44,244,806

Adjusted number of shares		8,744,129,876			8,613,332,527		7,315,714,465

Diluted earnings per share (euros)		0.9356			1.0382		1.2133
Diluted earnings per share from discontinued operations (euros)		(0.0031	)		0.0032		0.0425
Diluted earnings per share from continuing operations (euros)		0.9387			1.0350		1.1709

Remuneration and other benefits paid to the Bank’s directors and senior managers

Remuneration of directors

i. Bylaw-stipulated directors’ emoluments and attendance fees

Article 58 of the Bank’s current Bylaws approved by the shareholders at the annual general meeting held on June 21, 2008 provides that the share in the Bank’s profit for each year that the directors will be entitled to receive for discharging their duties as members of the board of directors -annual emolument and attendance fees- will be equal to 1% of the Bank’s net profit for the year. However, the board of directors may resolve to reduce this percentage. In the previous Bylaws, this percentage represented the limit only with respect to the annual emolument and did not include attendance fees.

The amount set by the board of directors for 2010, calculated pursuant to the aforementioned Article 58 of the Bylaws, was 0.183% of the Bank’s profit for 2010 (2009: 0.144% in like-for-like terms; 2008: 0.124% in like-for-like terms).

At the proposal of the appointments and remuneration committee, the directors at the board meeting held on December 20, 2010 resolved to set the annual emolument for 2010 at the same amounts as those paid out of the profits for 2009 and 2008.

F-72

Previously, at the board meeting held on December 22, 2008, under the powers conferred on them, the directors had resolved to reduce by 10% the annual emolument corresponding to the directors for 2008, and established the following amounts in this connection (the respective proportional amounts were allocated to any directors who did not sit on the board for the whole year): each board member received a gross emolument of EUR 106.3 thousand in 2010, 2009 and 2008 and, additionally, each member of the following board committees received the following gross emoluments: executive committee, EUR 213.2 thousand; audit and compliance committee, EUR 50 thousand; appointments and remuneration committee, EUR 30 thousand. Also, the first deputy chairman and the fourth deputy chairman received a gross amount of EUR 36 thousand each.

Furthermore, the directors receive fees for attending board and committee meetings, excluding executive committee meetings, since no attendance fees are received for this committee.

The amounts of the fees for attending the meetings of the board of directors and of the board committees (excluding the executive committee) were the same in 2010 as in 2009 and 2008 and will remain unchanged as from January 1, 2011, in accordance with the proposal made by the appointments and remuneration committee at its meeting on December 14, 2010 and approved by the directors at the board meeting on December 20, 2010. These attendance fees were approved by the directors at the board meeting held on December 17, 2007 in the following amounts:

	•		Board of directors: EUR 2,540 for resident directors and EUR 2,057 for non-resident directors.

	•		Risk committee and audit and compliance committee: EUR 1,650 for resident directors and EUR 1,335 for non-resident directors.

	•		Other committees: EUR 1,270 for resident directors and EUR 1,028 for non-resident directors.

ii. Salaries

Following is the detail of the salaries received by the Bank’s executive directors: Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos, Mr. Alfredo Sáenz Abad, Mr. Matías Rodríguez Inciarte, Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, Mr. Francisco Luzón López and Mr. Juan Rodríguez Inciarte, who took office as member of the board of directors on March 24, 2008.

Thousands of euros

2010

2009

2008

Total salaries

22,670

25,784

25,489

Of which: variable remuneration in cash

11,917

(1)

15,240


(1)		At the annual general meeting on June 11, 2010, the shareholders approved the first cycle of the deferred conditional delivery share plan, whereby payment of a portion of the variable remuneration for 2010 amounting to EUR 6,362 thousand will be deferred over the next three years and will accrue, where appropriate, in three equal portions and will be recognized as remuneration in each of the aforementioned years, provided that the conditions for entitlement to the remuneration are met. Note 5.d.iv) includes detailed information on the aforementioned deferred variable remuneration.

F-73

iii. Detail by director

The detail, by director, of the remuneration earned by the Bank’s directors in 2010 is as follows:


	Thousands of euros
	2010																								2009		2008
	Bylaw-stipulated emoluments												Salary of executive						Other
	Annual emolument								Attendance fees				directors (1)						remuneration
							Appointments								Variable
					Audit and		and								remuneration
			Executive		compliance		remuneration				Other		Fixed		in cash				Share plan
Directors	Board		committee		committee		committee		Board		fees		remuneration		(a)		Total		(b)		Other		Total		Total		Total

Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		106		213		—		—		28		4		1,344		1,682		3,026		486		1		3,864		3,992		5,420
Mr. Fernando de Asúa Álvarez		142		213		50		30		28		191		—		—		—		—		—		654		647		642
Mr. Alfredo Sáenz Abad		106		213		—		—		28		4		3,703		3,351		7,054		1,301		473		9,179		10,237		9,295
Mr. Matías Rodríguez Inciarte		106		213		—		—		28		163		1,710		1,994		3,704		622		226		5,062		5,339		6,541
Mr. Manuel Soto Serrano		142		—		50		30		25		32		—		—		—		—		—		279		277		274
Assicurazioni Generali, SpA.		123		—		—		—		16		—		—		—		—		—		—		139		134		140
Mr. Antonio Basagoiti García-Tuñón		106		213		—		—		28		156		—		—		—		—		7		510		510		517
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea		106		213		—		—		28		4		1,353		1,440		2,793		321		16		3,481		3,647		4,021
Mr. Francisco Javier Botín-Sanz de Sautuola y O’Shea (2)		106		—		—		—		25		—		—		—		—		—		—		131		129		129
Lord Terence Burns		106		—		—		—		19		—		—		—		—		—		—		125		125		123
Mr. Guillermo de la Dehesa Romero		106		213		—		30		28		13		—		—		—		—		—		390		386		384
Mr. Rodrigo Echenique Gordillo (**)		106		213		—		30		28		11		—		—		—		—		35		423		418		443
Mr. Antonio Escámez Torres		106		213		—		—		23		149		—		—		—		—		39		530		537		535
Mr. Ángel Jado Becerro de Bengoa (***)		59		—		—		—		13		—		—		—		—		—		—		72		—		—
Mr. Francisco Luzón López		106		213		—		—		23		1		1,656		2,146		3,802		522		1,004		5,671		5,811		6,851
Mr. Abel Matutes Juan		106		—		50		—		25		16		—		—		—		—		—		197		192		194
Mr. Juan Rodríguez Inciarte (*)		106		—		—		—		28		120		987		1,304		2,291		505		111		3,161		3,121		3,830
Mr. Luis Ángel Rojo Duque (3)		106		—		50		30		8		21		—		—		—		—		—		215		225		229
Mr. Luis Alberto Salazar-Simpson Bos		106		—		50		—		25		19		—		—		—		—		—		200		202		198
Ms. Isabel Tocino Biscarolasaga		106		—		—		—		28		—		—		—		—		—		—		134		132		129

Total 2010		2,168		2,132		248		149		482		904		10,754		11,917		22,670		3,757		1,912		34,423		—		—

Total 2009		2,108		2,132		248		149		440		900		10,544		15,240		25,784		2,403		1,897		—		36,061		—

Total 2008		2,084		2,132		248		149		411		942		10,249		15,240		25,489		6,612		1,827		—		—		39,894


(*)		Appointed as member of the Bank’s board of directors on January 28, 2008, Mr. Juan Rodríguez Inciarte took office on March 24, 2008. He was appointed as a member of the risk committee on March 24, 2008.

(**)		Ceased to be a member of the risk committee on March 24, 2008. He was appointed as a member of the audit and compliance committee on December 14, 2010.

(***)		Appointed as member of the Bank’s board of directors by the shareholders at the general meeting held on January 11, 2010, Mr. Angel Jado Becerro de Bengoa took office on the same date.

(a)		Relating to the variable remuneration in cash received in 2010.

(b)		Amounts received in 2010 in respect of the variable remuneration in shares granted through the Plan I10 approved by the shareholders at the general meeting held on June 21, 2008.

(1)		Recognized under Personnel expenses at the Bank, except for the salary of Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, whose salary for the first eleven months of 2010 was recognized at Banco Español de Crédito, S.A.

(2)		Amounts contributed to Marcelino Botín Foundation.

(3)		Mr. Luis Ángel Rojo Duque died on May 24, 2011.

F-75

iv. Other remuneration

Remuneration under the share plan

The amount of Other remuneration — Share plan, EUR 3,757 thousand at December 31, 2010 and EUR 2,403 thousand at December 31, 2009, as shown in the foregoing table, relates to the variable remuneration received in 2010 and 2009 by the Bank’s directors in the form of Banco Santander, S.A. shares under the I10 and I09 incentive plans (Plans I10 and I09) approved by the shareholders at the annual general meeting on June 23, 2007. As established in the aforementioned plans, the number of shares received was determined by the degree of achievement of the targets to which it was tied, and fell short of the maximum number established in both years (see Note 5.d.ii).

Also, the amount at December 31, 2008, EUR 6,612 thousand, relates to the variable share-based remuneration received in 2008 by the Bank’s directors through the exercise of Banco Santander, S.A. share options granted under the I06 incentive plan (Plan I06) approved by the shareholders at the annual general meeting of Banco Santander, S.A. held on June 18, 2005 and, in the case of Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, through the delivery of shares of Banco Español de Crédito, S.A. under an incentive plan for executives of this entity approved by the shareholders at its annual general meeting held on February 28, 2006 (see Note 5.d.i).

Other

The amounts recorded under Other remuneration — Other in the foregoing table include, inter alia, the life and medical insurance costs borne by the Group relating to the Bank’s directors.

Remuneration of the board members as representatives of the Bank


		Thousands of euros
	Company	2010		2009		2008

Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos	Shinsei Bank, Ltd.		—		30.1		53.0
Mr. Fernando de Asúa Álvarez	Cepsa		—		100.2		97.2
Mr. Antonio Escámez Torres	Attijariwafa Bank Société Anonyme		10.0		5.0		14.8

			10.0		135.3		165.0

Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos ceased to discharge his duties as director of Shinsei Bank, Ltd. on June 23, 2009 and received compensation of EUR 73.1 thousand.

F-76

Also, in 2008, 2007, 2006 and 2005 Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos had received, in each year, options to acquire shares of Shinsei Bank, Ltd. (Shinsei), the detail being as follows: 10,000 shares at a price of JPY 416 each in 2008; 10,000 shares at a price of JPY 555 each in 2007; 25,000 shares at a price of JPY 825 each in 2006; and 25,000 shares at a price of JPY 601 each in 2005. At December 31, 2010, the market price of the Shinsei share was JPY 106 and, therefore, regardless of the stipulated exercise periods, the options granted in those years would not have given rise to any gains had they been exercised.

Mr. Fernando de Asúa ceased to discharge his duties as director of Cepsa on October 1, 2009 after the Group sold its ownership interest in that company.

Furthermore, other directors of the Bank earned a total of EUR 741 thousand in 2010 as members of the boards of directors of Group companies (2009: EUR 663 thousand; 2008: EUR 729 thousand), the detail being as follows: Lord Burns received EUR 607 thousand as non-executive chairman of the Group companies Santander UK Plc and Alliance & Leicester Plc.; Mr. Antonio Basagoiti García-Tuñón received EUR 83 thousand as non-executive chairman of the board of directors of Banesto and in bylaw stipulated directors’ fees; Mr. Ángel Jado Becerro de Bengoa received EUR 9 thousand from Banco Banif, S.A. as a member of its board prior to joining the board of directors of the Bank and Mr. Matías Rodríguez Inciarte received EUR 42 thousand as a non-executive director of U.C.I., S.A.

Post-employment and other long-term benefits

The total balance of supplementary pension obligations assumed by the Group over the years to its current and retired employees (covered mostly by in-house provisions which amounted to EUR 9,519 million at December 31, 2010) includes the obligations to those who have been directors of the Bank during the year and who discharge (or have discharged) executive functions. The total pension obligations to these directors, together with the total sum insured under life insurance policies and other items, amounted to EUR 325 million at December 31, 2010 (December 31, 2009: EUR 292 million; December 31, 2008: EUR 311 million).

F-77

The following table provides information on: (i) the pension obligations assumed and covered by the Group; and (ii) other insurance -the premiums of which are paid by the Group, the related cost being included in the Other remuneration — Other column in the table in Note 5.a.iii-, in both cases in respect of the Bank’s executive directors:


	Thousands of euros
	2010				2009				2008
	Accrued				Accrued				Accrued
	pension		Other		pension		Other		pension		Other
	obligations		insurance		obligations		insurance		obligations		insurance

Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		25,029		—		24,642		—		25,579		—
Mr. Alfredo Sáenz Abad		86,620		11,108		85,740		11,108		80,049		10,785
Mr. Matías Rodríguez Inciarte		44,560		5,131		52,536		5,131		50,894		4,982
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea		31,329		1,403		23,775		1,403		21,737		1,403
Mr. Francisco Luzón López		55,950		9,934		53,513		9,031		53,083		7,624
Mr. Juan Rodríguez Inciarte		11,629		2,961		10,969		2,961		9,918		2,875

		255,117		30,537		251,175		29,634		241,260		27,669

The amounts in the Accrued pension obligations column in the foregoing table relate to the accrued present actuarial value of the future annual payments to be made by the Group. These amounts were obtained using actuarial calculations and cover the obligations to pay the respective pension supplements or lump sums. In the case of Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos, Mr. Alfredo Sáenz Abad, Mr. Matías Rodríguez Inciarte and Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, these supplements or sums were calculated as 100% of the sum of the fixed annual salary received at the date of effective retirement or, where appropriate, at the date of opting to receive the benefit in a lump sum, plus 30% of the arithmetical mean of the last three variable remuneration payments received until that date. In addition, in the case of Mr. Francisco Luzón López, to the amount thus calculated will be added the amounts received by him in the year before retirement or pre-retirement or, where appropriate, at the date of opting to receive the benefit in a lump sum, in his capacity as a member of the board of directors or the committees of the Bank or of other consolidable Group companies and, in the case of Mr. Juan Rodríguez Inciarte, 100% of the gross fixed annual salary received at the date of effective retirement or, where appropriate, at the date of opting to receive the benefit in a lump sum.

On December 17, 2007, March 24, 2008, July 21, 2008 and April 28, 2009, the board of directors of the Bank resolved to authorize a change in the contracts of the executive directors and the other members of the Bank’s senior management -the senior executives- granting them the right, once they reach the date of retirement -or pre-retirement, as appropriate- to opt to receive their accrued pensions -or amounts similar thereto- in the form of an annuity or a lump sum-, i.e. in one single payment, in full but not in part. In order to maintain the financial neutrality for the Group, the amount to be received in the form of a lump sum by the commitment beneficiary at the date of retirement must be the aliquot part of the market value of the assets assigned to cover the mathematical provisions of the policy instrumenting these commitments to senior executives at the date of economic effect of exercising the option. The senior management who are still in service on reaching the age of retirement -or who at the date of the contract entered into have passed the age of retirement- must state whether they wish to opt for this form of benefit. This option will mean that no further pension benefit will accrue and the lump sum to be received, which will be updated at the agreed-upon interest rate, will be fixed. Should the senior executive subsequently die whilst still in service and prior to retirement, the lump sum of the pension will correspond to his/her heirs.

In 2009, Mr. Emilio Botín Sanz de Sautuola y García de los Ríos and Mr. Alfredo Sáenz Abad, who had passed the age of retirement, exercised the option to receive their respective accrued pensions as a lump sum on the date of effective retirement.

F-78

Furthermore, at the board meeting held on December 21, 2009, the Bank’s directors resolved that the executive directors -and other members of senior management who are beneficiaries of defined benefit plans who have not reached the age of retirement may opt, upon reaching the age of 60 and on each of their following birthdays until they are 64 years of age, to receive their accrued pensions as a lump sum, which will be determined at the date of economic effect of exercising the option and which they (or their heirs in the event of death) will be entitled to receive when they retire or are declared to be disabled. In order to maintain the financial neutrality for the Group, the amount to be received in the form of a lump sum by the commitment beneficiary at the date of retirement must be the aliquot part of the market value of the assets assigned to cover the mathematical provisions of the policy instrumenting these commitments to senior executives at the date of economic effect of exercising the option. This option will mean that no further pension benefit will accrue and the lump sum to be received, which will be updated at the agreed-upon interest rate, will be fixed. Also, any person who exercises this option must undertake not to take pre-retirement, retire early or retire, in all cases at his/her own request, within two years from the exercise date.

Lastly, the board of directors resolution referred to in the preceding paragraph also regulated the impact of the deferral of the computable variable remuneration on the determination of the pension obligations (or similar amounts), in the form of an annuity or a lump sum, for pre-retirement, early retirement or normal retirement.

In 2010, Mr. Matías Rodríguez Inciarte, who had reached the age of 60, exercised the option to receive his accrued pension as a lump sum on the date of effective retirement.

The amounts included in the foregoing table in respect of the pension obligations accrued to the directors Mr. Emilio Botín Sanz de Sautuola y García de los Ríos and Mr. Alfredo Sáenz Abad in 2009 and to the director Mr. Matías Rodríguez Inciarte in 2010 are those relating to the aforementioned lump sums, and no further amounts will accrue in respect of pensions after those dates. The lump sums will be updated at the agreed-upon interest rate.

Pension provisions recognized and reversed in 2010 amounted to EUR 9,570 thousand and EUR 7,408 thousand, respectively (2009: EUR 5,703 thousand and EUR 4 thousand, respectively; 2008: EUR 26,974 thousand and EUR 11 thousand, respectively).

Additionally, other directors have life insurance policies the cost of which is borne by the Group, the related insured sum being EUR 3 million at December 31, 2010 (2009 and 2008: EUR 3 million each year). Also, the payments made in 2010 to the members of the board entitled to post-employment benefits amounted to EUR 2.6 million (2009: EUR 2.6 million).

F-79

Deferred variable share-based remuneration systems

The detail of these plans granted to directors (see Note 47) is as follows:

i) Plan I06 (see Note 47)

In 2004 a long-term incentive plan (I06) was designed which, consisting of options on shares of the Bank, was tied to the achievement of two targets which were achieved. The exercise period was from January 15, 2008 to January 15, 2009. The executive directors were beneficiaries of this plan; the number of Bank share options held by them is indicated below:


					Options granted		Options exercised
										Number of				Market		Remuneration							Options at				Date of		Date of
	Options at		Exercise				Number of			shares		Exercise		price		allocated		Options at		Number of			December 31		Exercise		commencement		expiry of
	December 31		price				options			acquired		price		applied		(thousands		December 31		options			2010 and		price		of exercise		exercise
	2007		(euros)		Number		exercised			(***)		(euros)		(euros)		of euros)		2008		cancelled			2009		(euros)		period		period

Plan I06
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		541,400		9.09		—		(541,400	)		541,400		9.09		12.40		1,780		—		—			—		—		—		—
Mr. Alfredo Sáenz Abad		1,209,100		9.09		—		—					—		—		—		1,209,100		(1,209,100	)		—		9.09		15-01-08		15-01-09
Mr. Matías Rodríguez Inciarte		665,200		9.09		—		(332,600	)		67,901		9.09		14.12		1,661		332,600		(332,600	)		—		9.09		15-01-08		15-01-09
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)		293,692		9.09		—		—					—		—		—		293,692		(293,692	)		—		9.09		15-01-08		15-01-09
Mr. Francisco Luzón López		639,400		9.09		—		(300,000	)		60,656		9.09		14.04		1,473		339,400		(339,400	)		—		9.09		15-01-08		15-01-09
Mr. Juan Rodríguez Inciarte (**)		419,000		9.09		—		(419,000	)		419,000		9.09		11.72		1,090		—		—			—		—		—		—

		3,767,792		9.09				(1,593,000	)								6,004		2,174,792		(2,174,792	)		—		9.09


(*)		Approved by Banesto’s shareholders at its annual general meeting on February 28, 2006.

(**)		Mr. Juan Rodríguez Inciarte was appointed as member of the board of directors in 2008. The data on his options for prior dates relate to the options granted to him as an executive prior to his appointment as director.

(***)		Under the I06 incentive plan (see Note 47), each purchase option granted entitles the beneficiary to acquire one Bank share at a price of EUR 9.09, and the number of shares acquired on the exercise of the options is determined on the basis of the settlement method used, which can be cash for stock or cashless for cash. In the case of cash-for-stock settlements, the number of shares granted as consideration for the payment in cash of the exercise price is equal to the number of options exercised.

F-80


			Options				Options		Shares			Options					Options		Shares			Options							Share
	Options at		granted in		Options at		granted in		delivered in 2009			cancelled in			Options at		granted in		delivered in			cancelled in 2010			Options at		Grant		delivery
	December 31, 2007		2008 (number)		December 31, 2008		2009 (number)		(number)			2009 (number)			December 31, 2009		2010 (number)		2010 (number)			(number)			December 31, 2010		date		deadline
Plan I09:
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		41,785		—		41,785		—		(37,937	)		(3,848	)		—		—		—			—			—		06-23-07		07-31-09
Mr. Alfredo Sáenz Abad		110,084		—		110,084		—		(99,945	)		(10,139	)		—		—		—			—			—		06-23-07		07-31-09
Mr. Matías Rodríguez Inciarte		53,160		—		53,160		—		(48,264	)		(4,896	)		—		—		—			—			—		06-23-07		07-31-09
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)		27,929		—		27,929		—		(25,357	)		(2,572	)		—		—		—			—			—		06-23-07		07-31-09
Mr. Francisco Luzón López		44,749		—		44,749		—		(40,628	)		(4,121	)		—		—		—			—			—		06-23-07		07-31-09
Mr. Juan Rodríguez Inciarte (**)		43,322		—		43,322		—		(39,332	)		(3,990	)		—		—		—			—			—		06-23-07		07-31-09

		321,029		—		321,029		—		(291,463	)		(29,566	)		—		—		—			—			—

Plan I10:
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		62,589		—		62,589		—		—			—			62,589		—		(56,825	)		(5,764	)		—		06-23-07		07-31-10
Mr. Alfredo Sáenz Abad		164,894		—		164,894		—		—			—			164,894		—		(149,707	)		(15,187	)		—		06-23-07		07-31-10
Mr. Matías Rodríguez Inciarte		79,627		—		79,627		—		—			—			79,627		—		(72,293	)		(7,334	)		—		06-23-07		07-31-10
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)		41,835		—		41,835		—		—			—			41,835		—		(37,982	)		(3,853	)		—		06-23-07		07-31-10
Mr. Francisco Luzón López		67,029		—		67,029		—		—			—			67,029		—		(60,856	)		(6,173	)		—		06-23-07		07-31-10
Mr. Juan Rodríguez Inciarte (**)		64,983		—		64,983		—		—			—			64,983		—		(58,998	)		(5,985	)		—		06-23-07		07-31-10

		480,957		—		480,957		—		—			—			480,957		—		(436,661	)		(44,296	)		—

Plan I11:
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		—		68,848		68,848		—		—			—			68,848		—		—			—			68,848		06-21-08		07-31-11
Mr. Alfredo Sáenz Abad		—		189,628		189,628		—		—			—			189,628		—		—			—			189,628		06-21-08		07-31-11
Mr. Matías Rodríguez Inciarte		—		87,590		87,590		—		—			—			87,590		—		—			—			87,590		06-21-08		07-31-11
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (***)		—		46,855		46,855		—		—			—			46,855		—		—			—			46,855		06-21-08		07-31-11
Mr. Francisco Luzón López		—		77,083		77,083		—		—			—			77,083		—		—			—			77,083		06-21-08		07-31-11
Mr. Juan Rodríguez Inciarte		—		50,555		50,555		—		—			—			50,555		—		—			—			50,555		06-21-08		07-31-11

		—		520,559		520,559		—		—			—			520,559		—		—			—			520,559

Plan I12:
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		—		—		—		82,941		—			—			82,941		—		—			—			82,941		06-19-09		07-31-12
Mr. Alfredo Sáenz Abad		—		—		—		228,445		—			—			228,445		—		—			—			228,445		06-19-09		07-31-12
Mr. Matías Rodríguez Inciarte		—		—		—		105,520		—			—			105,520		—		—			—			105,520		06-19-09		07-31-12
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea		—		—		—		56,447		—			—			56,447		—		—			—			56,447		06-19-09		07-31-12
Mr. Francisco Luzón López		—		—		—		92,862		—			—			92,862		—		—			—			92,862		06-19-09		07-31-12
Mr. Juan Rodríguez Inciarte		—		—		—		60,904		—			—			60,904		—		—			—			60,904		06-19-09		07-31-12

		—		—		—		627,119		—			—			627,119		—		—			—			627,119

Plan I13:
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		—		—		—		—		—			—			—		82,941		—			—			82,941		06-11-10		07-31-13
Mr. Alfredo Sáenz Abad		—				—		—		—			—			—		228,445		—			—			228,445		06-11-10		07-31-13
Mr. Matías Rodríguez Inciarte		—		—		—		—		—			—			—		105,520		—			—			105,520		06-11-10		07-31-13
Ms. Ana Patricia Botín-Sanz de				—
Sautuola y O’Shea		—		—		—		—		—			—			—		56,447		—			—			56,447		06-11-10		07-31-13
Mr. Francisco Luzón López		—		—		—		—		—			—			—		92,862		—			—			92,862		06-11-10		07-31-13
Mr. Juan Rodríguez Inciarte		—		—		—		—		—			—			—		60,904		—			—			60,904		06-11-10		07-31-13

		—		—		—		—		—			—			—		627,119		—			—			627,119


(*)		Without prejudice to the Banesto shares relating to Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea by virtue of the Banesto Share-Based Payment Incentive Plan approved by the shareholders at the annual general meeting of Banesto held on June 27, 2007, the maximum number of Santander shares shown in the foregoing table relates to the aforementioned executive director, based on the resolution adopted at the aforementioned annual general meeting.

(**)		Mr. Juan Rodríguez Inciarte was appointed as member of the board of directors in 2008. The data on his options include the options granted to him as an executive prior to his appointment as director.

(***)		Without prejudice to the Banesto shares relating to Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea by virtue of the Banesto Share-Based Payment Incentive Plan approved by the shareholders at the annual general meeting of Banesto held on February 24, 2010, the maximum number of Santander shares shown in the foregoing table relates to the aforementioned executive director, based on the resolution adopted at the aforementioned annual general meeting.

F-82

iii) Obligatory investment share plan

Pursuant to the obligatory investment share plan (see Note 47), the current executive directors also acquired as deferred share-based variable remuneration, prior to February 29, 2008, February 28, 2009 and February 28, 2010, the number of Bank shares shown in the table below, which involved an investment of EUR 1.5 million in 2008, EUR 0.8 million in 2009 and EUR 1.5 million in 2010. Executive directors who hold the shares acquired through the obligatory investment and remain in the Group’s employ for three years from the date on which the obligatory investment is made are entitled to receive the same number of Bank shares as that composing their initial obligatory investment.

The shareholders at the annual general meeting of June 19, 2009 introduced, for the third cycle, a requirement additional to that of remaining in the Group’s employ, which is that in the three-year period from the investment in the shares, none of the following circumstances should concur: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, that relating to risks that is applicable to the executive in question; or (iii) a material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards.


	3rd cycle		2nd cycle		1st cycle
Executive directors	2010-2012		2009-2011		2008-2010

Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		20,515		19,968		16,306
Mr. Alfredo Sáenz Abad		49,000		47,692		37,324
Mr. Matías Rodríguez Inciarte		25,849		25,159		20,195
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)		18,446		16,956		13,610
Mr. Francisco Luzón López		28,434		27,675		22,214
Mr. Juan Rodríguez Inciarte		15,142		14,738		14,617

		157,386		152,188		124,266


(*)		In accordance with the resolution adopted by the shareholders at the annual general meeting of Banco Santander held on June 23, 2007 and by the shareholders at the annual general meeting of Banesto held on June 27, 2007, the maximum number of Santander shares relating to Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea for the 2008-2010 cycle is that shown in the foregoing table. Also, the maximum number of shares relating to Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea for the 2009-2011 and 2010-2012 cycles as beneficiary of this plan is in line with the resolution adopted by the shareholders at the annual general meeting of Banco Santander held on June 21, 2008 and by the shareholders at the annual general meeting of Banesto held on February 24, 2010.

iv) Deferred conditional delivery share plan

At the annual general meeting held on June 11, 2010, the shareholders approved the first cycle of the deferred conditional delivery share plan, applicable to the variable salary remuneration to be received in 2010 by the executive directors and executives and employees of Santander Group whose variable remuneration or annual bonus for 2010 generally exceeds EUR 300,000 (gross), with a view to deferring a portion of the aforementioned variable remuneration or bonus over a period of three years in which it will be paid, where appropriate, in Santander shares.

The condition for accrual of the share-based deferred remuneration was, in addition to that of the beneficiary remaining in the Group’s employ, with the exceptions included in the plan regulations, that none of the following circumstances should concur: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, that relating to risks; (iii) a material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in capital adequacy and the qualitative assessment of risk.

The share-based bonus will be deferred over three years and will be paid, where appropriate, in three installments starting in the first year.

F-83


Executive directors	1st cycle

Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		94,345
Mr. Alfredo Sáenz Abad		312,450
Mr. Matías Rodríguez Inciarte		135,188
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)		91,187	(*)
Mr. Francisco Luzón López		154,981
Mr. Juan Rodríguez Inciarte		61,386


(*)		Shares of Banco Español de Crédito, as authorized by the shareholders of that entity at the annual general meeting of February 23, 2011. In this case, the share price of Banesto used to calculate the number of shares was EUR 6,143, the average market price of the Banesto share weighted by daily volume in the 15 trading days prior to January 19, 2011, the date on which the board of directors of this entity approved the variable remuneration of its executive directors for 2010.

Loans

The Group’s direct risk exposure to the Bank’s directors and the guarantees provided for them are detailed below. These transactions were made on an arm’s-length basis or the related compensation in kind was charged:


	Thousands of euros
	2010						2009						2008
	Loans and						Loans and						Loans and
	credits		Guarantees		Total		credits		Guarantees		Total		credits		Guarantees		Total

Mr. Alfredo Sáenz Abad		31		—		31		16		—		16		25		—		25
Mr. Matías Rodríguez Inciarte		14		—		14		7		10		17		20		10		30
Mr. Manuel Soto Serrano		2		—		2		—		—		—		5		—		5
Mr. Antonio Basagoiti García-Tuñón		36		1		37		47		1		48		66		1		67
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea		2		—		2		3		—		3		5		—		5
Mr. Javier Botín-Sanz de Sautuola y O’Shea		5		—		5		2		—		2		—		—		—
Mr. Rodrigo Echenique Gordillo		16		—		16		9		—		9		12		—		12
Mr. Antonio Escámez Torres		1,500		—		1,500		1,488		—		1,488		1,473		—		1,473
Mr. Angel Jado Becerro de Bengoa		3,002		—		3,002		—		—		—		—		—		—
Mr. Francisco Luzón López		9,230		—		9,230		5,004		—		5,004		1,649		—		1,649
Mr. Juan Rodríguez Inciarte		370		—		370		421		—		421		465		—		465
Mr. Luis Alberto Salazar-Simpson Bos		401		—		401		434		—		434		461		—		461
Ms. Isabel Tocino Biscarolasaga		30		—		30		40		—		40		49		—		49

		14,639		1		14,640		7,471		11		7,482		4,231		11		4,242

F-84

Senior managers

Following is a detail of the remuneration paid to the Bank’s executive vice presidents (*) in 2010, 2009 and 2008:


			Thousands of euros
	Number of		Salary in cash
	executive				Variable in					Other
Year	vice presidents⁽¹⁾		Fixed		cash			Total		remuneration		Total

2008		24		21,219		34,674			55,893		27,598		83,491
2009		24		21,512		36,468			57,980		16,745		74,725
2010		23		23,756		28,484	⁽²⁾		52,240		14,700		66,940


(*)		Excluding executive directors’ remuneration, which is detailed above.

⁽¹⁾		At some point in the year they occupied the position of executive vice president. The amounts reflect the annual remuneration regardless of the number of months in which the position of executive vice president was occupied.

⁽²⁾		At the annual general meeting held on June 11, 2010, the shareholders approved the first cycle of the deferred conditional delivery share plan, whereby payment of a portion of the variable remuneration for 2010 amounting to EUR 11,482 million will be deferred over the next three years and will accrue, where appropriate, in three equal portions and will be recognized as remuneration in each of the aforementioned years, provided that the conditions for entitlement to the remuneration are met. Notes 5 and 47 include detailed information on the aforementioned deferred variable remuneration.

The amounts in the Other remuneration column in the foregoing table include all the non-cash salary remuneration paid to the executive vice presidents, such as the life insurance premiums of EUR 1,099 thousand (2009: EUR 1,148 thousand, 2008: EUR 1,029 thousand), the termination or retirement benefits, and the share-based variable remuneration in the form of Santander shares -EUR 9,190 thousand (2009: EUR 5,982 thousand)- under the I10 and I09 incentive plans approved by the shareholders at the annual general meeting on June 23, 2007. As established in the aforementioned plans, the number of shares received by the executive vice presidents -1,078,730 Santander shares in 2010 (2009: 746,756 Santander shares)- was determined by the degree of achievement of the targets to which it was tied, and fell short of the maximum number established in both years. Also, in 2008 EUR 22,410 thousand were allocated due to the exercise by the executive vice presidents of 5,317,978 Santander share options under the I06 incentive plan (see Note 47) and the delivery of Banesto shares under the incentive plan for executives approved by the shareholders at the annual general meeting of this entity held on February 28, 2006.

Following is a detail of the maximum number of options or Santander shares that the Bank’s executive vice presidents (excluding executive directors) were entitled to receive at December 31, 2010, 2009 and 2008 under the various plans then in force (see Note 47).


Maximum number of
options/shares	12/31/10		12/31/09		12/31/08

Plan I06 (*)		—		—		1,499,010
Plan I09		—		—		822,508
Plan I10		—		1,154,158		1,280,124
Plan I11		1,226,754		1,312,214		1,446,259
Plan I12		1,498,713		1,562,227		—
Plan I13		1,468,762		—


(*)		The exercise period was from January 15, 2008 to January 15, 2009.

Additionally, with respect to the obligatory investment share plan, the annual investment made in February 2010, 2009 and 2008 by the executive vice presidents (excluding current executive directors) amounted to EUR 3.2 million (equal to 330,104 shares), EUR 2.9 million (equal to 508,764 shares) and EUR 3.4 million (equal to 261,681 shares), respectively.

F-85

Lastly, the final number of Santander shares allocated to senior management for deferral purposes under the deferred conditional delivery share plan (see Note 47), calculated taking into account the average market price of the shares weighted by daily volume in the 15 trading days prior to December 20, 2010 -the date on which the board of directors approved the bonus for 2010-, is 1,496,628 shares.

The actuarial liability recognized in respect of post-employment benefits earned by the Bank’s senior managers totalled EUR 227 million at December 31, 2010 (December 31, 2009: EUR 245 million; December 31, 2008: EUR 240 million). Settlements of EUR 47 million took place in 2010. The net charge to the consolidated income statement amounted to EUR 31 million in 2010 (2009: EUR 40 million; 2008: EUR 41 million). Additionally, the total sum insured under life and accident insurance policies relating to this group amounted to EUR 61 million at December 31, 2010 (December 31, 2009: EUR 63 million; December 31, 2008: EUR 59 million).

Post-employment benefits to former directors and former executive vice presidents

The post-employment benefits paid and settlements made in 2010 to former directors of the Bank and former executive vice presidents amounted to EUR 7.9 million and EUR 33 million, respectively (2009: EUR 7.9 million and EUR 40 million, respectively; 2008: EUR 7.7 million and EUR 19.1 million, respectively).

The amounts recognized in the consolidated income statement for 2010 in connection with the Group’s pension and similar obligations to former directors of the Bank and former executive vice presidents were zero and a release of EUR 173 thousand, respectively (2009: release of EUR 1,258 thousand and a period provision of EUR 7,460 thousand, respectively; 2008: period provisions of EUR 1,064 thousand and EUR 570 thousand, respectively).

Furthermore, Provisions — Provisions for pensions and similar obligations in the consolidated balance sheet at December 31, 2010 included EUR 82.3 million and EUR 116.8 million in respect of the post-employment benefit obligations to former directors of the Bank and former executive vice presidents, respectively (2009: EUR 84.9 million and EUR 146 million, respectively; 2008: EUR 88.8 million and EUR 132.2 million, respectively).

Contract termination

The Bank has signed contracts with all its executive directors.

The Bank’s executive directors have indefinite-term employment contracts. Executive directors whose contracts are terminated voluntarily or due to breach of duties are not entitled to receive any economic compensation. Under current conditions, if the contracts are terminated for reasons attributable to the Bank or due to objective circumstances (such as those affecting the executive directors’ functional and organic statute), the directors are entitled, at the date of termination of their employment relationship with the Bank, to the following:

•

In the cases of Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos and Mr. Alfredo Sáenz Abad, to retire and to receive the amounts relating to the accrued pensions in the form of capital (EUR 25,029 thousand and EUR 86,620 thousand, respectively), without any additional amounts accruing in respect of pensions in the future in both cases, since the consolidation option referred to in Note 5.c has been exercised by both executive directors.

Had Mr. Alfredo Sáenz Abad’s contract been terminated in 2009, he would have been able to choose between retiring or receiving severance pay equivalent to 40% of his fixed annual salary multiplied by the number of years’ service in banking, up to a maximum of ten times his fixed annual salary. However, Mr. Alfredo Sáenz Abad waived his right to receive this severance pay.

•

In the case of Mr. Matías Rodríguez Inciarte, to take pre-retirement and to receive his accrued pensions in the form of capital (EUR 44,560 thousand), without any additional amounts accruing in respect of pensions in the future, since the consolidation option referred to in Note 5.c has been exercised.

At December 31, 2009 and 2008, Mr. Matías Rodríguez Inciarte would have been entitled to take pre-retirement and to accrue annual pension supplements amounting to EUR 2,507 thousand and EUR 2,416 thousand, respectively, in those years.

F-86

•

In the case of Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, pursuant to a change in her contract approved by the directors at the board meeting held on January 24, 2011, following the report of the appointments and remuneration committee, to take pre-retirement and to accrue a pension supplement. At December 31, 2010, the annual pension supplement would amount to EUR 2,556 thousand (December 31, 2009: EUR 1,841 thousand; December 31, 2008: EUR 1,781 thousand).

At December 31, 2009 and 2008, Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea was entitled to receive a termination benefit amounting to five years’ annual fixed salary at the date of termination -2009: EUR 6,472 thousand, 2008: EUR 6,345 thousand-, although this entitlement to termination benefit ceased as a result of the change in her contract.

•

In the case of Mr. Francisco Luzón López, to take pre-retirement and to accrue a pension supplement. At December 31, 2010, the annual pension supplement would amount to EUR 2,850 thousand (2009: EUR 2,701 thousand; 2008: EUR 2,648 thousand).

•

In the case of Mr. Juan Rodríguez Inciarte, pursuant to a change in his contract approved by the directors at the board meeting held on January 24, 2011, following the report of the appointments and remuneration committee, to take pre-retirement and to accrue a pension supplement. At December 31, 2010, the annual pension supplement would amount to EUR 908 thousand (December 31, 2009: EUR 869 thousand, December 31, 2008: EUR 958 thousand).

At December 31, 2009 and 2008, Mr. Juan Rodríguez Inciarte was entitled to receive a termination benefit amounting to five years’ annual fixed salary at the date of termination -2009: EUR 4,936 thousand, 2008: EUR 4,792 thousand-, although this entitlement to termination benefit ceased as a result of the change in his contract.

If Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, Mr. Francisco Luzón López or Mr. Juan Rodríguez Inciarte retire or take pre-retirement, they have the right to opt to receive the pensions accrued -or similar amounts- in the form of income or capital -i.e. in a single payment- in full but not in part, without prejudice to the right to exercise their respective options, after reaching the age of 60 (see Note 5.c).

Additionally, other non-director members of the Group’s senior management have contracts which entitle them to receive benefits in the event of termination for reasons other than voluntary redundancy, retirement, disability or serious breach of duties. These benefits are recognized as a provision for pensions and similar obligations and as a staff cost only when the employment relationship between the Bank and its managers is terminated before the normal retirement date.

Detail of the directors’ investments in companies with similar business activities and performance by directors, as independent professionals or as employees, of similar activities

In accordance with the requirements of Articles 229 and 230 of the Spanish Limited Liability Companies Law (Ley de Sociedades de Capital), in order to enhance the transparency of listed companies, following is a detail of the investments held by the directors and persons related to them in the share capital of entities engaging in banking, financing or lending; and of the management or governing functions, if any, that the directors discharge thereat:


		Number of
Director	Corporate name	shares		Functions

Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos	Bankinter, S.A.		3,295,300		—
	Bank of America Corporation		560		—
	Santander Investment, S.A.		—	Chairman (1)
Mr. Alfredo Sáenz Abad	Banco Bilbao Vizcaya Argentaria, S.A.(2)		26,016		—
	HSBC Holdings plc		13,509		—
	Lloyds Banking Group plc		522		—
	Banco Bradesco S.A. (*)		1,815		—
	Banco Banif, S.A.		—	Chairman (1)
	Santander Investment, S.A.		—	Deputy chairman (1)
	Santander Private Banking s.p.a.		—	Chairman (1)

F-87


		Number of
Director	Corporate name	shares		Functions

Mr. Matías Rodríguez Inciarte	Banco Español de Crédito, S.A.		27,575	Director (1)
	Banco Santander Totta, S.A.		—	Chairman (1)
Mr. Manuel Soto Serrano	Banco Bilbao Vizcaya Argentaria, S.A.		150,000		—
	Intesa Sanpaolo S.p.A.		108,483		—
	UniCredito Italiano S.p.A.		150,000		—
	Istituto per le Opere di Religione (IOR)		—	Member (3)
Assicurazioni Generali S.p.A. (4)	Commerzbank, AG		57,934,287		—
	Intesa Sanpaolo S.p.A.		587,826,770		—
	Mediobanca Banca di Credito Finanziario S.p.a.		17,201,061		—
	UniCredito Italiano S.p.A.		77,439,951		—
	Société Générale		1,563,574		—
	Erste Group Bank AG		1,334,234		—
	Banca Monte dei Paschi di Siena S.p.A.		22,216,015		—
	ING Groep Bank N.V.		10,037,337
	Deustche Bank A.G.		1,306,535		—
	BNP Paribas S.A.		2,301,378
	Banco Bilbao Vizcaya Argentaria, S.A.		6,178,178		—
	Crédit Agricole, S.A.		3,625,797		—
	Banco Español de Crédito, S.A.		753,296		—
Mr. Antonio Basagoiti García-Tuñón	Banco Popular Español, S.A.		517		—
	Banco Bilbao Vizcaya Argentaria, S.A. (*)		11		—
	Banco Español de Crédito, S.A.		1,000	Chairman (1)
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea	Bankinter, S.A.		4,649,101		—
	Banco Español de Crédito, S.A.		560,214	—
	Santander UK plc		—	Chief executive officer
	Santander Investment, S.A.		—	Director (1)
Mr. Javier Botín-Sanz de Sautuola y O’Shea	Bankinter, S.A.		4,649,101		—
Lord Burns (Terence)	Lloyds Banking Group plc (*)		3,745		—
	Barclays plc (*)		1,901		—
	Santander UK plc		—	Chairman (1)
	Alliance & Leicester plc		—	Chairman (1)
Mr. Guillermo de la Dehesa Romero	Goldman Sachs & Co.		19,546		—
	Banco Pastor, S.A.		11,088		—
Mr. Rodrigo Echenique Gordillo	Wells Fargo & Co.		4,500		—
	Barclays plc		20,000		—
	Lloyds Banking Group plc		70,000		—
	Banco Banif, S.A.		—	2nd deputy chairman (1)
	Santander Investment, S.A.		—	Director (1)
	Allfunds Bank, S.A.		—	Deputy chairman (1)
	Banco Santander International		—	Director (1)
Mr. Antonio Escámez Torres	Banco de Valencia, S.A.		349		—
	Attijariwafa Bank Société Anonyme		10	Deputy chairman (1)
	Santander Consumer Finance, S.A.		—	Chairman (1)
	Open Bank, S.A.		—	Chairman (1)
Mr. Ángel Jado Becerro de Bengoa	Bankinter, S.A. (5)		1,244,000		—
	Banco Banif, S.A.		—	Director (1)

F-88


		Number of
Director	Corporate name	shares		Functions

Mr. Francisco Luzón López	Banco Bilbao Vizcaya Argentaria, S.A.		85,793		—
	Bank of America Corporation		121,106		—
	Citigroup Inc.		196,141		—
	Wells Fargo & Co.		32,517		—
	Lloyds Banking Group plc		497,679		—
	Royal Bank of Scotland Group plc		586,665		—
	BNP Paribas S.A.		5,963		—
	Société Générale		6,398		—
	Barclays plc		101,375		—
	HSBC Holdings plc		13,294		—
	UBS, AG		29,444		—
Mr. Abel Matutes Juan	Banco Bilbao Vizcaya Argentaria, S.A.		676,448		—
	Banco Español de Crédito, S.A.		11,980
	Citigroup Inc.		1,090,629		—
Mr. Juan Rodríguez Inciarte	Banco Bilbao Vizcaya Argentaria, S.A.		1,016		—
	Wells Fargo & Co.		107		—
	Santander UK plc		—	Deputy chairman (1)
	Alliance & Leicester plc		—	Director (1)
	Banco Banif, S.A.		—	Director (1)
	Santander Consumer Finance, S.A.		—	Director (1)
Ms. Isabel Tocino Biscarolasaga	Banco Bilbao Vizcaya Argentaria, S.A.		2,402		—
	Citigroup Inc.		11,300		—
Mr. Antoine Bernheim (6)	Credit Suisse Group A.G.		40,900		—
	BNP Paribas S.A.		16,179		—
	UBS A.G.		82,863		—
	Intesa Sanpaolo S.p.A.		398,533		—
	UniCredito Italiano S.p.A.		171,944		—
	Royal Bank of Scotland Group plc		12,298		—
	Bank of New York Mellon Corporation		10,000		—
	BSI SA		—	Director (1)
	Mediobanca Banca di Credito Finanziario S.p.a.		63,000	Director (1)


(*)		Ownership interests held by related persons.

(1)		Non-executive.

(2)		1,016 shares are held by related persons.

(3)		Non-executive member of the control committee.

(4)		More detailed information on the ownership interests held by Assicurazioni Generali, S.p.A. can be consulted in the notes to the financial statements of this company or on its website (www.generali.com).

(5)		244,000 shares are held by related persons.

(6)		Representative on the Bank’s board of directors of the non-executive proprietary director Assicurazioni Generali S.p.A.

None of the members of the board of directors perform, as independent professionals or as employees, any activities of the kind indicated in the foregoing table.

F-89

Debt instruments

The detail, by classification, type and currency, of Debt instruments is as follows:


	Thousands of euros
	2010			2009			2008

Classification:
Financial assets held for trading		57,871,332			49,920,518			43,895,548
Other financial assets at fair value through profit or loss		4,604,308			7,365,213			5,154,732
Available-for-sale financial assets		79,688,813			79,289,337			42,547,677
Loans and receivables		8,429,010			14,959,331			17,652,560

		150,593,463			151,534,399			109,250,517

Type:
Spanish government debt securities		35,663,155			38,312,678			20,499,493
Foreign government debt securities		63,600,151			44,006,698			23,132,075
Issued by financial institutions		23,760,726			39,853,240			39,096,714
Other fixed-income securities		27,713,486			29,528,505			26,703,413
Impairment losses		(144,055	)		(166,722	)		(181,178	)

		150,593,463			151,534,399			109,250,517

Currency:
Euro		61,843,978			72,745,088			51,577,517
Pound sterling		11,125,156			11,882,570			16,345,483
US dollar		23,442,472			25,744,623			15,396,510
Other currencies		54,325,912			41,328,840			26,112,185
Impairment losses		(144,055	)		(166,722	)		(181,178	)

		150,593,463			151,534,399			109,250,517

			At December 31, 2010, the nominal amount of Spanish government debt securities assigned to certain own or third-party commitments amounted to EUR 3,684 million (December 31, 2009: EUR 16,509 million; December 31, 2008: EUR 2,674 million).

			Additionally, at December 31, 2010 other debt securities totaling EUR 23,350 million had been assigned to own obligations (December 31, 2009: EUR 23,152 million; December 31, 2008: EUR 22,487 million), mainly as security for credit facilities received by the Group.

			The detail, by origin of the issuer, of Debt instruments at December 31, 2010 is as follows:


	Thousands of euros
	Private		Sovereign
	debt		debt		Total		%

Spain		7,915,055		35,663,155		43,578,210		28.94	%
United Kingdom		14,721,336		4,169,412		18,890,748		12.54	%
Portugal		6,107,875		2,819,005		8,926,880		5.93	%
Ireland		569,603		—		569,603		0.38	%
Greece		—		176,947		176,947		0.12	%
Other European countries		4,666,194		6,958,959		11,625,153		7.72	%
United States		10,793,052		2,953,177		13,746,229		9.13	%
Brazil		2,504,132		30,948,350		33,452,482		22.21	%
Mexico		902,514		10,755,734		11,658,248		7.74	%
Chile		1,083,966		2,281,273		3,365,239		2.23	%
Other American countries		1,615,845		1,524,303		3,140,148		2.09	%
Rest of the world		450,585		1,012,991		1,463,576		0.97	%

		51,330,157		99,263,306		150,593,463		100.00	%

F-91

Equity instruments

Breakdown

The detail, by classification and type, of Equity instruments is as follows:


	Thousands of euros
	2010		2009		2008

Classification:
Financial assets held for trading		8,850,318		9,248,022		6,272,403
Other financial assets at fair value through profit or loss		8,267,351		5,877,331		2,777,793
Available-for-sale financial assets		6,546,013		7,331,166		6,372,629
Of which:
Disregarding allowances for impairment losses		6,546,013		7,331,166		6,381,788
Allowances for impairment losses		—		—		(9,159	)

		23,663,682		22,456,519		15,422,825

Type:
Shares of Spanish companies		4,778,438		4,981,812		3,219,901
Shares of foreign companies		6,468,185		7,526,087		5,897,681
Investment fund units and shares		4,560,560		4,254,774		3,614,329
Other securities		7,856,499		5,693,846		2,700,073
Of which: unit linked		7,856,499		5,693,846		2,700,073
Impairment losses		—		—		(9,159	)

		23,663,682		22,456,519		15,422,825

Note 29 contains a detail of the valuation adjustments recognized in equity on available-for-sale financial assets.

Changes

The changes in Available-for-sale financial assets, disregarding the allowances for impairment losses, were as follows:


	Millions of euros
	2010			2009			2008
Balance at beginning of year		7,331			6,382			10,173
Changes in the scope of consolidation		—			467			366
Transfers (Note 13)		—			53			204
Net additions /(disposals)		(1,077	)		(192	)		(454	)
Of which:
Shinsei		—			—			322
Cielo		(651	)		—			—
Metrovacesa		—			938			—
France Telecom		—			(378	)		—
Attijariwafa Bank		—			(367	)		—
Iberdrola, S.A.		—			—			(846	)
Valuation adjustments (*)		292			621			(3,907	)

Balance at end of year		6,546			7,331			6,382


(*)		The valuation adjustments in 2008 included the write-downs of the ownership interests held in that year in The Royal Bank of Scotland (EUR 1,293 million) and Fortis Bank (EUR 749 million).

The main acquisitions and disposals made in 2010, 2009 and 2008 were as follows:

i. Metrovacesa, S.A. (Metrovacesa)

On February 20, 2009, certain credit institutions, including Banco Santander, S.A. and Banco Español de Crédito, S.A., entered into an agreement for the restructuring of the debt of the Sanahuja Group, whereby these credit institutions received shares representing 54.75% of the share capital of Metrovacesa in payment of the Sanahuja Group’s debt.

F-93

The aforementioned agreement also envisaged the acquisition by the creditor entities of an additional 10.77% of the share capital of Metrovacesa (shares on which the Sanahuja family was granted a call option for four years), which gave rise to an additional disbursement of EUR 214 million for the Group, and other conditions concerning the administration of this company.

Following the execution of the agreement, Santander Group had an ownership interest of 23.63% in Metrovacesa, S.A., and 5.38% of the share capital was subject to the aforementioned option.

In December 2009, the Group measured this investment at EUR 25 per share, which gave rise to additional write-downs and impairment losses of EUR 269 million net of tax (see Note 1.h).

At December 31, 2010, the value of this holding amounted to EUR 402 million, after deducting the write-downs, equivalent to EUR 24.4 per share. Also, the Group has granted the company participating loans amounting to EUR 109 million, which were provisioned in full.

ii. France Telecom España, S.A. (France Telecom)

On April 29, 2009, the Group announced it had entered into an agreement with Atlas Services Nederland BV (a wholly-owned subsidiary of France Telecom) to sell the Group’s 5.01% ownership interest in France Telecom España, S.A. for EUR 378 million. This transaction generated a loss for the Group of EUR 14 million.

iii. Attijariwafa Bank Société Anonyme

On December 28, 2009, the Group sold to the Moroccan company Société Nationale d’Investissement (SNI) 10% of the share capital of Attijariwafa Bank for MAD 4,149.4 million (approximately EUR 367 million at the closing exchange rate). This transaction gave rise to a gain of EUR 218 million for Santander Group (see Note 1.h), which was recognized under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations in the consolidated income statement (see Note 50). After the sale, Santander Group has a 4.55% ownership interest in Attijariwafa Bank.

iv. Cielo, S.A.

In July 2010 the Group entered into an agreement with Banco do Brasil S.A. and Banco Bradesco S.A. for the sale to these two entities of all the shares held by Santander Group in Cielo S.A. — formerly Visanet — (7.20% of the share capital). The agreed-upon sale price was BRL 1,487 million (approximately EUR 650.7 million), which gave rise to a gain of EUR 212 million, net of taxes and non-controlling interests.

Notifications of acquisitions of investments

The notifications made by the Bank in 2010, in compliance with Article 155 of the Spanish Limited Liability Companies Law (Ley de Sociedades de Capital) and Article 53 of Securities Market Law 24/1998 (Ley del Mercado de Valores), of the acquisitions and disposals of holdings in investees are listed in Appendix IV.

F-94

Allowances for impairment losses

Following is a summary of the changes in the impairment losses on these items and on debt instruments classified as Available-for-sale financial assets (see Note 7):


	Thousands of euros
	2010			2009			2008

Balance at beginning of year		166,722			190,337			102,991
Net impairment losses for the year		176,250			490,326			386,164
Of which:
Impairment losses charged to income		198,693			536,567			400,858
Impairment losses reversed with a credit to income		(22,443	)		(46,241	)		(14,694	)
Net changes in the scope of consolidation		—			—			19,654
Write-off of assets due to impairment		(205,241	)		(505,017	)		(370,498	)
Exchange differences and other items		(19,094	)		(8,924	)		52,026

Balance at end of year		118,637			166,722			190,337


Of which:
By geographical location of risk:
Spain		48,475			97,746			144,796
Rest of Europe		—			—			1,271
Latin America		70,162			68,976			44,270
By type of asset covered:
Debt instruments — Available-for-sale financial assets (Note 7)		118,637			166,722			181,178
Equity instruments — Available-for-sale financial assets		—			—			9,159

Trading derivatives (assets and liabilities) and Short positions

Trading derivatives

The detail, by type of inherent risk, of the fair value of the trading derivatives arranged by the Group is as follows (see Note 36):


	Thousands of euros
	2010				2009				2008
	Debit		Credit		Debit		Credit		Debit		Credit
	balance		balance		balance		balance		balance		balance

Interest rate risk		51,675,279		52,116,623		43,413,018		43,135,683		68,145,560		67,005,552
Currency risk		14,444,766		16,015,980		11,364,400		9,892,032		19,001,043		14,381,752
Price risk		5,642,774		6,413,108		3,995,032		5,075,830		8,129,606		7,237,843
Other risks		1,305,950		733,386		1,083,963		609,079		539,100		542,286

		73,068,769		75,279,097		59,856,413		58,712,624		95,815,309		89,167,433

F-95

Short positions

Following is a breakdown of the short positions:


	Thousands of euros
	2010		2009		2008

Borrowed securities:
Debt instruments		2,580,279		1,536,689		1,054,527
Of which, Santander UK		1,172,795		896,439		775,094
Equity instruments		278,868		106,199		57,263
Of which, Santander UK		62,135		6,784		13,670

Short sales:
Debt instruments		9,443,391		3,496,842		1,912,854
Of which: the Bank		9,200,390		2,529,586		1,903,554
Equity instruments		380		—		10,587

		12,302,918		5,139,730		3,035,231

10.

Loans and advances to customers

Breakdown

The detail, by classification, of Loans and advances to customers in the consolidated balance sheets is as follows:


	Thousands of euros
	2010			2009			2008

Financial assets held for trading		755,175			10,076,412			684,348
Other financial assets at fair value through profit or loss		7,777,403			8,328,516			8,972,707
Loans and receivables		715,621,319			664,145,998			617,231,380
Of which:
Disregarding impairment losses		735,318,317			682,019,094			629,697,436
Impairment losses		(19,696,998	)		(17,873,096	)		(12,466,056	)
Of which, due to country risk		(40,871	)		(37,234	)		(304,207	)

		724,153,897			682,550,926			626,888,435

Loans and advances to customers disregarding impairment losses		743,850,895			700,424,022			639,354,490

Note 51 contains a detail of the residual maturity periods of loans and receivables and of the related average interest rates.

There are no loans and advances to customers for material amounts without fixed maturity dates.

In August 2010 the Group acquired a US vehicle financing portfolio from HSBC with a nominal value of USD 4.3 million for approximately USD 4 million (approximately EUR 3.15 thousand million), subject to adjustments. The debt recovery of this acquired portfolio was already being performed by Santander Consumer USA.

In September 2010, the Group acquired a US vehicle financing portfolio of CitiFinancial from Citigroup Inc. (Citi) with a nominal value of USD 3.2 thousand million (EUR 2.3 thousand million) for a price of 99% of its gross amount. Additionally, both entities entered into an agreement whereby Santander will perform the debt recovery of the vehicle financing portfolio retained by Citi amounting to approximately USD 7.2 thousand million.

F-96

Breakdown

Following is a detail, by loan type and status, borrower sector, geographical area of residence and interest rate formula, of the loans and advances to customers, which reflect the Group’s exposure to credit risk in its core business, disregarding impairment losses:


	Millions of euros
	2010		2009		2008

By loan type and status:
Commercial credit		15,737		17,454		22,250
Secured loans		430,073		411,778		351,609
Reverse repurchase agreements		6,166		13,958		5,228
Other term loans		234,858		204,224		216,690
Finance leases		20,260		20,873		21,011
Receivable on demand		8,849		8,088		8,572
Impaired assets		27,908		24,049		13,994

		743,851		700,424		639,354

By borrower sector:
Public sector — Spain (*)		12,138		9,802		7,668
Public sector — Other countries (**)		3,527		2,861		3,029
Individuals		395,622		379,297		347,201
Energy		12,504		11,521		10,476
Construction		26,708		22,696		24,341
Manufacturing		47,568		40,534		43,993
Services		147,299		134,638		123,895
Other sectors		98,485		99,074		78,751

		743,851		700,424		639,354

By geographical area:
Spain		227,613		230,345		240,247
European Union (excluding Spain)		320,286		311,776		279,664
United States and Puerto Rico		57,881		49,501		15,096
Other OECD countries		6,432		5,256		8,104
Latin America		122,940		96,470		88,720
Rest of the world		8,699		7,075		7,523

		743,851		700,424		639,354

By interest rate formula:
Fixed rate		297,259		286,445		256,506
Floating rate		446,592		413,979		382,848

		743,851		700,424		639,354


(*)		At December 31, 2010 the issuer rating was AA.

(**)		At December 31, 2010, the detail by issuer rating was approximately as follows: 7.5% AAA, 42.9% A, 46.0% BBB and 3.6% below BBB.

F-97

Impairment losses

The changes in the impairment losses on the assets making up the balances of Loans and receivables — Loans and advances to customers, Loans and receivables — Loans and advances to credit institutions (see Note 6) and Loans and receivables — Debt instruments (see Note 7) were as follows:

Thousands of euros

2010

2009

2008

Balance at beginning of year

17,898,632

12,719,623

8,796,371

Impairment losses charged to income for the year

11,468,216

12,002,717

6,596,635

Of which:

Individually assessed

14,769,923

13,948,358

7,683,692

Collectively assessed

1,404,944

2,205,598

640,424

Impairment losses reversed with a credit to income

(4,706,651

)

(4,151,239

)

(1,727,481

)

Inclusion of entities in the Group in the year (Note 3)

—

1,426,104

2,310,095

Write-off of impaired balances against recorded impairment allowance

(10,913,172

)

(9,794,628

)

(4,552,393

)

Exchange differences and other changes

1,285,299

1,544,815

(431,085

)

Balance at end of year

19,738,975

17,898,632

12,719,623

Of which:

By method of assessment:

Individually

14,584,051

11,627,929

7,183,237

Of which: due to country risk (Note 2.g)

49,074

45,694

554,230

Collectively

5,154,924

6,270,703

5,536,386

By geographical location of risk:

Spain

6,810,296

6,992,818

5,948,950

Rest of Europe

4,694,585

4,435,269

3,307,313

America

8,234,094

6,470,545

3,463,360

By classification of assets:

Loans and advances to credit institutions

16,559

25,536

253,567

Debt instruments

25,418

—

Loans and advances to customers

19,696,998

17,873,096

12,466,056

Previously written-off assets recovered in 2010, 2009 and 2008 amounted to EUR 1,201,317 thousand, EUR 914,721 thousand and EUR 699,747 thousand, respectively. Taking into account these amounts and those recognized in Impairment losses charged to income for the year in the foregoing table, impairment losses on Loans and receivables amounted to EUR 10,266,899 thousand in 2010, EUR 11,087,996 thousand in 2009 and EUR 5,896,888 thousand in 2008.

The increase in the impairment losses charged to income in 2009 with respect to 2008 was due to various factors: the scope effect resulting from the new inclusions in the Group, the full consolidation of Banco Real for the whole year, the substantial deterioration of the macroeconomic situation and, to a lesser extent, the shift in preceding years in the mix of the Group’s portfolio towards more profitable products albeit with higher risk premiums.

Impaired assets

The detail of the changes in the balance of the financial assets classified as Loans and receivables — Loans and advances to customers and considered to be impaired due to credit risk is as follows:


	Millions of euros
	2010			2009			2008

Balance at beginning of year		24,049			13,994			6,070
Net additions		13,575			18,046			11,200
Written-off assets		(10,913	)		(9,795	)		(4,552	)
Increase in scope of consolidation		239			1,006			1,945
Exchange differences and other		958			798			(669	)

Balance at end of year		27,908			24,049			13,994

This amount, after deducting the related allowances, represents the Group’s best estimate of the fair value of the impaired assets.

F-98

Following is a detail of the financial assets classified as loans and receivables and considered to be impaired due to credit risk at December 31, 2010, classified by geographical location of risk and by age of the oldest past-due amount:


	Millions of euros
	With no
	past-due
	balances or
	less than 3		With balances past due by
	months		3 to 6		6 to 9		9 to 12		More than
	past due		months		months		months		12 months		Total

Spain		2,726		1,835		1,511		1,001		5,240		12,313
European Union (excluding Spain)		308		2,782		1,192		759		2,190		7,231
United States and Puerto Rico		898		567		231		139		817		2,652
Other OECD countries		18		35		37		34		—		124
Latin America		768		2,310		894		791		822		5,585
Rest of the world		—		3		—		—		—		3

		4,718		7,532		3,865		2,724		9,069		27,908

The detail at December 31, 2009 is as follows:


	Millions of euros
	With no
	past-due
	balances or
	less than 3		With balances past due by
	months		3 to 6		6 to 9		9 to 12		More than
	past due		months		months		months		12 months		Total

Spain		2,171		1,431		1,356		956		4,287		10,201
European Union (excluding Spain)		276		3,343		977		689		1,418		6,703
United States and Puerto Rico		361		1,024		352		248		572		2,557
Other OECD countries		5		35		23		16		23		102
Latin America		398		1,893		977		688		516		4,472
Rest of the world		—		4		3		2		4		13

		3,212		7,730		3,688		2,599		6,820		24,049

The detail at December 31, 2008 is as follows:


	Millions of euros
	With no
	past-due
	balances or
	less than 3		With balances past due by
	months		3 to 6		6 to 9		9 to 12		More than
	past due		months		months		months		12 months		Total

Spain		637		2,461		984		694		1,486		6,262
European Union (excluding Spain)		38		2,447		550		388		816		4,239
United States and Puerto Rico		102		261		62		44		85		554
Other OECD countries		28		284		3		2		4		321
Latin America		274		1,359		458		322		200		2,613
Rest of the world		2		1		1		—		1		5

		1,081		6,813		2,058		1,450		2,592		13,994

F-99

Securitization

Loans and advances to customers includes, inter alia, the securitized loans transferred to third parties on which the Group has retained risks, albeit partially, and which therefore, in accordance with the applicable accounting standards, cannot be derecognized. The breakdown of the securitized loans, by type of financial instrument, and of the securitized loans derecognized because the stipulated requirements were met (see Note 2.e) is shown below. Note 22 details the liabilities associated with these securitization transactions.

Millions of euros

2010

2009

2008

Derecognized

9,647

10,836

2,882

Of which:

Mortgage assets (*)

9,635

10,232

2,088

Other securitized assets

604

794

Retained on the balance sheet

133,046

123,706

126,497

Of which:

Securitized mortgage assets

99,842

90,182

90,264

Of which: the UK

73,865

64,592

66,615

Other securitized assets

33,204

33,524

36,233

Total

142,693

134,542

129,380


(*)		Since 2009 this balance has included assets of Santander Holdings USA (formerly Sovereign) amounting to approximately EUR 8,538 million that were sold, prior to this company’s inclusion in the Group, on the secondary market for multifamily loans, and over which control was transferred and substantially all the associated risks and rewards were not retained.

The growth in securitization since 2008 has been the result of its use as a tool for the management of regulatory capital and as a means of diversifying the Group’s liquidity sources. In 2008, 2009 and 2010 the Group did not derecognize any of the securitizations performed, and the balance derecognized in those years relates to securitizations performed in prior years.

11.

Hedging derivatives

The detail, by type of risk hedged, of the fair value of the derivatives qualifying for hedge accounting is as follows (see Note 36):


	Thousands of euros
	2010				2009				2008
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities

Fair value hedges		8,006,630		5,832,452		7,585,383		4,296,012		8,553,353		5,213,389
Of which: Portfolio hedges		1,539,868		2,683,447		1,552,732		2,820,008		971,284		2,956,415
Cash flow hedges		153,421		438,240		201,626		719,726		879,230		694,328
Hedges of net investments in foreign operations		66,962		362,936		46,841		175,339		265,549		49,894

		8,227,013		6,633,628		7,833,850		5,191,077		9,698,132		5,957,611

Note 36 contains a description of the Group’s main hedges.

F-100

12.

Non-current assets held for sale

The detail of Non-current assets held for sale is as follows:


	Thousands of euros
	2010		2009		2008

Equity instruments		—		4,014		3,890,215
Of which:
Cepsa		—		—		2,846,300
Interbanca (Note 3-b)		—		—		1,000,000
Tangible assets		5,971,824		5,110,723		5,265,868
Of which:
Foreclosed assets and acquired assets		5,873,862		4,938,536		4,881,006
Other tangible assets held for sale		97,962		172,187		384,862
Other assets		313,196		674,452		111,403

		6,285,020		5,789,189		9,267,486

			Impairment losses of EUR 2,500,441 thousand, EUR 2,090,126 thousand and EUR 178,495 thousand were deducted from the balance of this item at December 31, 2010, 2009 and 2008, respectively. The net charges recorded in those years amounted to EUR 298,337 thousand, EUR 1,350,592 thousand and EUR 70,027 thousand, respectively (see Note 50).

			The most significant transactions relating to non-current assets held for sale were as follows:

			*Sale of Santander business campus*

			In the first half of 2008 Banco Santander entered into an agreement with the consortium led by Propinvest in relation to the sale of the Ciudad Financiera Santander business campus and the subsequent leaseback thereof for a term of 40 years, with the Bank reserving the right to a purchase option at market price at the end of the aforementioned term. This transaction, which was completed on September 12, 2008, was performed within the framework of the restricted private competition organized by Banco Santander for the sale and subsequent leaseback of a portfolio of properties owned by it in Spain, of which the business campus was the last part. The price agreed upon for the Santander Business Campus was EUR 1,900 million. The gains obtained by Banco Santander on this sale were recognized under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations in the consolidated income statement and amounted to EUR 586 million, net (EUR 836 million, gross — see Note 50). Other relevant information on this transaction is provided in Note 16.

			*Cepsa*

			At December 31, 2008, the Bank’s directors classified the ownership interest held in Compañía Española de Petróleos, S.A. (Cepsa) as a non-current asset held for sale, since it intended to recover the value of the investment through the sale thereof in the short term. The Cepsa shares were previously recognized under Investments in the consolidated balance sheet, since the entity was deemed to be an associate, and the investment was accounted for using the equity method. The balance at which this asset was recognized related basically to the carrying amount of the ownership interest when the decision to sell it was taken; this amount was lower than the fair value of the ownership interest less costs to sell at 2008 year-end.

			On March 31, 2009, Santander Group announced the agreement with the International Petroleum Investment Company of the Emirate of Abu Dhabi for the sale to it of the 32.5% ownership interest held by the Group in Cepsa for EUR 33 per share, which would be reduced by the amount of any dividends paid out of 2009 profit prior to completion of the transaction. This transaction was completed in 2009 and did not give rise to any gain or loss for the Group.

F-101

Changes

The changes in Investments — Associates were as follows:


	Millions of euros
	2010			2009			2008

Balance at beginning of year		164			1,323			15,689
Acquisitions and capital increases (Note 3)		11			13			754
Of which:
Sovereign		—			—			228
RFS Holdings B.V.		—			—			408
Disposals and capital reductions (Note 3)		(41	)		(14	)		(41	)
Of which:
RFS Holdings B.V.		—			—			(36	)
Transfers		—			(53	)		(3,955	)
Of which:
Interbanca (Note 12)		—			—			(800	)
Cepsa (Note 12)		—			—			(2,736	)
Attijariwafa (Note 8)		—			—			(204	)
Effect of equity accounting		17			—			792
Impairment losses		—			—			(8	)
Dividends paid		(16	)		(5	)		(550	)
Change in consolidation method (Note 3)		101			(1,346	)		(10,658	)
Exchange differences and other changes (*)		37			246			(700	)

Balance at end of year		273			164			1,323


(*)		In 2008 Exchange differences and other changes included EUR 723 million relating to the exchange losses incurred on RFS Holdings B.V.

Impairment losses

No significant impairment was disclosed with respect to investments in associates in 2010, 2009 or 2008.

Other disclosures

Following is a summary of the financial information on the associates (obtained from the information available at the reporting date):


	Millions of euros
	2010			2009			2008

Total assets		4,630			2,604			59,915
Total liabilities		(3,828	)		(2,160	)		(54,643	)
Non-controlling interests		—			—			(196	)

Net assets		802			444			5,076


Group’s share of the net assets of associates		202			155			1,314
Goodwill		71			9			9

Total Group share		273			164			1,323

Total income		1,047			311			21,849

Total profit		70			77			1,050

Group’s share of the profit of associates		17			—			792

F-103

14.

Insurance contracts linked to pensions

The detail of Insurance contracts linked to pensions (see Note 25.c) is as follows:


	Thousands of euros
	2010		2009		2008

Assets relating to insurance contracts covering post-employment benefit plan obligations:
Bank		1,986,454		2,094,039		2,159,707
Banesto		202,458		227,609		248,025
Other Spanish companies		29,541		31,159		32,035
Assets relating to insurance contracts covering other similar obligations:
Bank		551		1,791		4,794
Other Spanish companies		944		1,553		2,428

		2,219,948		2,356,151		2,446,989

15.

Liabilities under insurance contracts and Reinsurance assets

The detail of Liabilities under insurance contracts and Reinsurance assets in the consolidated balance sheets (see Note 2.j) is as follows:


	Thousands of euros
	2010							2009							2008
	Direct							Direct							Direct
	insurance and					Total		insurance and					Total		insurance and					Total
	reinsurance		Reinsurance			(balance		reinsurance		Reinsurance			(balance		reinsurance		Reinsurance			(balance
	assumed		ceded			payable)		assumed		ceded			payable)		assumed		ceded			payable)

Technical provisions for:

Unearned premiums and unexpired risks		370,787		(169,755	)		201,032		455,181		(195,688	)		259,493		409,187		(194,646	)		214,541
Life insurance:		3,060,593		(51,275	)		3,009,318		4,744,629		(55,891	)		4,688,738		4,130,577		(51,645	)		4,078,932
Unearned premiums and risks		328,963		(51,275	)		277,688		555,597		(55,891	)		499,706		332,507		(25,401	)		307,106
Mathematical provisions		2,731,630		—			2.731,630		4,189,032		—			4,189,032		3,798,070		(26,244	)		3,771,826
Claims outstanding		514,608		(65,376	)		449,232		483,234		(52,529	)		430,705		407,121		(46,856	)		360,265
Bonuses and rebates		22,418		—			22,418		18,605		—			18,605		17,440		(5,937	)		11,503
Life insurance policies where the investment risk is borne by the policyholders		5,763,143		(40	)		5,763,103		10,939,477		(50	)		10,939,427		11,713,993		(135,854	)		11,578,139
Other technical provisions		717,725		(259,946	)		457,779		275,320		(112,664	)		162,656		171,193		(23,450	)		147,743

		10,449,274		(546,392	)		9,902,882		16,916,446		(416,822	)		16,499,624		16,849,511		(458,388	)		16,391,123

The Group performs insurance and reinsurance transactions in Spain, Portugal, Brazil, Mexico, Chile, Argentina and Uruguay through companies owned by it. The main products offered, which are aimed at individual customers who are, in turn, customers of the Bank in each country, are life and non-life insurance policies and unit-linked-type savings products where the investment risk is borne by the policyholder. The lines of insurance offered are: life savings insurance (13% of premiums), unemployment (1% of premiums), home insurance (3% of premiums), various non-life lines (3% of premiums) and savings insurance (80% of premiums). Most of the insurance contract liabilities recognized in the Group’s consolidated financial statements relate to savings insurance, the vast majority of which are measured at fair value, which is the value of the investments assigned to the related contracts (risk borne by the policyholder).

F-104

16.

Tangible assets

Changes

The changes in Tangible assets in the consolidated balance sheet were as follows:


	Thousands of euros
	Property,			Leased
	plant and			out under an
	equipment			operating			Investment
	for own use			lease			property			Total

Cost:
Balances at January 1, 2008		7,831,065			6,839,566			487,448			15,158,079
Additions / Disposals (net) due to change in the scope of consolidation (*)		1,569,298			(3,634,372	)		190,232			(1,874,842	)
Additions / Disposals (net)		1,168,177			(38,474	)		98,790			1,228,493
Transfers and other changes		(126,811	)		(140,635	)		130,857			(136,589	)
Exchange differences (net)		(535,316	)		(551,757	)		5			(1,087,068	)

Balances at December 31, 2008		9,906,413			2,474,328			907,332			13,288,073
Additions / Disposals (net) due to change in the scope of consolidation		463,730			62,695			(19	)		526,406
Additions / Disposals (net)		263,707			(187,545	)		38,474			114,635
Transfers and other changes		(188,297	)		12,962			279,498			104,163
Exchange differences (net)		793,761			36,906			(2,086	)		828,581

Balances at December 31, 2009		11,239,314			2,399,346			1,223,199			14,861,859
Additions / Disposals (net) due to change in the scope of consolidation		37,318			11,026			—			48,344
Additions / Disposals (net)		1,545,402			820,777			267,774			2,633,953
Transfers and other changes		(32,385	)		(24,381	)		47,112			(9,654	)
Exchange differences (net)		600,027			19,222			23,163			642,412

Balances at December 31, 2010		13,389,676			3,225,990			1,561,248			18,176,914


Accumulated depreciation:
Balances at January 1, 2008		(3,532,600	)		(2,058,208	)		(16,375	)		(5,607,183	)
Additions / Disposals (net) due to change in the scope of consolidation (*)		(816,487	)		1,529,887			(4,206	)		709,194
Disposals		347,031			56,819			2,402			406,252
Transfers and other changes		99,030			(233,015	)		(3,220	)		(137,205	)
Charge for the year		(577,291	)		(3,091	)		(3,997	)		(584,379	)
Exchange differences and other items		250,977			199,599			(2	)		450,573

Balances at December 31, 2008		(4,229,340	)		(508,009	)		(25,399	)		(4,762,748	)
Additions / Disposals (net) due to change in the scope of consolidation		(256,214	)		(14,794	)		(851	)		(271,860	)
Disposals		583,508			40,089			2,777			626,374
Transfers and other changes		8,883			(194,196	)		(5,111	)		(190,423	)
Charge for the year		(762,387	)		(276	)		(7,643	)		(770,306	)
Exchange differences and other items		(353,229	)		(9,760	)		50			(362,939	)

Balances at December 31, 2009		(5,008,779	)		(686,946	)		(36,177	)		(5,731,902	)
Disposals		330,598			168,502			2,828			501,928
Transfers and other changes		(63,051	)		(360,419	)		(10,590	)		(434,060	)
Charge for the year		(846,120	)		(223	)		(9,504	)		(855,847	)
Exchange differences and other items		(260,066	)		(7,818	)		(397	)		(268,281	)

Balances at December 31, 2010		(5,847,418	)		(886,904	)		(53,840	)		(6,788,162	)

F-105


	Thousands of euros
	Property,			Leased
	plant and			out under an
	equipment			operating			Investment
	for own use			lease			property			Total

Impairment losses:
Balances at January 1, 2008		(10,853	)		(70,662	)		(10,348	)		(91,863	)
Impairment charge for the year		(16,699	)		—			(1,801	)		(18,500	)
Additions / Disposals (net) due to change in the scope of consolidation (*)		(2,406	)		54,404			—			51,998
Exchange differences and other		17,501			16,258			833			34,592

Balances at December 31, 2008		(12,457	)		—			(11,316	)		(23,773	)
Impairment charge for the year		(29,683	)		(1,554	)		(84,856	)		(116,093	)
Additions / Disposals (net) due to change in the scope of consolidation		(22,597	)		—			—			(22,597	)
Exchange differences and other		36,364			(8,189	)		66			28,241

Balances at December 31, 2009		(28,373	)		(9,743	)		(96,106	)		(134,222	)
Impairment charge for the year		(21,581	)		(2,889	)		(82,182	)		(106,652	)
Exchange differences		15,686			(2,633	)		(19,294	)		(6,241	)

Balances at December 31, 2010		(34,268	)		(15,265	)		(197,582	)		(247,115	)


Tangible assets, net:
Balances at December 31, 2008		5,664,616			1,966,319			870,617			8,501,552
Balances at December 31, 2009		6,202,162			1,702,657			1,090,916			8,995,735
Balances at December 31, 2010		7,507,990			2,323,821			1,309,826			11,141,637


(*)		The additions relate mainly to the acquisition of Banco Real and the reductions relate mainly to the disposal of Porterbrook.

	b)		*Property, plant and equipment for own use*

			The detail, by class of asset, of Property, plant and equipment — For own use in the consolidated balance sheet is as follows:


	Millions of euros
			Accumulated			Impairment			Carrying
	Cost		depreciation			losses			amount

Land and buildings		3,767		(923	)		(12	)		2,832
IT equipment and fixtures		2,093		(1,410	)		—			683
Furniture and vehicles		3,705		(1,814	)		—			1,891
Construction in progress and other items		341		(82	)		—			259

Balances at December 31, 2008		9,906		(4,229	)		(12	)		5,665


Land and buildings		4,431		(1,116	)		(28	)		3,287
IT equipment and fixtures		2,525		(1,754	)		—			772
Furniture and vehicles		4,118		(2,081	)		—			2,037
Construction in progress and other items		165		(58	)		—			106

Balances at December 31, 2009		11,239		(5,009	)		(28	)		6,202


Land and buildings		5,393		(1,354	)		(34	)		4,005
IT equipment and fixtures		2,904		(2,076	)		—			828
Furniture and vehicles		4,834		(2,347	)		—			2,487
Construction in progress and other items		259		(71	)		—			188

Balances at December 31, 2010		13,390		(5,848	)		(34	)		7,508

F-106

The carrying amount at December 31, 2010 in the foregoing table includes the following approximate amounts:

•

EUR 5,104 million relating to property, plant and equipment owned by Group entities and branches located abroad (December 31, 2009: EUR 4,717 million; December 31, 2008: EUR 4,063 million).

•

EUR 660 million (December 31, 2009: EUR 196 million; December 31, 2008: EUR 118 million) relating to property, plant and equipment being acquired under finance leases by the consolidated entities (Note 2.l discloses additional information on these items).

	c)		*Investment property*

			The comparison of the fair value of the investment property at December 31, 2010 with the carrying amount at that date results in unrealized gains of EUR 9 million (December 31, 2009: EUR 9 million; December 31, 2008: EUR 18 million).

			The rental income earned from investment property and the direct costs related both to investment properties that generated rental income in 2010, 2009 and 2008 and to investment properties that did not generate rental income in those years are not material in the context of the consolidated financial statements.

	d)		*Sale of properties*

			On November 14, 2007, the Group sold ten singular properties to two companies in the Pontegadea Group for EUR 458 million and recognized a net gain of EUR 216 million. At the same time, an operating lease agreement for the aforementioned properties (with maintenance, insurance and taxes payable by the Group) was entered into with these companies, with compulsory terms of between 12 and 15 years, during which the rent (initially set at EUR 1,722 thousand per month) will be reviewed annually on the date of completion of each year of the lease term, based on the percentage variation in the Spanish Consumer Price Index (CPI) in the preceding twelve months, except in the fifth year (effective from the sixth year), in which the rent for nine of the ten properties will be reviewed on the basis of the CPI plus three percentage points. In nine of the ten lease agreements, the agreement is renewable for five additional five-year periods and a last three-year renewal period, up to a total of 40 years. In one of the ten lease agreements, the agreement is renewable for five additional five-year periods up to a total of 40 years. Nine of the ten lease agreements provide for adjustment of the rent to market in each renewal period. One of the ten lease agreements provides for adjustment of the rent to market in 2017, with subsequent adjustments to market taking place every five years from 2017 onwards. Also, the lease agreements include a purchase option exercisable by the Group on final expiry of the agreements (2047), with the exception of one of the leases, which envisages the possibility of exercising the purchase option in March 2023, March 2028, March 2033, March 2038, March 2043 and March 2047. In all the lease agreements, the value of the properties in the event that the purchase option is exercised shall be the market value of the properties on the related dates; this market value will be determined, if appropriate, by independent experts.

			Also, on November 23, 2007 the Group sold 1,152 of its branch offices to the Pearl Group for EUR 2,040 million and recognized a net gain of EUR 860 million. Simultaneously, an operating lease agreement for the aforementioned branch offices (with maintenance, insurance and taxes payable by the Group) was entered into with the Pearl Group, with compulsory terms of 24, 25 or 26 years (depending on the property), during which the rent (initially set at EUR 8,417 thousand per month, payable quarterly) will be reviewed annually on the date of completion of each year of the lease term: (i) during the first ten years of the agreement, based on the percentage variation in the Spanish CPI in the preceding twelve months, plus 215 basis points; and (ii) from the eleventh year onwards, based on variations in the CPI. The agreement is renewable for a maximum of three additional seven-year periods, up to a total of 45, 46 or 47 years (depending on the property), the rent being adjusted to market at the end of the compulsory term and of each renewal period, and includes an option, exercisable by the Group on final expiry of the lease (45, 46 or 47 years, depending on the property) to purchase the properties at their market value on the expiry date; this market value will be determined, if appropriate, by independent experts.

F-107

Lastly, on September 12, 2008 the Group completed the sale of its head offices (the Santander Business Campus) to Marme Inversiones 2007, S.L. for EUR 1,904 million and recognized a net gain of EUR 586 million (not including any net gains relating to certain projects in progress that the Group undertook to complete, which were completed in 2009, as a result of which the Group recognized gains of EUR 73 million). Simultaneously, an operating lease agreement for the aforementioned offices (with maintenance, insurance and taxes payable by the Group) was entered into with Marme Inversiones 2007, S.L., with a compulsory term of 40 years, during which the rent (initially set at EUR 6,891 thousand per month, payable quarterly) will be reviewed annually based on the variation in the preceding twelve months in the Harmonized Consumer Price Index of the euro zone multiplied by 1.74, with a minimum of 2.20% during the first ten years and a maximum of 6% throughout the lease term. The agreement includes an option exercisable by the Group on final expiry of the lease to purchase the Business Campus at its market value on the expiry date -the market value will be determined, if appropriate, by independent experts-, and a right of first refusal if the lessor should wish to sell the Business Campus. In addition to the two aforementioned agreements, the Group entered into a third additional promotion agreement, whereby during the first 20 years of the lease term it can request Marme Inversiones 2007, S.L. to construct buildings additional to those already existing at the Business Campus or to acquire additional land (from the third year onwards) to be included in the Business Campus, all under certain terms and conditions and with a maximum total cost of approximately EUR 296 million, which would subsequently be included in the lease agreement.

The most noteworthy feature of the other agreed terms and conditions, all of which are customary market conditions for operating lease agreements, is that none of the aforementioned lease agreements provides for the transfer of ownership of the properties to the Group on expiry thereof, and the Group is entitled not to renew the rentals beyond the minimum compulsory term. Furthermore, the Group has not granted any guarantee to the buyers for any losses that might arise from the early termination of the agreements or for possible fluctuations in the residual value of the aforementioned properties.

In the above-mentioned transactions the Group considered information provided by independent advisors, who estimated the economic lives of the transferred properties at the transaction date, which in all cases were more than 60 years (more than 80 years in the case of the Business Campus). These advisors also analyzed both the selling prices of the properties and the agreed subsequent rental payments. The Group, based in part upon this analysis, concluded that their properties had been set at fair market values at that date.

The rental expense recognized by the Group in 2010 in connection with these agreements amounted to EUR 214 million (December 31, 2009: EUR 208 million; December 31, 2008: EUR 144 million). At December 31, 2010, the present value of the minimum future payments that the Group will incur during the compulsory term (since it is considered that the agreements will not be renewed and the existing purchase options will not be exercised) amounted to EUR 212 million payable within one year (December 31, 2009: EUR 189 million; December 31, 2008: EUR 208 million), EUR 784 million payable at between one and five years (December 31, 2009: EUR 697 million; December 31, 2008: EUR 835 million) -EUR 205 million in the second year (December 31, 2009: EUR 183 million; December 31, 2008: EUR 208 million), EUR 199 million in the third year (December 31, 2009: EUR 177 million; December 31, 2008: EUR 209 million), EUR 193 million in the fourth year (December 31, 2009: EUR 172 million; December 31, 2008: EUR 180 million) and EUR 187 million in the fifth year (December 31, 2009: EUR 166 million; December 31, 2008: EUR 210 million)-, and EUR 2,010 million payable at more than five years (December 31, 2009: EUR 1,764 million; December 31, 2008: EUR 1,906 million).

F-108

17.

Intangible assets — Goodwill

The detail of Goodwill, based on the companies giving rise thereto (see Note 3.c), is as follows:


	Millions of euros
	2010		2009		2008

Santander Brasil S.A.		8,755		7,706		6,850
Santander UK Plc (formerly Abbey Group) (1)		8,250		7,996		6,921
Banco Santander Totta, S.A.		1,641		1,641		1,641
Santander Holdings USA, Inc.		1,537		1,425		—
Santander Consumer Holding GmbH (formerly CC-Holding)		1,018		878		875
Banco Santander — Chile		798		683		563
Santander Consumer USA Inc.		523		493		484
Grupo Financiero Santander Serfin (Mexico)		484		423		416
Santander Cards UK Limited		383		365		—
Banco Español de Crédito, S.A.		369		369		369
Santander Consumer Bank AS		137		129		112
Santander Consumer Bank S.p.A.		106		106		106
Banco Santander Consumer Portugal, S.A.		59		122		122
Other companies		562		529		377

TOTAL GOODWILL		24,622		22,865		18,836


(1)		Including Alliance & Leicester and Bradford and Bingley.

		At least once per year (or whenever there is any indication of impairment), the Group reviews goodwill for impairment (i.e. a potential reduction in its recoverable value to below its carrying amount). For this purpose, it analyses the following: (i) certain macroeconomic variables that might affect its investments (population data, political situation, economic situation -including bankarisation-, among others); (ii) various microeconomic variables comparing the investments of the Group with the financial services industry of the country in which the Group carries on most of its business activities (balance sheet composition, total funds under management, results, efficiency ratio, capital adequacy ratio, return on equity, among others); and (iii) the price earnings (P/E) ratio of the investments as compared with the P/E ratio of the stock market in the country in which the investments are located and that of comparable local financial institutions.

		To supplement this, the Group performs estimates of the recoverable amounts of certain cash-generating units using discounted cash flow projections. In order to perform this calculation, the Group uses projections based on the five-year financial budgets approved by the directors and discounts them using rates in line with the market and the business in which the units operate. The cash flows beyond the time horizon are extrapolated using a constant growth rate. This growth rate does not exceed the average long-term growth rate for the market in which the cash-generating unit in question operates. The directors consider that any reasonably possible change in the key assumptions on which the recoverable amounts of the cash-generating units are based would not cause the carrying amounts thereof to exceed their recoverable amounts.

		Based on the foregoing, and in accordance with the estimates, projections and measurements available to the Bank’s directors in 2010, the Group recognized impairment losses on goodwill totaling EUR 63 million (2009: EUR 3 million; 2008: EUR 73 million) under Impairment losses on other assets — Goodwill and other intangible assets.

F-109

The changes in Goodwill were as follows:


	Millions of euros
	2010			2009			2008

Balance at beginning of year		22,865			18,836			13,831
Transfer of goodwill from Investments (Note 3)		—			—			8,000
Additions (Note 3)		16			2,300			941
Of which:
Santander Holdings USA, Inc (formerly Sovereign Bancorp)		—			1,601			—
Santander UK (Bradford & Bingley)		—			—			202
Santander UK (Alliance & Leicester)		—			—			554
Santander Consumer USA (formerly Drive)		—			26			42
Santander Cards UK Limited		—			359			—
Real Tokio Marine		—			152			—
GE Money Bank GmbH (Austria)		—			98			—
GE Money Oy (Finland)		—			42			—
Adjustments to initial acquisition price allocation		167			628			(413	)
Of which, transfer to other intangible assets		—			—			(447	)
Impairment losses		(63	)		(3	)		(73	)
Disposals		—			(1,288	)		(3	)
Of which:
Banco Santander Brasil, S.A. (Note 3)		—			(1,286	)		—
Exchange differences and other items		1,637			2,392			(3,447	)

Balance at end of year		24,622			22,865			18,836

The changes in goodwill in 2008 related mostly to the goodwill that arose on the full consolidation of Banco Real (see Note 3.b), to the acquisition of Alliance & Leicester and to the exchange differences arising on the translation to euros, at the closing rates, of the amount of the goodwill expressed in foreign currency, mainly that resulting from the purchases of Santander UK and Banco Real. In accordance with current regulations, these exchange differences were recognized with a charge to the heading Valuation adjustments — Exchange differences in equity and a credit to Goodwill in assets. The change in the balance of this heading is disclosed in the consolidated statement of recognized income and expense.

Also, the changes in 2009 related mainly to the acquisitions made in the year (Sovereign and GE units in Europe — see Note 3), the partial derecognition of the goodwill of Banco Santander Brasil associated with the placement among non-controlling shareholders of 14.47% of its share capital (see Note 3) and the exchange differences arising on the translation to euros, at the closing rates, of the amount of the goodwill expressed in foreign currency, mainly that resulting from the purchases of Santander UK and Banco Real, the trend in the balance reflecting the recovery of these currencies in 2009.

Substantially all the changes in goodwill from December 31, 2009 to December 31, 2010 relate to exchange differences, which, in accordance with current regulations, were recognized with a credit to Valuation adjustments — Exchange differences in equity. The changes in the balance of this item are shown in the consolidated statement of recognized income and expense.

F-110

18.

Intangible assets — Other intangible assets

The detail of Intangible assets — Other intangible assets and of the changes therein in 2010, 2009 and 2008 is as follows:


		Thousands of euros
					Net		Change in					Application of			Exchange
	Estimated	December 31,			additions and		scope of		Amortization			amortization			differences			December 31,
Thousands of euros	useful life	2009			disposals		consolidation		and impairment			and impairment			and other			2010

With indefinite useful life:
Other brand names			40,874			98		—		—			—			3,184			44,156

With finite useful life:
Credit cards (Abbey)	5 years		27,024			—		—		—			(27,024	)		—			—
IT developments	3-7 years		2,941,871			1,338,493		—		—			(356,679	)		313,519			4,237,204
Other			1,696,817			133,415		1,560		—			(61,594	)		128,749			1,898,947
Accumulated amortization			(1,920,500	)		—		—		(1,084,137	)		436,522			(163,950	)		(2,732,065	)
Impairment losses			(7,728	)		—		—		(6,399	)		8,775			(856	)		(6,208	)

			2,778,358			1,472,006		1,560		(1,090,536	)		—			280,646			3,442,034


		Thousands of euros
					Net		Change in						Application of			Exchange
	Estimated	December 31,			additions and		scope of			Amortization			amortization			differences			December 31,
Thousands of euros	useful life	2008			disposals		consolidation			and impairment			and impairment			and other			2009

With indefinite useful life:
Other brand names			41,011			1,388		—			—			—			(1,525	)		40,874

With finite useful life:
Credit cards (Abbey)	5 years		25,197			—		—			—			—			1,827			27,024
IT developments	3 years		2,174,528			856,169		24,910			—			(501,904	)		388,168			2,941,871
Other			885,577			487,153		160,316			—			(35,513	)		199,284			1,696,817
Accumulated amortization			(1,332,187	)		—		(40,774	)		(826,139	)		515,036			(236,436	)		(1,920,500	)
Impairment losses			(7,058	)		—		—			(28,618	)		22,382			5,566			(7,728	)

			1,787,068			1,344,711		144,452			(854,757	)		—			356,884			2,778,358

F-111


		Thousands of euros
					Net		Change in						Application of			Exchange
	Estimated	December 31,			additions and		scope of			Amortization			amortization			differences			December 31,
Thousands of euros	useful life	2007			disposals		consolidation			and impairment			and impairment			and other			2008

With indefinite useful life:
Brand name (Abbey)			429,536			—		—			—			(331,829	)		(97,707	)		—
Other brand names			16,639			—		—			—			—			24,372			41,011

With finite useful life:
Customer deposits (Abbey)	10 years		1,175,428			—		—			—			(903,867	)		(271,561	)		—
Credit cards (Abbey)	5 years		32,727			—		—			—			—			(7,530	)		25,197
IT developments	3 years		1,574,969			726,322		209,873			—			(159,527	)		(177,108	)		2,174,528
Other			233,352			24,118		183,391			—			(11,571	)		456,287			885,577
Accumulated amortization			(1,234,838	)		—		(171,372	)		(655,211	)		482,266			246,968			(1,332,187	)
Impairment losses			(25,479	)		—		—			(911,203	)		924,528			5,096			(7,058	)

			2,202,334			750,440		221,892			(1,566,414	)		—			178,816			1,787,068

At December 31, 2010, 2009 and 2008, the Group reviewed the useful lives of its intangible assets and adjusted the carrying amounts of these assets on the basis of the estimated economic benefits currently expected to be obtained therefrom. As a result of this review, in 2008 the Group recognized under Impairment losses on other assets — Goodwill and other intangible assets impairment losses amounting to EUR 911 million relating substantially in full to intangible assets arising from the acquisition of Abbey in 2004 (see Note 1.h).

19.

Other assets

The detail of Other assets is as follows:


	Thousands of euros
	2010		2009		2008

Transactions in transit		304,591		439,739		204,780
Net pension plan assets (Note 25)		984,231		502,041		510,028
Prepayments and accrued income		2,558,738		2,259,262		1,952,843
Other		3,283,736		2,411,016		2,716,801
Inventories		455,107		518,833		620,774

		7,586,403		6,130,891		6,005,226

F-112

20.

Deposits from central banks and Deposits from credit institutions

The detail, by classification, counterparty, type and currency, of Deposits from central banks and Deposits from credit institutions is as follows:


	Thousands of euros
	2010		2009		2008

Classification:
Financial liabilities held for trading		40,975,603		46,117,206		35,951,711
Of which:
Deposits from central banks		12,605,204		2,985,488		9,109,857
Deposits from credit institutions		28,370,399		43,131,718		26,841,854
Other financial liabilities at fair value through profit or loss		19,600,014		22,847,995		14,130,169
Of which:
Deposits from central banks		336,985		10,103,147		4,396,901
Deposits from credit institutions		19,263,029		12,744,848		9,733,268
Financial liabilities at amortized cost		79,536,568		73,126,386		79,795,490
Of which:
Deposits from central banks		8,644,043		22,345,110		9,211,957
Deposits from credit institutions		70,892,525		50,781,276		70,583,533

		140,112,185		142,091,587		129,877,370

Type:
Reciprocal accounts		423,304		948,049		509,282
Time deposits		57,233,213		78,325,126		82,559,946
Other demand accounts		2,677,990		3,340,932		2,527,834
Repurchase agreements		78,196,555		56,818,092		41,651,446
Central bank credit account drawdowns		1,579,723		2,658,925		2,626,262
Hybrid financial liabilities		1,400		463		2,600

		140,112,185		142,091,587		129,877,370

Currency:
Euro		52,872,178		58,457,951		59,833,384
Pound sterling		25,309,040		34,719,824		27,275,168
US dollar		43,996,327		37,066,057		33,490,478
Other currencies		17,934,640		11,847,756		9,278,340

		140,112,185		142,091,587		129,877,370

Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates.

F-113

21.

Customer deposits

The detail, by classification, geographical area and type, of Customer deposits is as follows:


	Thousands of euros
	2010		2009		2008

Classification:
Financial liabilities held for trading		7,848,954		4,658,372		4,896,065
Other financial liabilities at fair value through profit or loss		27,142,003		14,636,466		9,318,117
Financial liabilities at amortized cost		581,384,862		487,681,399		406,015,268

		616,375,819		506,976,237		420,229,450

Geographical area:
Spain		218,788,099		170,760,231		142,376,596
European Union (excluding Spain)		230,929,334		199,169,106		170,778,310
United States and Puerto Rico		40,854,747		37,851,345		8,440,893
Other OECD countries		997,944		1,101,108		470,721
Latin America		124,333,911		96,804,592		96,103,045
Rest of the world		471,784		1,289,855		2,059,885

		616,375,819		506,976,237		420,229,450

Type:
Demand deposits-
Current accounts		148,066,306		135,895,002		94,773,159
Savings accounts		136,693,907		127,940,647		115,673,794
Other demand deposits		3,430,804		3,570,326		3,035,757
Time deposits-
Fixed-term deposits		275,628,965		192,244,789		143,130,514
Home-purchase savings accounts		230,791		315,867		295,458
Discount deposits		448,432		448,432		11,625,840
Hybrid financial liabilities		4,754,258		5,447,496		8,159,893
Other term deposits		153,812		212,113		290,055
Notice deposits		1,316,203		2,208,116		1,764,954
Repurchase agreements		45,652,341		38,693,449		41,480,026

		616,375,819		506,976,237		420,229,450

Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates.

22.

Marketable debt securities

	a)		*Breakdown*

			The detail, by classification and type, of Marketable debt securities is as follows:


	Thousands of euros
	2010		2009		2008

Classification:
Financial liabilities held for trading		365,265		586,022		3,569,795
Other financial liabilities at fair value through profit or loss		4,277,732		4,886,840		5,191,073
Financial liabilities at amortized cost		188,229,225		206,490,311		227,642,422

		192,872,222		211,963,173		236,403,290

Type:
Bonds and debentures outstanding		185,868,663		183,250,197		194,291,014
Notes and other securities		7,003,559		28,712,976		42,112,276

		192,872,222		211,963,173		236,403,290

F-114

The changes in Bonds and debentures outstanding were as follows:

Millions of euros

2010

2009

2008

Balance at beginning of year

183,250

194,291

200,557

Net inclusion of entities in the Group

831

10,760

20,333

Of which:

Acquisition of portfolios of HSBC and Citi by Santander Consumer USA

831

—

Santander Holdings USA, Inc. (Sovereign Bancorp, Inc.)

—

10,759

—

Alliance & Leicester Group

—

18,676

Issues

116,239

60,999

76,786

Of which:

Santander UK Group (formerly Abbey) (*)

Bonds in pounds sterling

51,052

4,945

21,667

Bonds in other currencies

24,221

33,257

29,599

Santander International Debt, S.A. Sole-Shareholder Company

Bonds — floating/fixed rate

10,012

2,928

16,007

Banco Santander Brasil S.A.

Real estate letters of credit

3,218

2,311

663

Bonds

3,984

556

Agricultural letters of credit

410

458

—

Banesto

Bonds

5,979

4,556

3,818

Mortgage-backed bonds — fixed rate

565

2,807

100

Santander Consumer USA Inc.

Asset-backed securities

4,642

—

Banco Santander, S.A.

Bonds

2,110

—

Mortgage-backed bonds — fixed rate

2,030

1,500

—

Santander US Debt, S.A. Sole-Shareholder Company

Debentures — floating rate

3,068

1,032

—

Banco Santander — Chile

Bonds

2,135

859

—

Banco Santander Totta, S.A.

Mortgage debentures

950

1,000

Bonds

342

1,520

1,496

Totta (Ireland), PLC

Bonds — floating rate

112

3,380

849

Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander

Bonds

164

—

Redemptions

(112,730

)

(75,614

)

(93,872

)

Of which:

Santander UK Group (*)

(70,071

)

(48,277

)

(65,039

)

Santander International Debt, S.A. Sole-Shareholder Company

(11,576

)

(2,672

)

(6,239

)

Santander Holdings USA, Inc.

(9,652

)

—

Banesto

(7,134

)

(4,971

)

(7,407

)

Totta (Ireland), PLC

(3,380

)

(849

)

(1,189

)

Banco Santander S.A. (Brazil)

(3,116

)

(2,278

)

(555

)

Banco Santander, S.A.

(1,965

)

(1,545

)

(1,783

)

Hipototta No. 6 Limited

(1,818

)

—

Santander US Debt, S.A. Sole-Shareholder Company

(1,562

)

(13,156

)

(4,178

)

Banco Santander Totta, S.A.

(1,383

)

(1,430

)

(2,637

)

Santander Consumer USA

(519

)

(155

)

(960

)

Banco Santander — Chile

(228

)

—

Santander Consumer Bank S.p.A.

(26

)

—

(217

)

Santander Consumer Bank Aktiengesellschaft

—

(149

)

(203

)

Santander Central Hispano International Limited

—

(46

)

(979

)

Fondo de Titulización de Activos Santander Empresas 1

—

(468

)

Fondo de Titulización de Activos Santander Empresas 2

—

(691

)

Fondo de Titulización de Activos Santander Empresas 3

—

(883

)

Exchange differences

2,098

1,459

(5,806

)

Repurchases and other changes

(3,819

)

(8,645

)

(3,707

)

Balance at end of year

185,869

183,250

194,291


(*)		Including Alliance & Leicester.

Notes and other securities

These notes were issued basically by Abbey National North America LLC, Santander UK, Sovereign Bancorp, Inc., Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander, Banco Santander, S.A., Banco Santander Puerto Rico, Banesto, S.A., Laparanza, S.A., Santander Consumer Finance, S.A., Santander Commercial Paper, S.A., Sole-Shareholder Company and Fondo de Titulización de Activos Santander 2.

F-116

Guarantees

The detail of liabilities and contingent liabilities secured by financial assets is as follows:

Millions of euros

2010

2009

2008

Asset-backed securities

39,279

37,945

50,153

Of which, mortgage-backed securities

28,059

27,481

34,409

Other mortgage securities

65,187

53,994

47,758

Of which: mortgage-backed bonds

41,960

42,204

37,726

104,466

91,939

97,911

The mortgage-backed securities and other mortgage securities are secured by mortgage loans with average maturities of more than ten years. The main terms and conditions of these loans are listed below:

Transactions securing mortgage-backed securities:

•

First mortgage for acquisition and/or refurbishment of principal or second residence, which at the date of securitization did not have any amounts more than 30 days past due. For these purposes, financing granted to property developers is excluded.

•

Appraisal conducted by specialist valuer.

•

The amount of the loan does not exceed 80% of the lower of the appraised value and the purchase price, unless additional guarantees are provided (borrower’s payment capacity, other collateral, guarantors of solvency or mortgage credit insurance), in which case this limit may be extended up to a maximum of 120%.

•

Each of the mortgaged properties must have at least one liability insurance policy in force. The capital insured must not be lower than either the appraised value (excluding the land) or the amount of the loan.

With respect to issues of mortgage-backed bonds (cédulas hipotecarias), in order to calculate the amount of the qualifying assets, the following transactions are excluded from the total base of the unsecuritized mortgage portfolio:

	•		Transactions classified as non-performing, at pre-action stage and at procedural stage.

	•		Transactions without appraisal by a specialist valuer.

•

Transactions exceeding 80% of the appraised value in residential financing and 60% in the case of other assets.

	•		Second mortgages or mortgages with insufficient collateral.

	•		Transactions without insurance or with insufficient insurance.

The other securitizations, including asset-backed securities and notes issued by special-purpose vehicles (SPVs), are secured by:

•

Mortgage loans to individuals to finance the acquisition and refurbishment of homes with an average maturity of more than ten years.

•

Personal consumer finance loans with no specific guarantee and unsecured loans with an average maturity of five years.

•

Loans to SMEs (non-financial small and medium-sized enterprises) secured by State guarantees, and loans to companies (micro companies, SMEs, companies and large companies) secured by property mortgages, the borrower’s personal guarantee, guarantees and other collateral other than property mortgages, with an average maturity of seven years.

F-117

•

Mortgage and non-mortgage loans to finance municipalities, autonomous communities and subsidiaries with an average maturity of more than ten years.

•

Asset-backed securities issued by various European special-purpose vehicles backed by German and Italian loans for the purchase of vehicles and Italian personal loans, with an average maturity of eight years.

•

Commercial credit of Banco Santander (ordinary invoice discounting, occasional discounting and advances to customers on legitimate receivables) with an average maturity of 45 days.

The fair value of the guarantees received by the Group (financial and non-financial assets) which the Group is authorized to sell or pledge even if the owner of the guarantee has not defaulted is scantly material taking into account the Group’s financial statements as a whole.

Spanish mortgage-market issues

The members of the board of directors hereby state that the Group’s Spanish entities to which the regulations mentioned below apply have specific policies and procedures in place to cover all activities relating to the mortgage-market issues launched by it, which guarantee strict compliance with the mortgage market regulations applicable to these activities as provided for in Royal Decree 716/2009, of April 24, implementing certain provisions of Mortgage Market Law 2/1981, of March 25, and, by application thereof, in Bank of Spain Circular 7/2010, of November 30, and other financial and mortgage system regulations. Also, financial management defines the Group entities’ funding strategy.

The risk policies applicable to mortgage market transactions envisage maximum loan-to-value (LTV) ratios, and specific policies are also in place adapted to each mortgage product, which occasionally require the application of stricter limits.

The Group’s general policies in this respect establish that an analysis must be performed of the repayment capacity of each potential customer. This analysis must determine whether each customer’s income is sufficient to meet the repayments of the loan requested. In addition, the analysis of each customer must include a conclusion on the stability over time of the customer’s income considered with respect to the life of the loan. The indicator used to measure the repayment capacity (effort ratio) of each potential customer takes into account mainly the relationship between the potential debt and the income generated, considering on the one hand the monthly repayments of the loan requested and other transactions and, on the other, the monthly salary income and other duly supported income.

The Group entities have specialized document comparison procedures and tools for verifying customer information and solvency (see Note 54).

The Group entities’ procedures envisage that each mortgage originated in the mortgage market must be individually valued by an appraisal company not related to the Group.

Mortgage Market Law 41/2007, Article 5, establishes that any appraisal company approved by the Bank of Spain may issue valid appraisal reports. However, as permitted by this same article, the Group entities perform a series of checks and select, from among these companies, a small group with which it enters into cooperation agreements with special conditions and automated control mechanisms. The Group’s internal regulations specify, in detail, each of the internally approved companies, as well as the approval requirements and procedures and the controls established to uphold them. In this connection, the regulations establish the functions of an appraisal company committee on which the various areas of the Group related to these companies are represented. The aim of the committee is to regulate and adapt the internal regulations and the activities of the appraisal companies to the current market and business situation.

F-118

Basically, the companies wishing to cooperate with the Group must have a significant level of activity in the mortgage market in the area in which they operate, they must pass a preliminary screening process based on criteria of independence, technical capacity and solvency -in order to ascertain the continuity of their business- and, lastly, they must pass a series of tests prior to obtaining definitive approval.

In order to comply with the legislation, any appraisal provided by the customer is reviewed, irrespective of which appraisal company issues it, to verify whether the requirements, procedures and methods used to prepare it are formally adapted to the valued asset pursuant to current legislation and that the values reported are customary in the market.

Following is a detail of the information required by Bank of Spain Circular 7/2010, of November 30, pursuant to the aforementioned Royal Decree 716/2009, of April 24:


	Thousands of euros
	12/31/10
Carrying amount of the mortgage loans and credits receivable		108,173,754
Of which:
Loans eligible to cover issues of mortgage-backed securities		58,811,432
Transfers of assets retained on balance sheet: mortgage-backed certificates and other securitized mortgage assets		10,968,834

Mortgage-backed bonds (“cédulas hipotecarias”)

The mortgage-backed bonds issued by Group entities are securities the principal and interest of which are specifically secured by mortgages, there being no need for registration in the Property Register and without prejudice to the issuer’s unlimited liability.

The mortgage-backed bonds include the holder’s financial claim on the issuer, secured as indicated in the preceding paragraph, and may be enforced to claim payment from the issuer after maturity. The holders of these securities have the status of special preferential creditors vis-à-vis all other creditors (established in Article 1923.3 of the Spanish Civil Code) in relation to all the mortgage loans and credits registered in the issuer’s favor and, where appropriate, in relation to the cash flows generated by the derivative financial instruments associated with the issues.

In the event of insolvency, the holders of these bonds will enjoy the special privilege established in Article 90.1.1 of Insolvency Law 22/2003, of July 9. Without prejudice to the foregoing, in accordance with Article 84.2.7 of the Insolvency Law, during the insolvency proceedings, the payments relating to the repayment of the principal and interest of the bonds issued and outstanding at the date of the insolvency filing will be settled up to the amount of the income received by the insolvent party from the mortgage loans and credits and, where appropriate, from the replacement assets backing the bonds and from the cash flows generated by the financial instruments associated with the issues (Final Provision 19 of the Insolvency Law).

If, due to a timing mismatch, the income received by the insolvent party is insufficient to meet the payments described in the preceding paragraph, the insolvency managers must settle them by realizing the replacement assets set aside to cover the issue and, if this is not sufficient, they must obtain financing to meet the mandated payments to the holders of the mortgage-backed bonds, and the finance provider must be subrogated to the position of the bond-holders.

In the event that the measure indicated in Article 155.3 of the Insolvency Law were to be adopted, the payments to all holders of the mortgage-backed bonds issued would be made on a pro-rata basis, irrespective of the issue dates of the bonds.

The outstanding mortgage-backed bonds issued by the Group totalled EUR 41,960 million at December 31, 2010 (all of which were denominated in euros), of which EUR 23,509 million were issued by Banco Santander, S.A.; EUR 17,274 million were issued by Banco Español de Crédito, S.A. and EUR 1,177 million were issued by Santander Consumer Finance, S.A. The issues outstanding at December 31, 2010 and 2009 are detailed in the separate financial statements of each of these companies.

F-119

Changes

The changes in Subordinated liabilities were as follows:


	Millions of euros
	2010			2009			2008

Balance at beginning of year		36,805			38,873			36,193
Net inclusion of entities in the Group		—			1,598			2,776
Alliance & Leicester Group		—			—			1,648
Banco AMRO Real S.A.		—			—			1,128
Santander Holdings USA, Inc.		—			1,598			—
Issues		287			6,874			312
Of which:
Banco Santander- Chile		206			48			—
Banco Santander, S.A.		73			9			—
Santander Finance Capital, S.A., Sole-Shareholder Company		—			2,463			—
Santander Finance Preferred, S.A., Sole-Shareholder Company		—			1,576			—
Santander Issuances, S.A., Sole-Shareholder Company		—			1,544			—
Santander International Preferred, S.A., Sole-Shareholder Company		—			690			—
Banesto, S.A.		—			497			—
Redemptions		(7,728	)		(9,316	)		(1,315	)
Of which:
Santander Issuances, S.A., Sole-Shareholder Company		(1,852	)		(500	)		—
Santander Central Hispano Issuances Limited		(1,484	)		(1,027	)		(153	)
Santander UK Plc ()*		(1,453	)		(3,468	)		(409	)
Santander Finance Capital, S.A., Sole-Shareholder Company		(1,000	)		(2,280	)		—
Santander Perpetual, S.A., Sole-Shareholder Company		(848	)		(588	)		—
Banco Santander (Brasil) S.A.		(347	)		(20	)		—
Banco Santander Totta, S.A.		(254	)		(25	)		—
Santander Holdings USA, Inc.		(148	)		—			—
Banesto, S.A.		(17	)		(131	)		(500	)
Santander Finance Preferred, S.A., Sole-Shareholder Company		—			(1,174	)		—

Exchange differences		1,161			708			(2,066	)
Other changes		(51	)		(1,932	)		2,973

Balance at end of year		30,474			36,805			38,873


(*)		Including Alliance & Leicester.

Other disclosures

This item includes the preference shares (participaciones preferentes) and other financial instruments issued by the consolidated companies which, although equity for legal purposes, do not meet the requirements for classification as equity (preference shares).

The preference shares do not carry any voting rights and are non-cumulative. They were subscribed to by non-Group third parties and, except for the shares of Santander UK referred to below, are redeemable at the discretion of the issuer, based on the terms and conditions of each issue.

For the purposes of payment priority, preference shares (participaciones preferentes) are junior to all general creditors and to subordinated deposits. The remuneration of these securities, which have no voting rights, is conditional upon the obtainment of sufficient distributable profit and upon the limits imposed by Spanish banking regulations on equity.

The other issues are subordinated and, therefore, rank junior to all general creditors of the issuers. The issues launched by Santander Central Hispano Issuances Limited, Santander Central Hispano Financial Services Limited, Santander Issuances, S.A. (Sole-Shareholder Company), Santander Perpetual, S.A. (Sole-Shareholder Company), Santander Finance Capital, S.A. (Sole-Shareholder Company), Santander International Preferred, S.A. (Sole-Shareholder Company) and Santander Finance Preferred S.A. (Sole-Shareholder Company) are guaranteed by the Bank or by restricted deposits arranged by the Bank for this purpose.

F-121

Except for those described in Note 34.a, at December 31, 2010 none of these issues was convertible into Bank shares or granted privileges or rights which, in certain circumstances, might make them convertible into shares.

At December 31, 2010, Santander UK plc had a GBP 200 million subordinated debt issue which is convertible, at Santander UK plc’s option, into preference shares of Santander UK plc, at a price of GBP 1 per share. Also, in 2010 the Group launched an issue of bonds mandatorily exchangeable for shares of Banco Santander Brasil (see Note 34).

The accrued interest on the subordinated liabilities amounted to EUR 2,230 million in 2010 (December 31, 2009: EUR 2,354 million; December 31, 2008: EUR 2,415 million) (see Note 39).

24.

Other financial liabilities

The detail of Other financial liabilities is as follows:


	Thousands of euros
	2010		2009		2008

Trade payables		2,079,988		1,902,249		2,282,759
Clearing houses		1,485,159		734,873		761,534
Tax collection accounts:
Tax payables		2,106,448		1,915,373		2,066,685
Factoring accounts payable		415,545		448,985		283,478
Unsettled financial transactions		3,182,829		2,753,781		3,628,473
Other financial liabilities		10,073,424		11,847,307		8,658,240
Of which: recognized in financial liabilities held for trading		—		302,520		—

		19,343,393		19,602,568		17,681,169

Note 51 contains a detail of the residual maturity periods of other financial assets and liabilities at each year-end.

25.

Provisions

Breakdown

The detail of Provisions is as follows:


	Thousands of euros
	2010		2009		2008

Provisions for pensions and similar obligations		9,519,093		10,628,684		11,198,117
Provisions for taxes and other legal contingencies		3,670,184		3,283,339		2,363,706
Provisions for contingent liabilities and commitments (Note 2):		1,030,244		641,620		678,584
Of which: due to country risk		18,796		18,418		56,254
Other provisions		1,440,332		2,979,096		3,495,852

Provisions		15,659,853		17,532,739		17,736,259

F-122

Changes

The changes in Provisions were as follows:


	Millions of euros
	2010											2009												2008
				Contingent											Contingent												Contingent
				liabilities and		Other									liabilities and			Other									liabilities and			Other
	Pensions			commitments		provisions			Total			Pensions			commitments			provisions			Total			Pensions			commitments			provisions			Total

Balances at beginning of year		10,629			642		6,262			17,533			11,198			679			5,860			17,737			11,820			636			4,115			16,571
Net inclusion of entities in the Group		—			4		8			12			44			125			(26	)		143			175			73			2,816			3,064
Additions charged to income:
Interest expense and similar charges (Note 39)		481			—		—			481			482			—			—			482			454			—			—			454
Personnel expenses (Note 47)		146			—		—			146			176			—			—			176			184			—			—			184
Period provisions		188			69		876			1,133			339			46			1,407			1,792			598			(3	)		1,045			1,640
Other additions arising from insurance contracts linked to pensions		(29	)		—		—			(29	)		(30	)		—			—			(30	)		(17	)		—			—			(17	)
Payments to pensioners and pre-retirees with a charge to internal provisions		(1,258	)		—		—			(1,258	)		(1,191	)		—			—			(1,191	)		(1,086	)		—			—			(1,086	)
Insurance premiums paid		(3	)		—		—			(3	)		(1	)		—			—			(1	)		(8	)		—			—			(8	)
Payments to external funds		(1,205	)		—		—			(1,205	)		(594	)		—			—			(594	)		(563	)		—			—			(563	)
Amount used		—			—		(3,364	)		(3,364	)		—			—			(1,412	)		(1,412	)		—			—			(1,523	)		(1,523	)
Transfers, exchange differences and other changes		570			315		1,329			2,214			206			(208	)		433			431			(359	)		(27	)		(594	)		(980	)

Balances at end of year		9,519			1,030		5,111			15,660			10,629			642			6,262			17,533			11,198			679			5,860			17,736

F-123

Provisions for pensions and similar obligations

The detail of Provisions for pensions and similar obligations is as follows:


	Millions of euros
	2010		2009		2008

Provisions for post-employment plans — Spanish entities		5,247		5,443		5,596
Of which: defined benefit		5,244		5,439		5,593
Provisions for other similar obligations — Spanish entities		3,273		3,851		4,166
Of which: pre-retirements		3,262		3,842		4,158
Provisions for post-employment plans — Santander UK		28		496		744
Provisions for post-employment plans and other similar obligations — Other foreign subsidiaries		971		839		692
Of which: defined benefit		966		829		688

Provisions for pensions and similar obligations		9,519		10,629		11,198

i. Spanish entities — Post-employment plans and other similar obligations

At each year-end, the consolidated Spanish entities had post-employment benefit obligations under defined benefit plans. On July 25, 2006, the Bank entered into an agreement with the employee representatives to promote a defined contribution plan aimed at all current personnel. Subsequently, at its meeting on December 17, 2007, the Bank’s board of directors approved the implementation of a defined contribution retirement plan for executives of the Bank. In 2008, in accordance with the aforementioned plan, an extraordinary contribution totaling EUR 111 million was made for past service. Lastly, in various years some of the consolidated entities offered certain of their employees the possibility of taking pre-retirement and, therefore, provisions are recognized each year for the obligations to employees taking pre-retirement -in terms of salaries and other employee benefit costs- from the date of their pre-retirement to the date of effective retirement.

At December 31, 2010, 2009 and 2008, the Spanish entities had post-employment benefit obligations under defined contribution and defined benefit plans. The expenses incurred in respect of contributions to defined contribution plans amounted to EUR 47 million in 2010 (2009: EUR 44 million; 2008: EUR 40 million).

The amount of the defined benefit obligations was determined on the basis of the work performed by independent actuaries using the following actuarial techniques:

Valuation method: projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.

Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows:

Post-employment plans

Other similar obligations

2010

2009

2008

2010

2009

2008

Annual discount rate

4.0%

Mortality tables

GRM/F-95

(PERM/F-2000

in the case of

Banesto)

Cumulative annual CPI growth

1.5%

Annual salary increase rate

2.50% (2.9% in the

case of Banesto)

n/a

Annual social security pension increase rate

1.5%

n/a

Annual benefit increase rate

n/a

0% to 1.5%

F-124

The discount rate used is that required by Spanish legislation for measuring similar obligations, which is published annually by the Directorate-General of Insurance (Resolution of January 4, 2010). The maximum rate to be used in 2010 was set at 4.33%. This figure relates to 100% of the average interest rates of Government bonds for the last quarter of the year prior to that in which the rate is applicable.

The estimated retirement age of each employee is the first at which the employee is entitled to retire or the agreed-upon age, as appropriate.

The fair value of insurance contracts was determined as the present value of the related payment obligations, taking into account the following assumptions:


	Post-employment plans									Other similar obligations
	2010			2009			2008			2010			2009			2008

Expected rate of return on plan assets		4.0	%		4.0	%		4.0	%		—			—			—
Expected rate of return on reimbursement rights		4.0	%		4.0	%		4.0	%		4.0	%		4.0	%		4.0	%

The funding status of the defined benefit obligations in 2010 and the four preceding years is as follows:


	Millions of euros
	Post-employment plans										Other similar obligations
	2010		2009		2008		2007		2006		2010		2009		2008		2007		2006

Present value of the obligations:
To current employees		1,240		1,200		1,273		1,259		1,215		—		—		—		—		—
Vested obligations to retired employees		4,471		4,708		4,828		4,876		4,958		—		—		—		—		—
To pre-retirees		—		—		—		—		—		3,262		3,842		4,158		3,950		4,481
Long-service bonuses and other obligations		—		—		—		—		—		8		9		8		50		46
Other		181		183		181		174		164		3		—		—		1		—

		5,892		6,091		6,282		6,309		6,337		3,273		3,851		4,166		4,001		4,527
Less-
Fair value of plan assets		183		184		193		192		203		—		—		—		—		—
Unrecognized actuarial (gains)/losses		457		462		489		487		482		—		—		—		—		—
Unrecognized past service cost		8		6		7		4		5		—		—		—		—		—

Provisions — Provisions for pensions		5,244		5,439		5,593		5,626		5,647		3,273		3,851		4,166		4,001		4,527

Of which:
Internal provisions for pensions		3,025		3,086		3,153		3,114		3,065		3,272		3,848		4,159		3,987		4,504
Insurance contracts linked to pensions (Note 14)		2,219		2,353		2,440		2,512		2,582		1		3		7		14		23

The amounts recognized in the consolidated income statement in relation to the aforementioned defined benefit obligations are as follows:


	Millions of euros
	Post-employment plans									Other similar obligations
	2010			2009			2008			2010			2009		2008

Current service cost		52			55			56			1			1		5
Interest cost		215			226			240			139			153		145
Expected return on plan assets		(7	)		(7	)		(8	)		—			—		—
Expected return on insurance contracts linked to pensions		(90	)		(95	)		(95	)		—			—		—
Extraordinary charges (credits)-
Actuarial (gains)/losses recognized in the year		3			10			6			(14	)		38		4
Past service cost		40			29			63			28			—		—
Pre-retirement cost		1			(19	)		(23	)		10			257		587
Other		(21	)		(51	)		(20	)		(10	)		—		(53	)

Total		193			148			219			154			449		688

F-125

The changes in the present value of the accrued defined benefit obligations were as follows:


	Millions of euros
	Post-employment plans									Other similar obligations
	2010			2009			2008			2010			2009			2008

Present value of the obligations at beginning of year		6,091			6,282			6,309			3,851			4,166			4,001
Current service cost		52			55			56			1			1			5
Interest cost		215			226			240			139			153			145
Pre-retirement cost		1			(19	)		(23	)		10			257			587
Effect of curtailment/settlement		(21	)		(51	)		(21	)		(10	)		—			(54	)
Benefits paid		(465	)		(383	)		(334	)		(732	)		(765	)		(726	)
Past service cost		42			29			66			28			—			—
Actuarial (gains)/losses		(32	)		(52	)		(11	)		(14	)		38			4
Other		9			4			—			—			1			204

Present value of the obligations at end of year		5,892			6,091			6,282			3,273			3,851			4,166

The changes in the fair value of plan assets and of insurance contracts linked to pensions were as follows:

Plan assets


	Millions of euros
	Post-employment plans
	2010			2009			2008

Fair value of plan assets at beginning of year		184			193			192
Expected return on plan assets		7			7			8
Actuarial gains/(losses)		(1	)		(4	)		(2	)
Contributions		3			(1	)		8
Benefits paid		(10	)		(11	)		(13	)

Fair value of plan assets at end of year		183			184			193

Insurance contracts linked to pensions


	Millions of euros
	Post-employment plans									Other similar obligations
	2010			2009			2008			2010			2009			2008

Fair value of insurance contracts linked to pensions at beginning of year		2,353			2,440			2,512			3			7			14
Expected return on insurance contracts (Note 38)		90			95			95			—			—			—
Actuarial gains/(losses)		(29	)		(31	)		(17	)		—			—			—
Premiums paid		(39	)		7			11			—			—			—
Benefits paid		(156	)		(158	)		(161	)		(2	)		(4	)		(7	)

Fair value of insurance contracts linked to pensions at end of year		2,219			2,353			2,440			1			3			7

In 2011 the Group expects to make contributions in Spain to fund its defined benefit pension obligations for amounts similar to those made in 2010.

The plan assets and the insurance contracts linked to pensions are instrumented through insurance policies.

F-126

The following table shows the estimated benefits payable at December 31, 2010 for the next ten years:


	Millions
	of euros

2011		1,063
2012		1,006
2013		907
2014		837
2015		749
2016 to 2020		2,545

		7,107

ii. United Kingdom

At the end of each of the last three years, the businesses in the United Kingdom had post-employment benefit obligations under defined contribution and defined benefit plans. The expenses incurred in respect of contributions to defined contribution plans amounted to EUR 55 million in 2010 (2009: EUR 22 million; 2008: EUR 10 million).

The amount of the defined benefit obligations was determined on the basis of the work performed by independent actuaries using the following actuarial techniques:

Valuation method: projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.

Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows:


	2010		2009		2008

Annual discount rate		5.45%		5.75%		6.40%
Mortality tables	103 S1 Light TMC		PX92MC C2009		PX92MC C2008
Cumulative annual CPI growth		3.5%		3.4%		3.0%
Annual salary increase rate		3.5%		3.4%		3.5%
Annual pension increase rate		3.4%		3.3%		3.0%

The funding status of the defined benefit obligations in 2010 and the four preceding years is as follows:


	Millions of euros
	2010			2009			2008			2007		2006

Present value of the obligations		7,824			7,116			5,445			6,248		6,350

Less-
Fair value of plan assets		7,617			5,910			4,591			4,913		4,810
Unrecognized actuarial (gains)/losses		767			787			202			60		(102	)

Provisions — Provisions for pensions		(560	)		419			652			1,275		1,642


Of which:
Internal provisions for pensions		28			496			744			1,275		1,642
Net assets for pensions		(588	)		(77	)		(92	)		—		—

F-127

The amounts recognized in the consolidated income statement in relation to the aforementioned defined benefit obligations are as follows:


	Millions of euros
	2010			2009			2008

Current service cost		43			72			69
Interest cost		416			367			331
Expected return on plan assets		(370	)		(320	)		(298	)
Extraordinary charges (credits):
Actuarial (gains)/losses recognized in the year		22			—			(1	)
Past service cost		—			(1	)		—

Total		111			118			101

The changes in the present value of the accrued defined benefit obligations were as follows:


	Millions of euros
	2010			2009			2008

Present value of the obligations at beginning of year		7,116			5,445			6,248
Net inclusion of entities in the Group		—			—			1,252
Current service cost		43			72			69
Interest cost		416			367			331
Past service cost		—			(1	)		—
Benefits paid		(241	)		(261	)		(199	)
Actuarial (gains)/losses		244			1,050			(802	)
Exchange differences and other items		246			444			(1,454	)

Present value of the obligations at end of year		7,824			7,116			5,445

The net inclusion of entities in the Group in 2008 relates mainly to Alliance & Leicester.

The changes in the fair value of the plan assets were as follows:


	Millions of euros
	2010			2009			2008

Fair value of plan assets at beginning of year		5,910			4,591			4,913
Net inclusion of entities in the Group		—			—			1,335
Expected return on plan assets		370			320			298
Actuarial gains/(losses)		273			364			(954	)
Contributions		1,121			564			413
Benefits paid		(241	)		(261	)		(199	)
Exchange differences		184			332			(1,215	)

Fair value of plan assets at end of year		7,617			5,910			4,591

The net inclusion of entities in the Group in 2008 relates mainly to Alliance & Leicester.

In 2011 the Group expects to make contributions to fund these obligations for amounts similar to those made in 2010.

F-128

The main categories of plan assets as a percentage of total plan assets are as follows:


	2010			2009			2008

Equity instruments		34	%		39	%		41	%
Debt instruments		58	%		54	%		56	%
Properties		1	%		1	%		2	%
Other		7	%		6	%		1	%

The expected return on plan assets was determined on the basis of the market expectations for returns over the duration of the related obligations.

The following table shows the estimated benefits payable at December 31, 2010 for the next ten years:


	Millions
	of euros

2011		254
2012		271
2013		289
2014		309
2015		330
2016 to 2020		2,027

		3,480

iii. Other foreign subsidiaries

Certain of the consolidated foreign entities have acquired commitments to their employees similar to post-employment benefits.

At December 31, 2010, 2009 and 2008, these entities had post-employment benefit obligations under defined contribution and defined benefit plans. The expenses incurred in respect of contributions to defined contribution plans amounted to EUR 49 million in 2010 (2009: EUR 48 million; 2008: EUR 28 million).

The actuarial assumptions used by these entities (discount rates, mortality tables and cumulative annual CPI growth) are consistent with the economic and social conditions prevailing in the countries in which they are located.

The funding status of the obligations similar to post-employment benefits and other long-term benefits in 2010 and the four preceding years is as follows:


	Millions of euros
	2010			2009			2008			2007			2006

Present value of the obligations		11,062			9,078			6,735			7,264			6,198

Less-
Fair value of plan assets		10,176			8,497			6,307			6,725			3,917
Unrecognized actuarial (gains)/losses		667			632			386			134			517
Unrecognized past service cost		—			3			—			—			—

Provisions — Provisions for pensions		219			(54	)		42			405			1,764


Of which:
Internal provisions for pensions		966			829			688			821			2,198
Net assets for pensions		(396	)		(425	)		(418	)		(239	)		(224	)
Unrecognized net assets for pensions		(351	)		(458	)		(228	)		(177	)		(210	)

F-129

In January 2007 Banco do Estado de São Paulo, S.A.- Banespa (which merged with Banco Santander Banespa, S.A. on August 31, 2006) externalized a portion of the pension obligations to employees for which it still recognized an internal fund and for this purpose arranged an external plan or fund managed by Banesprev. As a result of this externalization, the related assets and liabilities were transferred to Banesprev, and Provisions — Provisions for pensions and similar obligations at December 31, 2007 included the present value of the aforementioned obligations, net of the fair value of the related plan assets and the net unrecognized cumulative actuarial gains and/or losses.

The amounts recognized in the consolidated income statement in relation to these obligations are as follows:


	Millions of euros
	2010			2009			2008

Current service cost		50			49			54
Interest cost		939			736			670
Expected return on plan assets		(851	)		(672	)		(627	)
Extraordinary charges (credits):
Actuarial (gains)/losses recognized in the year		83			73			31
Pre-retirement cost		31			9			5
Other		11			(10	)		(2	)

Total		263			185			131

The changes in the present value of the accrued obligations were as follows:


	Millions of euros
	2010			2009			2008

Present value of the obligations at beginning of year		9,078			6,735			7,264
Net inclusion of entities in the Group		—			68			673
Current service cost		50			49			54
Interest cost		939			736			670
Pre-retirement cost		31			9			5
Effect of curtailment/settlement		(8	)		(209	)		(2	)
Benefits paid		(717	)		(587	)		(535	)
Past service cost		17			3			—
Actuarial (gains)/losses		585			830			(10	)
Exchange differences and other items		1,087			1,444			(1,384	)

Present value of the obligations at end of year		11,062			9,078			6,735

The net inclusion of entities in the Group in 2008 relates mainly to Banco Real.

The changes in the fair value of the plan assets were as follows:


	Millions of euros
	2010			2009			2008

Fair value of plan assets at beginning of year		8,497			6,307			6,725
Net inclusion of entities in the Group		—			49			618
Expected return on plan assets		851			672			627
Actuarial gains/(losses)		351			449			(351	)
Contributions		130			158			285
Benefits paid		(646	)		(533	)		(495	)
Exchange differences and other items		993			1,395			(1,102	)

Fair value of plan assets at end of year		10,176			8,497			6,307

F-130

The net inclusion of entities in the Group in 2008 relates mainly to Banco Real.

In 2011 the Group expects to make contributions to fund these obligations for amounts similar to those made in 2010.

The main categories of plan assets as a percentage of total plan assets are as follows:


	2010			2009			2008

Equity instruments		9	%		12	%		12	%
Debt instruments		86	%		83	%		83	%
Properties		1	%		1	%		2	%
Other		4	%		4	%		3	%

The expected return on plan assets was determined on the basis of the market expectations for returns over the duration of the related obligations.

The following table shows the estimated benefits payable at December 31, 2010 for the next ten years:


	Millions
	of euros

2011		736
2012		768
2013		800
2014		834
2015		869
2016 to 2020		5,150

		9,157

Provisions for taxes and other legal contingencies and Other provisions

The balances of Provisions — Provisions for taxes and other legal contingencies and Provisions — Other provisions, which include, inter alia, provisions for restructuring costs and tax-related and non-tax-related proceedings, were estimated using prudent calculation procedures in keeping with the uncertainty inherent to the obligations covered. The definitive date of the outflow of resources embodying economic benefits for the Group depends on each obligation. In certain cases, these obligations have no fixed settlement period and, in other cases, are based on the legal proceedings in progress.

The detail of Provisions for taxes and other legal contingencies and Other provisions is as follows:


	Millions of euros
	2010		2009		2008

Recognized by Spanish companies		840		828		1,061
Recognized by other EU companies		536		537		721
Recognized by other companies		3,735		4,897		4,078
Of which:
Brazil		3,664		3,428		2,920

		5,111		6,262		5,860

F-131

Litigation

i. Tax-related proceedings

At December 31, 2010, the main tax-related proceedings concerning the Group were as follows:

•

“Mandados de Segurança” filed by Banco Santander Brasil, S.A. and certain Group companies in Brazil challenging the increase in the rate of Brazilian social contribution tax on net income from 9% to 15% stipulated by Interim Measure 413/2008, ratified by Law 11,727/2008.

•

“Mandados de Segurança” filed by certain Group companies in Brazil claiming their right to pay the Brazilian social contribution tax on net income at a rate of 8% and 10% from 1994 to 1998.

•

The “Mandados de Segurança” filed by Banco Santander, S.A. and other Group entities claiming their right to pay the Brazilian PIS and COFINS social contributions only on the income from the provision of services. In the case of Banco Santander, S.A., the “Mandado de Segurança” was declared unwarranted and an appeal was filed at the Federal Regional Court. In September 2007 the Federal Regional Court found in favor of Banco Santander, S.A., but the Brazilian authorities appealed against the judgment at the Federal Supreme Court. In the case of Banco ABN AMRO Real, S.A., in March 2007 the court found in its favor, but the Brazilian authorities appealed against the judgment at the Federal Regional Court, which handed down a decision partly upholding the appeal in September 2009. Banco ABN AMRO Real, S.A. filed an appeal at the Federal Supreme Court.

•

Real Leasing, S.A., Arrendamiento Mercantil and Banco ABN AMRO Real, S.A. have filed various administrative and legal claims in connection with the deductibility of the provision for doubtful debts for 1995.

•

Banco Santander Brasil, S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against various municipalities that demand payment of the Service Tax on certain items of income from transactions not classified as provisions of services.

•

In addition, Banco Santander Brasil, S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against the tax authorities in connection with the social security tax on certain items which are not considered to be employee remuneration.

•

In November 2009 Banco Santander Brasil, S.A. and certain of its subsidiaries availed themselves of the program for the deferral and payment in cash of tax and Social Security debts established in Law 11941/2009. The main processes included in this program, which were reported in prior years, refer to litigation related to (i) the right to consider the social contribution tax on net income as deductible in the calculation of Brazilian legal entities income tax, (ii) the right to pay the Brazilian social contribution tax on net income at a rate of 8%, and (iii) the deductibility for income tax purposes of the depreciation expense in the same period as that in which lease income is recognized in finance lease companies. The participation in this program entails payment of the disputed amounts and the discontinuance of the related court proceedings.

•

In December 2008, the Brazilian tax authorities issued an infringement notice against Banco Santander Brasil, S.A. in relation to income tax (IRPJ and CSL) for 2002 to 2004. The tax authorities took the view that Banco Santander Brasil, S.A. did not meet the necessary legal requirements to be able to deduct the goodwill arising out of the acquisition of Banespa. Banco Santander Brasil, S.A. filed an appeal at Conselho Administrativo de Recursos Fiscais (CARF) against the infringement notice. In June 2010 the Brazilian tax authorities issued infringement notices in relation to this same matter for 2005 to 2007. Banco Santander Brasil, S.A. filed an appeal against these procedures at CARF. The Group considers, based on the advice of its external legal counsel, that the stance taken by the Brazilian tax authorities is not correct, that there are sound defense arguments to appeal against the infringement notice and that, therefore, the risk of loss is remote. Consequently, no provisions have been recognized in connection with these proceedings because this matter should not affect the consolidated financial statements.

F-132

•

In December 2010, the Brazilian tax authorities issued an infringement notice against Santander Seguros, S.A., as the successor by merger to ABN AMRO Brazil Dois Participacoes, S.A., in relation to income tax (IRPJ and CSL) for 2005. The tax authorities questioned the tax treatment applied to a sale of Real Seguros, S.A. shares made in that year. The aforementioned entity filed an appeal against the infringement notice. Also, the tax authorities issued infringement notices against Banco Santander, S.A. in connection with income tax (IRPJ and CSL), questioning the tax treatment applied to the economic compensation received under the contractual guarantees provided by the sellers of the former Banco Meridional. The entity filed an appeal against the aforementioned infringement notice.

•

A claim was filed against Abbey National Treasury Services plc by tax authorities abroad in relation to the refund of certain tax credits and other associated amounts. A favorable judgment at first instance was handed down in September 2006, although the judgment was appealed against by the tax authorities in January 2007 and the court found in favor of the latter in June 2010. Abbey National Treasury Services plc plans to appeal against this judgment to a higher court.

•

Legal action filed by Sovereign Bancorp Inc. to take a foreign tax credit in connection with taxes paid outside the United States in fiscal years 2003 to 2005 in relation to financing transactions carried out with an international bank.

ii. Non-tax-related proceedings

At December 31, 2010, the main non-tax-related proceedings concerning the Group were as follows:

•

Customer remediation: claims associated with the sale by Santander UK (formerly Abbey) of certain financial products to its customers.

The provisions recorded by Santander UK in this respect were calculated on the basis of the estimate of the number of claims that will be received, of those, the number that will be upheld and the estimated average settlement per case.

•

LANETRO, S.A. (currently ZED WORLDWIDE, S.A.): claim (ordinary lawsuit no. 558/2002) filed by LANETRO, S.A. against Banco Santander, S.A. at Madrid Court of First Instance no. 34, requesting that the Bank comply with the obligation to subscribe to €30.05 million of a capital increase at the plaintiff.

On December 16, 2003, a judgment was handed down dismissing the plaintiff’s request. The subsequent appeal filed by LANETRO was upheld by a decision of the Madrid Provincial Appellate Court on October 27, 2006.

In a decision handed down on March 30, 2010, the Supreme Court dismissed an extraordinary appeal against procedural infringements and partly upheld a cassation appeal filed in both cases by the Bank against the decision of the Madrid Provincial Appellate Court.

Zed Worldwide, S.A. requested the court-ordered enforcement of the decision. On January 25, 2011, the court of First Instance issued an order to enforce the decision handed down by the Madrid Provincial Appellate Court, whereby the Bank has to subscribe to 75.1 million shares at their par value of €0.4 per share totaling €30.05 million. Zed Worldwide filed an appeal for reconsideration of the order enforcing the decision, which the Bank has opposed. On March 23, 2011, the Court of first instance dismissed the appeal for reconsideration.

•

Proceeding under Civil Procedure Law filed by Galesa de Promociones, S.A. against the Bank at Elche Court of First Instance no. 5, Alicante (case no. 1946/2008). The claim sought damages amounting to €51,396,971.43 as a result of a judgment handed down by the Supreme Court on November 24, 2004 setting aside a summary mortgage proceeding filed by the Bank against the plaintiff company, which concluded in the foreclosure by the Bank of the mortgaged properties and their subsequent sale by the latter to third-party buyers. The judgment of the Supreme Court ordered the reversal of the court foreclosure proceeding prior to the date on which the auctions were held, a circumstance impossible to comply with due to the sale of the properties by the Bank to the aforementioned third parties, which prevented the reincorporation of the properties into the debtor company’s assets and their re-auction.

The damages claimed are broken down as follows: (i) €18,428,076.43 relating to the value of the property auctioned; (ii) €32,608,895 relating to the loss of profit on the properties lost by the plaintiff, which was prevented from continuing its business activity as a property developer; and (iii) €360,000 relating to the loss of rental income.

F-133

On March 2, 2010, the court of first instance handed down a decision partly upholding both the claim filed against the Bank and the counterclaim, ordering the Bank to pay the plaintiff €4,458,960.61, and Galesa Promociones, S.A. to pay the Bank €1,428,075.70, which resulted in a net loss of €3,030,874.91 for the Bank. Two appeals against this decision were filed on May 31, 2010: one by Galesa and the other one by the Bank. On November 11, 2010, the Alicante Provincial Appellate Court handed down a decision upholding the appeal filed by the Bank and dismissing the appeal brought by Galesa de Promociones S.A., as a result of which and by way of offsetting the indemnity obligations payable by each party, the Bank became a creditor of Galesa in the amount €400,000.

Galesa de Promociones S.A. filed a cassation appeal against the above decision at the Supreme Court, for which leave to proceed has not yet been granted. Both parties have appealed before the Court and the Bank has filed a pleading for the inadmission of the appeal.

•

Declaratory large claims action brought at Madrid Court of First Instance no. 19 (case no. 87/2001) in connection with a claim filed by Inversión Hogar, S.A. against the Bank. This claim sought the termination of a settlement agreement entered into between the Bank and the plaintiff on December 11, 1992.

On May 19, 2006, a judgment was handed down at first instance, whereby the agreement was declared to be terminated and the Bank was ordered to pay €1.8 million, plus the related legal interest since February 1997, to return a property that was given in payment under the aforementioned agreement, to pay an additional €72.9 million relating to the replacement value of the assets foreclosed and subsequently sold by the Bank, and to pay all the related court costs. The Bank and Inversión Hogar, S.A. filed appeals against the judgment.

On July 30, 2007, the Madrid Provincial Appellate Court handed down a decision upholding in full the appeal filed by the Bank, reversing the judgment issued at first instance and dismissing the appeal filed by Inversión Hogar, S.A. On completion of the clarification procedure, as it had announced previously, Inversión Hogar, S.A. filed a cassation appeal against the aforementioned decision and an extraordinary appeal for procedural infringements at the Civil Division of the Supreme Court, which issued an order on December 1, 2009, admitting for consideration the appeals filed by Inversión Hogar, S.A. and its subsidiaries, with a summons to the Bank to present the related notice of opposition to these appeals, which was submitted on January 21, 2010. The Supreme Court has set the issuing the judgment for September 29, 2011.

•

Claim in an ordinary proceeding filed by Inés Arias Domínguez and a further 17 persons against Santander Investment, S.A. at Madrid Court of First Instance no. 13 (case no. 928/2007), seeking damages of approximately €43 million, plus interest and costs. The plaintiffs, who were former shareholders of Yesocentro, S.A. (Yesos y Prefabricados del Centro, S.A.) alleged that Santander Investment, S.A. breached the advisory services agreement entered into on October 19, 1989 between the former Banco Santander de Negocios, S.A. and the plaintiffs, in relation to the sale of shares owned by the plaintiffs to another company called Invercámara, S.A.

This claim was contested by Santander Investment, S.A. on November 5, 2007. The preliminary hearing was set for April 28, 2008 although it was subsequently postponed until a motion for a preliminary ruling on a civil issue filed by the Bank was resolved.

In an order issued by Madrid Court of First Instance no. 13 on September 11, 2008, which was ratified by an order issued by the Madrid Provincial Appellate Court on March 24, 2010, the proceeding was stayed on preliminary civil ruling grounds because another proceeding based on the same events had been initiated by other shareholders of Yesocentro at the Madrid Court of First Instance no. 47 (proceeding no. 1051/2004) and, therefore, the former proceeding was stayed until a final decision had been handed down on the latter. In the proceeding filed at Court no. 47, a first instance judgment was handed down partly upholding the claim as well as an appeal judgment partly upholding the appeals filed by the plaintiffs and the Bank. On January 10, 2011, the Bank filed a cassation appeal and an extraordinary appeal on the grounds of procedural infringements.

•

On February 6, 2008, Banco Santander, S.A. filed a request for arbitration with the Secretary of the Spanish Arbitration Court against the business entity Gaesco Bolsa, Sociedad de Valores, S.A., claiming €66,418,077.27 that the latter owes Banco Santander, S.A. as a result of the early termination of the financial transaction framework agreement entered into by the aforementioned company and Banco Santander, S.A. and of the financial transactions performed under the agreement. In the same proceedings Gaesco filed a counterclaim against the Bank. On May 12, 2009, an arbitral award was issued upholding all the claims of Banco Santander, S.A. and dismissing the counterclaim filed by Gaesco Bolsa, Sociedad de Valores, S.A. Gaesco filed for the annulment of the arbitral award at Madrid Provincial Appellate Court.

F-134

Additionally, Mobilaria Monesa, S.L. (parent of the former Gaesco) filed a claim against Banco Santander, S.A. at Santander Court of First Instance no. 5, reproducing the claims discussed and already resolved in arbitration circumstance which was brought to the Court’s attention in the notice of opposition thereto filed by the Bank.

The above proceeding was stayed by Santander Provincial Appellate Court (order dated December 20, 2010) due to the Court issuing the preliminary civil ruling on the grounds claimed by the Bank— until the request for annulment of the arbitral award of May 12, 2009 is resolved.

The Group considers that the risk of loss arising as a result of these matters is remote and, accordingly, it has not recognized any provisions in connection with these proceedings.

•

Former employees of Banco do Estado de São Paulo S.A., Santander Banespa, Cia. de Arrendamiento Mercantil: a claim was filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s Bylaws in the event that the entity obtained a profit and that the distribution of this profit, in the form of this bonus, were approved by the board of directors. The bonus was not paid in 1994 and 1995 since the bank did not make a profit and partial payments were made from 1996 to 2000 in variable percentages as agreed by the board of directors, and the relevant clause was eliminated from the Bylaws in 2001. In September 2005 the Regional Labor Court ordered Banco Santander Banespa, Cia. de Arrendamiento Mercantil (currently Banco Santander (Brasil), S.A.) to pay the half-yearly bonus and the Bank subsequently lodged an appeal at the High Labor Court. Decisions were handed down in June 2008 and in March 2011 ordering the Bank to pay the half-yearly bonus from 1996 onwards for a maximum amount equivalent to the share in the profits. A related appeal against these decisions was filed at the Federal Supreme Court, and is currently pending.

•

Padrão Comércio de Incorporacão de Imóveis Ltda.: A claim for BRL 87 million against Banco Santander (Brasil), S.A. for purported wrongful charges made by Banco do Estado de São Paulo, S.A. (“Banespa”) since the account was opened in 1994 until 1996. In 2006 the Pernambuco Court of Justice handed down a decision at first instance against Banespa for not having submitted all the relevant documentation. Banespa then filed an appeal, dismissed in 2009, in which a new expert’s report was requested and additional documentation was provided which evidenced that at least a portion of the funds under dispute had been used by the plaintiff. Taking into account the outcome of the aforementioned appeal, the inability to submit the aforementioned additional documentation due to procedural reasons and the scant possibilities, in the opinion of the legal advisers of Banco Santander (Brasil), S.A., owing to all the above factors, of obtaining a favorable decision by filing a special appeal with the Federal Court, it was decided to start a negotiation process with Padrão which led to an agreement, reached in June 2010, whereby Banco Santander (Brasil), S.A. paid BRL 54.5 million. In exchange Padrão withdrew the aforementioned claim against Banco Santander Brasil. The agreement was certified by the court.

•

“Planos economicos”: Like the rest of the banking system, Santander Brasil has been the subject of claims from customers, mostly depositors, and of class actions brought by consumer protection associations and the public prosecutor’s office, among others, in connection with the possible effects of certain legislative changes relating to differences in the monetary adjustments to interest on bank deposits and other inflation-linked contracts (planos económicos). The plaintiffs considered that their vested rights in relation to the inflationary adjustments had been impaired due to the immediate application of these adjustments. In April 2010, the High Court of Justice set the statute of limitations period for these class actions at five years, as requested by the banks, rather than twenty years, as sought by the plaintiffs, which will significantly reduce the number of actions of this kind brought and the amounts claimed in this connection. As regards the substance of the matter, the decisions issued to date have been adverse for the banks, although two proceedings have been brought at the High Court of Justice and the Supreme Federal Court as a result of which the matter is expected to be definitively settled. In August 2010, the High Court of Justice handed down a decision finding for the plaintiffs in terms of substance, but excluding one of the planos from the claim, thereby reducing the claimed amount and confirming the five-year statute of limitations period for these class actions. Shortly thereafter, the Supreme Federal Court issued an injunctive relief order whereby all the proceedings in progress were stayed until this court issues a final decision on the matter. Consequently, enforcement of the aforementioned decision handed down by the High Court of Justice was also stayed.

•

Proceeding under Civil Procedure Law (case no. 1043/2009) conducted at Madrid Court of First Instance no. 26, following a claim brought by Banco Occidental de Descuento, Banco Universal, C.A. against the Bank for USD 150,000,000 in principal plus USD 4,656,164 in interest for alleged termination of an escrow contract. On October 7, 2010, the Bank was served notice of a decision dated October 1, 2010 which upheld the claim filed by Banco Occidental de Descuento, Banco Universal, C.A. without a ruling being issued in relation to court costs. The Bank filed an appeal against the aforementioned first-instance decision. Banco Occidental de Descuento, Banco Universal, C.A. filed another appeal against the ruling that declared that the Bank should not bear the court costs .The plaintiff requested provisional enforcement of the decision, against which the Bank has submitted notice of opposition.

F-135

•

The bankruptcy of various Lehman Group companies was made public on September 15, 2008. Various customers of Santander Group were affected by this situation since they had invested in securities issued by Lehman or in other products which had such assets as their underlying security.

On November 12, 2008, the Group announced the implementation of a solution (which was of a strictly commercial, exceptional nature and did not imply any admission of misselling) for holders of one of the products sold -Seguro Banif Estructurado- issued by the insurance company Axa Aurora Vida, which had as its underlying security a bond issued and guaranteed by Lehman.

The solution involved replacing the Lehman issuer risk with the issuer risk of Santander Group subsidiaries. The exchange period ended on December 23, 2008. As a result of the exchange, at 2008 year-end a loss was recognized under “Gains/Losses on financial assets and liabilities” in the consolidated income statement for the difference of €46 million (€33 million after tax) between the fair value of the bonds received and the bonds delivered in the exchange.

In February 2009 the Group offered a similar solution to other customers affected by the Lehman bankruptcy. The cost of this transaction, before tax, was €143 million (€100 million after tax), which were recognized under Gains/Losses on financial assets and liabilities in the consolidated income statement for 2008.

At the date hereof, certain claims had been filed in relation to this matter. The Bank’s directors and its legal advisers consider that the various Lehman products were sold in accordance with the applicable legal regulations in force at the time of each sale or subscription and that the fact that the Group acted as intermediary would not give rise to any liability in relation to the insolvency of Lehman. Accordingly, the risk of loss is considered to be remote and, therefore, it has not been necessary to recognize any liability in this connection.

•

The investigation, on the grounds of alleged fraud, of Bernard L. Madoff Investment Securities LLC (“Madoff Securities”) by the US Securities and Exchange Commission (“SEC”) took place in December 2008. The exposure of customers of the Group through the subfund Optimal Strategic US Equity (“Optimal Strategic”) was €2,330 million, of which €2,010 million related to institutional investors and international private banking customers and the remaining €320 million were in the investment portfolios of the Group’s private banking customers in Spain, who were qualifying investors.

On January 27, 2009, the Group announced its decision to offer a solution to those of its private banking customers who had invested in Optimal Strategic and had been affected by the alleged fraud. This solution, which was applied to the principal amount invested, net of redemptions, totaled €1,380 million. It consisted of a replacement of assets whereby the private banking customers could exchange their investments in Optimal Strategic US for preference shares to be issued by the Group for the aforementioned amount, with an annual coupon of 2% and a call option that could be exercised by the issuer in year ten. At December 31, 2008, the Group determined that these events had to be considered to be adjusting events after the reporting period, as defined in IAS 10.3, because they provided evidence of conditions that existed at the end of the reporting period and, therefore, taking into account IAS 37.14, it recognized the pre-tax cost of this transaction for the Group (€500 million —€350 million after tax—) under “Gains/Losses on financial assets and liabilities” in the consolidated income statement for 2008.

The Group has at all times exercised due diligence in the management of its customers’ investments in the Optimal Strategic fund. These products have always been sold in a transparent way pursuant to applicable legislation and established procedures and, accordingly, the decision to offer a solution was taken in view of the exceptional circumstances attaching to this case and based on solely commercial reasons due to the interest the Group has in maintaining its business relationship with these customers.

At the time of the transactions, Madoff Securities was a broker-dealer authorized, registered and supervised by the SEC and was also authorized as an investment advisor by the US Financial Industry Regulatory Authority (FINRA). As the SEC has stated, Madoff Securities had been regularly inspected by the aforementioned supervisory body in recent years, and at no time was its reputation and solvency questioned by the market or by the US supervisory authorities.

F-136

At the date hereof, certain claims had been filed in relation to this matter. The Group is currently assessing the appropriate legal action to be taken. As discussed above, the Group considers that it has at all times exercised due diligence and that these products have always been sold in a transparent way pursuant to applicable legislation and established procedures. Therefore, except for the three cases in which the decisions handed down at first instance upheld the claim on grounds that are very particular to each specific case (which have been appealed against by the Bank), no provisions were recognized for the other claims since the risk of loss is considered remote.

On March 18, 2009, the Group issued the preference shares earmarked for the replacement of assets offered to the private banking customers affected by the fraud perpetrated by Madoff Securities and those affected by the Lehman bankruptcy who were not able to participate in the exchange made on December 23, 2008 (referred to above). The preference shares have been listed on the London Stock Exchange since March 23, 2009. The level of acceptance of the exchange proposal was close to 97%.

On May 26, 2009, two funds managed by Optimal Investment Services, S.A., an indirect subsidiary of Banco Santander, S.A., announced that they had entered into an agreement with Irving H. Picard, the court-appointed trustee for the liquidation of Madoff Securities. Under the agreement, the trustee allowed the funds’ claims in the liquidation proceeding and reduced his clawback demands on the funds by the amounts withdrawn by the latter from Madoff Securities, in the 90 days prior to bankruptcy, which US legislation allows him to claim, in exchange for the partial payment of those demands by the funds. The funds are Optimal Strategic U.S. Equity Limited and Optimal Arbitrage Limited. These are the only Optimal funds that had accounts at Madoff Securities.

Pursuant to the agreement, the funds’ claims against Madoff Securities’ estate were allowed in their full amounts, calculated on a cash-in, cash-out basis, of USD 1,540,141,277.60 and USD 9,807,768.40, respectively, and the funds were entitled to Securities Investor Protection Corporation advances of USD 500,000 each. The funds paid 85% of the clawback claims asserted by the trustee. The payments totaled USD 129,057,094.60 for Strategic U.S. Equity and USD 106,323,953.40 for Arbitrage.

The funds agreed not to file any other claims against Madoff Securities’ estate (in liquidation). The agreement also contains an “equal treatment” provision, so that if the trustee settled similar clawback claims for less than 85%, the funds would receive a rebate of a portion of their payments to make the percentages applied to the funds equal to those applied to other investors in comparable situations.

The agreement followed the trustee’s investigation of Optimal’s conduct in dealing with Madoff Securities, including a review of Optimal’s documents relating to its due diligence, in which the trustee concluded that its conduct did not provide grounds to assert any claim against the Optimal companies or any other entity of Santander Group (other than the clawback claims described above, which did not arise from any inappropriate conduct by the funds).

The agreement contains releases of all clawback and other claims the trustee may have against the funds for any matters arising out of the funds’ investments with Madoff Securities. The trustee’s release applies to all potential claims against other Optimal companies, Santander Group companies and their investors, directors, agents and employees who agree to release the trustee and the Madoff Securities estate (in liquidation), to the extent the claims arise out of the funds’ dealings with Madoff Securities. It also releases the funds from potential clawback liability for any other withdrawals made by them from Madoff Securities.

The agreement between the trustee and the aforementioned Optimal funds was approved by the United States Bankruptcy Court in New York on June 16, 2009.

* * * * *

F-137

At 2010, 2009 and 2008 year-end the Group had recognized provisions that reasonably cover any liabilities that might arise from these tax-related and non-tax-related proceedings.

The total amount of payments made by the Group arising from litigation in 2010, 2009 and 2008 is not material with respect to these consolidated financial statements.

26.

Other liabilities

The detail of Other liabilities is as follows:


	Thousands of euros
	2010		2009		2008

Transactions in transit		320,545		325,987		401,977
Accrued expenses and deferred income		4,891,489		5,438,831		4,593,557
Other		2,387,815		1,859,341		2,565,461

		7,599,849		7,624,159		7,560,995

27.

Tax matters

Consolidated Tax Group

Pursuant to current legislation, the Consolidated Tax Group includes Banco Santander, S.A. (as the Parent) and the Spanish subsidiaries that meet the requirements provided for in Spanish legislation regulating the taxation of the consolidated profits of corporate groups (as the controlled entities).

The other Group companies file income tax returns in accordance with the tax regulations applicable to them.

Years open for review by the tax authorities

At December 31, 2010, the Consolidated Tax Group had the years from 2005 to 2010 open for review in relation to the main taxes applicable to it.

The other entities have the corresponding years open for review, pursuant to their respective tax regulations.

The tax audit of 2001 and 2002 for the main taxes applicable to the Consolidated Tax Group was completed in March 2007 and that of 2003 and 2004 was completed in April 2010. Most of the tax assessments issued were signed on a contested basis.

In 2010 there were no significant developments in connection with the tax disputes at the different instances which were pending resolution at December 31, 2009 or which commenced in 2010.

Because of the possible different interpretations which can be made of the tax regulations, the outcome of the tax audits of the years reviewed and of the open years might give rise to contingent tax liabilities which cannot be objectively quantified. However, the Group’s tax advisers consider that it is unlikely that such contingent liabilities will become actual liabilities, and that in any event the tax charge which might arise therefrom would not materially affect the consolidated financial statements of the Group.

F-138

Reconciliation

The reconciliation of the income tax expense calculated at the standard tax rate to the income tax expense recognized and the detail of the effective tax rate are as follows:


	Millions of euros
	2010			2009			2008

Consolidated profit before tax:
From continuing operations		12,052			10,588			10,849
From discontinued operations		(25	)		46			372

		12,027			10,634			11,221

Income tax at 30%		3,608			3,190			3,366
Decreases due to permanent differences		(544	)		(1,460	)		(1,419	)
Of which:
Due to effect of different tax rates		(328	)		(1,180	)		(1,039	)

Income tax of Group companies, per local books		3,064			1,730			1,947

Net increases (decreases) due to other permanent differences		(178	)		(556	)		(346	)
Other, net		39			48			287

Current income tax		2,925			1,222			1,888


Effective tax rate		24.32	%		11.49	%		16.83	%

Of which:
Continuing operations		2,923			1,207			1,836
Discontinued operations		2			15			52
Of which:
Current tax		2,610			2,082			2,689
Deferred taxes		315			(860	)		(801	)
Taxes paid in the year		2,078			1,527			1,445

Tax recognized in equity

In addition to the income tax recognized in the consolidated income statement, the Group recognized the following amounts in consolidated equity:


	Millions of euros
	2010		2009			2008

Net tax credited (charged) to equity:
Measurement of non-current assets held for sale		—		—			(16	)
Measurement of available-for-sale fixed-income securities		387		(373	)		30
Measurement of available-for-sale equity securities		134		35			247
Measurement of cash flow hedges		70		106			163

Total		591		(232	)		424

Deferred taxes

Tax assets in the consolidated balance sheets includes debit balances with the Spanish Public Treasury relating to deferred tax assets. Tax liabilities includes the liability for the Group’s various deferred tax liabilities.

F-139

The detail of Tax assets — Deferred and Tax liabilities — Deferred is as follows:

Millions of euros

2010

2009

2008

Tax assets:

17,089

15,827

14,644

Of which:

Banco Santander (Brasil) S.A.

3,572

3,410

1,775

Banco ABN AMRO Real S.A. (*)

—

2,191

Santander Holdings USA

1,933

1,925

—

Santander UK Group

656

909

1,303

Pre-retirements

887

989

1,242

Other pensions

806

910

1,084

Prepaid taxes- Investments

—

965

Valuation adjustments

1,265

602

787

Tax liabilities:

4,312

3,667

3,464

Of which:

Banco Santander (Brasil) S.A.

626

553

472

Banco ABN AMRO Real S.A. (*)

—

376

Santander Holdings USA

128

107

—

Santander UK Group

409

405

418

Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander

275

113

Santander Consumer Bank AG

Valuation adjustments

678

744

341


(*)		Merged into Banco Santander (Brasil), S.A. in 2009.

The detail of the deferred tax assets and liabilities at December 31, 2010, on the basis of their expected recovery/payment, is as follows:


	Millions
	of euros

Deferred tax assets		17,089
That do not depend on the Group’s ability to generate future profit		11,542
That depend on the Group’s ability to generate future profit		5,547
Deferred tax liabilities		(4,312	)

Net		1,235

The changes in Tax Assets — Deferred and Tax Liabilities — Deferred in the last three years were as follows:


	Millions of euros
							Foreign
							currency			(Charge)/
							balance			Credit to asset
	Balances at			(Charge)/			translation			and liability				Acquisitions		Balances at
	December 31,			Credit to			differences and			revaluation		Prepaid		for the year		December 31,
	2009			income			other items			reserve		taxes		(net)		2010

Deferred tax assets		15,827			72			882			233		—		75		17,089
Deferred tax liabilities		(3,667	)		(387	)		(381	)		122		—		1		(4,312	)

Total		12,160			(315	)		501			355		—		76		12,777

F-140


	Millions of euros
							Foreign
							currency
							balance			(Charge)/
							translation			Credit to asset
	Balances at			(Charge)/			differences			and liability					Acquisitions			Balances at
	December 31,			Credit to			and other			revaluation			Prepaid		for the year			December 31,
	2008			income			items			reserve			taxes		(net)			2009

Deferred tax assets		14,644			895			(1,736	)		(165	)		—		2,189			15,827
Deferred tax liabilities		(3,464	)		(35	)		246			(307	)		—		(107	)		(3,667	)

Total		11,180			860			(1,490	)		(472	)		—		2,082			12,160



	Millions of euros
							Foreign
							currency			(Charge)/
							balance			Credit to asset
	Balances at			(Charge)/			translation			and liability					Acquisitions			Balances at
	December 31,			Credit to			differences and			revaluation			Prepaid		for the year			December 31,
	2007			income			other items			reserve			taxes		(net)			2008

Deferred tax assets		10,853			837			(374	)		696			—		2,632			14,644
Deferred tax liabilities		(3,744	)		(36	)		461			107			—		(252	)		(3,464	)

Total		7,109			801			87			803			—		2,380			11,180

Other disclosures

In conformity with the Listing Rules Instrument 2005 published by the UK Financial Services Authority, it is hereby stated that shareholders of the Bank resident in the United Kingdom will be entitled to a tax credit in respect of the withholdings the Bank is required to make from the dividends to be paid to them. The shareholders of the Bank resident in the United Kingdom who hold their ownership interest in the Bank through Santander Nominee Service will be informed directly of the amount thus withheld and of any other data they may require to complete their tax returns in the United Kingdom. The other shareholders of the Bank resident in the United Kingdom should contact their bank or securities broker.

28.

Non-controlling interests

Non-controlling interests include the net amount of the equity of subsidiaries attributable to equity instruments that do not belong, directly or indirectly, to the Bank, including the portion attributed to them of profit for the year.

F-141

Breakdown

The detail, by Group company, of Equity — Non-controlling interests is as follows:


	Thousands of euros
	2010		2009		2008

Banesto Group		503,901		555,368		495,021
Grupo Financiero Santander, S.A.B. de C.V.		6,355		787,351		707,603
Banco Santander Chile		511,854		383,191		245,229
Brazil Group		3,556,777		2,571,235		122,067
Santander BanCorp		—		35,340		34,751
Other companies		396,380		402,051		353,935

		4,975,267		4,734,536		1,958,606


Profit for the year attributable to non-controlling interests		920,852		469,522		456,000
Of which:
Banesto Group		56,929		26,773		75,294
Grupo Financiero Santander, S.A.B. de C.V.		129,718		160,478		182,927
Banco Santander Chile		175,250		134,913		129,758
Santander Brasil		539,064		114,151		22,042
Santander BanCorp		2,224		3,178		2,434
Other companies		17,667		30,029		43,545

		5,896,119		5,204,058		2,414,606

Changes

The changes in Non-controlling interests are summarized as follows:


	Millions of euros
	2010			2009			2008

Balance at beginning of year		5,204			2,415			2,358
Change in consolidation method		—			—			105
Business combinations		101			(12	)		13
Change in proportion of ownership interest		(537	)		(2	)		(41	)
Valuation adjustments		29			75			(26	)
Dividends paid to non-controlling interests		(400	)		(233	)		(241	)
Changes in share capital (*)		3			2,187			74
Exchange differences and other items		575			305			(283	)
Profit for the year attributable to non-controlling interests		921			469			456

Balance at end of year		5,896			5,204			2,415


(*)		In 2009 including mainly the non-controlling interests arising from the initial public offering of Santander Brasil launched by the Group amounting to EUR 2,360 million at the closing exchange rate (see Note 3). This change is also shown as a capital increase in the consolidated statement of changes in total equity for 2009.

As described in Note 3, in 2010 the Bank acquired non-controlling interests previously held by third parties in Banco Santander México and Santander BanCorp, which led to a total reduction of EUR 1,223 million in the balance of Non-controlling interests.

Also, in the third quarter of 2010 the Group sold 2.616% of Banco Santander Brasil’s share capital. The selling price amounted to EUR 867 million, giving rise to increases of EUR 162 million and EUR 790 million in Reserves and Non-controlling interests, respectively, and a reduction of EUR 85 million in Valuation adjustments — Exchange differences.

The foregoing changes are shown in the consolidated statement of changes in equity.

29.

Valuation adjustments

The balances of Valuation adjustments include the amounts, net of the related tax effect, of the adjustments to assets and liabilities recognized temporarily in equity through the consolidated statement of recognized income and expense until they are extinguished or realized, when they are recognized definitively as shareholders’ equity through the consolidated income statement. The amounts arising from subsidiaries and jointly controlled entities are presented, on a line by line basis, in the appropriate items according to their nature.

F-142

It should be noted that the consolidated statement of recognized income and expense includes the changes to Valuation adjustments as follows:

	•		Revaluation gains (losses): includes the amount of the income, net of the expenses incurred in the year, recognized directly in equity. The amounts recognized in equity in the year remain under this item, even if in the same year they are transferred to the income statement or to the initial carrying amount of the assets or liabilities or are reclassified to another line item.

	•		Amounts transferred to income statement: includes the amount of the revaluation gains and losses previously recognized in equity, even in the same year, which are recognized in the income statement.

	•		Amounts transferred to initial carrying amount of hedged items: includes the amount of the revaluation gains and losses previously recognized in equity, even in the same year, which are recognized in the initial carrying amount of assets or liabilities as a result of cash flow hedges.

	•		Other reclassifications: includes the amount of the transfers made in the year between the various valuation adjustment items.

The amounts of these items are recognized gross, including the amount of the valuation adjustments relating to non-controlling interests, and the corresponding tax effect is presented under a separate item, except in the case of entities accounted for using the equity method, the amounts for which are presented net of the tax effect.

Available-for-sale financial assets

Valuation adjustments — Available-for-sale financial assets includes the net amount of unrealized changes in the fair value of assets classified as available-for-sale financial assets (see Notes 7 and 8).

The breakdown, by type of instrument and geographical origin of the issuer, of Valuation adjustments — Available-for-sale financial assets at December 31, 2010 and 2009 is as follows:

Millions of euros

December 31, 2010

December 31, 2009

Net

revaluation

Revaluation

gains/

Fair

Revaluation

gains/

Fair

gains

losses

(losses)

value

gains

losses

(losses)

value

Debt instruments

Government debt securities and debt instruments issued by central banks

Spain

272

(1,797

)

(1,525

)

27,050

250

(10

)

240

28,208

Rest of Europe

(229

)

(210

)

3,871

)

3,996

Latin America and rest of the world

503

(211

)

292

27,785

172

(135

)

26,409

Private-sector debt securities

461

(347

)

114

20,983

390

(165

)

225

20,677

1,255

(2,584

)

(1,329

)

79,689

829

(314

)

515

79,289

Equity instruments

Domestic

Spain

(326

)

(244

)

1,878

(282

)

(197

)

2,478

International

Rest of Europe

(266

)

(219

)

1,325

—

(192

)

(192

)

1,734

United States

(32

)

1,550

)

1,168

Latin America and rest of the world

543

(39

)

504

1,793

655

(215

)

440

1,952

743

(663

)

6,546

824

(694

)

130

7,331

Of which:

Listed

569

(552

)

4,089

667

(668

)

5,877

Unlisted

174

(111

)

2,457

157

(26

)

131

1,455

1,998

(3,247

)

(1,249

)

86,235

1,653

(1,008

)

645

86,620

F-143

Debt instruments

The total “unrealized losses” on debt instruments incurred for more than 12-months as of December 31, 2010 was €579 million (€80 million in 2009).

In 2010 there was a decline in value in the available-for-sale financial asset portfolio, concentrated mainly in Spanish and Portuguese Government debt securities. This decline in value was mainly due to the increase in risk spreads and market volatility due to tensions in the debt markets that were aggravated by the interventions in Ireland and Greece (in which the Group has marginal exposures).

At 2010, 2009 and 2008 year-end, we analyzed the unrealized revaluation losses. We concluded that they were temporary and, therefore, there was no evidence of impairment since the interest payment schedules for all the securities had been complied with and there was no evidence that the issuers would not continue to meet their payment obligations or that the future payments (both principal and interest) would not be sufficient to recover the cost.

At April 30, 2011, these unrealized losses were 25% lower (31% lower for the Spanish debt) mainly due to recovery of the value of the corresponding assets. As of the date of our report there has been no delay in the service of the Spanish debt and the Spanish sovereign rating remains at AA.

At December 31, 2010, our consolidated financial statements included the impairment recorded amounting €14 million (€43 million in 2009 and €35 million in 2008) as a consequence of the above assessments.

F-144

Equity instruments

Total “unrealized losses” on equity securities incurred for more than 12-months as of December 31, 2010 was €492 million (€507 million in 2009).

During 2010, 2009 and 2008 we completed the analysis described above and we recognized impairments amounting to €319 million, €494 million and €2,404 million, of which €2,042 million corresponded to the impairment of the ownership interests held in the Royal Bank of Scotland and Fortis in 2008, see Note 8.b, respectively. Impairments recorded in 2010 included one corresponding to a specific equity security, whose gross unrealized losses for more than 12-months at the moment of the impairment amounted to €237 million, after having considered the significant and prolonged decline in its fair value; unrealized losses of the remaining equity securities which at December 31, 2010 had reached a 40% decline after 18 months below cost were not material to the Group’s consolidated financial statements considered as a whole. No additional significant impairments were recorded in 2010 for the remainder of the equity securities that showed unrealized losses as of December 31, 2010 because, after carrying out the abovementioned analysis, we concluded that their carrying value was still recoverable.

Cash flow hedges

Valuation adjustments — Cash flow hedges includes the gains or losses attributable to hedging instruments that qualify as effective hedges. These amounts will remain under this heading until they are recognized in the consolidated income statement in the periods in which the hedged items affect it (see Note 11).

Accordingly, amounts representing valuation losses will be offset in the future by gains generated by the hedged instruments.

Hedges of net investments in foreign operations and Exchange differences

Valuation adjustments — Hedges of net investments in foreign operations includes the net amount of changes in the value of hedging instruments in hedges of net investments in foreign operations, for the portion of these changes considered as effective hedges (see Note 11).

Valuation adjustments — Exchange differences includes the net amount of exchange differences arising on non-monetary items whose fair value is adjusted against equity and the differences arising on the translation to euros of the balances of the consolidated entities whose functional currency is not the euro (see Note 2.a).

The net changes in these two headings in the consolidated statement of recognized income and expense include the valuation gain or loss relating to the exchange difference arising from the goodwill held by the Group in foreign currency. At December 31, 2008, the balance recognized in the consolidated statement of recognized income and expense in this connection represented a loss of approximately EUR 3,500 million. This change was offset by a negative change in the balance of goodwill at the corresponding date and, accordingly, it did not affect the Group’s equity (see Note 17).

The changes in 2009 and 2010 reflect the positive effect of the appreciation of foreign currencies, mainly the pound sterling and the Brazilian real in 2009, and the Brazilian real and the other Latin American currencies in 2010. Of the change in the balance in the two years, gains of approximately EUR 2,390 million in 2009 and EUR 1,640 million in 2010 related to the measurement of goodwill.

F-145

The detail, by country, of Valuation adjustments — Hedges of net investments in foreign operations and Valuation adjustments — Exchange differences is as follows:


	Thousands of euros
	2010			2009			2008

Net balance at end of year		(894,417	)		(3,555,140	)		(7,957,582	)
Of which:
Arising on consolidation:
Subsidiaries:		(891,113	)		(3,558,042	)		(7,949,868	)
Brazil Group		2,750,118			1,124,699			(2,819,871	)
Chile Group		300,912			(89,222	)		(475,525	)
Mexico Group		(452,209	)		(1,010,852	)		(977,254	)
Grupo Santander UK		(3,195,996	)		(2,964,878	)		(3,280,445	)
Other		(293,938	)		(617,789	)		(396,773	)
Associates		(3,304	)		2,902			(7,714	)

Entities accounted for using the equity method

Valuation adjustments — Entities accounted for using the equity method includes the amounts of valuation adjustments recognized in equity arising from associates.

The net changes in Valuation adjustments — Entities accounted for using the equity method were as follows:


	Thousands of euros
	2010			2009			2008

Balance at beginning of year		—			(148,402	)		(1,840	)
Revaluation gains (losses)		(171	)		—			(149,073	)
Amounts transferred to income		—			—			43,728
Transfers		—			148,402			(41,217	)

Balance at end of year		(171	)		—			(148,402	)


Of which:
Santander Holdings USA (formerly Sovereign)		—			—			(148,402	)

30.

Shareholders’ equity

Shareholders’ equity includes the amounts of equity contributions from shareholders, accumulated profit or loss recognized through the consolidated income statement, and components of compound financial instruments having the substance of permanent equity. Amounts arising from subsidiaries and jointly controlled entities are presented in the appropriate items based on their nature.

The changes in Shareholders’ equity are presented in the consolidated statement of changes in total equity. Significant information on certain items of Shareholders’ equity and the changes therein in 2010 is set forth below.

31.

Issued capital

Changes

At December 31, 2008, the share capital consisted of 7,994,059,403 shares with a total par value of EUR 3,997,029,701.50.

On January 28, 2009 the shareholders at the general meeting of Sovereign approved its acquisition by the Bank and on January 30, 2009 the Bank increased capital through the issue of 161,546,320 ordinary shares for an effective amount (par value plus premium) of EUR 1,302,063,339.

F-146

Additionally, after completion on October 5, 2009 of the period for the voluntary conversion of “Valores Santander” into shares, and in accordance with the terms established in the related prospectus, on October 13, 2009, 257,647 new shares were issued to cater for this exchange.

On November 2, 2009, the bonus issue through which the “Santander Dividendo Elección” programme (see Note 4) is instrumented took place, whereby 72,962,765 shares (0.89% of the share capital) relating to bonus share rights were issued in the proportion of one new share for 91 existing shares, for an amount of EUR 36,481,382.5.

On October 7, 2010, after completion on October 4, 2010 of the period for the voluntary conversion of “Valores Santander” into shares, and in accordance with the terms established in the related prospectus, 11,582,632 new shares were issued to cater for the conversion of 33,544 debt securities.

Lastly, on November 2, 2010 the bonus issue through which the “Santander Dividendo Elección” programme is instrumented took place, whereby 88,713,331 shares (1.08% of the share capital) were issued, corresponding to a capital increase of EUR 44,356,665.50.

Following these transactions, at December 31, 2010 the Bank’s share capital consisted of 8,329,122,098 shares with a par value of EUR 4,164,561,049.

The Bank’s shares are listed on the Spanish Stock Market Interconnection System and on the New York, London, Milan, Lisbon, Buenos Aires and Mexico Stock Exchanges, and all of them have the same features and rights. At December 31, 2010, the only shareholders listed in the Bank’s shareholders register with ownership interests of more than 3% were Chase Nominees Ltd. (with a 10.24% holding), State Street Bank & Trust (with a 9.52% holding), EC Nominees Ltd. (with a 6.45% holding), Bank of New York Mellon (with a 5.05% holding), Guaranty Nominees Limited (with a 3.73% holding) and Société Générale (with a 3.28% holding). These ownership interests are held on behalf of customers, and the Bank is not aware of any of these shareholders individually holding a stake of 3% or more.

Other considerations

The additional share capital authorized by the shareholders at the annual general meeting of June 19, 2009 was EUR 2,038,901,430.50. The Bank’s directors have until June 19, 2012 to carry out capital increases up to this limit. The resolution empowers the board to fully or partially disapply the pre-emption right in accordance with the terms of Article 308 of the Spanish Limited Liability Companies Law (Ley de Sociedades de Capital). At December 31, 2010, this power had not been exercised.

The shareholders at the annual general meeting of June 11, 2010 resolved to increase the Bank’s capital by a par value of EUR 500 million and granted the board the broadest powers to set the date and establish the terms and conditions of this capital increase within one year from the date of the aforementioned annual general meeting. If the board does not exercise the powers delegated to it within the period established by the annual general meeting, these powers will be rendered null and void.

In addition, the aforementioned annual general meeting authorized the board to issue fixed-income securities, convertible into or exchangeable for shares of the Bank, for up to a total of EUR 7,000 million or the equivalent amount in another currency. The Bank’s directors have until June 11, 2015 to execute this resolution.

At December 31, 2010, the shares of the following companies were listed on official stock markets: Banco Santander Río S.A.; Banco Santander Colombia, S.A.; Grupo Financiero Santander, S.A.B. de C.V.; Banco Santander — Chile; Cartera Mobiliaria, S.A., SICAV; Santander Chile Holding S.A.; Banco Santander (Brasil) S.A. and Banco Español de Crédito, S.A.

At December 31, 2010, the number of Bank shares owned by third parties and managed by Group management companies (mainly portfolio, collective investment undertaking and pension fund managers) was 23,863,827, which represented 0.29% of the Bank’s share capital. In addition, the number of Bank shares owned by third parties and received as security was 53.1 million (equal to 0.64% of the Bank’s share capital).

At December 31, 2010, the capital increases in progress at Group companies and the additional capital authorized by their shareholders at the respective general meetings were not material at Group level.

F-147

32.

Share premium

Share premium includes the amount paid up by the Bank’s shareholders in capital issues in excess of the par value.

The Spanish Limited Liability Companies Law (Ley de Sociedades de Capital) expressly permits the use of the share premium account balance to increase capital at the entities at which it is recognized and does not establish any specific restrictions as to its use.

The increase in the balance of Share premium in 2010 relates to the capital increases detailed in Note 31.a. Also in 2010, an amount of EUR 10 million was transferred from the Share premium account to the Legal reserve (see Note 33.b.i).

33.

Reserves

Definitions

Shareholders’ equity — Reserves — Accumulated reserves includes the net amount of the accumulated profit or loss recognized in previous years through the consolidated income statement that, in the distribution of profit, was appropriated to equity, and the own equity instrument issuance expenses and the differences between the selling price of treasury shares and the cost of acquisition thereof.

Shareholders’ equity — Reserves of entities accounted for using the equity method includes the net amount of the accumulated profit or loss generated in previous years by entities accounted for using the equity method, recognized through the consolidated income statement.

Breakdown

The detail of Accumulated reserves and Reserves of entities accounted for using the equity method is as follows:


	Thousands of euros
	2010		2009		2008

Accumulated reserves:
Restricted reserves-
Legal reserve		832,912		822,883		799,406
Reserve for treasury shares		736,792		531,695		871,994
Revaluation reserve Royal Decree-Law 7/1996		42,666		42,666		42,666
Reserve for retired capital		10,610		10,610		10,610
Voluntary reserves (*)		1,745,544		2,282,098		2,479,352
Consolidation reserves attributed to the Bank		6,652,259		6,752,138		5,591,045
Reserves at subsidiaries		18,233,866		14,097,534		11,363,796

		28,254,649		24,539,624		21,158,869
Reserves of entities accounted for using the equity method:
Associates		52,547		67,663		(290,463	)
Of which:
Sovereign		—		—		(352,986	)

		28,307,196		24,607,287		20,868,406


(*)		Include the reserves stipulated by Article 150 of the Spanish Limited Liability Companies Law (Ley de Sociedades de Capital) for an amount equal to the loans granted by Group companies to third parties for the acquisition of treasury shares.

i. Legal reserve

Under the Spanish Limited Liabilities Companies Law (Ley de Sociedades de Capital), 10% of net profit for each year must be transferred to the legal reserve until the balance of this reserve reaches 20% of the share capital. The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount.

F-148

In 2010 the Bank transferred EUR 10 million from the Share premium account to the Legal reserve so that, once again, after the capital increases described in Note 31 had been carried out, the balance of the Legal reserve reached 20% of the share capital, and at December 31, 2010 the Legal reserve was at the stipulated level.

ii. Reserve for treasury shares

Pursuant to the Spanish Limited Liability Companies Law (Ley de Sociedades de Capital), a restricted reserve has been recognized for an amount equal to the carrying amount of the Bank shares owned by subsidiaries. The balance of this reserve will become unrestricted when the circumstances that made it necessary to record it cease to exist. Additionally, this reserve covers the outstanding balance of loans granted by the Group secured by Bank shares.

iii. Revaluation reserve Royal Decree Law 7/1996, of June 7

The balance of “Revaluation Reserve Royal Decree-Law 7/1996” can be used, free of tax, to increase share capital. From January 1, 2007, the balance of this account can be taken to unrestricted reserves, provided that the monetary surplus has been realized. The surplus will be deemed to have been realized in respect of the portion on which depreciation has been taken for accounting purposes or when the revalued assets have been transferred or derecognized.

If the balance of this reserve were used in a manner other than that provided for in Royal Decree-Law 7/1996, of June 7, it would be subject to taxation.

iv. Reserves at subsidiaries and jointly controlled entities

The detail, by company, of Reserves at subsidiaries and jointly controlled entities, based on the companies’ contribution to the Group (considering the effect of consolidation adjustments) is as follows:


	Millions of euros
	2010			2009			2008

Banco Español de Crédito, S.A.		4,195			4,031			3,703
Grupo Santander UK		3,418			2,689			2,040
Banco Santander (Brasil), S.A. (Consolidated Group)		2,904			1,940			1,596
Banco Santander Totta, S.A. (Consolidated Group)		1,949			1,589			1,273
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander, S.A.B. de C.V.		1,931			1,623			1,630
Banco Santander — Chile		1,834			1,598			1,031
Banco de Venezuela, S.A., Banco Universal		—			—			663
Grupo Santander Consumer Finance, S.A.		797			723			559
Cartera Mobiliaria, S.A., SICAV		336			315			324
Santander Seguros y Reaseguros, Compañía Aseguradora, S.A.		331			237			149
Banco Banif, S.A.		274			210			188
Santander Investment, S.A.		217			230			207
Banco Santander International (United States)		206			241			203
Banco Santander (Suisse) SA		44			151			175
BSN — Banco Santander de Negocios Portugal, S.A.		—			94			116
Banco Santander Río, S.A.		(227	)		(412	)		(449	)
Exchange differences, consolidation adjustments and other companies (*)		25			(1,161	)		(2,044	)

Total		18,234			14,098			11,364


Of which: restricted		1,563			1,271			1,466


(*)		Includes the charge relating to cumulative exchange differences in the transition to International Financial Reporting Standards.

F-149

34.

Other equity instruments and Treasury shares

Other equity instruments

Other equity instruments includes the equity component of compound financial instruments, the increase in equity due to personnel remuneration, and other items not recognized in other Shareholders’ equity items.

At December 31, 2009 and 2008, Other equity instruments related mainly to “Valores Santander”, which are described below:

“Valores Santander”

In 2007, in order to partially finance the takeover bid launched on ABN AMRO, Santander Emisora 150, S.A. Sole-Shareholder Company issued securities mandatorily convertible into newly-issued ordinary shares of the Bank (“Valores Santander”) amounting to EUR 7,000 million. These securities can be voluntarily exchanged for Bank shares on October 4, 2011, and must be mandatorily exchanged on October 4, 2012.

The reference price of the Bank’s share for conversion purposes was set at EUR 16.04 per share, and the conversion ratio of the debt securities -i.e. the number of Bank shares corresponding to each “Valor Santander” for conversion purposes- is 311.76 shares for each “Valor Santander”. The nominal interest rate on these securities was 7.30% until October 4, 2008 and Euribor plus 2.75% thereafter until the securities are exchanged for shares.

Subsequent to issue, Banco Santander resolved on several occasions, in accordance with the prospectus, to change the conversion ratio of these securities. The latest revision was carried out in view of the bonus share issue performed by Banco Santander, through which the Santander Dividendo Elección programme for the payment of the third interim dividend for 2010 was put into effect, and the new reference price of the Banco Santander share for conversion purposes was set at EUR 14.13 per share. Consequently, the new conversion ratio applicable to the “Valores Santander” is 353.86 shares of Banco Santander for each “Valor Santander”, the result of dividing the face value of each “Valor Santander” (EUR 5,000) by the aforementioned reference price (EUR 14.13).

In 2010, 33,544 “Valores Santander” were voluntarily converted into Bank shares. This conversion led to a reduction of EUR 167,716 thousand in Other equity instruments and increases of EUR 5,791 thousand and EUR 161,925 thousand in Issued capital and Share premium, respectively.

The balance of Other equity instruments increased in 2010 due mainly to the issue described below:

Agreement with Qatar Holding

In October 2010 several investors from the Emirate of Qatar subscribed and paid an issue launched by Banco Santander, S.A. of bonds mandatorily exchangeable for shares of Banco Santander Brasil. The issue amounted to USD 2,819 million, of which Qatar Holding subscribed USD 2,719 million. The bonds mature on October 29, 2013, at which time they will be automatically exchanged for an amount of shares of Banco Santander Brasil equal to 5% of its current share capital. The exchange price will be BRL 23.75 per share and the bonds will pay a coupon in US dollars of 6.75% per annum.

The Group recognized EUR 366 million, relating to the present value of the interest payable, under Financial liabilities at amortized cost — Marketable debt securities and the remaining amount (EUR 1,668 million) in equity under Other equity instruments — Equity component of compound financial instruments.

Treasury shares

Shareholders’ equity — Treasury shares includes the amount of own equity instruments held by all the Group entities.

Transactions involving own equity instruments, including their issuance and cancellation, are recognized directly in equity, and no profit or loss may be recognized on these transactions. The costs of any transaction involving own equity instruments are deducted directly from equity, net of any related tax effect.

F-150

The shareholders at the Bank’s annual general meeting on June 11, 2010 set the maximum number of Bank shares that the Bank and/or any Group subsidiary are authorized to acquire at a number equivalent to 10% of the fully paid share capital amount, at a minimum share price not lower than par value and a maximum share price of up to 3% higher than the latest quoted price with respect to which the Bank did not trade for its own account in the Spanish Stock Market Interconnection System (including the block market) on the acquisition date concerned.

The Bank’s shares owned by the consolidated companies accounted for 0.268% of issued share capital at December 31, 2010 (December 31, 2009: 0.031%; December 31, 2008: 0.81%).

The average purchase price of the Bank’s shares in 2010 was EUR 9.28 per share and the average selling price was EUR 9.25 per share.

The effect on equity, net of taxes, arising from the purchase and sale of Bank shares was a loss of EUR 18 million in 2010, a gain of EUR 321 million in 2009 and a gain of EUR 12 million in 2008, and these amounts were recognized in equity.

35.

Memorandum items

Memorandum items relates to balances representing rights, obligations and other legal situations that in the future may have an impact on net assets, as well as any other balances needed to reflect all transactions performed by the consolidated entities although they may not impinge on their net assets.

Contingent liabilities

Contingent liabilities includes all transactions under which an entity guarantees the obligations of a third party and which result from financial guarantees granted by the entity or from other types of contract. The detail is as follows:

Thousands of euros

2010

2009

2008

Financial guarantees

18,395,112

20,974,258

15,614,342

Financial bank guarantees

17,517,828

19,725,382

14,514,126

Doubtful guarantees

603,779

489,367

196,862

Credit derivatives sold

273,225

759,224

903,067

Other financial guarantees

280

285

287

Irrevocable documentary credits

3,815,796

2,636,618

3,590,454

Other bank guarantees and indemnities provided

36,733,325

35,192,187

45,613,498

Other guarantees

29,331,463

28,025,392

38,905,912

Undertakings to provide bank guarantees

7,401,862

7,166,795

6,707,586

Other contingent liabilities

851,020

453,013

504,900

Assets earmarked for third-party obligations

107,734

Other doubtful contingent liabilities

—

Other contingent liabilities

743,286

453,004

504,896

59,795,253

59,256,076

65,323,194

A significant portion of these guarantees will expire without any payment obligation materializing for the consolidated entities and, therefore, the aggregate balance of these commitments cannot be considered to be an actual future need for financing or liquidity to be provided by the Group to third parties.

Income from guarantee instruments is recognized under Fee and commission income in the consolidated income statements and is calculated by applying the rate established in the related contract to the nominal amount of the guarantee.

At December 31, 2010, the Group had recognized provisions of EUR 1,030,244 thousand to cover contingent liabilities (December 31, 2009: EUR 641,620 thousand; December 31, 2008: EUR 678,584 thousand) (see Note 25).

F-151

i. Financial guarantees

Financial guarantees includes, inter alia, financial guarantee contracts such as financial bank guarantees, credit derivatives sold, and risks arising from derivatives arranged for the account of third parties.

ii. Other bank guarantees and indemnities provided

Other bank guarantees and indemnities provided includes guarantees other than those classified as financial, such as technical guarantees, guarantees covering the import and export of goods and services, irrevocable formal undertakings to provide bank guarantees, legally enforceable letters of guarantee and other guarantees of any kind.

iii. Other contingent liabilities

Other contingent liabilities includes the amount of any contingent liability not included in other items.

Contingent commitments

Contingent commitments includes those irrevocable commitments that could give rise to the recognition of financial assets.

The detail is as follows:


	Thousands of euros
	2010		2009		2008

Drawable by third parties		179,963,765		150,562,786		123,329,168
Financial asset forward purchase commitments		1,589,176		3,302,484		856,212
Regular way financial asset purchase contracts		2,702,529		3,446,834		1,626,097
Securities subscribed but not paid		25,689		29,141		42,467
Securities placement and underwriting commitments		21,478		11		50,006
Documents delivered to clearing houses		17,409,843		4,764,584		5,348,689
Other contingent commitments		1,996,913		1,424,916		472,367

		203,709,393		163,530,756		131,725,006

Off-balance-sheet funds under management

The detail of off-balance-sheet funds managed by the Group is as follows:


	Millions of euros
	2010		2009		2008

Investment funds		113,510		105,216		90,305
Pension funds		10,965		11,310		11,128
Assets under management		20,314		18,364		17,289

		144,789		134,890		118,722

Third-party securities held in custody

At December 31, 2010, the Group held in custody debt securities and equity instruments totaling EUR 823,102 million entrusted to it by third parties.

F-152

36.

Derivatives — Notional amounts and market values of trading and hedging derivatives

The detail of the notional and/or contractual amounts and the market values of the trading and hedging derivatives held by the Group is as follows:


	Millions of euros
	2010					2009					2008
	Notional		Market			Notional		Market			Notional		Market
	amount		value			amount		value			amount		value

Trading derivatives:
Interest rate risk-
Forward rate agreements		63,575		(19	)		150,906		(1,177	)		328,743		(31	)
Interest rate swaps		2,097,581		481			1,693,804		918			1,742,448		2,424
Options and futures		1,057,816		(904	)		1,001,660		537			848,479		(1,252	)
Foreign currency risk-
Foreign currency purchases and sales		165,747		(2,226	)		108,031		(525	)		110,049		(1,261	)
Foreign currency options		41,419		(182	)		45,983		(81	)		71,114		9
Currency swaps		183,109		838			112,361		2,079			82,080		5,871
Securities and commodities derivatives		241,185		(198	)		160,867		(606	)		156,094		889

		3,850,432		(2,210	)		3,273,612		1,144			3,339,007		6,648


Hedging derivatives:
Interest rate risk-
Forward rate agreements		—		—			—		—			653		1
Interest rate swaps		211,964		1,225			218,539		1,751			164,800		2,205
Options and futures		7,314		18			21,144		(26	)		27,140		33
Foreign currency risk-
Foreign currency purchases and sales		3,875		(4	)		1,714		(14	)		8,329		(69	)
Foreign currency options		30,989		(294	)		21,784		(128	)		4,209		246
Currency swaps		26,913		748			14,715		1,091			12,889		1,595
Securities and commodities derivatives		985		(100	)		1,007		(32	)		3,593		(270	)

		282,040		1,593			278,903		2,643			221,613		3,741

Total		4,132,472		(617	)		3,552,515		3,787			3,560,620		10,389

The notional and/or contractual amounts of the contracts entered into do not reflect the actual risk assumed by the Group, since the net position in these financial instruments is the result of offsetting and/or combining them. This net position is used by the Group basically to hedge the interest rate, underlying asset price or foreign currency risk; the results on these financial instruments are recognized under Gains/losses on financial assets and liabilities (net) in the consolidated income statements and increase or offset, as appropriate, the gains or losses on the investments hedged (see Note 11).

Additionally, in order to interpret correctly the results on the Securities and commodities derivatives shown in the foregoing table, it should be considered that these items relate mostly to securities options for which a premium has been received which offsets their negative market value. Also, this market value is offset by positive market values generated by symmetrical positions in the Group’s held-for-trading portfolio.

The Group manages the credit risk exposure of these contracts through netting arrangements with its main counterparties and by receiving assets as collateral for its risk positions.

F-153

The detail of the cumulative credit risk exposure, by financial derivative, is as follows:


	Millions of euros
	2010			2009			2008

Credit derivatives		855			1,942			3,186
Securities derivatives		2,191			2,763			4,322
Fixed-income derivatives		95			343			345
Currency derivatives		21,139			21,568			15,277
Interest rate derivatives		29,234			23,438			25,117
Commodities derivatives		252			138			138
Collateral received		(6,873	)		(7,430	)		(9,366	)

Total		46,893			42,761			39,019

The notional amounts and fair values of the hedging derivatives, by type of hedge, is as follows:


	Millions of euros
	2010					2009					2008
	Notional		Fair			Notional		Fair			Notional		Fair
	amount		value			amount		value			amount		value

Fair value hedges		212,705		2,174			203,975		3,289			169,623		3,340
Cash flow hedges		43,090		(285	)		66,194		(518	)		45,162		185
Hedges of net investments in foreign operations		26,245		(296	)		8,735		(128	)		6,828		216

		282,040		1,593			278,904		2,643			221,613		3,741

Following is the description of the main hedges (including the results of the hedging instrument and the hedged item attributable to the hedged risk):

i. Fair value and cash flow hedges

Micro-hedges

The Group hedges the interest rate risk of the issues guaranteed by the Parent Bank. At 2010 year-end, the Group held derivative contracts to hedge the interest rate risk of issues, with an equivalent euro nominal value of EUR 53,423 million, of which EUR 43,949 million were denominated in euros, EUR 5,662 million in US dollars and EUR 3,113 million in pounds sterling. The fair value of these transactions at that date represented a gain of EUR 1,651.5 million, which was offset by the loss on the hedged items, giving rise to a net gain of EUR 10.1 million.

Interest rate risk hedges of portfolios of financial instruments

The main hedges of portfolios of financial instruments in the Group are described below:

	•		Hedges for the purpose of eliminating exposure to the interest rate risk of mortgage loan portfolios.

	•		Hedges for the purpose of covering the interest rate risk of issued liabilities -issues of subordinated debt and mortgage-backed bonds (cédulas hipotecarias).

	•		Hedges for the purpose of covering the interest rate risk of fixed-rate consumer loans.

These hedges are recognized mainly at Santander UK, Banesto and the Santander Consumer Finance Group.

In the case of fair value hedges of interest rate risk on financial instrument portfolios, the gain or loss on the hedged items is recognized in assets or liabilities under Changes in the fair value of hedged items in portfolio hedges of interest rate risk. At December 31, 2010, there were gains of EUR 1,464 million and losses of EUR 810 million associated with assets and liabilities thus hedged, respectively (December 31, 2009: gains of EUR 1,420 million and losses of EUR 806 million, respectively; December 31, 2008: gains of EUR 2,403 million and losses of EUR 440 million, respectively).

F-154

In 2010 an expense of EUR 586 million and a revenue of EUR 585 million, attributable to the hedged risk, were recognized in profit or loss on the hedging instruments and on the hedged items, respectively (2009: a revenue of EUR 8 million and an expense of EUR 146 million, respectively). At December 31, 2010, a net loss of EUR 7 million was recognized in profit or loss as a result of the ineffectiveness of hedge accounting.

The fair value of the cash flow hedges, net of the related tax effect, is recognized with a charge or credit to Valuation adjustments — Cash flow hedges in the Group’s equity. The detail of the terms, from December 31, 2010, within which it is expected that the amounts recognized under Valuation adjustments — Cash flow hedges in consolidated equity at that date will be recognized in future consolidated income statements is as follows:


	Thousands of euros
	Less than			1 to 5			More than
2010	1 year			years			5 years			Total
Debit balances (losses)		(192,861	)		(61,793	)		(30,165	)		(284,819	)

ii. Foreign currency hedges (net investments in foreign operations)

As part of its financial strategy, the Group hedges the foreign currency risk arising from its investments in non-euro-zone countries. To this end, it arranges foreign currency derivatives in order to take a long position in euros vis-à-vis the local currency of the investment. At 2010 year-end, the Group held foreign currency options in this connection with an equivalent euro nominal value of EUR 13,375 million, of which EUR 10,030 million were denominated in Brazilian reais and EUR 3,345 million in Mexican pesos. In 2010 losses amounting to EUR 1,313 million arising from the settlement of options that were exercised in the year were taken to reserves. At 2010 year-end, the market value of the options not yet exercised represented an unrealized loss of EUR 320 million. In addition to these options, the Group arranged other derivatives hedging the exposure to Chilean pesos with an equivalent euro value of EUR 2,759 million, which gave rise to a loss of EUR 316 million in 2010. The hedge, through short currency positions taken using futures, of the underlying carrying amount in pounds sterling, for a notional amount of EUR 4,930 million, recorded a loss of EUR 109 million in 2010. The overall losses incurred by the hedging derivatives are offset from an equity position by the appreciation in euros of the value of these Group investments.

At 2009 year-end, the Group held foreign currency options in this connection with an equivalent euro nominal value of EUR 9,404 million, of which EUR 7,461 million were denominated in Brazilian reais and EUR 1,943 million in Mexican pesos. In 2009 losses amounting to EUR 292 million arising from the settlement of options that were exercised in the year were taken to reserves. At 2009 year-end, the market value of the options not yet exercised represented an unrealized loss of EUR 153 million. In addition to these options, the Group arranged other derivatives hedging the exposure to Chilean pesos with an equivalent euro value of EUR 1,478 million, which gave rise to a loss of EUR 107 million in 2009. The hedge, through short currency positions, of the underlying carrying amount in pounds sterling, for a notional amount of GBP 4,485 million, recorded a loss of EUR 339 million in 2009. The overall losses incurred by the hedging derivatives are offset from an equity position by the appreciation in euros of the value of these Group investments.

37.

Discontinued operations

No significant operations were discontinued in 2010 or 2008. Following is the most relevant information of the operations discontinued in 2009.

Description of divestments (see Note 3)

i. Banco de Venezuela

On July 6, 2009, Banco Santander announced that it had closed the sale of the stake in Banco de Venezuela to Banco de Desarrollo Económico y Social de Venezuela, a public institution of the Bolivarian Republic of Venezuela, for USD 1,050 million, of which USD 630 million were received in cash on that date and the remainder was received before year-end. This sale did not have a material impact on the Group’s consolidated income statement.

F-155

Profit or loss and net cash flows from discontinued operations

The detail of the profit or loss from discontinued operations is set forth below.

The comparative figures were restated in order to include the operations classified as discontinued.


	Millions of euros
	2010			2009			2008

Interest income/(charges)		33			248			645
Income from companies accounted for using the equity method		—			1			6
Net fee and commission income		2			48			184
Gains/losses on financial assets and liabilities		—			10			63
Exchange differences		—			(1	)		(1	)
Other operating income (net)		—			(8	)		(52	)

Total income		35			298			845
Personnel expenses		(6	)		(59	)		(162	)
Other general administrative expenses		(9	)		(61	)		(170	)
Depreciation and amortization		(1	)		(11	)		(33	)
Provisions		—			(19	)		(62	)
Impairment losses on financial assets		(37	)		(104	)		(63	)

Gains (losses) on disposal of assets not classified as non-current assets held for sale		(7	)		2			17

Operating profit/(loss) before tax		(25	)		46			372

Income tax		(2	)		(15	)		(53	)
Profit/(loss) from discontinued operations		(27	)		31			319

Additionally, following is a detail of the net cash flows attributable to the operating, investing and financing activities of discontinued operations.

The comparative figures were restated in order to include the operations classified as discontinued.


	Millions of euros
	2010			2009			2008

Cash and cash equivalents at beginning of year		—			2,623			1,807
Cash flows from operating activities		(2	)		(2,043	)		751
Cash flows from investing activities		2			143			(30	)
Cash flows from financing activities		—			(723	)		94

Cash and cash equivalents at end of year		—			—			2,623

F-156

Consideration received

The detail of the assets and liabilities associated with the operations discontinued in 2009 is as follows:


Millions of euros	2009

ASSETS:		8,839
Cash and balances with central banks		2,832
Financial assets held for trading		7
Available-for-sale financial assets		544
Loans and receivables		5,125
Investments		7
Tangible assets and intangible assets		132
Tax assets		128
Other assets		63

LIABILITIES:		(8,089	)
Financial liabilities at amortized cost		(7,619	)
Provisions		(309	)
Tax liabilities		(12	)
Other liabilities		(149	)

Underlying carrying amount		750

Goodwill		2
Non-controlling interests		(12	)

Net amount		740

Gains/Losses on divestments		—

Consideration received		740

Of which: In cash		740

Earnings per share relating to discontinued operations

The earnings per share relating to discontinued operations were as follows:


	2010			2009		2008

Basic earnings per share (euros)		(0.0031	)		0.0032		0.0427
Diluted earnings per share (euros)		(0.0031	)		0.0032		0.0425

38.

Interest and similar income

Interest and similar income in the consolidated income statement comprises the interest accruing in the year on all financial assets with an implicit or explicit return, calculated by applying the effective interest method, irrespective of measurement at fair value; and the rectifications of income as a result of hedge accounting. Interest is recognized gross, without deducting any tax withheld at source.

The detail of the main interest and similar income items earned in 2010, 2009 and 2008 is as follows:


	Thousands of euros
	2010		2009		2008

Balances with the Bank of Spain and other central banks		1,933,085		357,017		759,952
Loans and advances to credit institutions		1,044,967		2,520,858		3,819,453
Debt instruments		6,231,925		5,586,577		4,506,874
Loans and advances to customers		41,854,050		42,081,922		41,366,071
Insurance contracts linked to pensions (Note 25)		89,688		94,626		95,319
Other interest		1,753,039		2,532,004		4,495,877

Total		52,906,754		53,173,004		55,043,546

F-157

39.

Interest expense and similar charges

Interest expense and similar charges in the consolidated income statement includes the interest accruing in the year on all financial liabilities with an implicit or explicit return, including remuneration in kind, calculated by applying the effective interest method, irrespective of measurement at fair value; the rectifications of cost as a result of hedge accounting; and the interest cost attributable to provisions recorded for pensions.

The detail of the main items of interest expense and similar charges accrued in 2010, 2009 and 2008 is as follows:


	Thousands of euros
	2010		2009		2008

Deposits from the Bank of Spain and other central banks		303,610		296,449		422,265
Deposits from credit institutions		1,368,998		2,988,915		3,266,323
Customer deposits		13,445,551		11,810,713		15,000,393
Marketable debt securities and subordinated liabilities		7,189,382		8,590,796		13,232,690
Marketable debt securities		4,959,103		6,236,747		10,817,648
Subordinated liabilities (Note 23)		2,230,279		2,354,049		2,415,042
Provisions for pensions (Note 25)		481,273		481,771		453,852
Other interest		893,561		2,705,818		5,129,561

Total		23,682,375		26,874,462		37,505,084

40.

Income from equity instruments

Income from equity instruments includes the dividends and payments on equity instruments out of profits generated by investees after the acquisition of the equity interest.

The detail of Income from equity instruments is as follows:


	Thousands of euros
	2010		2009		2008

Equity instruments classified as:
Financial assets held for trading		241,950		238,209		222,795
Available-for-sale financial assets		120,118		198,265		329,962
Of which:
Royal Bank of Scotland		—		—		74,575

		362,068		436,474		552,757

41.

Income from companies accounted for using the equity method — Associates

Income from companies accounted for using the equity method — Associates comprises the amount of profit or loss attributable to the Group generated during the year by associates.

F-158

The detail of Income from companies accounted for using the equity method — Associates is as follows:


	Thousands of euros
	2010		2009			2008

Cepsa (Note 12)		—		—			130,932
Attijariwafa (Note 8)		—		—			27,560
Sovereign Bancorp (*)		—		(15,691	)		(110,251	)
RFS Holdings B.V. (**)		—		—			711,146
Other companies		16,921		15,171			32,367

		16,921		(520	)		791,754


(*)		Fully consolidated from February 2009.

(**)		Of the 2008 result of entities accounted for using the equity method relating to RFS Holdings B.V., EUR 675 million correspond to Banco Real, an entity which was accounted for using the equity method in the first three quarters of 2008 and was fully consolidated in the last quarter of that year (see Note 3).

42.

Fee and commission income

Fee and commission income comprises the amount of all fees and commissions accruing in favor of the Group in the year, except those that form an integral part of the effective interest rate on financial instruments.

The detail of Fee and commission income is as follows:


	Thousands of euros
	2010		2009		2008

Collection and payment services:
Bills		315,410		326,974		313,312
Demand accounts		995,078		858,696		570,404
Cards		1,980,236		1,761,868		1,566,972
Cheques and other		285,996		279,882		347,879
Orders		351,033		309,582		247,502

		3,927,753		3,537,002		3,046,069


Marketing of non-banking financial products:
Investment funds		1,198,307		1,070,672		1,458,148
Pension funds		151,465		148,986		160,331
Insurance		2,160,783		1,963,847		1,864,109

		3,510,555		3,183,505		3,482,588


Securities services:
Securities underwriting and placement		301,727		254,298		102,199
Securities trading		309,879		324,672		353,603
Administration and custody		221,815		242,665		247,612
Asset management		84,341		67,490		79,100

		917,762		889,125		782,514


Other:
Foreign exchange		177,613		154,847		96,187
Financial guarantees		529,739		485,149		391,280
Commitment fees		213,607		199,563		265,807
Other fees and commissions		2,402,673		2,277,177		1,676,955

		3,323,632		3,116,736		2,430,229

		11,679,702		10,726,368		9,741,400

F-159

43.

Fee and commission expense

Fee and commission expense shows the amount of all fees and commissions paid or payable by the Group in the year, except those that form an integral part of the effective interest rate on financial instruments.

The detail of Fee and commission expense is as follows:


	Thousands of euros
	2010		2009		2008

Fees and commissions assigned to third parties		1,222,954		1,050,665		936,713
Of which: Cards		842,156		728,485		710,330
Brokerage fees on lending and deposit transactions		41,542		29,591		26,925
Other fees and commissions		681,056		565,978		511,467

		1,945,552		1,646,234		1,475,105

44.

Gains/losses on financial assets and liabilities

Gains/losses on financial assets and liabilities includes the amount of the valuation adjustments of financial instruments, except those attributable to interest accrued as a result of application of the effective interest method and to allowances, and the gains or losses obtained from the sale and purchase thereof.

Breakdown

The detail, by origin, of Gains/losses on financial assets and liabilities is as follows:


	Thousands of euros
	2010			2009			2008

Other financial instruments at fair value through profit or loss (*)		70,028			197,993			607,309
Financial instruments not measured at fair value through profit or loss		791,430			1,630,858			1,722,651
Of which: Available-for-sale financial assets		1,020,035			861,901			767,131
Of which:
Debt instruments		437,794			439,633			397,213
Equity instruments		582,241			422,268			369,918
Of which: Other		(228,605	)		768,957			955,520
Of which:
Due to exchange of shares (Note 1.h)		—			723,917			—
Due to repurchase of securitizations		—			97,459			—
Disposal of ABN liabilities (Note 1.h)		—			—			741,100
Hedging derivatives and other		(8,847	)		(125,655	)		(4,539	)
Losses on assets to be delivered to Madoff/Lehman victims (Note 25)		—			—			(643,000	)
Other financial assets and liabilities held for trading (*)		1,311,812			2,098,449			1,209,828

		2,164,423			3,801,645			2,892,249


(*)		Includes the net gain or loss arising from transactions involving debt securities, equity instruments and derivatives included in this portfolio, since the Group manages its risk in these instruments on a global basis.

Gains/losses due to exchange of shares and repurchase of securitizations

In July 2009, the Group offered the holders of certain securities issued by various Group companies (with a total nominal amount of approximately EUR 9,100 million) the possibility of exchanging these securities for newly-issued Group securities plus a cash premium. Holders of securities with a cumulative nominal amount of EUR 4,527 million subscribed to this exchange. Since the characteristics of the securities received and delivered in the exchange differ substantially, the Group wrote down the original financial liability and recognized a new financial liability for the securities delivered, and recognized with a credit to income an amount of EUR 724 million relating to the difference between the carrying amount of the financial liability written down and the value of the consideration delivered.

F-160

Additionally, in August 2009 the Group invited the holders of securitization bonds to submit offers for the sale of their securities. The end nominal amount of bonds repurchased by the Group amounted to EUR 609 million, and the Group recognized with a credit to income an amount of EUR 97 million relating to the difference between the carrying amount of the financial liability written down and the value of the consideration delivered in cash.

On January 11, 2010, Banco Santander, S.A. invited the holders of subordinated bonds (corresponding to 13 different series issued by various Santander Group entities, with a combined outstanding amount of approximately EUR 3,300 million) to submit offers for the sale of all or part of their securities, to be purchased in cash by Banco Santander. The level of acceptance of the invitation was approximately 60% and the total nominal amount of the securities accepted for purchase was approximately EUR 2,000 million.

Also, on February 17, 2010, Banco Santander, S.A. invited the holders of perpetual subordinated bonds issued by Santander Perpetual, S.A.U., with a combined outstanding nominal amount of approximately USD 1,500 million (of which Santander holds approximately USD 350 million) to submit offers for the sale of all or part of their securities, to be purchased in cash by Banco Santander. The nominal amount accepted was USD 1,093 million, 95% of the total targeted by the offer.

These transactions did not give rise to any significant gains or losses in 2010.

Financial assets and liabilities at fair value through profit or loss

The detail of the amount of the asset balances is as follows:


	Millions of euros
	2010		2009		2008

Loans and advances to credit institutions		35,047		22,196		14,061
Loans and advances to customers		8,533		18,405		9,657
Debt instruments		62,476		57,286		49,050
Equity instruments		17,117		15,125		9,051
Derivatives		73,069		59,856		95,815

		196,242		172,868		177,634

The foregoing table shows the maximum credit risk exposure of these assets. The Group mitigates and reduces this exposure as explained below.

With respect to derivatives, the Group has entered into framework agreements with a large number of credit institutions and customers for the netting-off of asset positions and the provision of collateral for non-payment. For derivatives arranged with customers, the Group also applies a risk premium accrual policy. At December 31, 2010, the actual credit risk exposure of the derivatives was EUR 46,893 million (December 31, 2009: EUR 42,761 million; December 31, 2008: EUR 39,019 million) (see Note 36).

Loans and advances to credit institutions and Loans and advances to customers included repos amounting to EUR 35,054 million at December 31, 2010 (December 31, 2009: EUR 28,298 million). Also, mortgage-backed assets totalled EUR 5,995 million (December 31, 2009: EUR 6,828 million).

Debt instruments included EUR 37,893 million of Spanish and foreign government debt securities at December 31, 2010 (December 31, 2009: EUR 27,909 million).

At December 31, 2010 and 2009, the amount of the change in the year in the fair value of financial assets at fair value through profit or loss attributable to variations in their credit risk (spread) was not material, taking into account the Group’s management of these risks by purchasing protection through credit derivatives.

F-161

The detail of the amount of the liability balances is as follows:


	Millions of euros
	2010			2009			2008

Derivatives		(75,279	)		(58,713	)		(89,167	)
Other liabilities		(112,513	)		(99,175	)		(76,093	)

		(187,792	)		(157,888	)		(165,260	)

The difference between the amount recognized as liabilities at fair value and the amount which the Group would contractually be required to pay to the holders of the related obligations at maturity, in other than derivative transactions, was EUR 373 million at December 31, 2010 (December 31, 2009: EUR 352 million; December 31, 2008: EUR 605 million).

45.

Exchange differences

Exchange differences shows basically the gains or losses on currency dealings, the differences that arise on translations of monetary items in foreign currencies to the functional currency, and those disclosed on non-monetary assets in foreign currency at the time of their disposal.

46.

Other operating income and Other operating expenses

Other operating income and Other operating expenses in the consolidated income statement include:


	Thousands of euros
	2010			2009			2008

Insurance activity income		377,869			338,860			251,589
Income from insurance and reinsurance contracts issued		7,162,076			7,112,856			8,385,788
Of which:
Insurance and reinsurance premium income		6,845,205			6,950,140			8,150,685
Reinsurance income		316,871			162,716			235,103
Expenses of insurance and reinsurance contracts		(6,784,207	)		(6,773,996	)		(8,134,199	)
Of which:
Claims paid and other insurance-related expenses		(5,815,848	)		(3,015,508	)		(3,480,255	)
Net provisions for insurance contract liabilities		(689,019	)		(3,540,038	)		(4,381,487	)
Reinsurance premiums paid		(279,340	)		(218,450	)		(272,457	)
Non-financial services		135,451			140,404			117,718
Sales and income from the provision of non-financial services		340,371			377,800			586,872
Cost of sales		(204,920	)		(237,396	)		(469,154	)
Other operating income and expenses		(407,083	)		(335,347	)		(97,486	)
Other operating income		693,120			437,882			463,648
Of which, fees and commissions offsetting direct costs		70,430			116,851			155,785
Other operating expenses		(1,100,203	)		(773,229	)		(561,134	)
Of which, Deposit Guarantee Fund		(306,814	)		(317,708	)		(179,023	)

		106,237			143,917			271,821

Most of the Bank’s insurance activity is carried on in life insurance.

F-162

47.

Personnel expenses

Breakdown

The detail of Personnel expenses is as follows:


	Thousands of euros
	2010		2009		2008

Wages and salaries		6,635,673		6,060,541		4,941,871
Social security costs		1,188,132		1,054,906		815,864
Additions to provisions for defined benefit pension plans (Note 25)		145,859		175,810		184,072
Contributions to defined contribution pension funds (Note 25)		150,643		114,080		77,703
Share-based payment costs		152,820		147,805		107,644
Of which:
Payments granted to the Bank’s directors		5,055		5,724		3,560
Other personnel expenses		1,056,429		897,141		686,197

		9,329,556		8,450,283		6,813,351

Headcount

The average number of employees in the Group, by professional category, was as follows:


	Average number of employees (**)
	2010		2009		2008

The Bank:
Senior management (*)		100		87		90
Other line personnel		16,289		16,292		16,364
Clerical staff		3,284		3,625		3,816
General services personnel		31		33		36

		19,704		20,037		20,306

Banesto		9,272		9,678		10,330
Rest of Spain		6,749		5,970		5,940
Santander UK (**)		18,845		20,809		15,593
Other companies (***)		118,339		113,582		82,168

		172,909		170,076		134,337


(*)		Categories of deputy assistant executive vice presidents and above, including senior management.

(**)		The Santander UK Group includes Alliance & Leicester and Bradford & Bingley.

(***)		Excluding personnel assigned to discontinued operations.

The functional breakdown, by gender, at December 31, 2010 is as follows:


	Functional breakdown by gender
	Executives				Other line personnel				Clerical staff
	Men		Women		Men		Women		Men		Women

Continental Europe		1,239		248		6,342		2,844		21,855		19,815
United Kingdom		109		21		414		197		9,235		15,244
Latin America		707		108		3,681		2,750		39,905		54,155

Total		2,055		377		10,437		5,791		70,995		89,214

F-163

The same information, expressed in percentage terms at December 31, 2010, is as follows:


	Functional breakdown by gender
	Executives						Other line personnel						Clerical staff
	Men			Women			Men			Women			Men			Women

Continental Europe		83	%		17	%		69	%		31	%		52	%		48	%
United Kingdom		84	%		16	%		68	%		32	%		38	%		62	%
Latin America		87	%		13	%		57	%		43	%		42	%		58	%

Total		84	%		16	%		64	%		36	%		44	%		56	%

The labor relations between employees and the various Group companies are governed by the related collective labor agreements or similar regulations.

Share-based payments

The main share-based payments granted by the Group at December 31, 2010, 2009 and 2008 are described below.

i. The Bank

In recent years, as part of the deferred variable remuneration, the Group has set up remuneration systems tied to the performance of the stock market price of the shares of the Bank, based on the achievement of certain targets indicated below:


												Date of		Date of
				Euros								commencement		expiry of
	Number of			Exercise		Year		Employee	Number of			of exercise		exercise
	shares			price		granted		group	persons			period		period
Plans outstanding at 01/01/08		121,194,782

Options exercised (Plan I06)		(65,983,402	)		9.09		—	Executives		(1,555	)		15/01/08		15/01/09

Options granted (Plan I10)		46,560			—		2008	Executives		1			23/06/07		31/07/10

Options granted (Plan I11)		17,122,650			—		2008	Executives		5,771			21/06/08		31/07/11

Plans outstanding at 12/31/08		72,380,590

Shares delivered (Plan I09)		(8,978,865	)		—		2007	Executives		(5,066	)		23/06/07		31/07/09
Options cancelled, net (Plan I06)		(29,072,617	)		9.09		—	Executives		(957	)		15/01/08		15/01/09
Options cancelled, net (Plan I09)		(1,469,615	)		—		2007	Executives		(410	)		23/06/07		31/07/09
Options granted (Plan I12)		18,866,927			—		2009	Executives		6,510			19/06/09		31/07/12

Plans outstanding at 12/31/09		51,726,420

Shares delivered (Plan I10)		(12,947,042	)		—		2007	Executives		(4,930	)		23/06/07		31/07/10
Options cancelled, net (Plan I10)		(2,789,801	)		—		2007	Executives		(577	)		23/06/07		31/07/10
Options granted (Plan I13)		19,612,616			—		2010	Executives		6,782			11/06/10		31/07/13

Plans outstanding at 12/31/10		55,602,193

Of which:
Plan I11		17,122,650			—		2008	Executives		5,771			21/06/08		31/07/11
Plan I12		18,866,927			—		2009	Executives		6,510			19/06/09		31/07/12
Plan 113		19,612,616			—		2010	Executives		6,782			11/06/10		31/07/13

Plan I06

In 2004, as part of the variable remuneration, a long-term incentive plan (I06) was designed which, consisting of options on shares of the Bank, was tied to the achievement of two targets: appreciation of the Bank’s share price and growth in earnings per share, in both cases above a sample of comparable banks. These targets were achieved. The exercise period was from January 15, 2008 to January 15, 2009. This Plan was approved by the shareholders at the general meeting on June 18, 2005 and was cancelled at December 31, 2009.

F-164

The fair value of the equity instruments granted (EUR 57.5 million) was charged to income (see Note 47.a), with a credit to equity, in the specific period in which the beneficiaries provided their services to the Group.

The executive directors were beneficiaries under this plan; the number of Bank share options held by them is indicated in Note 5.d.

Long-term incentive policy

At the board meeting on March 26, 2007, following the report of the appointments and remuneration committee, the Bank’s directors approved a long-term incentive policy aimed at the Bank’s executive directors and certain executive personnel of the Bank and of other Santander Group companies. This policy, through which the deferred share-based variable remuneration is paid, includes Bank share-based payments, and its implementation requires, in conformity with the law and the Bank’s Bylaws, specific resolutions to be adopted by the general meeting.

Were it necessary or advisable for legal, regulatory or other similar reasons, the delivery mechanisms described below may be adapted in specific cases without altering the maximum number of shares linked to the plan or the essential conditions to which the delivery thereof is subject. These adaptations may involve replacing the delivery of shares with the delivery of cash amounts of an equal value.

The plans shaping the aforementioned incentive policy are as follows: (i) performance share plan; (ii) obligatory investment share plan; (iii) selective delivery share plan; (iv) minimum investment programme; and (v) deferred conditional delivery share plan. The characteristics of the plans are set forth below:

(i)

Performance share plan

The deferred share-based variable remuneration is instrumented through a multiannual incentive plan, which is payable in shares of the Bank. The beneficiaries of the plan are the executive directors and other members of senior management, together with any other Group executives determined by the board of directors or, when delegated by it, the executive committee.

This plan involves successive three-year cycles of share deliveries to the beneficiaries, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end. The aim is to establish an adequate sequence between the end of the incentive programme linked to the previous Plan I06 and the successive cycles of this plan. Thus, the first two cycles commenced in July 2007, the first cycle having a duration of two years (PI09) and the second cycle having a standard three-year term (PI10). The first cycle (PI09) was terminated on July 31, 2009 and the second cycle (PI10) was cancelled on July 31, 2010. In June 2008, 2009 and 2010 the third, fourth and fifth cycles of the performance share plan (PI11, PI12 and PI13, respectively) were approved.

For each cycle a maximum number of shares is established for each beneficiary who remains in the Group’s employ for the duration of the plan. The targets, which, if met, will determine the number of shares to be delivered with respect to the cycles approved until June 2008, were defined by comparing the Group’s performance with that of a benchmark group of financial institutions and were linked to two parameters, namely Total Shareholder Return (TSR) and growth in Earnings per Share (EPS). The targets, which, if met, will determine the number of shares to be delivered under Plan PI12 and Plan PI13, are defined by comparing the Group’s performance with that of a benchmark group of financial institutions and are linked to only one parameter, namely Total Shareholder Return (TSR).

F-165

At the end of the cycle of Plan PI11, the TSR and the EPS growth will be calculated for Santander and each of the benchmark entities and the results will be ranked from first to last. Each of the two criteria (TSR and EPS growth) will be weighted at 50% in the calculation of the percentage of shares to be delivered, based on the following scale and in accordance with Santander’s relative position among the group of benchmark financial institutions:


Santander’s	Percentage of			Santander’s	Percentage of
place in the TSR	maximum shares			place in the EPS	maximum shares
ranking	to be delivered			growth ranking	to be delivered

1st to 6th		50	%	1st to 6th		50	%
7th		43	%	7th		43	%
8th		36	%	8th		36	%
9th		29	%	9th		29	%
10th		22	%	10th		22	%
11th		15	%	11th		15	%
12th and below		0	%	12th and below		0	%

In the case of Plan PI12 and Plan PI13, the TSR criterion will determine the percentage of shares to be delivered, based on the following scale and in accordance with Santander’s relative position among the group of benchmark financial institutions:


Santander’s	Percentage of
place in the TSR	maximum shares
ranking	to be delivered

1st to 5th		100.0	%
6th		82.5	%
7th		65.0	%
8th		47.5	%
9th		30.0	%
10th and below		0	%

Any benchmark group entity that is acquired by another company, whose shares cease trading or that ceases to exist, will be excluded from the benchmark group. In an event of this or any similar nature, the comparison with the benchmark group will be performed in such a way that, for each of the measures considered (TSR and EPS growth, as appropriate), the maximum percentage of shares will be delivered if Santander ranks within the first quartile (including the 25th percentile) of the benchmark group; no shares will be delivered if Santander ranks below the median (50th percentile); 30% of the maximum amount of shares will be delivered if Santander is placed at the median (50th percentile). The linear interpolation method will be used for calculating the corresponding percentage for positions between the median and the first quartile (25th percentile) (neither included).

The fair value of the equity instruments granted under these plans is EUR 287 million (of which EUR 109 million correspond to PI13), and this amount is being charged to Personnel expenses, with a credit to equity, over the specific period in which the beneficiaries provide their services to the Group.

Plan I10 matured in 2010. As established in the aforementioned plan, the number of shares received by each beneficiary was determined by the degree of achievement of the targets to which Plan I10 was tied and, since it fell short of the maximum number established, the unearned options were cancelled.

(ii) Obligatory investment share plan

The deferred share-based variable remuneration is instrumented through this multiannual incentive plan, which is payable in shares of the Bank and is conditional upon compliance with certain investment and continued service requirements.

The current beneficiaries of the plan are the Group’s top 32 executives, who include the executive directors, non-director members of senior management and other executives (see Note 5).

F-166

The shares will be delivered within a maximum period of one month from the third anniversary of the date on which the obligatory investment was made.

The shareholders at the annual general meeting of June 19, 2009 introduced, for the third cycle, a requirement additional to that of remaining in the Group’s employ, which is that in the three-year period from the investment in the shares, none of the following circumstances should concur: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, that relating to risks that is applicable to the executive in question; or (iii) a material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards.

(iii) Selective delivery share plan

This plan envisages the selective delivery of shares in special circumstances relating to the hiring or retention of executives or employees of the Bank or other Group entities, except for executive directors. The board of directors, or by delegation thereof, the executive committee, shall decide when this instrument is to be used.

Each participant must have completed a minimum of three to four years of service at the Group. Each participant will be entitled to receive the shares upon completion of the minimum period of service.

The authorization may be used to assume share delivery obligations in the twelve months following the date it was granted. At the annual general meeting on June 11, 2010, the shareholders approved the delivery of shares of the Bank up to a maximum of 2,500,247 shares to be used selectively.

(iv) Minimum investment programme

This programme consists of the obligation of the Group’s top 31 executives (including executive directors) to hold Bank shares equal to one year’s fixed remuneration. This amount must be reached within a maximum period of five years from March 26, 2007.

(v) Deferred conditional delivery share plan

This deferred share-based variable remuneration is instrumented through a multiannual incentive plan, which is payable in shares of the Bank. The beneficiaries of the plan are the executive directors and executives and employees of Santander Group whose annual variable remuneration or bonus for 2010 generally exceeds EUR 300,000 (gross), with a view to deferring a portion of the aforementioned variable remuneration or bonus over a period of three years in which it will be paid in Santander shares.

F-167

The share-based bonus will be deferred over a period of three years and will be paid, where appropriate, in three installments starting in the first year. The amount in shares will be calculated based on the tranches of the following scale established by the board of directives on the basis of the gross variable cash-based remuneration or annual bonus for 2010:


Benchmark bonus	Percentage
(thousands of euros)	(deferred)
300 or less		0	%
301 to 600 (inclusive)		20	%
601 to 1,200 (inclusive)		30	%
1,201 to 2,400 (inclusive)		40	%
More than 2,400		50	%

The condition for accrual of the share-based deferred remuneration was, in addition to that of the beneficiary remaining in the Group’s employ, and with the exceptions envisaged in the plan regulations that none of the following circumstances should occur in the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, that relating to risks that is applicable to the executive in question; (iii) a material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in economic capital and the qualitative assessment of risk.

ii. Santander UK

The long-term incentive plans on shares of the Bank granted by management of Santander UK to its employees are as follows:

F-168

Date of

Exercise price

commencement

expiry of

Number of

in pounds

Year

Employee

Number of

of exercise

exercise

sterling (*)

granted

group

persons

period

Plans outstanding at 01/01/08

8,048,312

5.34

Options granted (Sharesave)

5,196,807

7.69

2008

Employees

6,556 (**

)

01/11/08

01/11/11

Options exercised

(6,829,255

)

4.91

01/11/08

01/11/13

Of which:

Executive options

(132,107

)

4.11

Sharesave

(4,506,307

)

3.07

MTIP

(2,190,841

)

8.73

Options cancelled (net) or not exercised

(262,868

)

4.87

Of which:

Sharesave

(233,859

)

4.13

MTIP

(29,009

)

10.88

Plans outstanding at 12/31/08

6,152,996

7.00

Options granted (Sharesave)

4,527,576

7.26

2009

Employees

7,066 (**

)

01/11/09
01/11/09

01/11/12
01/11/14

Options exercised

(678,453

)

Of which:

Sharesave

(678,453

)

3.85

Options cancelled (net) or not exercised

(1,277,590

)

Of which:

Sharesave

(1,277,590

)

7.48

Plans outstanding at 12/31/09

8,724,529

7.24

Options granted (Sharesave)

3,359,425

6.46

2010

Employees

4,752 (**

)

01/11/10
01/11/10

01/11/13
01/11/15

Options exercised

(72,516

)

7.54

Of which:

Sharesave

(72,516

)

7.54

Options cancelled (net) or not exercised

(3,072,758

)

6.82

Of which:

Sharesave

(3,072,758

)

6.82

Plans outstanding at 12/31/10

8,938,680

7.09

Of which:

Executive Options

12,015

4.54

2003-2004

Executives

26/03/06

24/03/13

Sharesave

8,926,665

7.09

2004-2008-
2009-2010

Employees

13,195

(**)

01/04/06

01/11/15


(*)		At December 31, 2010, 2009 and 2008, the euro/pound sterling exchange rate was EUR 1.16178/GBP 1; EUR 1.12600/GBP 1 and EUR 1.04987/GBP 1, respectively.

(**)		Number of accounts/contracts. A single employee may have more than one account/contract.

In 2005 the Group designed a Medium-Term Incentive Plan (MTIP) involving the delivery of Bank shares to Santander UK executives. Under the plan, effective allocation of the shares in 2008 was tied to the achievement of business targets by Santander UK (in terms of net profit and income). This plan was approved by the shareholders at the annual general meeting held on June 17, 2006. Subsequently, it was considered necessary to amend the conditions of the plan in order to reflect the impact of the sale of Santander UK’s life insurance business to Resolution on the income targets of Santander UK for 2007. The board of directors, after obtaining a favorable report from the appointments and remuneration committee, submitted this amendment for ratification by the shareholders at the annual general meeting held on June 23, 2007. The amendment was approved thereat. In the first half of 2008, all the shares under this plan were delivered, and the plan was cancelled on June 30, 2008.

In 2008 the Group launched a voluntary savings scheme for Santander UK employees (Sharesave Scheme) whereby employees who join the scheme will have between GBP 5 and GBP 250 deducted from their net monthly pay over a period of three or five years. When this period has ended, the employees may use the amount saved to exercise options on shares of the Bank at an exercise price calculated by reducing by up to 20% the average purchase and sale prices of the Bank shares in the first three trading days of September 2008. This scheme, which commenced in September 2009, was approved by the shareholders at the annual general meeting held on June 21, 2008 and is authorized by the UK tax authorities (HMRC). At the annual general meetings held on June 19, 2009 and June 11, 2010, the shareholders approved a plan with similar features to the plan approved in 2008.

F-169

iii. Fair value

The fair value of each option granted by the Group is calculated at the grant date. In order to value Plan I06 two valuation reports were performed by two multinational investment banks. These experts used the Black-Scholes equity option pricing model considering the following parameters: the expected life of the options, interest rates, volatility, exercise price, market price and dividends of the Bank shares and the shares of comparable banks. The Group calculated the fair value of the options granted based in part upon the two valuations.

With the exception of the share option plans which include terms relating to market conditions, the transfer terms included in the vesting conditions are not taken into account to estimate fair value. The transfer terms that are not based on market conditions are taken into account by adjusting the number of shares or share options included in the measurement of the service cost of the employee so that, ultimately, the amount recognized in the consolidated income statement is based on the number of shares or share options transferred. When the transfer terms are related to market conditions, the charge for the services received is recognized regardless of whether the market conditions for the transfer are met, although the non-market transfer terms must be satisfied. The share price volatility is based on the implicit volatility scale for the Bank’s shares at the exercise prices and the duration corresponding to most of the sensitivities.

The fair value of the performance share plans was calculated as follows:

	•		It was assumed that the beneficiaries will not leave the Group’s employ during the term of each plan.

	•		The Group calculated the fair value of the 50% linked to the Bank’s relative TSR position (100% in the case of PI12), on the grant date, considering the report of an independent expert whose assessment was carried out using a Monte Carlo valuation model, performing 10,000 simulations to determine the TSR of each of the companies in the benchmark group, taking into account the variables set forth below. The results (each of which represents the delivery of a number of shares) are classified in decreasing order by calculating the weighted average and discounting the amount at the risk-free interest rate.


	PI09			PI10			PI11			PI12			PI13

Expected volatility (*)		16.25	%		15.67	%		19.31	%		42.36	%		49.65	%
Annual dividend yield based on last few years		3.23	%		3.24	%		3.47	%		4.88	%		6.34	%
Risk-free interest rate (Treasury Bond yield (zero coupon) over the period of the plan)		4.473	%		4.497	%		4.835	%		2.04	%		3.33	%


(*)		Calculated on the basis of historical volatility over the corresponding period (two or three years).

The application of the simulation model results in percentage values of 42.7% for the I09 plan, 42.3% for the I10 plan and 44.9% for the I11 plan, which are applied to 50% of the value of the options granted in order to determine the cost per books of the TSR-based portion of the incentive, and percentage values of 55.42% for the I12 plan and 62.62% for the I13 plan. Since this valuation refers to a market condition, it cannot be adjusted after the grant date.

•

In view of the high correlation between TSR and EPS, it was considered feasible to extrapolate that, in a high percentage of cases, the TSR value is also valid for EPS. Therefore, it was initially determined that the fair value of the portion of the plans linked to the Bank’s relative EPS position, i.e. of the remaining 50% of the options granted, was the same as that of the 50% corresponding to the TSR. Since this valuation refers to a non-market condition, it is reviewed and adjusted on a yearly basis.

F-170

The fair value of each option granted by Santander UK was estimated at the grant date using a European/American Partial Differential Equation model with the following assumptions:


	2010	2009	2008

Risk-free interest rate	1.7%-5.2%	2.5%-3.5%	2.9%-6.5%
Dividend increase, based solely on the average increase since 1989	8%	10%	10%
Volatility of underlying shares based on historical volatility over 5 years	20.3%-39.4%	29.0%-34.4%	20.2%-29.6%
Expected life of options granted under:
Employee Sharesave Plan	3, 5 and 7 years	3, 5 and 7 years	3, 5 and 7 years
Executive Options Plan	10 years	10 years	10 years

48.

Other general administrative expenses

Breakdown

The detail of Other general administrative expenses is as follows:


	Thousands of euros
	2010		2009		2008

Property, fixtures and supplies		1,731,165		1,613,675		1,206,895
Other administrative expenses		1,554,733		1,435,743		1,048,392
Technology and systems		797,701		785,504		504,196
Advertising		633,511		594,432		534,876
Communications		670,307		631,806		452,900
Technical reports		428,470		359,753		298,037
Per diems and travel expenses		276,397		262,097		257,079
Taxes other than income tax		376,115		312,994		279,250
Surveillance and cash courier services		401,367		331,220		235,207
Insurance premiums		56,666		47,098		35,674

		6,926,432		6,374,322		4,852,506

Other information

Technical reports includes the fees paid by the various Group companies (detailed in the accompanying Appendices) to their respective auditors, the detail being as follows:

•

The fees for the audit of the financial statements of Group companies amounted to EUR 21.6 million, the detail being as follows:

Millions of euros

2010

2009

2008

Audit of the annual financial statements of the companies audited by Deloitte

21.6

19.6

18.3

Of which:

Santander UK

4.1

3.7

3.3

Santander Holdings USA (formerly Sovereign)

2.5

2.3

—

Santander Brasil

1.7

1.5

2.4

Audit of the Bank’s separate and consolidated financial statements

1.1

1.0

F-171

•

The fees for services similar to the audit of financial statements amounted to EUR 10.7 million, the detail being as follows:


	Millions of euros
	2010		2009		2008

Internal control audit (SOX) and regulatory capital audit (Basel)		6.5		6.8		5.9

Other reports required by the different national supervisory bodies of the countries in which the Group operates		4.2		4.2		4.5


		10.7		11.0		10.4

Additionally the auditors were paid EUR 5.4 million in 2010, EUR 5.7 million in 2009 and EUR 6.2 million in 2008, which related mainly to six months audits. The EUR 6.2 million paid in 2008 were recognized as an increase in the cost of the business combination effected in that year.

	•		The detail of the other attest services relating to the audit of the various Group companies is as follows: audit services required for the issuance of debt securities, for EUR 2.5 million (2009: EUR 0.7 million; 2008: EUR 0.9 million), services relating to the adaptation to Solvency II, for EUR 0.6 million, as well as due diligence review work and audits of other corporate transactions, for EUR 5.8 million (2009: EUR 3 million; 2008: EUR 2.9 million).

	•		The fees for the fiscal advisory services provided to various Group companies amounted to EUR 3.9 million (2009: EUR 3.2 million; 2008: EUR 1.9 million) and the fees for other non-attest services amounted to EUR 1.7 million (2009: EUR 1.5 million; 2008: EUR 3.4 million).

The services commissioned from the Group’s auditors meet the independence requirements stipulated by Audit Law 19/1988, of July 12, amended by Law 12/2010, of June 30, and by the Sarbanes-Oxley Act of 2002, and they did not involve the performance of any work that is incompatible with the audit function.

•

Also, the Group commissioned services from audit firms other than Deloitte amounting to EUR 18.9 million (2009: EUR 14.0 million; 2008: EUR 13.9 million).

49.

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

The detail of Gains/(losses) on disposal of assets not classified as non-current assets held for sale is as follows:


	Millions of euros
	2010			2009			2008

Gains:
On disposal of tangible assets		206			51			115
On disposal of investments		193			1,531			53
Of which:
Banco Santander Brasil (Note 3)		—			1,499			—
Disposal of Porterbrook (Note 3)		—			—			50

		399			1,582			168

Losses:
On disposal of tangible assets		(9	)		(14	)		(64	)
On disposal of investments		(40	)		(4	)		(3	)

		(49	)		(18	)		(67	)

		350			1,565			101

F-172

50.

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

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


	Millions of euros
Net balance	2010			2009			2008

Tangible assets		(332	)		(1,362	)		799
Impairment of non-current assets held for sale (Note 12) ()*		(298	)		(1,350	)		(70	)
Gain on disposals		(34	)		(12	)		868
Of which, on disposal of the Ciudad Financiera business campus (Note 1.h)		—			—			836

Other gains		113			243			3,046
Of which:
Antonveneta (Note 1.h)		—			—			3,046
Attijariwafa Bank (Note 1.h)		—			218			—

Other losses		(71	)		(106	)		(2,113	)
Of which, write-down of ownership interests in Royal Bank of Scotland and Fortis (Note 1.h)		—			—			(2,043	)

Total		(290	)		(1,225	)		1,731


(*)		Including in 2009 the write-downs performed at year-end of EUR 814 million (EUR 554 million net of tax) (see Note 1.h).

51.

Other disclosures

Residual maturity periods and average interest rates

The detail, by maturity, of the balances of certain items in the consolidated balance sheets is as follows:


	December 31, 2010
	Millions of euros																					Average
	On			Less than 1			1 to 3			3 to 12			1 to 3			3 to 5		More than 5				interest
	demand			month			months			months			years			years		years		Total		rate

Assets:
Cash and balances with central banks		64,653			8,354			2,664			2,031			66			—		17		77,785		4.71	%
Available-for-sale financial assets-		291			1,939			1,395			5,836			26,329			11,086		32,813		79,689		5.23	%
Debt instruments
Loans and receivables-
Loans and advances to credit institutions		10,205			17,131			2,017			3,551			2,511			1,199		8,194		44,808		3.67	%
Loans and advances to customers		19,338			35,294			33,879			77,766			105,792			74,138		369,414		715,621		5.33	%
Debt instruments		30			1,556			867			1,046			932			409		3,589		8,429		2.04	%

		94,517			64,274			40,822			90,230			135,630			86,832		414,027		926,332		5.16	%

Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks		704			7,486			305			2			65			82		—		8,644		1.12	%
Deposits from credit institutions		3,603			22,172			9,116			12,272			9,218			10,500		4,012		70,893		4.23	%
Customer deposits		282,895			71,286			47,990			79,457			68,481			16,467		14,809		581,385		2.88	%
Marketable debt securities (*)		1,669			8,869			10,356			20,403			63,476			25,960		57,496		188,229		2.48	%
Subordinated liabilities		69			20			1,361			137			2,318			1,776		24,794		30,475		5.98	%
Other financial liabilities		8,151			2,516			4,539			351			2,643			403		740		19,343		N/A

		297,091			112,349			73,667			112,622			146,201			55,188		101,851		898,969		2.99	%

Difference (assets less liabilities)		(202,574	)		(48,075	)		(32,845	)		(22,392	)		(10,571	)		31,644		312,176		27,363


(*)		Includes promissory notes, certificates of deposit and other short-term debt issues.

F-173


	December 31, 2009
	Millions of euros																				Average
	On			Less than 1			1 to 3			3 to 12			1 to 3		3 to 5		More than 5				interest
	demand			month			months			months			years		years		years		Total		rate

Assets:
Cash and balances with central banks		19,998			10,585			521			3,310			475		—		—		34,889		4.07	%
Available-for-sale financial assets-
Debt instruments		67			5,180			1,082			4,163			10,224		28,967		29,606		79,289		5.01	%
Loans and receivables-
Loans and advances to credit institutions		9,834			22,660			5,893			6,893			1,692		2,190		8,479		57,641		3.15	%
Loans and advances to customers		12,401			35,749			33,408			69,955			82,397		82,769		347,467		664,146		6.08	%
Debt instruments		70			321			506			1,738			2,387		4,297		5,640		14,959		4.57	%

		42,370			74,495			41,410			86,059			97,175		118,223		391,192		850,924		5.67	%

Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks		383			7,359			258			14,109			6		227		3		22,345		1.69	%
Deposits from credit institutions		7,978			13,161			2,611			15,253			5,238		4,962		1,578		50,781		2.68	%
Customer deposits		235,974			69,839			47,546			64,755			34,148		30,571		4,848		487,681		2.70	%
Marketable debt securities (*)		1,079			16,545			12,709			37,033			50,302		31,498		57,324		206,490		2.38	%
Subordinated liabilities		3,412			752			34			1,841			1,714		3,097		25,955		36,805		5.69	%
Other financial liabilities		6,765			5,992			1,680			2,072			1,675		646		470		19,300		N/A

		255,591			113,648			64,838			135,063			93,083		71,001		90,178		823,402		2.73	%

Difference (assets less liabilities)		(213,221	)		(39,153	)		(23,428	)		(49,004	)		4,092		47,222		301,014		27,522


(*)		Includes promissory notes, certificates of deposit and other short-term debt issues.


	December 31, 2008
	Millions of euros																			Average
	On			Less than 1			1 to 3			3 to 12		1 to 3				More than 5				interest
	demand			month			months			months		years		3 to 5 years		years		Total		rate

Assets:
Cash and balances with central banks		20,920			22,121			846			621		—		—		1,272		45,781		4.51	%
Available-for-sale financial assets-
Debt instruments		21			4,630			385			5,123		9,534		6,522		16,333		42,548		5.13	%
Loans and receivables-
Loans and advances to credit institutions		16,111			15,394			6,448			20,947		367		2,598		2,865		64,731		4.98	%
Loans and advances to customers		35,010			29,706			51,500			64,061		103,164		72,172		261,619		617,231		7.56	%
Debt instruments		38			—			600			6,071		30		173		10,741		17,652		3.15	%

		72,100			71,851			59,779			96,824		113,096		81,464		292,829		787,944		6.94	%

Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks		1,681			366			2,427			4,720		—		14		4		9,212		4.38	%
Deposits from credit institutions		10,411			16,243			24,200			10,550		4,006		3,740		1,432		70,584		3.20	%
Customer deposits		182,475			64,213			70,655			49,707		20,349		9,602		9,014		406,015		5.08	%
Marketable debt securities (*)		7,250			22,168			26,241			25,125		42,132		23,509		81,218		227,642		4.21	%
Subordinated liabilities		190			571			41			1,103		3,506		1,283		32,179		38,873		5.69	%
Other financial liabilities		9,453			2,646			1,760			1,209		461		1,873		278		17,681

		211,461			106,208			125,324			92,415		70,453		40,022		124,124		770,008		4.66	%

Difference (assets less liabilities)		(139,361	)		(34,356	)		(65,545	)		4,409		42,642		41,442		168,705		17,936


(*)		Includes promissory notes, certificates of deposit and other short-term debt issues.

F-174

Equivalent euro value of assets and liabilities

The detail of the main foreign currency balances in the consolidated balance sheet, based on the nature of the related items, is as follows:


	Equivalent value in millions of euros
	2010				2009				2008
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities

Cash and balances with central banks		69,690		—		28,198		—		26,685		—
Financial assets/liabilities held for trading		112,990		96,089		94,069		87,066		104,429		96,666
Other financial instruments at fair value		18,271		20,154		18,407		27,195		14,478		22,025
Available-for-sale financial assets		45,491		—		43,048		—		25,338		—
Loans and receivables		453,787		—		408,161		—		351,302		—
Investments		161		—		92		—		1,169		—
Tangible assets		5,270		—		3,918		—		3,286		—
Intangible assets		24,024		—		21,659		—		16,940		—
Financial liabilities at amortized cost		—		537,904		—		456,697		—		406,270
Liabilities under insurance contracts		—		9,516		—		6,675		—		2,985
Other		20,877		43,440		20,864		32,207		18,945		25,230

		750,561		707,103		638,416		609,840		562,572		553,176

Fair value of financial assets and liabilities not measured at fair value

The financial assets owned by the Group are measured at fair value in the accompanying consolidated balance sheet, except for loans and receivables, equity instruments whose market value cannot be estimated reliably and derivatives that have these instruments as their underlyings and are settled by delivery thereof.

Similarly, the Group’s financial liabilities -except for financial liabilities held for trading, those measured at fair value and derivatives other than those having as their underlying equity instruments whose market value cannot be estimated reliably- are measured at amortized cost in the accompanying consolidated balance sheet.

i) Financial assets measured at other than fair value

Following is a comparison of the carrying amounts of the Group’s financial assets measured at other than fair value and their respective fair values at year-end:


	Millions of euros
	2010				2009				2008
	Carrying		Fair		Carrying		Fair		Carrying		Fair
Assets	amount		value		amount		value		amount		value

Loans and receivables:
Loans and advances to credit institutions		44,808		45,103		57,641		58,121		64,731		65,059
Loans and advances to customers		715,621		721,887		664,146		676,218		617,231		627,006
Debt instruments		8,429		8,097		14,959		13,718		17,653		17,645

		768,858		775,087		736,746		748,057		699,615		709,710

F-175

ii) Financial liabilities measured at other than fair value

Following is a comparison of the carrying amounts of the Group’s financial liabilities measured at other than fair value and their respective fair values at year-end:


	Millions of euros
	2010				2009				2008
	Carrying		Fair		Carrying		Fair		Carrying		Fair
Liabilities	amount		value		amount		value		amount		value

Financial liabilities at amortized cost:
Deposits from central banks		8,644		8,644		22,345		22,349		9,212		9,212
Deposits from credit institutions		70,893		71,036		50,781		50,905		70,583		70,740
Customer deposits		581,385		582,624		487,681		488,675		406,015		407,537
Marketable debt securities		188,229		189,671		206,490		206,765		227,642		227,413
Subordinated liabilities		30,475		32,006		36,805		37,685		38,873		36,705
Other financial liabilities		19,343		19,282		19,300		19,636		17,681		17,677

		898,969		903,263		823,403		826,015		770,007		769,285

52.

Geographical and business segment reporting

Geographical segments

This primary level of segmentation, which is based on the Group’s management structure, comprises five segments: four operating areas plus the Corporate Activities Unit. The operating areas, which include all the business activities carried on therein by the Group, are Continental Europe, the United Kingdom (Santander UK), Latin America and Sovereign, based on the location of the Group’s assets.

The Continental Europe area encompasses all the Retail Banking (including the Private Banking entity Banco Banif, S.A.), Wholesale Banking and Asset Management and Insurance business activities carried on in Europe with the exception of the United Kingdom. Latin America includes all the financial activities carried on by the Group through its banks and subsidiaries, as well as the specialized units of Santander Private Banking, which is treated as a globally managed independent unit, and the New York business. Sovereign includes the businesses of the Sovereign unit that was acquired in 2009.

The Corporate Activities segment includes the centralized management business relating to financial and industrial investments, the financial management of the Parent’s structural currency position and its structural interest rate risk position and the management of liquidity and equity through issues and securitizations. As the Group’s holding unit, this segment handles the total capital and reserves, capital allocations and liquidity with the other businesses.

The financial statements of each operating segment are prepared by aggregating the figures for the Group’s various business units. The basic information used for segment reporting comprises the accounting data of the legal units composing each segment and the data available from the management information systems. All segment financial statements have been prepared on a basis consistent with the accounting policies used by the Group.

Consequently, the sum of the figures in the income statements of the various segments is equal to those in the consolidated income statement. With regard to the balance sheet, due to the required segregation of the various business units (included in a single consolidated balance sheet), the amounts lent and borrowed between the units are shown as increases in the assets and liabilities of each business. These amounts relating to intra-Group liquidity are eliminated and are shown in the Intra-Group eliminations column in the table below in order to reconcile the amounts contributed by each business unit to the consolidated Group’s balance sheet.

There are no customers located in areas other than those in which the Group’s assets are located that generate income exceeding 10% of total income.

F-176

The condensed balance sheets and income statements of the various geographical segments are as follows:


	Millions of euros
	2010
	Continental								Corporate		Intra-Group
(Condensed) balance sheet	Europe		United Kingdom		Latin America		Sovereign		activities		eliminations			Total

Loans and advances to customers		323,660		233,856		127,268		36,724		2,646		—			724,154
Financial assets held for trading (excluding loans and advances)		57,690		45,187		31,580		211		5,122		—			139,790
Available-for-sale financial assets		23,843		204		30,697		10,203		21,288		—			86,235
Loans and advances to credit institutions		66,925		29,137		21,632		722		36,868		(75,429	)		79,855
Non-current assets		4,965		2,323		4,880		507		1,909		—			14,584
Other asset accounts		22,160		42,063		57,186		3,430		138,996		(90,952	)		172,883

Total assets / liabilities		499,243		352,770		273,243		51,797		206,829		(166,381	)		1,217,501

Customer deposits		247,715		184,548		137,848		32,007		14,258		—			616,376
Marketable debt securities		48,413		64,326		15,376		1,945		62,812		—			192,872
Subordinated liabilities		1,740		8,143		5,683		2,781		12,128		—			30,475
Liabilities under insurance contracts		933		1		9,515		—		—		—			10,449
Deposits from central banks and credit institutions		77,029		54,159		38,026		9,567		36,760		(75,429	)		140,112
Other liability accounts		95,993		29,831		45,990		2,297		10,448		(27,765	)		156,794
Equity (share capital + reserves)		27,420		11,762		20,805		3,200		70,423		(63,187	)		70,423

Other customer funds under management		53,968		14,369		77,180		30		—		—			145,547

Investment funds		37,519		14,369		61,622		—		—		—			113,510
Pension funds		10,965		—		—		—		—		—			10,965
Assets under management		5,484		—		14,800		30		—		—			20,314
Savings insurance		—		—		758		—		—		—			758

Customer funds under management		351,836		271,386		236,087		36,763		89,198		—			985,270

F-177


	Millions of euros
	2009
	Continental								Corporate		Intra-Group
(Condensed) balance sheet	Europe		United Kingdom		Latin America		Sovereign		activities		eliminations			Total

Loans and advances to customers		322,026		227,713		97,901		34,605		306		—			682,551
Financial assets held for trading (excluding loans and advances)		50,764		41,245		22,521		163		4,331		—			119,024
Available-for-sale financial assets		20,132		897		29,154		9,568		26,870		—			86,621
Loans and advances to credit institutions		90,530		28,745		22,146		496		43,550		(105,630	)		79,837
Non-current assets		5,054		1,424		3,926		391		979		—			11,774
Other asset accounts		21,955		24,522		38,105		3,568		144,697		(102,125	)		130,722

Total assets / liabilities		510,461		324,546		213,753		48,791		220,733		(207,755	)		1,110,529

Customer deposits		198,144		166,607		108,122		30,888		3,216		—			506,977
Marketable debt securities		50,610		58,611		8,411		11,236		83,094		—			211,962
Subordinated liabilities		2,079		8,577		4,888		2,129		19,131		—			36,804
Liabilities under insurance contracts		10,287		3		6,627		—		—		—			16,917
Deposits from central banks and credit institutions		117,509		57,879		32,765		736		38,832		(105,630	)		142,091
Other liability accounts		105,366		26,946		34,994		1,689		11,274		(49,677	)		130,592
Equity (share capital + reserves)		26,466		5,923		17,946		2,113		65,186		(52,448	)		65,186

Other customer funds under management		70,289		10,937		62,759		327		—		—			144,312

Investment funds		44,598		10,937		49,681		—		—		—			105,216
Pension funds		11,310		—		—		—		—		—			11,310
Assets under management		5,499		—		12,538		327		—		—			18,364
Savings insurance		8,882		—		540		—		—		—			9,422

Customer funds under management		321,122		244,732		184,180		44,580		105,441		—			900,055

F-178


	Millions of euros
	2008
	Continental								Corporate		Intra-Group
(Condensed) balance sheet	Europe		United Kingdom		Latin America		Sovereign		activities		eliminations			Total

Loans and advances to customers		325,378		202,622		96,054		—		2,836		—			626,890
Financial assets held for trading (excluding loans and advances)		72,303		50,029		20,965		—		2,686		—			145,983
Available-for-sale financial assets		12,806		2,785		19,208		—		14,122		—			48,921
Loans and advances to credit institutions		63,296		31,518		19,946		—		48,222		(84,189	)		78,793
Non-current assets		4,612		1,210		3,272		—		1,195		—			10,289
Other asset accounts		17,644		30,626		30,496		—		178,563		(118,573	)		138,756

Total assets / liabilities		496,039		318,790		189,941		—		247,624		(202,762	)		1,049,632

Customer deposits		165,762		143,200		108,257		—		3,010		—			420,229
Marketable debt securities		52,077		67,996		8,674		—		107,657		—			236,404
Subordinated liabilities		1,752		9,890		3,847		—		23,384		—			38,873
Liabilities under insurance contracts		13,889		3		2,958		—		—		—			16,850
Deposits from central banks and credit institutions		85,232		60,063		29,331		—		39,434		(84,183	)		129,877
Other liability accounts		153,674		32,306		24,291		—		14,435		(77,011	)		147,695
Equity (share capital + reserves)		23,653		5,332		12,583		—		59,704		(41,568	)		59,704

Other customer funds under management		75,473		7,180		48,408		—		—		—			131,061

Investment funds		47,725		7,180		35,400		—		—		—			90,305
Pension funds		11,128		—		—		—		—		—			11,128
Assets under management		4,479		—		12,810		—		—		—			17,289
Savings insurance		12,141		—		198		—		—		—			12,339

Customer funds under management		295,064		228,266		169,186		—		134,051		—			826,567

F-179


	Millions of euros
	2010
	Continental												Corporate
(Condensed) income statement	Europe			United Kingdom			Latin America			Sovereign			activities			Total

INTEREST INCOME/(CHARGES)		10,957			4,431			14,778			1,736			(2,678	)		29,224
Income from equity instruments		217			—			80			1			64			362
Income from companies accounted for using the equity method		9			—			10			—			(2	)		17
Net fee and commission income		3,748			957			4,661			408			(40	)		9,734
Gains/losses on financial assets and liabilities		843			465			1,410			29			(141	)		2,606
Other operating income/(expenses)		171			28			(163	)		(67	)		137			106
TOTAL INCOME		15,945			5,881			20,776			2,107			(2,660	)		42,049
Personnel expenses		(3,429	)		(1,209	)		(3,955	)		(468	)		(269	)		(9,330	)
Other administrative expenses		(2,084	)		(819	)		(3,238	)		(364	)		(421	)		(6,926	)
Depreciation and amortization of tangible and intangible assets		(639	)		(286	)		(778	)		(105	)		(132	)		(1,940	)
Net impairment losses on financial assets		(4,218	)		(760	)		(4,687	)		(510	)		(268	)		(10,443	)
Provisions (net)		(60	)		(132	)		(990	)		(66	)		115			(1,133	)
Net impairment losses on non-financial assets		(48	)		—			(12	)		(19	)		(207	)		(286	)
Other non-financial gains/(losses)		(55	)		47			255			(6	)		(180	)		61
OPERATING PROFIT/(LOSS) BEFORE TAX		5,412			2,722			7,371			569			(4,022	)		12,052
Income tax		(1,417	)		(737	)		(1,717	)		(143	)		1,091			(2,923	)
PROFIT/(LOSS) FROM CONTINUING OPERATIONS		3,995			1,985			5,654			426			(2,931	)		9,129
Profit/(loss) from discontinued operations		(14	)		—			—			—			(13	)		(27	)
CONSOLIDATED PROFIT/(LOSS) FOR THE YEAR		3,981			1,985			5,654			426			(2,944	)		9,102
Attributable to non-controlling interests		96			—			850			—			(25	)		921
PROFIT/(LOSS) ATTRIBUTABLE TO THE PARENT		3,885			1,985			4,804			426			(2,919	)		8,181

F-180


	Millions of euros
	2009																		2008
(Condensed)	Continental												Corporate						Continental											Corporate
income statement	Europe			United Kingdom			Latin America			Sovereign			activities			Total			Europe			United Kingdom			Latin America			Sovereign		activities			Total

INTEREST INCOME/(CHARGES)		11,456			3,934			11,959			1,160			(2,210	)		26,299			9,259			2,411			8,025			—		(2,157	)		17,538
Income from equity instruments		218			—			96			1			121			436			266			—			58			—		229			553
Income from companies accounted for using the equity method		7			—			10			(3	)		(15	)		(1	)		15			1			680			—		96			792
Net fee and commission income		3,787			993			3,925			380			(5	)		9,080			4,074			926			3,208			—		59			8,267
Gains/losses on financial assets and liabilities		687			506			1,663			14			1,376			4,246			764			500			857			—		1,353			3,474
Other operating income/(expenses)		139			27			15			(89	)		52			144			181			49			10			—		32			272
TOTAL INCOME		16,294			5,460			17,668			1,463			(681	)		40,204			14,559			3,887			12,838			—		(388	)		30,896
Personnel expenses		(3,306	)		(1,170	)		(3,210	)		(457	)		(307	)		(8,450	)		(3,123	)		(986	)		(2,504	)		—		(200	)		(6,813	)
Other administrative expenses		(2,028	)		(827	)		(2,822	)		(309	)		(388	)		(6,374	)		(1,833	)		(617	)		(2,147	)		—		(255	)		(4,852	)
Depreciation and amortization of tangible and intangible assets		(570	)		(231	)		(566	)		(115	)		(114	)		(1,596	)		(500	)		(158	)		(404	)		—		(177	)		(1,239	)
Net impairment losses on financial assets		(3,286	)		(881	)		(4,979	)		(571	)		(1,861	)		(11,578	)		(2,476	)		(457	)		(3,020	)		—		(331	)		(6,284	)
Provisions (net)		(311	)		16			(681	)		(55	)		(762	)		(1,793	)		(89	)		(29	)		(533	)		—		(989	)		(1,640	)
Net impairment losses on non-financial assets		(41	)		—			(22	)		(1	)		(100	)		(164	)		(16	)		—			(6	)		—		(1,027	)		(1,049	)
Other non-financial gains/(losses)		(81	)		—			40			(2	)		382			339			(38	)		32			54			—		1,783			1,831
OPERATING PROFIT/(LOSS) BEFORE TAX		6,671			2,367			5,428			(47	)		(3,831	)		10,588			6,484			1,672			4,278			—		(1,584	)		10,850
Income tax		(1,768	)		(641	)		(1,257	)		22			2,437			(1,207	)		(1,686	)		(425	)		(663	)		—		938			(1,836	)
PROFIT/(LOSS) FROM CONTINUING OPERATIONS		4,903			1,726			4,171			(25	)		(1,394	)		9,381			4,798			1,247			3,615			—		(646	)		9,014
Profit/(loss) from discontinued operations		(45	)		—			91			—			(15	)		31			(21	)		—			340			—		—			319
CONSOLIDATED PROFIT/(LOSS) FOR THE YEAR		4,858			1,726			4,262			(25	)		(1,409	)		9,412			4,777			1,247			3,955			—		(646	)		9,333
Attributable to non-controlling interests		65			—			428			—			(24	)		469			109			—			346			—		1			456
PROFIT/(LOSS) ATTRIBUTABLE TO THE PARENT		4,793			1,726			3,834			(25	)		(1,385	)		8,943			4,668			1,247			3,609			—		(647	)		8,877

F-181

Following is the detail of revenue by the geographical segments used by the Group. For the purposes of the table below, revenue is deemed to be that recognized under Interest and similar income, Income from equity instruments, Fee and commission income, Gains/losses on financial assets and liabilities (net) and Other operating income in the accompanying consolidated income statements for 2010, 2009 and 2008.


	Revenue (millions of euros)
	Revenue from external							Inter-segment
	customers							revenue									Total revenue
Segment	2010			2009		2008		2010			2009			2008			2010			2009			2008

Continental Europe		27,538			31,968		40,396		130			1,297			1,108			27,668			33,265			41,504
United Kingdom		10,201			10,595		13,621		92			1,287			2,099			10,293			11,882			15,721
Latin America		35,197			30,101		23,184		(414	)		480			1,169			34,783			30,581			24,353
Sovereign		2,850			2,496		—		(42	)		(19	)		—			2,808			2,477			—
Corporate activities		(477	)		906		464		2,980			5,206			9,378			2,503			6,112			9,843
Inter-segment revenue adjustments and eliminations		—			—		—		(2,746	)		(8,251	)		(13,755	)		(2,746	)		(8,251	)		(13,755	)

TOTAL		75,309			76,066		77,666		—			—			—			75,309			76,066			77,666

Business segments

At this secondary level of segment reporting, the Group is structured into retail banking, asset management and insurance and global wholesale banking; the sum of these three segments is equal to that of the primary operating geographical segments. Total figures for the Group are obtained by adding to the business segments the data for the corporate activities segment.

The retail banking segment encompasses the entire commercial banking business (except for the corporate banking business managed globally using the global relationship model). The asset management and insurance segment includes the contribution to the Group arising from the design and management of the investment fund, pension and insurance businesses of the various units. The global wholesale banking segment reflects the returns on the global corporate banking business, those on investment banking and markets worldwide, including all the globally managed treasury departments and the equities business.

F-182

The condensed income statements and other significant data are as follows:


	Millions of euros
	2010															2009															2008
							Asset															Asset															Asset
				Global			management												Global			management												Global			management
(Condensed) income	Retail			wholesale			and			Corporate						Retail			wholesale			and			Corporate						Retail			wholesale			and			Corporate
statement	banking			banking			insurance			activities			Total			banking			banking			insurance			activities			Total			banking			banking			insurance			activities			Total

INTEREST INCOME/(CHARGES)		28,994			2,676			232			(2,678	)		29,224			25,800			2,508			201			(2,210	)		26,299			17,613			1,892			190			(2,157	)		17,538
Income from equity instruments		101			197			—			64			362			128			187			—			121			436			154			164			6			229			553
Income from companies accounted for using the equity method		19			—			—			(2	)		17			14			—			—			(15	)		(1	)		556			87			53			96			792
Net fee and commission income		8,058			1,292			424			(40	)		9,734			7,527			1,128			431			(6	)		9,080			6,861			883			464			59			8,267
Gains/losses on financial assets and liabilities		1,333			1,364			50			(141	)		2,606			1,452			1,384			34			1,376			4,246			1,100			995			26			1,353			3,474
Other operating income/(expenses)		(384	)		(22	)		375			137			106			(224	)		(22	)		338			52			144			31			(45	)		254			32			272
TOTAL INCOME		38,121			5,507			1,081			(2,660	)		42,049			34,697			5,185			1,004			(682	)		40,204			26,315			3,976			993			(388	)		30,896
Personnel expenses		(8,002	)		(898	)		(161	)		(269	)		(9,330	)		(7,236	)		(758	)		(149	)		(307	)		(8,450	)		(5,806	)		(672	)		(135	)		(200	)		(6,813	)
Other administrative expenses		(5,927	)		(445	)		(133	)		(421	)		(6,926	)		(5,445	)		(411	)		(130	)		(388	)		(6,374	)		(4,051	)		(388	)		(158	)		(255	)		(4,852	)
Depreciation and amortization of tangible and intangible assets		(1,623	)		(137	)		(48	)		(132	)		(1,940	)		(1,362	)		(88	)		(32	)		(114	)		(1,596	)		(946	)		(98	)		(18	)		(177	)		(1,239	)
Net impairment losses on financial assets		(10,168	)		(5	)		(2	)		(268	)		(10,443	)		(9,744	)		34			(10	)		(1,858	)		(11,578	)		(5,672	)		(281	)		—			(331	)		(6,284	)
Provisions (net)		(1,222	)		(11	)		(15	)		115			(1,133	)		(1,010	)		5			(36	)		(752	)		(1,793	)		(607	)		(26	)		(18	)		(989	)		(1,640	)
Net impairment losses on non-financial assets		(69	)		(10	)		—			(207	)		(286	)		(57	)		(3	)		(1	)		(103	)		(164	)		(24	)		—			2			(1,027	)		(1,049	)
Other non-financial gains/(losses)		235			5			1			(180	)		61			(33	)		—			—			372			339			43			4			1			1,783			1,831
OPERATING PROFIT/(LOSS) BEFORE TAX		11,345			4,006			723			(4,022	)		12,052			9,810			3,964			646			(3,832	)		10,588			9,252			2,515			667			(1,584	)		10,850
Income tax		(2,743	)		(1,071	)		(200	)		1,091			(2,923	)		(2,341	)		(1,084	)		(219	)		2,437			(1,207	)		(1,825	)		(775	)		(174	)		938			(1,836	)
PROFIT/(LOSS) FROM CONTINUING OPERATIONS		8,602			2,935			523			(2,931	)		9,129			7,469			2,880			427			(1,395	)		9,381			7,427			1,740			493			(646	)		9,014
Profit/(loss) from discontinued operations		(14	)		—			—			(13	)		(27	)		46			—			—			(15	)		31			319			—			—			—			319
CONSOLIDATED PROFIT/(LOSS) FOR THE YEAR		8,588			2,935			523			(2,944	)		9,102			7,515			2,880			427			(1,410	)		9,412			7,746			1,740			493			(646	)		9,333
Attributable to non-controlling interests		648			238			60			(25	)		921			333			132			28			(24	)		469			434			(1	)		22			1			456
PROFIT/(LOSS) ATTRIBUTABLE TO THE PARENT		7,940			2,697			463			(2,919	)		8,181			7,182			2,748			399			(1,386	)		8,943			7,312			1,741			471			(647	)		8,877

F-183


	Millions of euros
	2010												2009												2008
	Associates and												Associates and												Associates and
	jointly			Members of									jointly			Members of									jointly			Members of			Executive
	controlled			the board of			Executive vice			Other related			controlled			the board of			Executive vice			Other related			controlled			the board of			vice			Other related
	entities			directors			presidents			parties			entities			directors			presidents			parties			entities			directors			presidents			parties

Assets:
Loans and advances to credit institutions		3,921			—			—			—			3,990			—			—			—			4,019			—			—			—
Loans and advances to customers		144			15			30			1,330			149			7			24			1,664			221			4			21			1,728
Debt instruments		594			—			—			534			609			—			—			117			510			—			—			464

Liabilities:
Deposits from credit institutions		(231	)		—			—			—			(204	)		—			—			—			(136	)		—			—			—
Customer deposits		(183	)		(16	)		(59	)		(498	)		(217	)		(8	)		(41	)		(551	)		(143	)		(11	)		(22	)		(405	)
Marketable debt securities		—			—			—			(2,828	)		—			—			—			(1,007	)		—			—			—			—

Income statement:

Interest and similar income		78			—			—			173			96			—			1			111			203			—			1			83
Interest expense and similar charges		(3	)		—			(1	)		(19	)		(9	)		—			(1	)		(31	)		(25	)		—			(1	)		(10	)
Gains/losses on financial assets and liabilities		37			—			—			9			57			—			—			8			3			—			1			32
Fee and commission income		41			—			—			19			22			—			—			10			28			—			—			25
Fee and commission expense		(13	)		—			—						(11	)		—			—			—			(23	)		—			—			—

Other:
Contingent liabilities		2			—			—			442			—			—			—			491			293			—			—			479
Contingent commitments		90			1			5			3			137			1			3			3			164			1			7			13
Derivative financial instruments		6,878			—			—			1,378			6,868			—			—			3,153			7,074			—			—			1,314

In addition to the detail provided above, there were insurance contracts linked to pensions amounting to EUR 2,220 million at December 31, 2010 (December 31, 2009: EUR 2,356 million; December 31, 2008: EUR 2,447 million).

F-185

54.

Risk management

The Santander Group risk management and control structure and its risk appetite are determined mainly by the banking business model chosen by the Group.

	•		Santander Group focuses its banking activities on the retail banking business, and has an internationally diversified presence characterized by major market shares (>10%) in the main markets in which it operates. The wholesale banking business is conducted above all in the Group’s core markets.

	•		This model enables the Group to generate highly recurring earnings on the basis of a solid capital and liquidity base.

	•		Santander’s presence in the markets in which it operates is formalized through subsidiaries that are independent in terms of both capital and liquidity, in a manner that is compatible with corporate control. The corporate structure is necessarily a simple one, reducing to a minimum the use of non-operating or purely instrumental companies.

	•		Santander implements its operational and technological integration model through a series of corporate platforms and tools. This facilitates a swift and efficient compilation of data.

	•		All the Group’s activities are carried out within the bounds of its social and reputational commitment, in accordance with its strategic objectives.

The risk model underlying the business model is founded on the following principles:

	•		Independence of the risk function with respect to the business. The head of the Group’s risk division, Mr. Matías Rodríguez Inciarte, as third deputy chairman and as chairman of the risk committee, reports directly to the executive committee and the board. The segregation of functions between the business areas and the risk areas entrusted with risk acceptance, measurement, analysis, control and reporting provides sufficient independence and autonomy for proper risk control.

	•		Direct involvement of senior management in the decision-making process.

	•		Decisions by consensus (even at branch level), which ensure that different opinions are taken into account and avoid individual decision making. Decisions on credit transactions taken jointly by the risk and commercial areas.

	•		Definition of powers. The type of activities to be performed, segments, risks to be assumed and risk decisions to be made are clearly defined for each risk approval unit and, if appropriate, each risk management unit, based on their delegated powers. How transactions should be arranged and managed and where they should be accounted for is also defined.

	•		Centralized control. Risk is controlled and managed in an integrated fashion through a corporate structure with Group-wide responsibilities (all risk, all businesses, all geographical areas).

At Santander Group, the risk management and control process is conducted as follows:

	•		Establishment of risk policies and procedures. The risk policies and procedures constitute the basic regulatory framework governing risk activities and processes. The local risk units transpose the corporate risk regulations into their internal policies.

	•		Definition and assessment of risk methodologies. Risk methodologies facilitate the development of the internal risk models applicable by the Group, and they require risk measures and product valuation and yield curve building methods.

	•		Risk measurement. Risk measurement takes into account all risk exposures assumed across the business spectrum. It uses previously validated and approved methodologies and models based on the components and dimensions of risk throughout its life-cycle.

	•		Definition and limitation of risk appetite. The aim pursued is to delimit, in an efficient manner, the maximum levels of risk that can be assumed, by setting overall and specific limits for the various types of risks, products, customers, sectors and geographical areas.

	•		Implementation of a risk monitoring and control system which checks, on a daily basis and with the corresponding reports, the degree to which Santander’s risk profile matches the risk policies approved and the risk limits set.

F-186

Santander’s risk management fully identifies with Basel principles, insofar as it acknowledges and supports the leading-edge industry practices which the Group has implemented in advance; accordingly, for several years Santander has used a number of tools and techniques which are described in detail in the various sections of this Note. These tools and techniques include most notably the following:

	•		Internal ratings- and scorings-based models which, after assessing the various qualitative and quantitative risk components by customer and transaction, make it possible to estimate, firstly, the probability of default and, subsequently, the expected loss, based on LGD estimates.

	•		Economic capital, as a homogeneous measure of the risk assumed and a basis for the measurement of the management performed; RORAC, which is used both as a transaction pricing tool (bottom-up approach) and in the analysis of portfolios and units (top-down approach); and VaR, which is used for controlling market risk and setting the market risk limits for the various trading portfolios.

	•		Scenario analysis and stress testing to supplement credit and market risk analyses in order to assess the impact of alternative scenarios, even on provisions and capital.

Santander Group calculates the minimum regulatory capital in conformity with Bank of Spain Circular 3/2008 on the determination and control of minimum capital requirements for credit institutions. This Circular completed the transposition into Spanish banking legislation of Directives 2006/48/EC and 2006/49/EC that incorporate the new Basel Capital Accord (BIS II) into EU regulations.

As a result of the new developments in the regulatory framework, commonly referred to as BIS III, Santander Group has taken measures to apply the future requirements of BIS III -increased levels of high-quality capital and adequate capital conservation and countercyclical buffers- sufficiently in advance.

Santander Group also intends to apply the two new liquidity ratios, indicated in BIS III, which guarantee sufficient liquidity even in stress scenarios. These ratios are the Liquidity Coverage Ratio (LCR) for the short term (30 days) and the Net Stable Funding Ratio (NSFR), which relates to the structure of financing.

With regard to the new liquidity requirements, and in particular the net stable funding ratio, the Group considers it very important that the ultimate definition to be met, following the agreed observation and review periods, should reflect the differences associated with the various banking business models, and thus avoid penalizing the flow of credit to the real economy.

Risk appetite at Santander Group

The risks assumed by Santander must be delimited and quantified within the risk appetite framework defined and approved by its board of directors. Risk appetite is defined as the amount and type of risk that it considers reasonable to assume in implementing its business strategy.

The board of directors, at the proposal of senior management, is the body responsible for setting and monitoring the Group’s risk appetite and its risk tolerance. Senior management is responsible for achieving the desired risk profile and for managing risk in the Group’s day-to-day operations. The Group has the metrics and infrastructure required to guarantee the management of risk.

Risk appetite, which comprises both quantitative and qualitative aspects, is directly related to the Group’s global strategy, including the assessment of growth opportunities in key businesses and markets, funding liquidity and capacity, and capital. Pillar II, with its corresponding capital planning and stress test exercises, complements the reference framework for risk appetite.

The risk appetite formulated sets the boundaries for the budget process, in which the Group’s principal strategic parameters —earnings, liquidity, capital, NPL ratio, VaR, etc.- are analyzed and approved in an integrated fashion.

F-187

Risk appetite management criteria for each specific risk

The main criteria and metrics used are approved by the risk committee, the executive committee and, where appropriate, the board, at least once a year. Risk appetite is controlled and monitored with varying frequencies (ranging from daily to yearly), depending on the metric concerned and the corresponding level of responsibility.

For each risk, a set of criteria, metrics and, where necessary, limits (“hard” and “warning/control”) are established in accordance with principle of materiality. Following is a brief description of the general criteria applied for each risk, which are explained in greater detail in subsequent sections:

•

Credit risk: In general, credit risk appetite is shaped through control limits, which can vary in the course of the year in accordance with the needs of the banking business and the Group’s risk appetite, on the basis of the established segmentation of risk (standardized, individualized and wholesale). There are two types of limits (basic -budget-linked- and portfolio -standardized and individualized-). In addition, the results of stress tests performed in various scenarios are taken into consideration.

The main characteristics for each credit risk segment are as follows:

Standardized risks: scoring models and an automated decision-making process are used. Risks are grouped together into credit management programs (PGCs, using the Spanish acronym) with lending policies designed and approved on the basis of the risk appetite of the unit concerned, in keeping with its level of predictability. Annual PGCs are approved through the Group’s structure of delegated responsibilities.

Individualized risks: these are classified on the basis of a given risk exposure per customer. Analysts are each assigned a portfolio of customers which they monitor actively. The ratings of each customer are updated at least once a year.

Global Wholesale Banking Risk (BMG, using the Spanish acronym: includes Corporate Banking and Financial Institutions/IFIs): the distribution of the level of risk exposure by rating is used as a parameter for monitoring the portfolio. At least once a year limits are assigned to each group/customer and an analysis is performed of all aggregate limits, broken down by rating level. Reviews are conducted by sector (Corporate) and country (IFIs).

Santander’s basic objective in terms of concentration risk appetite is to ensure that its risk portfolio remains widely diversified from the perspective of its exposure to large risks, to certain markets and to specific products. This appetite is measured using three approaches (customers, products and sector) that include limits which are set as warning or control signals.

•

Market risk: the trading business is customer-centric. Checks are made to ensure that the limits proposed are consistent with the business budget. The metrics employed include VaR, management P&L and capital. VaR is established on the basis of the historical trend of losses, and is expressed as the amount used of management P&L up to a maximum percentage. Stress testing is also used.

Structural/market risks are linked to a conservative management of the Group’s assets and liabilities, liquidity and structural foreign exchange risk. The criteria and metrics used are described in detail in the corresponding sections below.

	•		Operational and technology risk: the established risk appetite is monitored on the basis of daily management and mitigation, through the gross losses/gross income ratio, self-assessment questionnaires/risk maps, and management indicators.

	•		Compliance and reputational risk: the appetite for this risk is deemed to be “zero”. Active reputational risk management policies are established through the corporate office set up for this purpose.

This risk is monitored using the following support indicators: 1) prevention of money laundering, 2) institutional relations with regulatory bodies, 3) codes of conduct for securities markets, 4) marketing of products, 5) MIFID regulations, 6) other: customer claims submitted to the Bank of Spain/supervisors, and data protection (Personal Data Protection Organic Law).

F-188

CORPORATE GOVERNANCE OF THE RISK FUNCTION

The risk committee is responsible for proposing the Group’s risk policy for approval by the board within its governing and supervisory powers. Furthermore, the committee ensures that the Group’s activities are consistent with its risk tolerance level and, in this regard, it sets global limits for the main risk exposures, which it reviews systematically, and decides upon any transactions that exceed the powers delegated to lower-ranking bodies.

The risk committee, an executive body that adopts decisions within the scope of the powers delegated by the board, is presided over by the third deputy chairman of Santander Group and also comprises a further four members of the Bank’s board of directors.

In 2010 the risk committee held 99 meetings, evidencing the importance that Santander Group attaches to the proper management of its risks.

The responsibilities assigned to the risk committee are essentially as follows:

•

To propose to the board the Group’s risk policy, which will identify, in particular:

	•		The various types of risk (financial, operational, technological, legal and reputational, inter alia) facing the Group;

	•		The information and internal control systems to be used to control and manage these risks;

	•		The level of risk deemed acceptable by the Group;

	•		The measures envisaged to mitigate the impact of the identified risks in the event that they materialize.

	•		To conduct systematic reviews of the Group’s exposure to its main customers, economic activity sectors, geographical areas and types of risk.

	•		To authorize the management tools and risk models and ascertain the result of their internal validation.

	•		To ensure that the Group’s actions are consistent with the level of risk tolerance previously defined.

	•		To be informed of, assess and follow any remarks and recommendations that may be periodically made by the supervisory authorities in discharging their function.

	•		To resolve transactions outside the powers delegated to lower-ranking bodies and the overall limits for pre-classified risk categories for economic groups or in relation to exposure by type of risk.

The risk committee has delegated certain of its powers to risk subcommittees which are structured by geographical area, business line and type of risk, all of which are defined in the corporate governance model.

In addition, both the executive committee and the board of directors of the Bank pay particular attention to the management of the Group’s risks.

The third deputy chairman of the Group is the person ultimately responsible for risk management and is a member of the board of directors and chairman of the risk committee. Two general risk units, which are independent of the business areas from both a hierarchical and functional standpoint, report to the third deputy chairman. The organizational and functional structure of these units is as follows:

•

The integrated risk control and internal risk validation unit, with global-reaching corporate responsibilities, which provide support to the Group’s governing bodies, namely:

	•		Validation of the internal risk models in order to assess the appropriateness and adequacy of the rating systems, internal processes and data processing systems, in conformity with Basel II.

	•		Integrated risk control in order to ensure that the risk management and control systems are consistent with the Bank’s global risk profile.

F-189

•

The risk unit, whose functions are divided into two blocks:

	•		A corporate structure, with global-reaching responsibilities (“all risks, all geographical areas”), which establishes the risk policies, methodologies and control systems: solvency, market and methodology.

	•		A business structure, centered on the performance and management integration of the risk function in the Group’s commercial, global and local businesses.

INTEGRATED RISK CONTROL

In 2008 Santander Group launched the integrated risk control function, which meant the early adoption of the new regulatory requirements then under discussion by the main bodies and forums (Basel Committee, CEBS, FSF, etc.) and of the recommendations on best risk management practices made by various public and private organizations.

Organization, mission and features of the function

The integrated risk control function is located in the integrated risk control and internal risk validation unit. This function provides risk control and management support to the Group’s governing bodies.

The risks which are given particular consideration are: credit risk (including concentration and counterparty risks); market risk (including liquidity and structural interest rate and foreign currency risks); operational and technology risk; and compliance and reputational risk.

The integrated control mission is based on three modules:

Module 1) To guarantee that the management and control systems for the various risks inherent in Santander Group’s activities comply with the most stringent criteria and the best practices observed in the industry and/or established by regulators;

Module 2) To ensure that senior management has an all-embracing view of the profiles of the various risks assumed at any time and that these profiles are consistent with the pre-determined risk appetite; and

Module 3) To supervise adequate compliance, in due time and form, with any recommendations on risk management and control made as a result of inspections conducted by internal audit and by the competent supervisory authorities.

The integrated risk control function supports the risk committee by providing it with the best risk management practices.

The main features of the function are as follows:

	•		Global and corporate scope: all risks, all businesses, all geographical areas;

	•		It is a third layer of control, which follows the control performed in the first instance by the officer responsible for managing and controlling each risk at each business or functional unit (first layer of control) and by the officer responsible for the control of each risk at corporate level (second layer of control). This system ensures a vision and, therefore, the integrated control of all the risks incurred as a result of Santander Group’s business activities.

	•		Special attention is paid to the development of best practices in the financial services industry, so that the Group is in a position to promptly incorporate any relevant advance.

	•		The available information and the resources assigned by Santander Group to the control of the various risks are optimized in order to avoid overlaps.

Methodology and tools

The specific methodology and tools supporting this function have been developed internally, with a view to systematizing their operation and tailoring them to Santander’s particular needs. As a result, it is possible to formalize the implementation of this methodology, making it traceable and objectifiable. Both the methodology and the tools are articulated through the three modules referred to above for all the risks addressed:

Module 1) Testing or review guidelines have been defined for each risk, divided into control areas (e.g. corporate governance, organizational structure, management systems, management integration, technology environment, contingency plans and business continuity, etc.).

The Group performs the tests and gathers the relevant evidence assessed in the process -which enables it to standardize the control parameters of the various risks- on a yearly basis, with the inclusion of new tests if required. The supporting tool is the Risk Control Monitor, which serves as a repository for the findings of each test and of the related working papers. In addition, the position of each risk is reviewed every six months, monitoring the recommendations arising from the annual integrated risk control report.

F-190

Module 2) Senior management is provided with the relevant monitoring capacity in terms of an all-embracing view of the various risks assumed and their consistency with the pre-determined risk appetites.

Module 3) In order to follow up the recommendations on risk management and control made by internal audit and by the supervisory authorities, the Group uses SEGRE, a tool which also enables it to include the recommendations made by the integrated risk control function itself. The use of this tool is coordinated with the risk control areas involved so as to optimize the follow-up process.

The Bank of Spain can access these tools if it deems it appropriate.

In 2010:

(a) The second review cycle of the various risks was completed in close cooperation with the corporate risk control areas, and the management and control systems in place for these risks were tested and assessed. Areas for improvement were identified, giving rise to recommendations, with the related implementation schedule agreed upon with the areas involved, together with the half-yearly follow-up of the progress made with respect to the 2009 recommendations;

(b) Periodic reports were submitted to the board of directors and the executive committee, giving an integrated view of all the risks; and

Following is an analysis of the Group’s main types of risk: credit, market, operational and reputational risks.

CREDIT RISK

3.1

Introduction to the treatment of credit risk

Credit risk is the possibility of loss stemming from the total or partial failure of our customers or counterparties to meet their financial obligations to the Group.

The specialization of Santander Group’s risk function is based on the type of customer and, accordingly, a distinction is made between individualized customers and standardized customers throughout the risk management process:

•

Individualized customers are defined as those to which a risk analyst has been assigned, basically because of the risk assumed. This category includes wholesale banking customers, financial institutions and certain enterprises belonging to retail banking. Risk management is performed through expert analysis supplemented by decision-making support tools based on internal risk assessment models.

•

Standardized customers are those which have not been expressly assigned a risk analyst. This category generally includes individuals, individual entrepreneurs, and retail banking enterprises not classified as individualized customers. Management of these risks is based on internal risk assessment and automatic decision-making models, supplemented subsidiarily, when the model is not comprehensive enough or is not sufficiently accurate, by teams of analysts specializing in this type of risk.

3.2

Main aggregates and variations

The profile of the credit risk assumed by the Group is characterized by a diversified geographical distribution and the prevalence of retail banking operations.

Global credit risk map — 2010

The following table shows the global map of the credit risk, expressed in nominal amounts (with the exception of exposure in derivatives and repos, which is expressed in credit risk equivalent) to which the Group was exposed at December 31, 2010.

F-191


	SANTANDER GROUP — GROSS CREDIT RISK EXPOSURE
							Sovereign			Private			Credit inst.			Drawable
	Customer			Drawable by			fixed-income			fixed-income			& cent. bank			by credit			Derivatives &									Change/
Data in millions of euros	drawdowns			customers			(excl. trad.)			(excl. trad.)			drawdowns			institutions			Repos (CRE)			Total			%			Dec-09
SPAIN		277,583			61,492			26,956			7,674			19,260			1,484			32,644			427,092			35.4	%		-3.0	%

Parent bank		168,070			45,097			16,210			4,892			14,059			1,210			26,568			276,105			22.9	%		-1.6	%
Banesto		79,842			10,154			7,980			1,198			3,204			273			5,905			108,556			9.0	%		-5.7	%
Other		29,671			6,241			2,765			1,584			1,997			1			171			42,430			3.5	%		-4.9	%

REST OF EUROPE		320,158			42,791			6,022			9,163			34,224			1			16,167			428,525			35.5	%		9.6	%

Germany		21,879			295			0			111			694			0			6			22,984			1.9	%		0.5	%
Portugal		23,062			7,831			5,515			3,517			1,466			1			1,880			43,272			3.6	%		11.6	%
United Kingdom		242,864			32,154			145			5,431			31,380			0			13,650			325,624			27.0	%		11.7	%
Other		32,353			2,511			362			103			684			0			631			36,645			3.0	%		-2.6	%

LATIN AMERICA		136,084			63,200			25,602			3,745			31,544			6			10,926			271,106			22.5	%		30.0	%

Brazil		81,684			42,159			18,040			2,613			24,008			0			5,758			174,263			14.4	%		32.0	%
Chile		27,397			7,929			1,764			948			2,313			6			2,938			43,296			3.6	%		24.8	%
Mexico		14,621			11,508			3,977			2			3,431			0			1,822			35,361			2.9	%		34.0	%
Other		12,382			1,603			1,820			183			1,791			0			407			18,186			1.5	%		18.5	%

UNITED STATES		53,288			10,888			1,682			8,953			2,984			0			795			78,590			6.5	%		16.8	%

REST OF THE WORLD		747			102			1			1			158			0			0			1,009			0.1	%		-33.9	%

TOTAL GROUP		787,860			178,473			60,262			29,536			88,169			1,491			60,532			1,206,322			100	%		8.8	%

%/total		65.3	%		14.8	%		5.0	%		2.4	%		7.3	%		0.1	%		5.0	%		100.0	%

Change/Dec-09		6.9	%		19.6	%		1.2	%		-24.0	%		43.9	%		9.4	%		-0.7	%		8.8	%

Data at December 31, 2010, prepared on the basis of legal-entity criteria.

Balances drawn down by customers include contingent liabilities and exclude repos (EUR 1,395 million) and Other financial assets — Loans and advances to customers (EUR 12,406 million).

Total fixed-income excludes trading portfolio and investments of third-party insurance policyholders.

Balances with credit institutions and central banks include contingent liabilities and exclude repos, trading portfolio and Other financial assets. Of the total, EUR 65,351 million relate to balances with central banks.

CRE (Credit Risk Equivalent: net replacement value plus maximum potential value. Including mitigators).

2010 was characterized by moderate lending growth, reflecting the lower demand for credit. Credit risk exposure grew by 8.8% in year-on-year terms. 48% of this growth was due to the effect of fluctuations in the year in the exchange rates of the main currencies against the euro. The remainder was mostly accounted for, with similar growth rates, by the balances drawn down and drawable by customers and the balances drawn down by credit institutions.

Spain continues to be the most significant unit as regards credit risk exposure, albeit with a decline of 3% on December 2009. Other European countries represent more than one third of credit risk exposure. Particularly noteworthy in this respect is the presence in the United Kingdom. Taken as a whole, Europe, including Spain, represents 71% of the total exposure.

In Latin America, which accounts for 23% of the total, 96% of the credit risk exposure is rated investment-grade.

At 2010 year-end, exposure in the United States represented 6.5% of the total for the Group.

Variations in aggregates in 2010

The changes in non-performing loans and the cost of credit reflect the impact of the deterioration of the economic environment, mitigated by prudent risk management, which generally enabled the Group to hold these data at levels lower than those of its competitors. As a result, the Group has a significant NPL coverage ratio.

The non-performing loans ratio stood at 3.55% in December 2010, up 31 basis points in the year, reflecting a slowdown in the growth experienced by this ratio in recent years. Non-performing loans fell at Santander Consumer Finance, Santander Brazil and Sovereign, but increased in the Group’s businesses in Spain. The NPL coverage ratio was 72.7%, as compared with a coverage ratio of 75.3% at 2009 year-end.

Specific credit loss provisions, net of recoveries of written-off assets, amounted to EUR 12,342 million, i.e. 1.56% of average credit risk exposure to customers (average lending plus off-balance-sheet exposures for the year), as compared with 1.57% in 2009.

F-192


													Specific Credit
													Loans
	Credit Risk				Non-								Provisions, Net
	Exposure to				Performing				Coverage				of RAWO **
	Customers *				Loans Ratio				Ratio				(Millions of				Cost of Credit
	(Millions of euros)				(%)				(%)				euros)				(% of risk)⁽³⁾
	2010		2009		2010		2009		2010		2009		2010		2009		2010⁽²⁾		2009⁽¹⁾

Continental Europe		370,673		366,970		4.34		3.64		71.4		76.6		6,190		5,084		1.64		1.39
Santander Network		126,705		129,099		5.52		4.38		51.8		64.9		2,454		1,851		1.89		1.41
Banesto		86,213		86,681		4.11		2.97		54.4		64.1		1,272		737		1.52		0.89
Santander Consumer Finance		67,820		60,214		4.95		5.39		128.4		96.8		1,884		2,005		2.85		3.38
Portugal		32,265		34,501		2.90		2.27		60.0		64.6		105		95		0.30		0.27
United Kingdom		244,707		238,215		1.76		1.71		45.8		43.8		826		1,018		0.34		0.43
Latin America		149,333		117,146		4.11		4.25		103.6		105.2		4,758		5,053		3.53		4.44
Brazil		84,440		65,611		4.91		5.27		100.5		99.2		3,703		3,537		4.93		5.88
Mexico		16,432		12,676		1.84		1.84		214.9		264.4		469		824		3.12		6.13
Chile		28,858		21,384		3.74		3.20		88.7		89.0		390		402		1.57		1.98
Puerto Rico		4,360		4,132		10.59		9.60		57.5		53.3		143		89		3.22		1.99
Colombia		2,275		1,719		1.56		1.83		199.6		187.5		15		31		0.68		1.94
Argentina		4,097		2,936		1.69		2.60		149.1		141.0		26		91		0.72		2.99
Sovereign		40,604		38,770		4.61		5.35		75.4		62.5		479		578		1.16		—
Total Group		804,036		758,347		3.55		3.24		72.7		75.3		12,342		11,760		1.56		1.57

Memorandum item:
Spain		283,424		284,307		4.24		3.41		57.9		73.4		4,352		3,497		1.53		1.20


*		Including gross loans and advances to customers, guarantees, documentary credits and retail segment derivatives (CRE: EUR 2,375 million)

**		RAWO= Recoveries of assets written off.

(1)		Excluding Sovereign

(2)		Excluding the inclusion of AIG in Santander Consumer Finance Poland

(3)		(Specific provisions — recoveries of written-off assets)/Total average credit risk.

Distribution of credit risk

Santander Group has a mainly retail profile (commercial banking represents 86.3% of its business) and its main portfolios consist of products secured with collateral (mortgages).

3.3

Metrics and measurement tools

Credit rating tools

Since 1993 the Group has used proprietary internal rating or scoring models to measure the credit quality of a given customer or transaction. Each rating or score relates to a certain probability of default or non-payment, determined on the basis of the Group’s historical experience, with the exception of certain portfolios classified as low default portfolios. More than 300 internal rating or scoring models are used in the Group’s loan approval and risk monitoring process.

Global rating tools are applied to the sovereign risk, financial institution and global wholesale banking segments. Management of these segments is centralized at Group level, for both rating calculation and risk monitoring purposes. These tools assign a rating to each customer, which is obtained from a quantitative or automatic module, based on balance sheet ratios or macroeconomic variables, supplemented by the analyst’s expert judgment.

For individualized corporates and institutions, the parent of Santander Group has defined a single methodology for the construction of a rating in each country, based on an automatic module which includes the initial participation of the analyst that can be supplemented subsequently if required. The automatic module determines the rating in two phases, a quantitative phase and a qualitative phase. The latter is based on a corrective questionnaire which enables the analyst to modify the automatic score by up to ±2 rating points. The quantitative rating is determined by analyzing the credit performance of a sample of customers and the correlation with their financial statements. The corrective questionnaire consists of 24 questions divided into 6 assessment areas. The automatic rating (quantitative + corrective questionnaire) may in turn be modified by the analyst by overwriting it or using a manual scoring module.

F-193

Ratings assigned to customers are reviewed periodically to include any new financial information available and the experience in the banking relationship. The frequency of the reviews is increased in the case of customers that reach certain levels in the automatic warning systems and of customers classified as requiring special monitoring. The rating tools themselves are also reviewed in order to progressively fine-tune the ratings they provide.

In the course of 2010 the quantitative rating module for wholesale banking was recalibrated and new expert rating models were developed for funds, management companies and LBOs (leveraged buy-outs).

For standardized risk portfolios, of both legal entities and individuals, the Group has scoring tools that automatically assign a score to proposed transactions.

These loan approval systems are supplemented by performance rating models. These tools provide enhanced predictability of the risk assumed and are used for preventive and marketing activities.

Credit risk parameters

The assessment of customers or transactions using rating or scoring systems constitutes a judgment of their credit quality, which is quantified through the probability of default (PD).

In addition to customer assessment, the quantification of credit risk requires the estimation of other parameters, such as exposure at default (EAD) and the percentage of EAD that will not be recovered (loss given default or LGD). Therefore, other relevant factors are taken into account in estimating the risk involved in transactions, such as the quantification of off-balance-sheet exposures, which depends on the type of product, or the analysis of expected recoveries, which is related to the guarantees provided and other characteristics of the transaction: type of product, term, etc.

These factors are the main credit risk parameters. Their combination facilitates calculation of the probable loss or expected loss (EL). This loss is considered to be an additional cost of the activity which is reflected in the risk premium and must be charged in the transaction price.

These risk parameters also make it possible to calculate the regulatory capital in accordance with the regulations deriving from the new Basel Capital Accord (BIS II). Regulatory capital is determined as the difference between unexpected loss and expected loss.

Unexpected loss is the basis for the capital calculation and refers to a very high, albeit scantly probable, level of loss, which is not deemed to be recurring and must be catered for using capital.

For portfolios with scant internal default experience, such as banks, sovereign risk or global wholesale banking, estimates of the risk parameters (PD, LGD and EAD) are based on alternative sources: market prices or studies conducted by external agencies gathering the shared experience of a sufficient number of entities. These portfolios are known as low default portfolios.

For all other portfolios, parameter estimates are based on the entity’s internal experience. The PD is calculated by observing the cases of new arrears in relation to the final rating assigned to customers or to the scoring assigned to the related transactions.

LGD calculation is based on the observation of the recoveries of defaulted loans, taking into account not only the income and expenses associated with the recovery process, but also the timing thereof and the indirect costs arising from the recovery process.

EAD is estimated by comparing the use of committed facilities at the time of default and their use under normal (performing) circumstances, so as to identify the actual use of the facilities at the time of default.

The parameters estimated for global portfolios are the same for all the Group’s units. Therefore, a financial institution with an 8.5 rating will have the same PD, regardless of the Group unit in which its exposure is accounted for. By contrast, the retail portfolios have specific rating and scoring systems in each of the Group’s units, which require separate estimates and specific assignment of parameters in each case.

F-194

The parameters are then assigned to the units’ on-balance-sheet transactions in order to calculate the expected losses and the capital requirements associated with their exposure.

Global rating scales

For regulatory capital calculation purposes the following tables are used, which assign PD on the basis of internal rating ranges, with a minimum value of 0.03%.

Wholesale banking

Banks

Sovereign risks

Internal rating

8.5 to 9.3

0.030

8.5 to 9.3

0.030

8.5 to 9.3

0.030

8.0 to 8.5

0.049

8.0 to 8.5

0.039

8.0 to 8.5

0.045

7.5 to 8.0

0.077

7.5 to 8.0

0.066

7.5 to 8.0

0.072

7.0 to 7.5

0.123

7.0 to 7.5

0.111

7.0 to 7.5

0.115

6.5 to 7.0

0.195

6.5 to 7.0

0.186

6.5 to 7.0

0.184

6.0 to 6.5

0.311

6.0 to 6.5

0.311

6.0 to 6.5

0.293

5.5 to 6.0

0.494

5.5 to 6.0

0.521

5.5 to 6.0

0.468

5.0 to 5.5

0.786

5.0 to 5.5

0.874

5.0 to 5.5

0.746

4.5 to 5.0

1.251

4.5 to 5.0

1.465

4.5 to 5.0

1.189

4.0 to 4.5

1.989

4.0 to 4.5

2.456

4.0 to 4.5

1.896

3.5 to 4.0

3.163

3.5 to 4.0

4.117

3.5 to 4.0

3.022

3.0 to 3.5

5.031

3.0 to 3.5

6.901

3.0 to 3.5

4.818

2.5 to 3.0

8.002

2.5 to 3.0

11.569

2.5 to 3.0

7.681

2.0 to 2.5

12.727

2.0 to 2.5

19.393

2.0 to 2.5

12.246

1.5 to 2.0

20.241

1.5 to 2.0

32.509

1.5 to 2.0

19.524

Less than 1.5

32.193

Less than 1.5

54.496

Less than 1.5

31.126

These PDs are applied consistently across the Group in keeping with the global management of these portfolios. As can be seen, although the PD assigned to the internal rating is not exactly the same for the same rating in the various portfolios, it is very similar in the tranches where most exposure is concentrated, i.e. in the rating tranches above 6.

F-195

Distribution of EAD and associated expected loss (EL)

The table below details the distribution, by segment, of the outstanding credit risk exposure in terms of EAD, PD, LGD and EL. Approximately 77% of total risk exposure to customers (excluding sovereign and counterparty risks and other assets) relates to the corporate, SME and individuals segments, which reflects the commercial orientation of Santander Group’s business and risks. The expected loss arising from customer exposure is 1.39%, as compared with 1.10% for the Group’s total credit risk exposure, and, accordingly, the profile of the credit risk assumed can be classified as medium-low.


	Segmentation of credit risk exposure
									Average
	EAD (1)		%			Average PD			LGD			EL

Sovereign debt		160,764		15.38	%		0.14	%		10.64	%		0.01	%
Banks and other financial institutions		63,264		6.05	%		0.41	%		74.94	%		0.31	%
Public sector		12,539		1.20	%		0.73	%		12.01	%		0.09	%
Corporate		154,725		14.80	%		0.90	%		37.40	%		0.34	%
SMEs		172,547		16.51	%		5.79	%		31.50	%		1.83	%
Mortgage loans to individuals		312,865		29.93	%		3.20	%		7.44	%		0.24	%
Consumer loans to individuals		119,921		11.47	%		8.69	%		54.57	%		4.74	%
Credit cards — individuals		31,193		2.98	%		5.46	%		63.74	%		3.48	%
Other assets		17,361		1.66	%		1.83	%		28.09	%		0.51	%
Memorandum item — customers (2)		803,791		76.90	%		4.18	%		33.31	%		1.39	%

Total		1,045,180		100.00	%		3.29	%		33.44	%		1.10	%

Data at December 2010


(1)		Excluding doubtful assets

(2)		Excluding sovereign debt, banks and other financial institutions and other assets

3.4.

Observed loss: measures of cost of credit

To supplement the use of the advanced models described above, other habitual measures are used to facilitate prudent and effective management of credit risk based on observed loss.

The cost of credit risk at Santander Group is measured using different approaches: variation in non-performing loans in the recovery process (ending doubtful assets — beginning doubtful assets + assets written off — recovery of assets written off), net credit loss provisions (provisions to specific allowances — recovery of assets written off) and net assets written off (assets written off — recovery of assets written off).

The general trend in recent years has been for Santander to keep the cost of credit at low levels. In 2010 the cost of credit, which was down slightly by one basis point, was the result of the continuing appreciable deterioration of the economic climate and the retail portfolio mix which, albeit with a higher expected loss, displayed higher direct and indirect returns and a more predictable risk profile. The retail portfolios performed well in 2010, particularly in Latin America, which resulted in the containment of the amounts recognized as provisions.

3.5

Credit risk cycle

The risk management process consists of identifying, measuring, analyzing, controlling, negotiating and deciding on, as appropriate, the risks incurred in the Group’s operations. The parties involved in this process are the risk taking areas, senior management and the risk units.

The process begins at senior management level, through the board of directors, the executive committee and the risk committee, which establishes the risk policies and procedures, and the limits and delegations of powers, and approves and supervises the scope of action of the risk function.

The risk cycle comprises three different phases: pre-sale, sale and post-sale:

•

Pre-sale: this phase includes the risk planning and target setting processes, determination of the Group’s risk appetite, approval of new products, risk analysis and credit rating process, and limit setting.

•

Sale: this is the decision-making phase for both pre-classified and specific transactions.

•

Post-sale: this phase comprises the risk monitoring, measurement and control processes and the recovery process.

F-196

Risk limit planning and setting

Risk limit setting is a dynamic process that identifies the Group’s risk appetite through the discussion of business proposals and the attitude to risk.

This process is defined in the global risk limit plan, an agreed-upon comprehensive document for the integrated management of the balance sheet and the inherent risks, which establishes risk appetite on the basis of the various factors involved.

The risk limits are founded on two basic structures: customers/segments and products.

For individualized risks, customers represent the most basic level, and individual limits are established (pre-classification) when certain features, generally materiality, concur.

For large corporate groups a pre-classification model, based on an economic capital measurement and monitoring system, is used. As regards the corporate segment, a simplified pre-classification model is applied for customers meeting certain requirements (thorough knowledge, rating, etc.).

In the case of standardized risks, the risk limits are planned and set using a credit management programme (PGC, using the Spanish acronym), a document agreed upon by the business areas and the risk units and approved by the risk committee or its delegated committees, which contains the expected results of transactions in terms of risk and return, as well as the limits applicable to the activity and the related risk management.

Risk analysis and credit rating process

Risk analysis is a pre-requisite for the approval of loans to customers by the Group.

This analysis consists of examining the customer’s ability to meet its contractual obligations to the Bank, which involves analyzing the customer’s credit quality, its risk transactions, its solvency and the return to be obtained in view of the risk assumed.

The risk analysis is conducted every time a new customer or transaction arises or with a pre-established frequency, depending on the segment involved. Additionally, the credit rating is examined and reviewed whenever a warning system is triggered or an event affecting the customer/transaction occurs.

Transaction decision-making

The purpose of the transaction decision-making process is to analyze transactions and adopt resolutions thereon, taking into account the risk appetite and any transaction elements that are important in achieving a balance between risk and return.

Since 1993 the Group has been using, among others, the RORAC (return on risk-adjusted capital) methodology for risk analysis and pricing in the decision-making process on transactions and deals.

Risk monitoring and control

In order to ensure adequate credit quality control, in addition to the tasks performed by the internal audit division, the risk unit has a specific risk monitoring function, consisting of local and global teams, to which specific resources and persons in charge have been assigned.

This monitoring function is based on an ongoing process of permanent observation to enable early detection of any incidents that might arise in the evolution of the risk, the transactions, the customers and their environment, with a view to adopting mitigating actions. The risk monitoring function is specialized by customer segment.

For this purpose a system called “companies under special surveillance” (FEVE, using the Spanish acronym) has been designed that distinguishes four categories based on the degree of concern raised by the circumstances observed (extinguish, secure, reduce and monitor). The inclusion of a company in the FEVE system does not mean that there has been a default, but rather that it is deemed advisable to adopt a specific policy for this company, to place a person in charge and to set the policy implementation period. Customers classified as FEVE are reviewed at least every six months, or every three months for those classified in the most severe categories. A company can be classified as FEVE as a result of the monitoring process itself, a review performed by internal audit, a decision made by the sales manager responsible for that company or the triggering of the automatic warning system.

F-197

Assigned ratings are reviewed at least annually, but should any weakness be detected, or depending on the rating itself, more frequent reviews are performed.

For exposures to standardized customers, the key indicators are monitored in order to detect any variance in the performance of the loan portfolio with respect to the forecasts contained in the credit management programs.

Credit risk exposure in Spain

Portfolio overview

At 2010 year-end, Santander Group’s credit portfolio in Spain amounted to EUR 236,000 million. If to this figure we add mainly guarantees and documentary credits, the total credit risk exposure of Santander’s businesses in Spain was EUR 283,424 million, 35% of the total for the Group, displaying an appropriate level of diversification, in terms of both products and customer segments.

The non-performing loans ratio stood at 4.24% at the end of 2010, with NPLs concentrated mostly in the sectors most affected by the deterioration of the economic climate. This ratio, although higher than that published in 2009, reflects a slowdown in the growth trend, the result of the stable behavior in 2010 of the NPL ratios of a large proportion of the portfolios composing the Group’s lending in Spain.

The total allowances available for the possible losses arising from these loans represent a coverage ratio of 58%.

Additionally, in accordance with Bank of Spain regulations and instructions, the Group classifies as substandard any performing loans for which there is no reason to classify them as doubtful, but which exhibit a weakness which might give rise to defaults and losses in the future, because the customers concerned are the weakest of a certain group or sector that has been affected by extraordinary higher-risk circumstances. The loans classified in this category total EUR 10,808 million.

Analysis of the home purchase loan portfolio

In compliance with Bank of Spain guidelines for enhanced transparency of market disclosures in relation to the property market, following is a breakdown of the home purchase loans granted to households by the Group’s main businesses in Spain. This portfolio, which is one of the most important, amounted to EUR 61,936 million (EUR 61,387 million of which were secured by mortgages) at 2010 year-end, accounting for 26% of total lending in Spain.


	Gross		Of which:
Millions of euros	amount		Doubtful
Home purchase loans		61,936		1,388
Without mortgage guarantee		549		30
With mortgage guarantee		61,387		1,358

The non-performing loans ratio of the mortgage loan portfolio reflected a substantial improvement at the end of 2010, in an adverse macroeconomic environment, falling to 2.2% from 2.5% at 2009 year-end.

The specific characteristics of the home purchase mortgage loan portfolio in Spain result in a medium-low risk profile and limited prospects of additional impairment:

	•		All mortgage transactions include principal repayments from the very first day.

	•		Habitual practice of early repayment, as a result of which the average life of transactions is much shorter than the contractual term.

	•		Debtors provide all their assets as security, not just the home.

	•		Most of the mortgages are floating rate loans with fixed spreads tied to Euribor.

	•		High quality of collateral: 94% of the portfolio relates to financing provided for principal residence purchases.

	•		85% of the portfolio has an LTV of less than 80%.

	•		Stable average effort ratio at around 29%.

F-198


Total LTV Ranges
In millions of euros	LTV < 50%		50% < LTV < 80%		80% < LTV < 100%		LTV > 100%
Gross amount		20,583		31,519		8,299		986
Of which: Doubtful		247		638		440		33

Loan-to-value ratio: ratio of the principal amount of the loan to the appraised value of the mortgaged asset. Using management criteria, the average LTV of the residential mortgage portfolio for individuals is 50.5%.

Financing granted for construction and property development for real estate purposes

The portfolio relating to this sector, defined in accordance with the Bank of Spain’s purpose-based classification guidelines, amounted to EUR 27,334 million in Spain, representing 3.7% of the Group’s total lending, and reflected a significant decrease in comparison with previous years (12% with respect to 2009 and 27% with respect to 2008, on a like-for-like basis). This represents a market share of approximately 10% in construction and property development for real estate purposes, substantially lower than the market share of the Group’s businesses in Spain taken as a whole (15%).

The reduction of the risk exposure to this sector was due largely to the introduction of an approval policy for new loans adapted to the situation of the sector, which resulted in the repayment of outstanding loan transactions, and to the proactive management of existing risks.


			Excess over		Specific
	Gross amount		collateral value		allowance
In millions of euros	Total		Total		Total
1) Loans recognized (gross exposure) (1)		27,334		13,296		1,890
1.1) Of which: Doubtful		4,636		2,391		1,321
1.2) Of which: Substandard		4,932		2,715		569

- Total collective coverage (total businesses in Spain)						768
- Written-off assets		589


(1)		By loan purpose

At 2010 year-end, the non-performing loans ratio of this portfolio was 17%, mirroring the downturn experienced by the sector. With respect to the EUR 9,568 million classified as doubtful and substandard loans, more than 75% of the related transactions are with debtors who are current in their payments. The coverage ratio stood at 28%.

The exposure to the construction and property development for real estate purposes sector includes a high proportion of mortgage loans (EUR 21,210 million, representing 78% of the portfolio), the detail being as follows:


Millions of euros – December 2010	Credits: Gross
1. Without mortgage guarantee		6,124

2. With mortgage guarantee		21,210

2.1 Completed buildings		12,709
2.1.1 Residential		5,247
2.1.2 Other		7,462
2.2 Buildings under construction		2,548
2.2.1 Residential		1,991
2.2.2 Other		558
2.3 Land		5,953
2.3.1 Developed land		3,678
2.3.2 Developable land		2,023
2.3.3 Other land		252

TOTAL		27,334

F-199

A product of particular relevance in the property development portfolio is the developer mortgage loan for housing construction, exposure to which totalled EUR 9,854 million at 2010 year-end, approximately 1.3% of Santander Group’s total lending. Exposure to this product decreased by 9.3% in 2009 and fell by an even higher rate in 2010 (20%).

At year-end, this portfolio had a high level of customer granularity, low concentration and an adequate level of collateral and allowances.

The analysis of the portfolio distribution, by stage of the work in progress of the financed developments, is as follows:

	•		Developments with completed work / certificate of final completion obtained: 72.5% of outstanding risk.

	•		Developments with a percentage of completion of more than 80%: 12.8% of outstanding risk.

	•		Developments with a percentage of completion of between 50 and 80%: 3.1% of outstanding risk.

	•		Percentage of completion of less than 50%: 11.5%.

The detail of the stages of completion of the property developments shows that nearly 85% of the financed developments of this kind are complete or are close to completion, thus having overcome the construction risk.

Policies and strategies in place for the management of these risks

The policies in force for the management of this portfolio, which are reviewed and approved on a regular basis by the Group’s senior management, are currently geared towards reducing and securing the outstanding exposure, albeit without neglecting any viable new business that may be identified.

In order to manage this credit risk exposure, Santander Group has specialist teams whose functions are not restricted to the risk units, but rather supplement risk management and embrace the entire life-cycle of these transactions: their commercial management, their legal treatment, their possible future recovery management, etc.

The Group’s anticipatory management of these risks enabled it to significantly reduce its exposure (down 27% from 2008 to 2010), and it has a granular, geographically diversified portfolio in which the financing of second residences accounts for a very small proportion of the total. Mortgage financing provided for non-urban land accounts for a small percentage (4.2%) of the mortgage exposure to land transactions; the remainder relates to land already classified as urban or developable and which can therefore be developed.

In the case of financing projects for housing whose construction is already complete, the significant reduction of exposure (-20% in 2010) was achieved through various different measures. Alongside the efforts of the existing specialist marketing channels, a series of campaigns were conducted which, supported by teams of managers specifically assigned to this function, in the case of the Santander Network were directly supervised by the recovery business area. The direct management of these campaigns with developers and purchasers, applying policies of sale price reduction and adaptation of financing conditions to buyers’ needs, made it possible to subrogate existing loans. These subrogations enable the Group to diversify its risk in a business segment that displays a clearly lower non-performing loans ratio.

The loan approval processes are managed by specialist teams which, working in direct coordination with the sales teams, have a set of clearly defined policies and criteria:

	•		Developers with an ample solvency profile and proven experience in the market.

	•		Strict criteria regarding the specific parameters of the transactions: exclusive financing for the construction cost, high percentages of accredited sales, principal residence financing, etc.

	•		Support of financing of government-subsidized housing, with accredited sales percentages.

	•		Restricted financing of land purchases, subject to the restoration of a sufficient level of coverage in existing financing arrangements or to the obtainment of increased collateral.

In addition to the permanent control performed by its risk monitoring teams, the Group has a specialist technical unit that monitors and controls this portfolio with regard to the stage of completion of construction work, planning compliance and sales control, and validates and controls progress billing payments. Santander has created a set of specific tools for this function. All mortgage distributions, drawdowns of any kind, changes in grace periods, etc., are authorized centrally.

F-200

In the case of construction-phase projects that are experiencing difficulties of any kind, the policy adopted is to ensure completion of the construction work so as to obtain completed buildings that can be sold in the market. To this end, each project is analyzed individually so that the most effective set of measures can be adopted in each case (supplier payment structures guaranteeing completion of the construction work, establishment of specific drawdown schedules, etc.)

In those cases requiring analysis of some kind of restructuring of the outstanding exposure, the restructuring is conducted jointly by the risk unit and the recovery business area, in advance of any default situations, applying criteria aimed at endowing projects with a payment structure that facilitates their successful completion. These restructuring transactions are authorized centrally by expert teams, thus ensuring the application of strict criteria consistent with the principles of prudence governing the Group’s risk management. Any potential losses are recognized in accordance with Bank of Spain rules, when they are identified and the positions are classified and the related provisions recognized without waiting for the related default to occur.

Management of on-balance-sheet property assets is conducted through companies specializing in the sale of real estate (Altamira Santander Real Estate, S.A. and Promodomus Desarrollo de Activos, S.L.) and is supplemented by the commercial network structure. The assets are sold with price reductions in keeping with the market situation.

Acquired and foreclosed assets

One of the mechanisms employed in Spain to ensure the efficient management of the portfolio is the purchase and foreclosure of property assets.

The Group considered acquisition to be an efficient tool for the resolution of defaulted loans, as compared with the various legal proceeding routes open to it, the main reasons being as follows:

	•		Immediate availability of the assets, as opposed to the longer duration of legal proceedings.

	•		Cost saving.

	•		Enhanced viability of companies as a result of the injection of liquidity for their business activity.

	•		Reduction of potential loss in value of the loans to these customers.

	•		Reduced exposure and expected loss.

The detail of the assets acquired and foreclosed by the Group’s main businesses in Spain at 2010 year-end is as follows:

SPAIN: ACQUIRED AND FORECLOSED ASSETS (millions of euros)


	Gross carrying		Of which:		Net carrying
	amount		Allowance		amount		% covered
Property assets from loans to construction and property development companies		5,396		1,790		3,606		33	%
Of which:
Completed buildings		1,093		268		825		25	%
Residential		714		175		539		25	%
Other		379		93		286		25	%
Buildings under construction		564		139		425		25	%
Residential		562		138		424		25	%
Other		2		1		1		25	%
Land		3,740		1,383		2,357		37	%
Developed land		2,235		775		1,460		35	%
Developable land		1,308		521		787		40	%
Other land		197		87		110		44	%
Property assets from home purchase mortgage loans to households		1,506		369		1,137		25	%
Other foreclosed property assets		607		154		453		25	%
Equity instruments of, ownership interests in and financing provided to non-consolidated companies holding these assets		840		438		402

In 2010 net additions to acquired and foreclosed assets fell by 44% due to a combination of lower gross additions (-20%) and a significant increase in disposals (+31%). Management of on-balance-sheet property assets is conducted through companies specializing in the sale of real estate and is assisted by the commercial network structure, which enables these assets to be sold in the market with acceptable levels of losses.

F-201

Thousands of millions of euros


	2009		2010

Gross additions		2.5		2.1	-20	%
Disposals		0.8		1.1	31	%
Difference		1.7		1.0	-44	%

Of the total figure, 41% relates to completed buildings that are available for sale, and 95% of total land assets are developed or developable land, which has a level of coverage of 37%.

Refinancing

Refinancing is one of the management tools established to adapt the maturity structure of loan principal and interest to customers’ revised payment capacity.

At Santander Group, refinancing is confined, with stringent and selective criteria, to transactions:

	•		that are viable and whose initial impairment is not very severe,

	•		in which customers have a willingness to pay,

	•		that improve the Bank’s position in terms of expected loss, and

	•		in which refinancing does not discourage an additional effort by customers.

The Group’s corporate refinancing policy ensures uniform and strict application of these criteria across the various units:

	•		The overall exposure to the customer is assessed, regardless of the situation of each individual contract, and the highest possible level of guarantees is assigned to all the customer’s risks.

	•		The exposure to the customer is not increased.

	•		All the alternatives to refinancing and their impacts are assessed, making sure that the results of this solution exceed those which would foreseeably be obtained if no refinancing were performed.

	•		Special attention is paid to the guarantees and the possible future changes in their value.

	•		Its use is restricted, and priority is given to the restructuring of loans that requires an additional effort from customers, and actions that only postpone the problem are avoided.

	•		Restructured transactions are subject to special monitoring, which continues until the debt has been repaid in full.

	•		For individualized customers, a detailed, case-by-case analysis is performed, in which the use of expert judgment makes it possible to establish the most suitable conditions.

In addition to the close monitoring of these portfolios by the Group’s risk management teams, the competent supervisory authorities and Santander Group’s internal audit pay special attention to the control and appropriate assessment of refinanced portfolios.

Refinancing does not entail the release of provisions and the risk continues to be classified as doubtful, unless:

•

The criteria established in Bank of Spain Circular-based regulations are met (i.e. collection of ordinary interest outstanding and, in any case, provision of new effective guarantees or reasonable assurance of payment capacity);

•

The precautionary provisions included, using the principle of prudence, in the Group’s corporate policy are met (sustained payment for a period of between three and twelve months, depending on the transaction features and the type of guarantee).

In the case of Spain (commercial networks of Santander plus Banesto), at 2010 year-end the balance of transactions refinancing exposures previously accounted for as doubtful assets amounted to EUR 2,258 million, of which EUR 1,675 million related to corporate transactions and EUR 583 million to individuals.

Of the total refinanced amount, EUR 1,313 million met the requirements for reclassification as standard risk defined by the Bank of Spain in Annex IX of Circular 4/2004.

At 2010 year-end, a high percentage (84%) of these refinanced transactions were performing normally with respect to compliance with the related payment obligations.

F-202

Analysis of the mortgage portfolio in the United Kingdom

With regard to standardized exposures, in addition to the loan portfolio in Spain, the mortgage loan portfolio in the United Kingdom is particularly noteworthy because of its significance with respect to Santander Group’s total lending.

This portfolio is composed entirely of first-mortgage loan transactions on properties located throughout the United Kingdom, since transactions involving second or successive liens on the mortgaged properties are no longer originated.

Geographically speaking, the credit risk exposure is concentrated mainly in the Greater London area, where housing price indices reflect a more stable behavior, even in times of economic slowdown.

All properties are appraised by authorized valuers prior to the approval of the transaction, in accordance with the Group’s risk management principles and in keeping with the methodology defined by the Royal Institution of Chartered Surveyors.

The portfolio performed favorably in 2010, achieving a non-performing loans ratio of 1.41% at year-end (2009: 1.52%), the result of both the ongoing monitoring and control of the portfolio and the strict credit policies in place, which include, among other measures, a maximum loan-to-value ratio with respect to the properties securing the loans. On the basis of these policies, since 2009 no mortgages with an LTV of more than 100% have been granted, and a mere 0.1% of the mortgages granted in the same period have an LTV of more than 90%; as a result, the average LTV ratio stands at 51%.

There is no risk appetite for loans deemed to be “high risk” (subprime mortgages) and, therefore, the credit risk policies in force expressly prohibit the granting of loans of this kind, establishing stringent credit quality requirements for both transactions and customers. Buy-to-let mortgage loans, which have the highest risk profile, represent a scant percentage (barely 1%) of the total portfolio amount.

Another indicator of the sound performance of the portfolio is the small volume of foreclosed properties, which amounted to EUR 143 million at 2010 year-end, representing just 0.07% of total mortgage exposure. The efficient management of foreclosures, coupled with the existence of a dynamic market in which foreclosed homes can be sold in a short space of time, contributes to the good results achieved.

Risk control function

Supplementing the management process, the risk control function obtains a global view of the Group’s loan portfolio, through the various phases of the risk cycle, with a level of detail sufficient to permit the assessment of the current situation of the exposure and any changes therein.

The aim of the control model is to assess the solvency risk assumed in order to detect any areas requiring attention and to propose measures to correct any possible impairment. Therefore, it is essential that the control activity itself be accompanied by an analysis component aimed at facilitating a proactive approach to the early detection of problems and the subsequent recommendation of action plans.

Any variances in the Group’s risk exposure from budgets, limits and benchmarks are controlled on an ongoing and systematic basis, and the impacts of these variances in certain future situations, both of an exogenous nature and those arising from strategic decisions, are assessed in order to establish measures that place the profile and amount of the loan portfolio within the parameters set by the Group.

The risk control function is performed by assessing risks from various complementary perspectives, the main pillar being control by geographical location, business area, management model, product and process, thus facilitating the detection of specific areas of action requiring decision-making.

One of the focal points in 2010 was to strengthen the vision of the various units from a local control perspective, obtaining in-depth knowledge of their business contexts, legislation, strategies, local regulations and changes in their portfolios. Also, the uniformity of the control model was consolidated by establishing standards in the data flow, its portfolio-based analysis and the monitoring of the main management metrics, which facilitate the ongoing measurement of the exposure of each of the business segments.

In 2006, within the corporate framework established in the Group for compliance with the Sarbanes-Oxley Act, a corporate tool was made available on the Group’s intranet for the documentation and certification of all the subprocesses, operational risks and related mitigating controls. The risk division assesses annually the efficiency of the internal control of its activities.

F-203

Scenario analysis

As part of its ongoing risk monitoring and control process, the Group performs simulations of the performance of its portfolio in various adverse and stress scenarios (stress testing). This enables the Group to assess its capital adequacy in the event of certain future circumstantial situations. These simulations are performed systematically on the Group’s most important portfolios in accordance with a corporate methodology which:

•

Calculates the sensitivity of the credit risk parameters (PD and LGD) to certain macroeconomic variables.

•

Designs benchmark scenarios (at global level and for each of the Group units).

•

Identifies “break-off scenarios” (the levels above which the sensitivity of the risk factors to macroeconomic variables is more accentuated) and the distance of these break-off scenarios from the current situation and the benchmark scenarios.

•

Estimates the expected loss associated with each of the set scenarios and the changes in the risk profile of each portfolio in response to changes in certain macroeconomic variables.

The simulation models used by the Group rely on data from a complete economic cycle to calibrate the behavior of the credit risk parameters in response to changes in the macroeconomic variables.

In the wholesale banking area, since low-default portfolios are involved, there is not sufficient historical default data available to perform the calibration and, therefore, expert judgment is used.

The scenarios are developed from the standpoint of each unit and the Group as a whole. The main macroeconomic variables contained in these scenarios are as follows:

	•		Unemployment rate

	•		Housing prices

	•		GDP

	•		Interest rate

	•		Inflation

The scenario analysis enables senior management to gain a clearer understanding of the foreseeable performance of the portfolio in response to changing market and circumstantial conditions and it is a basic tool for assessing the adequacy of the provisions recognized to cater for stress scenarios.

The analyses performed, in both base and acid scenarios, for the Group as a whole and each of the units, over a five-year horizon, demonstrate the strength of the balance sheet in the various projected market and macroeconomic scenarios.

EU stress tests

With a view to increasing confidence in European financial institutions and enhancing the transparency and uniformity of the financial information disclosed to the market, the Committee of European Banking Supervisors (CEBS) published the results of the stress tests conducted in the first half of 2010 on 91 banking groups representing at least 50% of the domestic banking systems of 20 European countries.

Performed in coordination with the European Central Bank and the European Commission, as scenario design providers, and with the national banking authorities, as the bodies ultimately responsible for conducting the analyses, the CEBS stress tests assessed the level of capital that the institutions would achieve in 2011, and the changes therein with respect to 2009 year-end (the starting point), in two different scenarios: a benchmark stress scenario and an adverse stress scenario including the impact of sovereign debt shocks.

In the case of Santander, this stress test exercise demonstrated the strength and validity of its business model. In the most adverse scenario, the Group is able to report a profit, distribute dividends and continue to generate capital, maintaining its Tier 1 capital intact at 10.0%, with a capital surplus of EUR 23,131 million, compared with the 6% benchmark threshold.

F-204

Loan recovery

In 2010 recovery management continued to be one of the strategic cornerstones of the Bank’s risk management.

For the performance of this function, which is essentially a business activity, the Bank has in place a corporate management model which defines the general operating guidelines. These guidelines are applied in the various geographical areas in which the Bank is present, adapted as required to suit the local business models and the economic situation of the respective environments.

Fundamentally, this corporate model establishes management procedures and circuits on the basis of customer characteristics, distinguishing between a mass management approach using multiple channels and a more personalized management through the assignment of specific managers.

Thus, based on this management segmentation, various mechanisms were established to ensure the recovery management of default customers from the earliest stages of arrears to the ultimate write-off of the debt. In this connection, the actions taken by the recovery function vis-à-vis customers commence on the first day of non-payment of the debt and end when the debt has been paid or has returned to performing status. In some segments preventative management of customers is performed before they fall into arrears.

Loan recovery, thus conceived as an integrated business, is based on an ongoing review of management processes and methodology. It is supported by all the Group’s resources, with the participation and cooperation of other areas (Commercial, Resources, Technology, Human Resources), and technological solutions for enhanced effectiveness and efficiency are developed.

Santander pays the utmost attention to the development of talent. The Recoveries unit has a practical hands-on training programme that aims to broaden participants’ knowledge, facilitate the exchange of ideas and best practices and further the teams’ professional development, and at all times seeks to integrate the recovery process into the Group’s ordinary commercial activity.

In 2010, as a result of all these measures adopted to ensure an effective recovery process, the Group was able to improve its non-performing loan recovery ratios and contain the amount of new NPLs, which translated into a considerable reduction of managed NPLs with respect to those recorded in 2009, a trend which was observed in most of the Group’s business units.

2010 also witnessed good results in the recovery of written-off assets, actions having been undertaken both at the level of each default customer and through an active management of the loan portfolios. All the above made it possible to increase loan recoveries in 2010.

3.6

Credit risk from other standpoints

Certain areas and/or specific views of credit risk deserve specialist attention, complementary to global risk management.

Concentration risk

Concentration risk control is key to the risk management process. The Group continuously monitors the degree of credit risk concentration, by geographical area/country, economic sector, product and customer group.

The risk committee establishes the risk policies and reviews the exposure limits required to ensure adequate management of credit risk concentration.

The Group is subject to Bank of Spain regulations on “large exposures”. In accordance with Bank of Spain Circular 3/2008, no exposure to a single individual or economic group, including all types of credit and equity risks, should exceed 25% of the Group’s capital. Also, the total amount of large exposures (defined as those exceeding 10% of eligible capital) may not exceed eight times the Group’s capital. Exposures to governments and central banks belonging to the OECD are excluded from this treatment.

At December 31, 2010, there was only one economic group with respect to which the Group’s exposure exceeded 10% of capital: a Spanish multinational group with an internal rating equal to “A-“, exposure to which represented 11.09% of capital. Following the application of risk mitigation techniques and the regulations applicable to large exposures, the percentage stood at 9.28% of eligible capital.

At December 31, 2010, the Group’s credit exposure to the top 20 borrower financial groups, excluding AAA-rated governments and sovereign bonds denominated in local currency, accounted for 6.0% of the credit risk exposure to customers (lending plus off-balance-sheet exposures).

From a sector-based standpoint, the distribution of the corporate portfolio is adequately diversified.

F-205

The Group’s risk division works closely with the finance division in the active management of credit portfolios, which includes reducing the concentration of exposures through several techniques, such as the arrangement of credit derivatives for hedging purposes or the performance of securitization transactions, in order to optimize the risk/return ratio of the total portfolio.

Credit risk from financial market operations

This concept includes the credit risk arising in treasury operations with customers, mainly credit institutions. These operations are performed using both money market financing products arranged with various financial institutions and products intended to provide service to the Group’s customers.

Risk control is performed using an integrated, real-time system that enables the Group to know at any time the unused exposure limit with respect to any counterparty, any product and maturity and at any Group unit.

Credit risk is measured at its current market value and its potential value (exposure value considering the future variation in the underlying market factors). Therefore, the credit risk equivalent (CRE) is defined as the sum of net replacement value plus the maximum potential value of the contracts in the future. Calculations are also performed of capital at risk or unexpected loss (i.e. the loss which, once the expected loss is subtracted, constitutes the economic capital, net of guarantees and recoveries).

The total credit risk exposure to credit institutions from financial market operations stands at 63.2%. By type of product, 52.3% relates to derivative transactions, mainly products without optionality, and the remaining 47.7% to liquidity and traditional financing products.

Derivative transactions are concentrated on counterparties with high credit ratings and, therefore, 62.8% of the risk exposure is to counterparties with a credit rating of A- or above. In 2010 the total exposure arising from these transactions in terms of credit risk equivalent was EUR 46,893 million.

Distribution of OTC-derivative credit risk exposure by counterparty rating


RATING	%
AAA		11.6	%
AA		9.7	%
A		41.5	%
BBB		21.3	%
BB		13.3	%
B		1.6	%
Other		0.9	%

The distribution of the credit risk exposure arising from derivatives, by counterparty, is as follows: 41% to banks, 34% to large corporations and 10% to SMEs.

With respect to the geographical distribution of the risk exposure, 18% is to Spanish counterparties, 20% to UK counterparties (operations performed mainly by Santander UK) and 29% to other European countries, 9% to the United States and 16% to Latin America.

F-206

Credit derivative transactions

Santander Group uses credit derivatives to hedge credit transactions, to conduct customer business in financial markets and, to a lesser extent, as part of its trading operations. Credit derivatives represent a small portion of the Group’s operations as compared with other similar banks and are subject to strict internal controls and to sound operational risk minimization policies.

The risk inherent to these transactions is controlled using a wide array of limits such as VaR, nominal value by rating, sensitivity to spread by rating and name, sensitivity to recovery rate and sensitivity to correlation. Jump-to-default limits are also set by individual name, geographical area, sector and liquidity.

At December 31, 2010, for the Group’s trading operations, the sensitivity of credit transactions to increases of 1 basis point in spreads was EUR -1.5 million and the average annual VaR amounted to EUR 17.2 million. This last-mentioned measure increased with respect to 2009 due to the higher volatility of the credit spreads quoted in the market.

In notional terms, the position in CDSs includes protection purchased for EUR 89,127 million and protection sold for EUR 79,764 million.

Country risk

Country risk is a credit risk component inherent in all cross-border credit transactions due to circumstances other than ordinary commercial risk. Its main elements are sovereign risk, transfer risk and other risks that can affect international financial operations (war, natural disasters, balance of payments crises, etc.).

At December 31, 2010, the country risk exposure for which allowances must be recorded amounted to EUR 435 million, EUR 37 million of which related to intra-Group transactions. At 2009 year-end, the total regulatory country risk exposure amounted to EUR 444 million. The allowance recognized in this connection at 2010 year-end amounted to EUR 69 million, as compared with EUR 65 million at 2009 year-end.

The Group’s country risk management policies continued to adhere to a principle of maximum prudence, and country risk is assumed, applying highly selective criteria, in transactions that are clearly profitable for the Group and bolster its overall relationship with its customers.

Sovereign risk

As a general rule, sovereign risk is the risk assumed in transactions with the central bank (including the regulatory cash reserve requirement), the issuer risk of the Treasury or Republic (government debt securities) and the risk arising from transactions with public entities with the following features: their funds are obtained only from fiscal income; they are legally recognized as entities directly included in the government sector; and their activities are of a non-commercial nature.

At December 31, 2010, the sovereign risk was distributed among Europe (56.1%), Latin America (37.7%), United States (5.1%) and other regions (1.0%). Noteworthy were the contributions from the United Kingdom (27.2%) and Spain (21.2%) in Europe and from Brazil (27.1%) and Mexico (6.0%) in Latin America. The rise in this risk with respect to the figure at 2009 year-end reflects mainly the increase in balances with central banks in the United Kingdom, Brazil and the United States, which was partially offset by the reduction of Spanish government debt securities in the trading and banking books.

The percentage sovereign risk exposure to the peripheral countries of Europe was small with respect to the total portfolio: Portugal (2.4%), Italy (0.3%), Ireland (0.2%) and Greece (0.1%).

As regards Latin America as a whole, the sovereign risk exposure arose mainly from the subsidiary banks’ obligations to make certain deposits at the related central banks and from the fixed-income portfolios held as part of the structural interest rate risk management strategy. These exposures are taken in local currency and are financed out of local customer deposits, also denominated in local currency. The exposures to the sovereign risk of Latin American issuers denominated in currencies other than the official currency of the issuer country totalled EUR 1,812 million, which accounts for 2.7% of the total sovereign risk exposure to Latin American issuers.

Environmental risk

The environmental risk analysis of credit transactions is one of the main features of the strategic corporate social responsibility plan. The analysis is founded on two major cornerstones:

•

The Equator Principles: an initiative of the International Finance Corporation of the World Bank. These principles constitute an international standard for the analysis of the social and environmental implications of project finance transactions. The adoption of these principles involves the commitment to assess, using a sequential methodology, the social and environmental risks of the projects financed:

•

For transactions amounting to USD 10 million or more, an initial general questionnaire is completed, designed to establish the social and environmental risks of the project (which is classified, from higher to lower risk, into category A, B or C, respectively) and the degree of compliance of the transaction with the Equator Principles.

•

For projects classified into the highest-risk categories (categories A and B), a more exhaustive questionnaire is completed, which is adapted according to the business sector involved.

F-207

•

Depending on the category and location of the projects, a social and environmental audit is conducted (by independent external advisers). To this end, specific questionnaires have been developed for the sectors in which the Bank is most active. Furthermore, the Bank organizes social and environmental training courses for both its risk management teams and the heads of its business units.

•

The VIDA tool: implemented since 2004, the main aim of this tool is to assess the environmental risk of both current and potential customer companies, using a system that classifies each of the companies into one of seven categories, depending on the degree of environmental risk incurred. In 2010, 41,306 companies in Spain were assessed using this tool.

MARKET RISK

4.1

Activities subject to market risk

The measurement, control and monitoring of the market risk area comprises all operations in which net worth risk is assumed. This risk arises from changes in interest rates, exchange rates, equity prices, credit spreads and commodity prices and from the volatility of each of these factors, as well as from the liquidity risk of the various products and markets in which the Group operates.

The activities are segmented by risk type as follows:

Trading: this item includes financial services for customers, trading operations and positioning mainly in fixed-income, equity and foreign currency products.

	b)		Balance sheet management: interest rate risk and liquidity risk arising as a result of the maturity and repricing gaps of all assets and liabilities. This item also includes the active management of the credit risk inherent in the Group’s balance sheet.

	c)		Structural risks:

•

Structural foreign currency risk/hedges of results: foreign currency risk arising from the currency in which investments in consolidable and non-consolidable companies are made (structural exchange rate). This item also includes the positions taken to hedge the foreign currency risk on future results generated in currencies other than the euro (hedges of results).

•

Structural equities risk: this item includes equity investments in non-consolidated financial and non-financial companies that give rise to equities risk.

The treasury area is responsible for managing the positions taken in the trading activity.

The financial management area is responsible for managing the balance sheet management risk and structural risks centrally through the application of uniform methodologies adapted to the situation of each market in which the Group operates. Thus, in the convertible currencies area, financial management directly manages the Parent’s risks and coordinates the management of the other units operating in these currencies. Decisions affecting the management of these risks are taken through the ALCO committees in the respective countries and, ultimately, by the Parent’s markets committee.

The aim pursued by financial management is to ensure the stability and recurring nature of both the net interest margin of the commercial activity and the Group’s economic value, whilst maintaining adequate liquidity and solvency levels.

Each of these activities is measured and analyzed using different tools in order to reflect their risk profiles as accurately as possible.

F-208

	4.2		Methodologies

			*Trading*

The standard methodology applied to trading activities by Santander Group in 2010 was value at risk (VaR), which measures the maximum expected loss with a given confidence level and time horizon. This methodology was based on a standard historical simulation with a 99% confidence level and a one-day time horizon. Statistical adjustments were made to enable the swift and efficient incorporation of the most recent events that condition the level of risk assumed. Specifically, the Group uses a time window of two years or 520 daily data obtained retrospectively from the reference date of the VaR calculation. Two figures are calculated each day, one by applying an exponential decline factor which gives a lesser weighting to more distant observations in time, and another with uniform weightings for all observations. The VaR reported is the higher of these two figures.

VaR is not the only measure. It is used because it is easy to calculate and because it provides a good reference of the level of risk incurred by the Group. However, other measures are simultaneously being taken to enable the Group to exercise greater risk control in all the markets in which it operates.

One of these measures is scenario analysis, which consists of defining behavior scenarios for various financial variables and determining the impact on results of applying them to the Group’s activities. These scenarios can replicate past events (such as crises) or, conversely, determine plausible scenarios that are unrelated to past events. A minimum of three types of scenarios are defined (plausible, severe and extreme) which, together with VaR, make it possible to obtain a much more complete spectrum of the risk profile.

Also, the market risk area, in accordance with the principle of independence of the business units, monitors daily the positions of each unit and the global positions, through an exhaustive control of changes in the portfolios, the aim being to detect possible incidents and correct them immediately. The daily preparation of an income statement is an excellent risk indicator, insofar as it allows us to identify the impact of changes in financial variables on the portfolios.

Lastly, due to their atypical nature, derivatives and credit management activities are controlled daily using specific measures. In the case of derivatives, a control is conducted of sensitivities to fluctuations in the price of the underlying (delta and gamma), in volatility (vega) and in time (theta). For credit management activities, measures such as sensitivity to spread, jump-to-default and risk concentrations by rating level are reviewed systematically.

With respect to the credit risk inherent in the trading portfolios, and in keeping with the recommendations made by the Basel Committee on Banking Supervision and with current regulations, an additional measure, the incremental default risk (IDR), is calculated to cover the default risk not properly captured in the VaR, by measuring the variation in the related credit spreads. The instruments subject to control are basically fixed-income government and corporate bonds, derivatives on bonds (forwards, options, etc.) and credit derivatives (credit default swaps, asset-backed securities, etc.). The method used to calculate the IDR, which in essence is similar to that applied to the credit risk on non-trading positions, is based on direct measurements on the loss distribution tails at the appropriate percentile (99.9%). The Monte Carlo method is used and one million simulations are applied.

Balance sheet management

Interest rate risk

The Group analyses the sensitivity of the net interest margin and market value of equity to changes in interest rates. This sensitivity arises from maturity and interest rate repricing gaps in the various balance sheet items.

On the basis of the balance-sheet interest rate position, and considering the market situation and outlook, the necessary financial measures are adopted to align this position with that desired by the Bank. These measures can range from the taking of positions on markets to the definition of the interest rate features of commercial products.

The measures used by the Group to control interest rate risk in these activities are the interest rate gap, the sensitivity of net interest margin and market value of equity to changes in interest rates, the duration of capital, value at risk (VaR) and scenario analysis.

Interest rate gap of assets and liabilities

The interest rate gap analysis focuses on the mismatches between the interest reset periods of on-balance-sheet assets and liabilities and of off-balance-sheet items. This analysis facilitates a basic snapshot of the balance sheet structure and enables concentrations of interest rate risk in the various maturity buckets to be detected. Additionally, it is a useful tool for estimating the possible impact of potential changes in interest rates on the Group’s net interest margin and market value of equity.

The flows of all the on- and off-balance-sheet aggregates must be broken down and placed at the point of repricing or maturity. The duration and sensitivity of aggregates that do not have a contractual maturity date are analyzed and estimated using an internal model.

F-209

Net interest margin (NIM) sensitivity

The sensitivity of the net interest margin measures the change in the expected net interest income for a specific period (twelve months) given a shift in the yield curve.

The sensitivity of the net interest margin is calculated by simulating the margin both for a scenario of changes in the yield curve and for the current scenario, the sensitivity being the difference between the two margins so calculated.

Market value of equity (MVE) sensitivity

The sensitivity of the market value of equity is a complementary measure to the sensitivity of the net interest margin.

This sensitivity measures the interest rate risk implicit in the market value of equity based on the effect of changes in interest rates on the present values of financial assets and liabilities.

Value at risk (VaR)

The value at risk for balance sheet aggregates and investment portfolios is calculated by applying the same standard as that used for trading: maximum expected loss under an historical simulation with a confidence level of 99% and a one-day time horizon. Statistical adjustments were made to enable the swift and efficient incorporation of the most recent events that condition the level of risk assumed.

Scenario analysis

Two interest rate performance scenarios are established: maximum volatility and sudden crisis. These scenarios are applied to the activities under analysis, thus obtaining the impact on the market value of equity and the net interest margin projections for the year.

Liquidity risk

Liquidity risk is associated with the Group’s ability to fund its commitments at reasonable market prices and to carry out its business plans with stable sources of funding. The Group permanently monitors maximum gap profiles.

The measures used to control liquidity risk in balance sheet management are the liquidity gap, liquidity ratios, stress scenarios and contingency plans.

Liquidity gap

The liquidity gap provides information on contractual and expected cash inflows and outflows for a given period for each currency in which the Group operates. The gap measures net cash requirements or surpluses at a given date and reflects the liquidity level maintained under normal market conditions.

The Group conducts two types of liquidity gap analyses, depending on the balance sheet item in question:

1.- Contractual liquidity gap: all cash-flow generating on- and off-balance-sheet items are analyzed and placed at the point of contractual maturity. For assets and liabilities without contractual maturities, an internal analysis model is used based on a statistical study of the time series of the products, and the so-called stable or unstable balance for liquidity purposes is determined.

2.- Operational liquidity gap: this is a scenario for normal liquidity profile conditions, since the cash flows of the on-balance-sheet items are placed at the point of probable liquidity rather than at the point of contractual maturity. In this analysis, the definition of the behavior scenario (renewal of liabilities, discounts in portfolio disposals, renewal of assets, etc.) is the fundamental point.

Liquidity ratios

The liquidity ratio compares liquid assets available for sale or transfer (after the relevant discounts and adjustments have been applied) with the total amount of liabilities (including contingencies). This ratio shows, by non-consolidable currency, the Group’s capacity to immediately respond to its commitments.

Cumulative net liquidity is defined as the 30-day cumulative gap obtained from the modified liquidity gap. The modified contractual liquidity gap is calculated on the basis of the contractual liquidity gap, and places liquid assets at the point of settlement or transfer rather than at the point of maturity.

F-210

Additionally, other ratios or measures relating to the structural liquidity position are used:

	•		Loans to net assets

	•		Customer deposits, insurance and medium/long-term financing to loans

	•		Customer deposits, insurance and medium/long-term financing, equity and other liabilities to total loans and fixed assets

	•		Short-term funding to net liabilities

Scenario analysis/Contingency plan

Santander Group’s liquidity management focuses on adopting all the measures required to prevent a crisis. It is not always possible to predict the causes of a liquidity crisis and, therefore, contingency plans focus on the modeling of potential crises by analyzing various scenarios, the identification of crisis types, internal and external communications, and individual responsibilities.

The contingency plan spans management activity from local unit to head office level. At the first sign of a crisis, it specifies clear lines of communication and suggests a wide range of responses to different levels of crisis.

Since a crisis can occur locally or globally, each local unit must prepare a contingency funding plan. Each local unit must inform headquarters of its contingency plan at least every six months so that it can be reviewed and updated. However, these plans must be updated more frequently if market conditions make this advisable.

Lastly, Santander Group is actively involved in the process initiated by the Basel Committee to strengthen the liquidity of financial institutions¹, through two channels: on the one hand, by participating in the impact analysis of the regulatory changes proposed -basically the introduction of two new ratios: liquidity coverage ratio (LCR) and net stable funding ratio (NSFR)- and, on the other, by being present at the various forums created to discuss and make suggestions on the issue (European Banking Authority, etc.), in both cases in close cooperation with the Bank of Spain.

Structural foreign currency risk / Hedges of results / Structural equities risk

These activities are monitored by measuring positions and results.

Complementary measures

Calibration and test measures

Back-testing consists of performing a comparative analysis between VaR estimates and daily clean results (i.e. profit or loss on the portfolios at the end of the preceding day valued at following-day prices). The aim of these tests is to verify and provide a measure of the accuracy of the models used to calculate VaR.

Back-testing analyses performed at Santander Group comply, at the very least, with the BIS recommendations regarding the verification of the internal systems used to measure and manage financial risks. Additionally, Santander Group also conducts hypothesis tests: excess tests, normality tests, Spearman’s rank correlation, average excess measures, etc.

The assessment models are regularly calibrated and tested by a specialized unit.

Coordination with other areas

Joint efforts are made daily with other areas to mitigate operational risk. This coordination work comprises mainly the reconciliation of positions, risks and results.


¹		“Basel III: International framework for liquidity risk measurement, standards and monitoring” (Basel Committee on Banking Supervision, December 2010)

F-211

4.3

Control system

Limit setting

The limit setting process is performed together with the budgeting activity and is the tool used to establish the assets and liabilities of each business activity. Limit setting is a dynamic process that responds to the level of risk appetite considered acceptable by senior management.

Objectives of the limits structure

The limits structure requires a process to be performed that pursues, inter alia, the following objectives:

•

To identify and delimit, in an efficient and comprehensive manner, the main types of financial risk incurred, so that they are consistent with business management and the defined strategy.

•

To quantify and communicate to the business areas the risk levels and profile deemed acceptable by senior management so as to avoid undesired risks.

	•		To give flexibility to the business areas for the efficient and timely assumption of financial risks, depending on market changes, and for the implementation of the business strategies, provided that the acceptable levels of risk are not exceeded.

	•		To allow business makers to assume risks which, although prudent, are sufficient to obtain the budgeted results.

	•		To delimit the range of products and underlyings with which each treasury unit can operate, taking into account features such as assessment model and systems, liquidity of the instruments involved, etc.

4.4

Risks and results in 2010

Trading

The average VaR of the Group’s market trading operations in 2010, at EUR 28.7 million, was slightly lower than that for 2009 (EUR 30.2 million), even though in 2010 it was affected by the periods of greater volatility as a result of the sovereign debt crisis in Europe. In 2010 the changes in VaR were due mainly to changes in the positions in the portfolios in Brazil and Mexico. Also, in comparison with other similar financial groups, the Group’s trading risk profile can be classified as low. The dynamic management of this profile enables the Group to change its strategy in order to capitalize on the opportunities offered by an environment of uncertainty.

In Latin America, the US and Asia, credit spread VaR and commodities VaR are not presented separately because they are scantly material or immaterial.

Average VaR fell by EUR 1.5 million with respect to 2009. This reduction was concentrated in interest rate VaR, which fell from EUR 20 million to EUR 16 million, and exchange rate VaR, which fell from EUR 15.5 million to EUR 11.4 million. Average equities VaRD rose slightly to EUR 8 million. The most significant increase in risk was in credit spreads, which increased from EUR 11.9 million to EUR 20.9 million due to the above-mentioned volatility surrounding the so-called sovereign debt crisis in the euro zone.

Distribution over time of risks and results

The risk assumption profile, in terms of VaR and results, showed that VaR increased in the first half of 2010 and then remained stable. As regards results, the performance was more irregular in 2010, most notably in April, August and November, when the European sovereign debt crisis was latent, with a lower bottom line than the yearly average, mainly in the Madrid unit and in the books of global operations.

Calibration and test measures

Pursuant to the recommendations issued by BIS for the calibration and control of the efficiency of the internal market risk measurement and management systems, in 2010 the Group regularly performed the required benchmark tests and analyses, and drew conclusions which enabled it to verify the reliability of the model.

As in 2009, in 2010 there were no 99% VaR breaks (i.e. days when the daily loss² exceeded VaR). Worthy of note, however, was the exception to 99% VaE³ (i.e. days when the daily gain exceeded VaE) on 10 May 2010 due mainly to the slump in credit spreads following the agreement reached by the euro zone ministers, the ECB and the IMF. This agreement included the implementation of the European Stabilization Mechanism and the announcement that the ECB would purchase government debt to stem the lack of confidence regarding the euro and sovereign debt.


²		Results in terms of “clean results”. The results for these years do not include intraday results or those arising from fees and commissions.

³		Value at Earnings (VaE) is the balancing entry for VaR on the profit side.

F-212

Balance sheet management⁴

B1. Interest rate risk

Convertible currencies

At the end of December 2010, the sensitivity of the net interest margin at one year to parallel increases of 100 basis points was concentrated on the euro yield curve (EUR 284.1 million), the Parent bank being the main contributor, and on the pound sterling yield curve (GBP 330.8 million). The sensitivity of the margin for other convertible currencies was scantly material.

Also at 2010 year-end, the equity value sensitivity to parallel increases of 100 basis points in the euro yield curve was EUR 1,265.7 million and was mostly concentrated on the Parent bank. With respect to the pound sterling curve, the sensitivity was GBP 406.2 million.

In the current environment of low interest rates, the Bank’s sensitivity to rate increases, in terms of net interest margin and equity value, is positive.

Latin America

Quantitative risk analysis

The interest rate risk in balance sheet management portfolios in Latin America, measured in terms of sensitivity of the net interest margin (NIM) at one year to a parallel increase of 100 b.p. in the yield curve, remained at low levels throughout 2010, fluctuating within a narrow band and reaching a high of EUR 79 million⁵ in April, and then falling to a low of EUR 6 million in September, mainly due to the increase in hedges in Brazil and the disposal of the portfolio in Mexico. It subsequently increased through year-end, mainly due to the growth in deposits and issues in Brazil.

Measured in terms of sensitivity, interest rate risk fluctuated within a narrow band between EUR 651 million and EUR 827 million, and increased in the last quarter due mainly to the lengthening of the duration of the loan portfolio in Brazil and Chile.

At the end of December 2010, the risk consumption for the region, measured in terms of 100 b.p. sensitivity of the MVE, stood at EUR 763 million (December 2009: EUR 704 million), while the net interest margin risk at one year, measured in terms of 100 b.p. sensitivity, was EUR 45 million (December 2009: EUR 64 million).

Geographical distribution

Net interest margin sensitivity

For Latin America taken as a whole, the sensitivity of the net interest margin at one year to increases of 100 basis points was EUR 45 million at December 2010, and was distributed geographically according to the chart below.

This shows that over 90% of the risk is concentrated in three countries: Brazil, Chile and Mexico.

Market value of equity sensitivity

For Latin America taken as a whole, the consumption at December 2010 was EUR 763 million (sensitivity of the market value of equity to a parallel increase of 100 basis points in interest rates). Over 90% of the market value of equity risk is concentrated in four countries: Brazil, Chile, Mexico and Puerto Rico.


⁴		Includes the total balance sheet, except for financial assets and liabilities held for trading.

⁵		Sensitivity expressed as an absolute figure. It is the sum of the sensitivity to numerous yield curves grouped together applying correlation assumptions (betas) between these curves.

F-213

B2. Structural credit risk management

The aim of structural credit risk management is to reduce, through the sale of assets, the concentrations that arise naturally as a result of commercial activity. These sales are offset by the acquisition of other assets which permit diversification of the loan portfolio as a whole. The financial management area analyses these strategies and submits management proposals to the ALCO with a view to optimizing credit risk exposure and contributing to the creation of value.

In 2010:

•

Assets amounting to over EUR 26,000 million were securitized, of which EUR 19,000 million were placed in the market and the remainder were retained by the Group’s various units. These retained securitization transactions increased the Group’s liquidity position since they can be discounted at central banks.

•

Higher tranches of asset-backed bonds issued by Group companies were repurchased in the secondary market (around EUR 500 million).

B3. Funding and liquidity risk management

The Group’s liquidity management framework and the liquidity position at 2010 year-end are described below.

Liquidity management framework

Liquidity management is based on three basic pillars:

A) Organizational governance and board model — a sound governance model that ensures the participation of senior management and of the board in the decision-making process, thus facilitating integration with the Group’s global strategy.

B) Management — adapted to the liquidity needs of each business, in accordance with the decentralized organizational model.

C) Balance sheet analysis and liquidity risk measurement — thorough analysis of the balance sheet and of the changes therein in order to support decision-making.

Organizational and governance model

Decisions relating to all structural risks are made through local ALCO committees, in coordination with the markets committee, which is the senior decision-making body responsible for coordinating all the global decisions affecting liquidity risk measurement, management and control.

The markets committee is presided over by the Entity’s chairman and consists of the second deputy chairman and managing director, the third deputy chairman (who, in turn is ultimately responsible for the Group’s risk management), the finance executive vice president and risk executive vice president and the heads of the business and analysis units.

There are also ALCO committees for both convertible currencies and Latin American currencies.

The management function for structural risks, including liquidity risk, is performed by the financial management area, and the control of these risks is the responsibility of the global market risk area. Both areas provide support to the ALCOs by submitting management analyses and proposals and controlling compliance with the limits set.

Accordingly, in keeping with best governance practices, the Group establishes a clear division between the implementation of the financial management strategy (for which the financial management area is responsible) and its monitoring and control (which is the responsibility of the market risk area).

B. Liquidity management

Structural liquidity management seeks to finance the Group’s recurring business with optimal maturity and cost conditions, avoiding the need to assume undesired liquidity risks.

F-214

Funding and liquidity management is based on the following principles:

•

Broad base of highly stable customer deposits: more than 85% are retail customer deposits captured by the various commercial units in the Group’s main markets.

•

Financing of stable on-balance-sheet liquidity needs (commercial gap or difference between lending and deposits) through medium- and long-term issues, establishing a surplus of structural financing in order to cope with possible adverse situations.

•

Diversification of funding sources to reduce concentration risk with respect to:

	•		Instruments/investors

	•		Markets/currencies

	•		Terms

•

Strict control of short-term funding needs, in keeping with the Group’s policy of minimizing the raising of short-term financing.

•

Autonomy and responsibility of subsidiaries in the management of liquidity funding, with no structural support from the Parent.

In practice, based on the aforementioned principles, the liquidity management performed by the Group consists of the following:

•

Preparation of a liquidity plan each year on the basis of the funding needs arising from the budgets of each business and the methodology described above. Based on these liquidity requirements and taking into account certain prudential limits on the raising of short-term market financing, financial management establishes an issue and securitization plan for the year.

•

Year-round monitoring of the actual changes in the balance sheet and in the financing requirements, which results in the relevant updates of the plan.

•

Maintaining an active presence in a broad and diversified set of funding markets. In particular, the Group has nine major independent issuer units which avoid any dependence on a specific market and endow it with significant issuance capabilities in various markets.

•

Supported by the foregoing, the Group has an adequate structure of medium- and long-term issues, well diversified by product (senior, subordinate, preference, mortgage-backed bonds, securitizations), with a conservative average term (4.1 years at 2010 year-end).

•

All this translates into a moderate need for short-term wholesale financing at Group level.

Subsidiaries have a high degree of autonomy in their liquidity management, in keeping with Santander Group’s decentralized funding model. Specifically, each subsidiary must budget its liquidity requirements and assess its own ability to raise funding in the wholesale markets so that it can establish the issue and securitization plan in cooperation with the Parent.

Only in the case of Santander Consumer Finance, the Parent (Banco Santander, S.A.) provides the required liquidity, always at market prices considering the financing term and the rating of the liquidity taker. As part of its strategy to optimize the use of liquidity, the Group implemented a policy in the last two years to severely reduce Santander Consumer Finance’s reliance on the Parent, and this policy is expected to be maintained in the coming years.

Balance sheet analysis and liquidity risk measurement

Funding and liquidity decision-making is based on a thorough understanding of the Group’s current situation (environment, strategy, balance sheet and liquidity position), of the future liquidity needs of the businesses (liquidity projection) and of the accessibility and situation of the funding sources in wholesale markets.

Its aim is to ensure that the Group maintains optimum liquidity levels to cover its short- and long-term funding requirements, optimizing the impact of the funding cost on the income statement.

F-215

This requires the monitoring of the balance sheet structure, the preparation of short- and medium-term liquidity projections and the establishment of basic measures, consistent with those described in the following section.

Simultaneously, various scenario analyses are conducted considering the additional liquidity needs that could arise if certain extreme but plausible events occur. These events might have a varying effect on the various balance sheet items and/or funding sources (extent of roll-over of wholesale financing, run-off of deposits, impairment of liquid assets, etc.), due either to the global market conditions or to the Group’s specific situation.

All this enables the Group to respond to a broad-range of potential adverse situations and to implement early, if necessary, the related contingency plans.

These measures are in line with the practices being promoted by the Basel Committee to strengthen the liquidity of financial institutions, the objective of which is to define a framework of principles and metrics that are currently in the observation phase.

Current liquidity position

The Group maintains an excellent structural liquidity position and has the ability to cope with further stress market conditions, as reflected by the following factors:

Robust balance sheet

Funding dynamics

Robust balance sheet

The balance sheet at 2010 year-end had a sound structure consistent with the Group’s commercial nature. The loan portfolio, which accounted for 75% of net assets, was fully funded by customer deposits and medium- and long-term financing. Similarly, structural liquidity needs, i.e. loans and fixed assets, were also fully funded by structural funds (deposits, medium- and long-term financing and equity).

As regards wholesale market funding, the Group’s structure is based mainly on medium- and long-term instruments, which in aggregate account for 89% of total wholesale market funding.

Short-term funding is a residual portion of the structure (3% of total liabilities) and is amply covered by liquid assets.

Finally, it should be noted that the Bank has ample capacity to call on central banks to obtain immediate liquidity. At 2010 year-end, total assets available for discounting at the various central banks to which the Group has access through its subsidiaries amounted to close to EUR 100,000 million.

Funding dynamics

Developments in 2010 enabled Santander to continue to improve its structural liquidity position based on two management levers, which proved highly effective in the current environment of economic downturn.

As a first lever, the Group was able to significantly increase its customer deposit base.

This increase was driven by two factors. On the one hand, the effort made to capture new deposits through the commercial networks, which was fostered by the customers’ confidence in the Group’s liquidity and capital adequacy. All of this has made Santander the bank chosen by depositors in many markets — the so-called “flight-to-quality” effect.

The second lever is the high capacity to access wholesale funding markets, which the Group was able to access regularly through its various units. This strategy enabled Santander to access various institutional investor bases with a large variety of instruments and maturities.

Consequently, in 2010 the Group’s units raised a total of EUR 38,000 million in medium- and long-term issues in the wholesale senior debt and mortgage-backed bond markets, which represents a significant increase in volumes with respect to 2009. This capacity is underpinned by the excellent credit quality of the Group (which is rated AA by Standard & Poor’s and Aa2 by Moody’s). Additionally, in all cases investors’ appetite for securities was in line with placement prices that reflected the superior credit quality of the Group and its subsidiaries.

F-216

In short, the improvement in structural liquidity reported by the Group in the last twelve months is explained by the sharp growth in deposits, sound access to medium- and long-term wholesale markets and the generation of liquidity by the businesses in the current scenario.

Accordingly, Santander commences 2011 with an excellent liquidity situation and lower issuance needs. It does not have a concentration of maturities in the coming years, in which the amount of the annual maturities is lower than that of the issues launched in 2010, and, in addition, it will not be necessary to cover all the maturities because of the dynamics of the businesses.

In any case, for the duration of the current climate of uncertainty, Santander will continue to implement a conservative policy regarding issuances, as it did in 2010, in order to further reinforce its sound current position.

Structural foreign currency risk/hedges of results

Structural foreign currency risk arises from the Group’s operations in foreign currencies, and relates mainly to long-term investments, and the results and hedges of those investments.

Foreign currency risk is managed dynamically in order to limit the impact on capital of currency depreciations and optimize the financial cost of hedges.

The Group’s general policy for managing the foreign currency risk on long-term investments is to finance these investments in the currency in which they are denominated, provided that the market is sufficiently deep and the cost is justified by the expected currency depreciation. Also, hedges are arranged on an as-needed basis when it is considered that a local currency may weaken against the euro quicker than it is being discounted in the market.

At 2010 year-end, the largest long-term exposures (with their potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso, the US dollar and the Chilean peso. The Group hedges a portion of these long-term exposures through foreign exchange derivatives.

Additionally, the financial management division at consolidated level is responsible for managing the foreign currency risk inherent in the expected results and dividends of the Group at the units whose base currency is not the euro.

F-217

Structured financing

Despite the complicated economic climate, Santander Group achieved 12% growth in structured financing, to a committed investment of EUR 19,445 million at December 31, 2010, distributed among 673 transactions, with an increase in both industry diversification and the internationalization of the business. By product type, the leading position of project finance was reinforced, with an exposure of EUR 13,258 million distributed among 490 transactions, followed by acquisition finance transactions, with an investment of EUR 3,526 million in 37 transactions (of which EUR 2,004 million related to 13 margin call loans), and, lastly, LBOs and other structured financing transactions, which totalled EUR 2,661 million (146 transactions).

Following the analysis of the impact on the solar PV portfolio in Spain of the entry into force of the new Royal Decree-Law 14/2010, of December 23, no downward revaluations were considered necessary for this type of loan other than loan loss allowances amounting to EUR 104.5 million for the entire structured financing portfolio. Lastly, it should be noted that Santander’s net exposure to project finance operations was reduced by almost EUR 1,300 million to EUR 11,957 million at 2010 year-end due to the three partial transfers of the project portfolio to CLOs in the three years prior to 2010.

A structured operations portfolio is also held as a result of the integration of the UK Alliance & Leicester group in 2008. This is a diversified portfolio consisting entirely of specialized lending transactions. The committed exposure at 2010 year-end amounted to GBP 4,936 million (EUR 5,735 million) relating to 241 transactions. This exposure was reduced by 15.9% with respect to 2009 year-end.

Exposures related to complex structured assets

Santander Group continued to have very limited exposure to complex structured instruments or vehicles, as a reflection of its culture of management in which prudence in risk management constitutes one of its principal symbols of identity. Specifically, at 2010 year-end, the Group had:

	•		CDOs and CLOs: a position of EUR 486 million, down 24% with respect to 2009 year-end. This position is largely a result of the integration of the Alliance & Leicester portfolio in 2008. 32% of this portfolio was rated AAA and 77% had a rating of A or higher.

	•		Non-agency CMOs and pass-throughs with alt-A mortgage underlying¹: exposure of EUR 639 million at the end of December, arising from the integration of Sovereign Bank in January 2009. This position fell by 17% with respect to December 2009.

	•		Hedge funds: the total exposure was not material (EUR 540 million at the end of December) and consisted largely of the financing provided to these funds (EUR 295 million), the remainder being direct portfolio investment. This exposure involved low levels of loan-to-value risk -around 35% (collateral of EUR 1,543 million at year-end). The risk exposure to this type of counterparty is analyzed on a case-by-case basis, and the percentages of collateral are established according to the features and assets of each fund. Exposure decreased by 2% with respect to 2009 year-end.

	•		Conduits: there is no exposure. The conduit positions resulting from the acquisition of Alliance & Leicester were recognized at their market value in the Group’s balance sheet in the third quarter of 2010.

	•		Monolines: Santander’s exposure to monoline insurers amounted to EUR 274 million² in December 2010, and was concentrated mainly on an indirect exposure amounting to EUR 244 million, by virtue of the guarantee provided by entities of this kind for various traditional financing or securitization transactions. The exposure was to double-default risk in this case. The primary underlyings had high credit ratings, mostly “AA”. The small remainder was direct exposure (e.g. through the purchase of a credit default swap to protect it against the risk of default of these insurance companies). Exposure decreased significantly -by 31%-with respect to 2009.

Overall, it can be asserted that the exposure to these instruments arising from the Group’s ordinary operations decreased in 2010, and that it is due mainly to the integration of exposures at entities acquired by the Group, such as Alliance & Leicester or Sovereign (in 2008 and 2009, respectively). All these exposures were known at the time of the purchase and adequate provisions were recognized. Since their integration in the Group these exposures have been reduced notably, the final objective being their derecognition. In particular, the A&L exposure to CDOs, CLOs, Alt-A-paper and conduits was reduced by approximately 80% in 2010.

Santander’s policy with respect to the approval of new transactions involving these products continues to be very prudent and conservative and is subject to strict supervision by the Group’s senior management. Before approval is given for a new transaction, product or underlying, the risk division checks:

	•		whether there is an adequate valuation model (mark-to-market, mark-to-model or mark-to-liquidity) to monitor the value of each exposure.

	•		whether the inputs enabling application of this valuation model are observable in the market.


¹		Alternative A-paper: mortgages arising in the US market which, for various reasons, are deemed to have an intermediate level of risk, between prime and subprime mortgages (not all the required information is available, loan-to-value levels above standard levels, etc.).

²		The guarantees provided by monoline insurers in US Municipal Bonds are not treated as exposure. As a result of the acquisition of Sovereign Bank, the Group integrated a portfolio of this type of bonds amounting to EUR 1,328 million at December 2010.

F-218

Provided the two aforementioned conditions are met, the risk division ascertains:

•

the availability of adequate systems duly adapted for the calculation and daily monitoring of the results, positions and risks of the new transactions envisaged.

•

the degree of liquidity of the product or underlying, with a view to arranging the related hedge on a timely basis.

4.5

Internal model

At 2010 year-end, Santander Group obtained the Bank of Spain’s approval for the internal market risk model for the calculation of regulatory capital in the trading portfolios of the Spain, Chile and Portugal units. The Group intends to gradually extend this approval to its other units.

Following this approval, the regulatory capital of the trading activities for the above-mentioned scope is calculated using advanced approaches, applying as a fundamental measure the VaR calculated by the market risk area and, additionally, capturing an incremental charge for default risk (incremental default risk).

The Group cooperates closely with the Bank of Spain to make further progress in the scope of application of the internal model (at geographical and operational levels) and in the impact analysis of future changes, in line with the consultative documents issued by the Basel Committee to strengthen the capital of financial institutions in December 2010⁶.

OPERATIONAL RISK

Definition and objectives

Santander Group defines operational risk as “the risk of loss resulting from inadequate or failed internal processes, human resources or systems or from external events”. Unlike other risks, this is a risk that is not associated with products or businesses, but is found in processes and/or assets and is generated internally (people, systems, processes) or as a result of external risks, such as natural disasters.

The basic aim pursued by the Group in operational risk control and management is to identify, measure/assess, control/mitigate and inform about this risk.

The Group’s priority, therefore, is to identify and eliminate any clusters of operational risk, irrespective of whether losses have been incurred. Measurement of this risk also contributes to the establishment of priorities in operational risk management.

For the purpose of calculating regulatory capital for operational risk, Santander Group decided to opt initially for the standardized approach provided for under Basel II standards. The Group is assessing the most appropriate time to shift to advanced measurement approaches (AMA) taking into account, however, that: a) the short-term priority in operational risk management is focused on mitigation; and b) most of the regulatory requirements established for use of the AMA must be incorporated in the standardized approach and, at the present time, these requirements have already been included in the operational risk management approach used by Santander Group.

Management model

The organizational model for risk management and control is the result of the adaptation to the new Basel II environment implemented by the Group, which establishes three levels of control:

	•		First level: control functions performed by the Group’s units

	•		Second level: functions performed by the corporate areas

	•		Third level: integrated control functions performed by the risk division — integrated risk control and internal risk validation area (CIVIR, using the Spanish acronym).

Operational risk management and control are conducted by the technology and operations division. Within this division, the corporate technology and operational risk area, created in 2008, is responsible for the definition of policies and methodology and for the management and control of technology and operational risks. The implementation, integration and local adaptation of the policies and guidelines established by the area are entrusted to the local operational risk officers identified in each unit.


⁶		“Basel III: International framework for liquidity risk measurement, standards and monitoring” (Basel Committee on Banking Supervision, December 2010)

F-219

This operational risk management structure is based on the knowledge and experience of the executives and professionals of the various Group units, with particular importance being attached to the role of the local operational risk officers.

The technology and operational risk management model includes the following phases:

•

Identification of the operational risk inherent in all the Bank’s activities, products, processes and systems.

•

Objective and continued measurement and assessment of operational risk, consistent with the industry and regulatory standards (Basel II, Bank of Spain, etc.), and setting of risk tolerance limits.

•

Continuous monitoring of operational risk exposures in order to detect unassumed levels of risk, implement control procedures, improve internal awareness and mitigate losses.

•

Establishment of mitigation measures to eliminate or minimize operational risk.

•

Generation of periodic reports on the exposure to operational risk and the level of control for senior management and the Group’s areas/units, and reporting to the market and the regulatory authorities.

•

Definition and implementation of systems enabling the Group to monitor and control operational risk exposures. These systems are integrated into the Group’s daily management, using the current technology and maximizing the automation of applications.

•

Definition and documentation of operational risk management policies and implementation of the related methodologies consistent with current regulations and best practices.

The operational risk management model implemented by Santander Group provides the following benefits:

•

Integrated and effective management of operational risk (identification, measurement/assessment, control/mitigation and information).

•

Improved knowledge of actual and potential operational risks and better assignment to business and support lines.

•

The information on operational risk helps improve processes and controls and reduce losses and income volatility.

Model implementation: global initiatives and results

The main duties and activities performed and global initiatives adopted by this function are summarized as follows:

	•		Definition and implementation of the Corporate Technology and Operational Risk Management Framework.

	•		Designation of head coordinators and creation of operational risk departments.

	•		Training and experience sharing: communication of best practices within the Group.

	•		Fostering of mitigation plans: control of both the implementation of corrective measures and projects under development.

	•		Ensure the effective management of operational and technological risk.

	•		Provide adequate information on this type of risk.

The corporate function strengthens technology risk management and fosters the following aspects, inter alia:

	•		Security of information systems.

	•		Promotion of contingency and business continuity plans.

	•		Management of the risk associated with the use of technology (development and maintenance of applications, design, implementation and maintenance of technology platforms, production of computer processes, etc.).

Substantially all the Group units are currently included in the model, with a high degree of uniformity. However, the different pace of the implementation, phases, timetables and historic depth of the respective databases gives rise to differences in the level of progress between one country and another.

F-220

In general:

•

Classified databases of operational incidents are received on a monthly basis. The captured events relating to operational risk are not restricted by thresholds, i.e. none are excluded due to their amount, and they include events affecting the accounts (including positive effects) and those not affecting the accounts.

•

Self-assessment questionnaires completed by the main Group units are received and analyzed and their results materialize in the preparation of risk maps.

•

A corporate system of operational risk indicators is in place, which is updated continuously in coordination with the internal control area.

•

The most significant and frequent events are identified and analyzed, and mitigation measures are adopted and disseminated to the other Group units as best practice guidelines.

•

Databases are reconciled with the accounting records.

The Group monitors and controls technology and operational risk through its governing bodies. Accordingly, the various local resources areas hold monitoring committee meetings with the corporate area once a month on a country basis. In addition, in 2010 the Group’s management committee meetings regularly included the treatment of salient matters in operational risk management and mitigation.

Also, operational risk management led to a reduction in the gross loss incurred of around 3% on a like-for-like basis.

In general, all the Group units continue to improve all matters relating to the control of losses and operational risk management, as illustrated in the annual review performed by internal audit.

The risk committee formally approves the establishment of the Group’s operational risk profiles and limits on an annual basis. The Group’s risk appetite is established, and must be in the low or medium-low profile, which is defined on the basis of various ratios. In this regard, limits are set by country and at Group level based on the gross loss to gross income ratio.

Additionally, the Group units performed risk self-assessment exercises in terms of frequency and severity, which enabled limits to be established throughout 2010 on the basis of the distribution and modeling of expected/unexpected losses.

Analysis and monitoring of controls in market operations

In view of the specific features and complexity of financial markets, the Group considers it necessary to steadily strengthen the operational control of its financial market activities, thus bolstering the highly stringent and conservative risk and operational principles already applied on a regular basis by Santander Group.

In addition to monitoring all operational control-related matters, in all its units the Group placed greater emphasis on a number of aspects, so that the reviews conducted are validated on a monthly basis by the management committee of each unit. The most noteworthy of these aspects are as follows:

	•		Review of the valuation models and, in general, of the values of the portfolios.

	•		Processes for the capture and independent validation of prices.

	•		Adequate confirmation of transactions with counterparties.

	•		Review of transaction cancellations/modifications.

	•		Review and monitoring of the effectiveness of guarantees, collateral and risk mitigators.

Corporate information

The corporate technology and operational risk control area has a system for integral management of operational risk information (IGIRO), which every quarter consolidates the information available from each country/unit in the operational risk sphere and gives a global view with the following features:

•

Two levels of information: one corporate, with consolidated information, and the other individualized for each country/unit.

•

Dissemination of the best practices among the countries/units of Santander Group, obtained from the combined study of the results of qualitative and quantitative analyses of operational risk.

F-221

Information is also prepared on the following aspects:

	•		Santander Group’s operational risk management model.

	•		Human resources and scope of action.

	•		Analysis of the database of errors and incidents.

	•		Operational risk cost and accounting reconciliation.

	•		Self-assessment questionnaires.

	•		Indicators.

	•		Mitigating measures/active management.

	•		Contingency plans.

	•		Regulatory framework: BIS II.

	•		Insurance.

This information acts as the basis for meeting the needs of reporting to the risk committee, senior management, regulators, rating agencies, etc.

The role of insurance in operational risk management

Santander Group considers insurance as a key factor in operational risk management. Since 2004 the operational risk area has worked closely with the insurance management area in Santander Group in all activities leading to improvements in the two areas. Some notable examples are as follows:

	•		Cooperation in the presentation of Santander Group’s operational risk management and control model to insurers and reinsurers.

	•		Analysis and follow-up of the recommendations and suggestions for improving operational risks made by insurance companies, through previous audits performed by specialized companies, and of the subsequent implementation thereof.

	•		Sharing of the information generated in the two areas in order to strengthen the quality of error bases and the cover of insurance policies for the various operational risks.

	•		Close cooperation between local operational risk officers and local insurance coordinators in order to enhance operational risk mitigation.

	•		Regular meetings to report on specific activities, statements of position and projects in the two areas.

	•		Active participation of the two areas in the global insurance sourcing desk, the highest technical body in the Group responsible for the definition of insurance coverage and arrangement strategies.

REPUTATIONAL RISK

Santander Group defines reputational risk as the risk associated with the perception of the Bank held by the various internal and external stakeholders with which it is related as a result of its business activities, which may have an adverse impact on results or business expectations. This risk includes legal, economic, financial, ethical, social and environmental aspects.

Various Group governance structures are involved in the management of reputational risk, depending on the sources thereof. Thus, the audit and compliance committee provides support to the board in this connection and supervises compliance with the Group’s general code of conduct, the code of conduct in securities markets, the manuals and procedures for the prevention of money laundering and, in general, the Bank’s governance and compliance rules, and makes any required proposals for improvement.

The management of the reputational risk that may arise from an inadequate sale of products or an improper provision of services by the Group is performed mainly through the following bodies and procedures:

Risk committee

It is the responsibility of the board, as part of its supervisory function, to define the Group’s risk policy.

The risk committee, in its capacity as the body ultimately responsible for global risk management and for all banking operations, assesses, with the support of the general secretary’s division, the reputational risk within its scope of competence in areas for which it has decision-making powers.

Corporate marketing committee

The corporate marketing committee is chaired by the Group’s general secretary and is composed of representatives of the following divisions: risk, financial management, technology and operations, general secretary’s division, the controller’s unit, internal audit, commercial banking, global wholesale banking and private banking, asset management and insurance. This committee is the Group’s senior decision-making body regarding the approval and monitoring of products and services.

F-222

The corporate marketing committee pays particular attention to the suitability of products or services for the environment in which they are to be sold, placing particular emphasis on ensuring that:

	•		Each product or service is sold by people who know how to sell it.

	•		Customers know what they are investing in and are aware of the risk involved in the particular product or service, and this can be evidenced by supporting documentation.

	•		The product or service fits the customer’s risk profile.

	•		Each product or service is sold where its sale is possible, not only from a legal or tax standpoint (i.e. it complies with the legal or tax regime of the country in question), but also with regard to the local financial culture.

	•		When a given product or service is approved, maximum placement limits are set.

Also, local marketing committees are created at local level to channel proposals for the approval of new products, after issuing a favorable opinion, to the corporate marketing committee and to approve products that are not new and the related marketing campaigns.

In their respective approval processes the marketing committees’ actions are guided by a risk-based approach, from the view point of both the Bank and the customer.

In 2010 the corporate marketing committee held 21 meetings and the local Commercial Banking Spain marketing committee held 10 meetings, at which a total of 237 products and services were analyzed (197 new products and services were submitted to the corporate marketing committee and 40 were submitted to the local marketing committee since these products and services were not new and matched the profile previously authorized by the corporate marketing committee).

Global consultative committee

The global consultative committee is the advisory body of the corporate marketing committee and consists of area representatives who provide an insight into risks, regulation and markets. This committee, which holds meetings on a quarterly basis, may recommend the review of products affected by regulatory and market changes, impaired solvency (country, sectors or companies) or changes in the Group’s market perception at medium and long term.

Corporate reputational risk management office

The purpose of the corporate reputational risk management office, which is part of the corporate compliance and reputational risk area (general secretary’s division), is to provide the relevant governing bodies with the appropriate information enabling them: (i) to conduct an appropriate analysis of risk in the approval phase, with a twofold focus: impact on the Bank and impact on customers; and (ii) to monitor products over their life cycle.

In 2010, 52 products and services considered not to be new were submitted for approval by the corporate reputational risk management office, which also resolved 110 inquiries from various areas and countries. The products approved by the corporate reputational risk management office were successive issues of products previously approved by the corporate marketing committee or the local Commercial Banking Spain marketing committee, after these committees had delegated this power to the office.

Procedures manual for the sale of financial products

This manual, which has been used at Banco Santander since 2004 in the retail sale of financial products in Spain, is applied to investment services for financial products, including: fixed-income or equity securities or other financial instruments, money market instruments, shares or units in collective investment undertakings, traded and OTC derivatives and atypical financial contracts. Nevertheless, the corporate marketing committee may opt to include other financial products within the scope of the procedures manual, as was the case with structured deposits, savings and investment insurance, and pension plans.

In 2010, 90 products and services subject to this manual were submitted for approval.

COMPLIANCE WITH THE NEW REGULATORY FRAMEWORK

Throughout 2010 Santander Group participated in the impact studies launched by the Basel Committee and CEBS and coordinated at local level by the Bank of Spain to gauge the new regulations known as Basel III, the implementation of which involves the establishment of new capital and liquidity standards, with more stringent criteria that are homogenous at international level.

F-223

Santander has very sound capital ratios, in keeping with its business model and its risk profile, which places it in a good position to comfortably comply with Basel III. The impact analysis performed did not disclose significant effects on the high capital adequacy ratios of the Group, which benefits from a considerable organic capacity to generate capital. The new capital regulations will be implemented gradually between 2013 and 2019.

Santander Group intends to adopt, over the next few years, the advanced internal ratings-based (AIRB) approach under Basel II for substantially all its banks, until the percentage of net exposure of the loan portfolio covered by this approach exceeds 90%. The short-term attainment of this objective also depends on the acquisitions of new entities and the need for the various supervisors to coordinate the validation processes of the internal approaches. The Group is present in geographical areas where there is a common legal framework among supervisors, as is the case in Europe through the Capital Requirements Directive. However, in other jurisdictions, the same process is subject to the framework of cooperation between the home and host supervisors under different legislations, which in practice entails adapting to the different criteria and timetables in order to obtain authorization to use the advanced approaches on a consolidated basis.

Accordingly, Santander Group continued in 2010 with the project for the gradual implementation of the technology platforms and methodological improvements required for the roll-out of the AIRB approaches for regulatory capital calculation purposes at the remaining Group units. Santander Group has obtained authorization from the supervisory authorities to use advanced approaches for the calculation of regulatory capital requirements for credit risk for the Parent and the main subsidiaries in Spain, the United Kingdom and Portugal, which represents two thirds of its total exposure at 2010 year-end. The Group’s Basel implementation strategy is focused on obtaining authorization for the use of AIRB approaches at the main entities in the Americas and in consumer banking in Europe.

As regards the other risks explicitly addressed in Pillar I of Basel II, Santander Group was authorized to use its internal model for market risk with respect to the treasury area’s trading activities in Madrid and in 2010 it obtained authorization for the Chile and Portugal units, thus continuing the gradual implementation of the plan it submitted to the Bank of Spain for the other units.

With regard to operational risk, the Group considers that the development of the internal model should be based primarily on the experience accumulated in the management of the entity through the corporate guidelines and criteria established after assuming control, which are a distinctive feature of Santander. The Group has performed numerous acquisitions in recent years and, as a result, a longer maturity period is required in order to develop the internal model based on its own management experience of the various acquired entities. However, although Santander Group has decided to use the standardized approach for regulatory capital calculation purposes, it is considering the possibility of adopting AMA approaches once it has collated sufficient data using its own management model in order to make as much use as possible of the virtues that characterize the Group.

With respect to Pillar II, Santander Group uses an economic capital approach to quantify its global risk profile and its capital adequacy position as part of the internal capital adequacy assessment process (ICAAP) at consolidated level. This process, which is supplemented with a qualitative description of the risk management and internal control systems, is reviewed by internal audit and internal validation teams and is subject to a corporate governance structure that culminates in its approval by the Group’s board of directors, which also establishes the strategic factors relating to risk appetite and capital adequacy targets on an annual basis. The economic capital model considers risks not included in Pillar I (concentration risk, interest rate risk and business risk). The Group’s diversification offsets the additional capital required for the aforementioned risks.

In accordance with the capital requirements set by the European Directive and Bank of Spain rules, Santander Group publishes its Pillar III disclosures report on an annual basis. This report, the first edition of which was published with data at December 31, 2008, comfortably meets the market transparency requirements in relation to the so-called Pillar III. Santander Group considers that the market reporting requirements are fundamental to complement the minimum capital requirements of Pillar I and the supervisory review process performed through Pillar II. In this respect, its Pillar III disclosures report incorporates the recommendations made by the Committee of European Banking Supervisors (CEBS) to make Santander an international benchmark in terms of market transparency, as is already the case with its annual report.

In parallel to the roll-out of advanced approaches at the various Group units, Santander is carrying out an ambitious training process on Basel at all levels of the organization, covering a significant number of professionals from all areas and divisions, with a particular focus on those most affected by the changes arising from the adoption of the new international standards on capital adequacy.

Internal validation of risk models

Internal validation is a pre-requisite for the supervisory validation process. A fully-independent specialized unit of the Entity obtains an expert opinion on the adequacy of the internal models for the intended internal or regulatory purposes, and concludes on their usefulness and effectiveness.

In addition to complying with the regulatory requirement, the internal validation function provides essential support to the risk committee and the local risk committees in the performance of their duties to authorize the use of the models (for management and regulatory purposes) and to review them regularly.

F-224

Internal model validation at Santander encompasses credit risk models, market risk models, financial asset pricing models and the economic capital model. The scope of the validation includes not only the more theoretical or methodological aspects, but also the technology systems and the quality of the data the models provide, on which their effective operation relies, and, in general, all the relevant aspects of risk management (controls, reporting, uses, involvement of senior management, etc.).

The internal validation function is located, at corporate level, within the integrated risk control and internal risk validation area (CIVIR) and reports directly to the third deputy chairman of the Group and chairman of the risk committee. This function is performed at a global and corporate level in order to ensure uniformity of application, and is implemented through four regional centers located in Madrid, London, Sao Paulo and New York (the New York centre, which was newly created in 2010, has been fully operational since January 2, 2011). From a functional and hierarchical standpoint, these centers are fully accountable to the corporate centre, thus ensuring consistency in the performance of their activities. This system facilitates the application of a corporate methodology that is supported by a set of tools developed internally by Santander to provide a robust corporate framework to be used at all the Group’s units and which automate certain verifications to ensure efficient reviews.

It should be noted that Santander Group’s corporate internal validation framework is fully consistent with the internal validation standards for advanced approaches issued by the Bank of Spain. Accordingly, the Group maintains the segregation of functions between internal validation and internal audit, which, in its role as the last layer of control at the Group, is responsible for reviewing the methodology, tools and work performed by internal validation and for giving its opinion on the degree of effective independence.

ECONOMIC CAPITAL

The concept of economic capital has traditionally been contrasted with that of regulatory capital, the latter being the measure required by capital adequacy regulations. The Basel II capital framework has without doubt brought the two concepts closer together. While Pillar I determines the minimum regulatory capital requirements, Pillar II quantifies, through economic capital, the Group’s overall capital adequacy.

The Group’s economic capital model enables it to quantify the consolidated risk profile taking into account all the significant risks of the business, as well as the diversification effect inherent in a multi-national, multi-business group such as Santander. The Group used this model to prepare its internal capital adequacy assessment report in accordance with Bank of Spain regulations within the framework of Pillar II of Basel II.

The concept of diversification is fundamental to the proper measurement of the risk profile of a group with global operations. Although it is an intuitive concept that has been a part of risk management since the very beginnings of the banking business, diversification can also be explained in terms of the imperfect correlation between the various risks, which means that the largest loss events do not occur simultaneously in all portfolios or for all types of risk. Consequently, the sum of the economic capital of the various portfolios and types of risk, taken separately, is higher than the Group’s total economic capital. In other words, the risk borne by the Group as a whole is less than the risk arising from the sum of its various components considered separately.

Additionally, the economic capital measurement and aggregation model also considers the concentration risk for wholesale portfolios (large corporations, banks and sovereigns), in terms of both the size of their exposure and their industry or geographical concentration. Any geographical or product concentration in retail portfolios is captured through the application of an appropriate correlation model.

Analysis of the global risk profile

The distribution of economic capital among the main business areas reflects the diversified nature of the Group’s business activities and risk. The Group’s diversification will increase even further with the acquisitions announced in recent months in different geographical areas including, inter alia, Poland, Germany, the UK, Mexico and the US.

Continental Europe accounts for almost 40% of the Group’s capital, while Latin America accounts for almost one third (Brazil: 20%), the United Kingdom 11% and Sovereign 6%, while the corporate activities area, which assumes the risk stemming from exposure to structural foreign currency risk (risk arising from holding investments in foreign subsidiaries denominated in currencies other than the euro) and most of the equity investments, represents 13%.

At December 31, 2010, the Group’s total economic capital requirements, including the portion relating to non-controlling interests, amounted to EUR 46,526 million.

F-225

Additionally, the main purpose of the Group’s capital planning is to obtain future economic and regulatory capital projections so as to assess the adequacy of capital in various scenarios. For each scenario, capital planning incorporates the Group’s earnings forecasts, in a manner consistent with its strategic targets (organic and inorganic growth, pay-out ratio, etc.) economic developments and stress situations, and identifies possible capital management strategies enabling the Group to optimize the Bank’s capital adequacy and return on capital.

RORAC and value creation

Santander Group has used RORAC methodology in its credit risk management since 1993, with the following objectives:

•

Calculation of economic capital requirement and of the return thereon for the Group’s business units and for business segments, portfolios or customers, in order to facilitate an optimal allocation of economic capital.

•

Budgeting of capital requirements and RORACs of the Group’s business units and inclusion thereof in their compensation plans.

•

Analysis and setting of prices in the decision-making process for transactions (loan approval) and customers (monitoring).

The RORAC methodology facilitates the comparison, on a consistent basis, of the performance of transactions, customers, portfolios and businesses, and identifies those which achieve a risk-adjusted return higher than the Group’s cost of capital, thus aligning risk management and business management with the aim of maximizing value creation, which is the ultimate objective of Group senior management.

The Group periodically assesses the level and evolution of the value creation (VC) and return on risk-adjusted capital (RORAC) of its main business units. The VC is the profit generated over and above the cost of the economic capital (EC) used, and is calculated using the following formula:

VC = Profit - (average EC x cost of capital)

The profit used is obtained by making the required adjustments to accounting profit in order to reflect only each unit’s recurring profit or loss from its business activity.

The minimum rate of return on capital that a transaction should achieve is determined by the cost of capital, which is the minimum remuneration required by shareholders. In order to objectively calculate this rate, the premium that shareholders demand for investing in the Group is added to the risk-free return. This premium depends essentially on the degree of volatility of the market price of the Santander share in relation to the market trend. The cost of capital for 2010 applied to the various Group units was 13.606%.

If a transaction or portfolio yields a positive return, it will be contributing to the Group’s profit, although it will not actually create shareholder value unless this return exceeds the cost of capital.

The Group’s return on risk-adjusted capital (RORAC), of 18.5%, amply exceeded the estimated cost of capital for 2010. Value creation, i.e. economic profit less the cost of capital used to obtain it, amounted to EUR 2,411 million.

F-226

CONSOLIDATED BALANCE SHEET

Thousands of Euros

2010

2009

2008

Assets

Cash and due from banks

70,858,410

28,231,681

41,131,292

Interest earning deposits in other banks

25,063,368

29,288,269

43,553,958

Securities purchased under agreements to resell

9,988,524

21,288,275

19,391,367

Trading account assets

196,241,901

172,867,988

177,451,940

Banks

35,054,229

22,714,580

13,998,287

Loans

8,525,594

17,885,911

9,537,868

Derivatives

73,068,769

59,856,413

95,815,309

Debt securities

62,475,640

57,285,731

49,050,280

Equity securities

17,117,669

15,125,353

9,050,196

Investment securities

94,663,835

101,579,834

66,572,866

Available-for-sale

94,663,835

101,579,834

66,572,866

Net Loans and leases

702,459,309

653,348,725

607,424,343

Loans and leases, net of unearned income

722,121,041

671,184,116

619,890,400

Less-Allowance for loan losses

(19,661,732

)

(17,835,391

)

(12,466,057

)

Premises and equipment, net

12,780,464

11,499,449

11,953,856

Investment in affiliated companies

272,915

164,473

1,323,452

Other assets

102,952,009

89,904,613

78,381,486

Intangible Assets

3,442,034

2,778,358

1,787,068

Goodwill in consolidation

24,622,345

22,865,056

18,836,199

Accrual Accounts

2,558,738

2,259,262

1,952,843

Hedge derivatives

8,227,013

7,833,850

9,698,132

Others

64,101,879

54,168,087

46,107,244

Total assets

1,215,280,735

1,108,173,307

1,047,184,560

Liabilities

Deposits

633,938,785

554,133,789

468,641,990

Non interest deposits

4,825,310

5,393,916

4,608,242

Interest bearing

629,113,475

548,739,873

464,033,748

Demand deposits

153,185,961

142,483,882

99,670,268

Savings deposits

136,693,907

127,940,647

115,673,794

Time deposits

339,233,607

278,315,344

248,689,686

Certificates of deposit

—

Short-term debt

130,729,864

124,189,724

125,291,176

Long-term debt

216,475,672

220,089,591

233,516,879

Other liabilities

153,221,957

135,889,561

159,733,023

Taxes Payable

8,618,446

7,003,945

5,768,665

Accounts Payable

8,285,660

7,859,466

8,738,047

Accrual Accounts

4,953,205

5,502,958

4,669,160

Pension Allowance

7,299,145

8,272,533

8,751,128

Stock borrowing liabilities

—

Derivatives

81,912,726

63,903,701

95,125,044

Liabilities under insurance contracts

10,449,274

16,916,446

16,849,511

Other Provisions

6,140,760

6,904,055

6,538,142

Short securities positions

12,302,918

5,139,730

3,035,231

Others

13,259,823

14,386,727

10,258,095

Total liabilities

1,134,366,278

1,034,302,665

987,183,068

Equity

Stockholders’ equity

Capital stock

4,164,561

4,114,413

3,997,030

Additional paid-in-capital

29,457,152

29,305,257

28,103,802

Other additional capital

(1,462,276

)

(2,326,272

)

(3,114,636

)

Current year earnings

8,180,909

8,942,538

8,876,414

Other reserves

34,677,992

28,630,648

19,724,276

Total stockholders’ equity

75,018,338

68,666,584

57,586,886

Non-controlling interests

5,896,119

5,204,058

2,414,606

Total Equity

80,914,457

73,870,642

60,001,492

Total liabilities and Equity

1,215,280,735

1,108,173,307

1,047,184,560

The Group has issued Mortgage backed securities, called Cédulas Hipotecarias (see Note 22).

F-228

Additionally, as of December 31, 2010, 2009 and 2008, the investment debt securities assigned to certain Group or third-party commitments amounted to €27,034 million, €39,661 million and €25,161 million, respectively.

CONSOLIDATED STATEMENTS OF INCOME


	Thousands of Euros
	2010			2009			2008
Interest income:
Interest and fees on loans and leases		42,513,764			42,707,534			42,574,139
Interest on deposits in other banks		2,880,783			3,362,476			5,561,810
Interest on securities purchased under agreements to resell		978,676			1,155,892			1,788,147
Interest on investment securities		6,801,027			6,285,097			5,567,274
Dividends		16			5,350			92,017
Total interest income		53,174,266			53,516,349			55,583,387

Interest expenses:
Interest on deposits		(13,732,501	)		(15,852,047	)		(18,814,100	)
Interest on short-term borrowings		(3,258,486	)		(2,929,118	)		(5,437,822	)
Interest on long-term debt		(5,116,603	)		(6,561,801	)		(12,174,778	)
Total interest expense		(22,107,590	)		(25,342,966	)		(36,426,700	)
Interest income / (Charges)		31,066,676			28,173,383			19,156,687
Provision for credit losses		(10,257,986	)		(11,010,021	)		(5,909,252	)
Interest income / (Charges) after provision for credit losses		20,808,690			17,163,362			13,247,435
Non interest income:
Commissions and fees from fiduciary activities		1,349,772			1,219,658			1,618,479
Commissions and fees from securities activities, net		784,129			774,296			704,525
Fees and commissions from insurance activities		9,043,520			8,858,253			9,977,441
Other Fees and commissions, net		5,439,465			5,122,333			4,079,182
Gains (losses) from:
Affiliated companies’ securities		170,170			1,521,863			3,791,479
Investment securities		2,107,665			4,551,719			(6,767,774	)
Foreign exchange, derivatives and other, net		319,857			(811,761	)		7,757,144
Sale of premises		197,057			37,279			887,931
Income from non financial entities		345,255			381,653			591,177
Gains on sale of non-current assets / liabilities held for sale not classified as discontinued operations		209,643			414,802			36,419
Other income		810,610			485,908			558,812
Total non interest income		20,777,143			22,556,003			23,234,815
Non interest expense:
Salaries and employee benefits		(9,917,026	)		(9,176,648	)		(7,774,565	)
Occupancy expense of premises, depreciation and maintenance, net		(2,502,490	)		(2,254,891	)		(1,665,057	)
General and administrative expenses		(5,279,789	)		(4,889,737	)		(3,771,527	)
Impairment of goodwill		(63,000	)		(2,631	)		(72,726	)
Impairment / amortization of intangible assets		(1,090,536	)		(854,757	)		(1,566,414	)
Impairment of tangible assets		(529,593	)		(1,503,048	)		(111,114	)
Provisions for specific allowances		(923,595	)		(1,444,074	)		(1,034,102	)
Payments to Deposit Guarantee Fund		(306,814	)		(317,708	)		(179,023	)
Insurance claims		(7,590,945	)		(7,604,807	)		(8,472,523	)
Expenses of non financial entities		(205,246	)		(244,083	)		(489,283	)
Losses on sale of non-current assets / liabilities held for sale not classified as discontinued operations		(201,477	)		(289,617	)		(75,184	)
Other expenses		(923,449	)		(549,564	)		(421,407	)
Total non interest expense		(29,533,960	)		(29,131,565	)		(25,632,925	)
Income before income taxes		12,051,873			10,587,800			10,849,325
Income tax expense		(2,923,190	)		(1,206,610	)		(1,836,052	)
Net consolidated income for the year		9,128,683			9,381,190			9,013,273
Net income attributed to non-controlling interests		920,852			466,083			447,662
Income from discontinued operation, net of taxes		(26,922	)		27,431			310,803
NET INCOME ATTRIBUTED TO THE GROUP		8,180,909			8,942,538			8,876,414

F-229

Following are the summarized balance sheets of Banco Santander, S.A. as of December 31, 2010, 2009 and 2008.

CONDENSED BALANCE SHEETS (Parent company only)


	2010		2009		2008
	(Thousands of Euros)
Assets
Cash and due from banks		70,716,206		70,922,607		78,827,627
Trading account assets		67,807,360		57,262,358		79,641,722
Investment securities		29,849,856		34,033,734		16,061,930
Net Loans and leases		186,505,411		174,645,173		183,754,083
Investment in affiliated companies		60,496,584		67,430,284		62,232,929
Premises and equipment, net		1,271,519		1,338,600		728,588
Other assets		12,647,754		10,436,136		13,943,826

Total assets		429,294,690		416,068,892		435,190,705

Liabilities
Deposits		221,026,754		236,833,251		213,464,786
Short-term debt		26,923,776		13,597,783		34,337,021
Long-term debt		59,800,705		59,884,683		57,769,675
Other liabilities		76,825,438		59,571,695		84,257,494

Total liabilities		384,576,673		369,887,412		389,828,976

Stockholders’ equity
Capital stock		4,164,561		4,114,413		3,997,030
Retained earnings and other reserves		40,553,456		42,067,067		41,364,699

Total stockholders’ equity		44,718,017		46,181,480		45,361,729


Total liabilities and Stockholders’ Equity		429,294,690		416,068,892		435,190,705

Following are the summarized statements of income of Banco Santander, S.A. for the years ended December 31, 2010, 2009 and 2008.

CONDENSED STATEMENTS OF INCOME (Parent company only)


	2010			2009			2008
	(Thousands of Euros)

Interest income
Interest from earning assets		9,061,280			11,410,345			15,233,869
Dividends from affiliated companies		5,514,503			2,456,785			4,541,565

		14,575,783			13,867,130			19,775,434
Interest expense		(5,816,718	)		(7,117,004	)		(13,318,953	)

Interest income / (Charges)		8,759,065			6,750,126			6,456,481
Provision for credit losses		(2,131,820	)		(331,241	)		(1,387,505	)

Interest income / (Charges) after provision for credit losses		6,627,245			6,418,885			5,068,976
Non interest income:		715,785			1,483,843			4,369,576
Non interest expense:		(3,950,314	)		(3,688,492	)		(4,555,202	)

Income before income taxes		3,392,716			4,214,236			4,883,350
Income tax expense		(60,851	)		(63,423	)		(57,132	)

Net income		3,331,865			4,150,813			4,826,218

F-230

Following are the summarized cash flow statements of Banco Santander, S.A. for the years ended December 31, 2010, 2009 and 2008.

CONDENSED CASH FLOW STATEMENTS (Parent company only)


	2010			2009			2008
	(Thousands of Euros)
1. Cash flows from operating activities
Consolidated profit		3,331,865			4,150,813			4,826,218
Adjustments to profit		3,053,649			1,305,971			2,895,285
Net increase/decrease in operating assets		14,922,859			(12,900,811	)		63,231,280
Net increase/decrease in operating liabilities		13,166,127			(26,129,154	)		61,252,781
Reimbusements/payments of income tax		215,014			254,105			57,132
Total net cash flows from operating activities (1)		4,843,796			(7,517,454	)		5,800,136

2. Cash flows from investing activities
Investments (-)		(1,329,085	)		(3,641,824	)		(3,686,280	)
Divestments (+)		4,577,220			2,026,980			524,116
Total net cash flows from investment activities (2)		3,248,135			(1,614,844	)		(3,162,164	)

3. Cash flows from financing activities
Disposal of own equity instruments		2,342,793			32,345			—
Acquisition of own equity instruments		(2,313,767	)		(61,059	)		(61,471	)
Issuance of debt securities		6,970,186			1,945,877			200,039
Redemption of debt securities		(9,437,904	)		—			—
Dividends paid		(4,107,009	)		(4,386,550	)		(4,243,021	)
Issuance/Redemption of equity instruments		—			—			7,020,677
Other collections/payments related to financing activities		(376,768	)		(438,283	)		1,162,017
Total net cash flows from financing activities (3)		(6,922,469	)		(2,907,670	)		4,078,241

4. Effect of exchange rate changes on cash and cash equivalents (4)		250,691			112,740			(468,668	)

5. Net increase/decrease in cash and cash equivalents (1+2+3+4)		1,420,153			(11,927,228	)		6,247,545
Cash and cash equivalents at beginning of period		6,626,871			18,554,099			12,306,554
Cash and cash equivalents at end of period		8,047,024			6,626,871			18,554,099

F-231

55.2

Preference Shares and Preferred Securities

The following table shows the balance of the preference shares and preferred securities as of December 31, 2010, 2009 and 2008:

2010

2009

2008

(Thousands of Euros)

Preference shares

435,364

430,152

1,051,272

Preferred securities

6,916,930

7,315,291

7,621,575

Total at year-end

7,352,294

7,745,443

8,672,847

Both Preference Shares and Preferred Securities are recorded under the “Financial liabilities at amortized cost — Subordinated Liabilities” caption in the consolidated balance sheet as of December 31, 2010, 2009 and 2008.

Preference Shares include the financial instruments issued by the consolidated companies which, although equity for legal purposes, do not meet the requirements for classification as equity in the financial statements. These shares do not carry any voting rights and are non-cumulative. They were subscribed to by non-Group third parties except for the shares of Santander UK, plc amounting to GBP 200 million, are redeemable at the discretion of the issuer, based on the conditions of the issuer. None of these issues are convertible into Bank shares or granted privileges or right which, in certain circumstances, make them convertibles into shares.

This category includes non-cumulative preferred non-voting shares issued by Banesto Holdings, Santander UK plc and Santander Holdings USA, Inc.

For the purposes of payment priority, Preferred Securities are junior to all general creditors and to subordinated deposits. The payment of dividends on these securities, which have no voting rights, is conditional upon the obtainment of sufficient distributable profit and upon the limits imposed by Spanish banking regulations on equity.

This category includes non-cumulative preferred non-voting securities issued by Santander Finance Capital, S.A. (Unipersonal), Santander Finance Preferred, S.A. (Unipersonal), and Santander International Preferred, S.A. (Sociedad Unipersonal), guaranteed by the Bank. It also includes non-cumulative preferred non-voting securities issued by Banesto Preferentes, S.A, Banco Español de Crédito, S.A., Santander PR Capital Trust and Santander UK Group.

Except the issues of Santander PR Capital Trust I, which redeems in 2036, all preference shares and preferred securities are perpetual securities and there is no obligation that requires the Group to redeem them. All securities have been fully subscribed by third parties outside the Group. In the consolidated balance sheets, these securities are shown net of any temporary operations relating to liquidity guarantees (see Note 23 and Exhibit III), and are described in the table below:

F-232


	Outstanding at December 31, 2010
		Amount in
Preference Shares		currency
Issuer/Date of issue	Currency	(million)		Interest rate			Redemption Option (1)

Banesto Holding, Ltd, December 1992	US Dollar		45.1		10.500	%	June 30, 2012
Santander UK plc, October 1995	Pounds Sterling		80.3		10.375	%	No option
Santander UK plc, February 1996	Pounds Sterling		80.3		10.375	%	No option
Santander UK plc, March 2004	Pounds Sterling		13.6		5.827	%	March 22, 2016
Santander UK plc, May 2006	Pounds Sterling		34.9		6.222	%(2)	May 24, 2019
Santander Holdings USA, Inc, August 2000	US Dollar		147.5		12.000	%	May 16, 2020
Santander Holdings USA, Inc, May 2006	US Dollar		75.5		7.300	%	May 15, 2011


	Outstanding at December 31, 2010
		Amount in
Preferred Securities		currency
Issuer/Date of issue	Currency	(million)		Interest rate	Maturity date
Banesto Group
Banco Español de Crédito, October 2004	Euro		96.9	€CMS 10 + 0.125%	Perpetuity
Banco Español de Crédito (1), November 2004	Euro		158.0	5.5%	Perpetuity
Banco Español de Crédito, June 2009	Euro		497.5	6.0%	Perpetuity

Santander Finance Capital, S.A. (Unipersonal)
March 2009	US Dollar		18.2	2.0%	Perpetuity
March 2009	US Dollar		25.0	2.0%	Perpetuity
March 2009	Euro		313.7	2.0%	Perpetuity
March 2009	Euro		153.7	2.0%	Perpetuity
June 2009	Euro		1,965.6	Euribor (3M) + 2.2%	Perpetuity

Santander Finance Preferred, S.A. (Unipersonal)
March 2004	US Dollar		89.3	6.41%	Perpetuity
September 2004	Euro		174.2	€CMS 10 +0.05% subject to a maximum distribution of 8% per annum	Perpetuity
October 2004	Euro		165.1	5.75%	Perpetuity
November 2006	US Dollar		161.8	6.80%	Perpetuity
January 2007	US Dollar		109.5	6.50%	Perpetuity
March 2007	US Dollar		210.4	US3M + 0.52%	Perpetuity
July 2007	Pounds Sterling		9.0	7.01%	Perpetuity
July 2009	Pounds Sterling		679.4	Libor (3M) + 7.66%	Perpetuity
July 2009	Euro		125.6	Euribor (3M) + 7.66%	Perpetuity
September 2009	US Dollar		161.6	USD Libor (3M) + 7.67%	Perpetuity
September 2009	US Dollar		825.1	10.50%	Perpetuity

Santander International Preferred S.A. (Sociedad Unipersonal)
March 2009	US Dollar		981.0	2.00%	Perpetuity
March 2009	Euro		8.6	2.00%	Perpetuity

Santander UK Group
Abbey National Capital Trust I, February 2000	US Dollar		621.2	Fixed to 8.963% until June 30, 2030, and from this date, 2.825% + Libor USD (3M)	Perpetuity
Abbey National Plc, February 2001(3)	Pounds Sterling		101.8	7.037%	Perpetuity
Abbey National Plc, August 2002	Pounds Sterling		15.9	Fixed to 6.984% until February 9, 2018, and thereafter, at a rate reset semi-annually of 1.86% per annum + Libor GBP (6M)	Perpetuity

Santander PR Capital Trust I
February 2006	US Dollar		125	6.750%	July 2036


(1)		From these date the issuer can redeem the shares, subject to prior authorization by the national supervisor.

(2)		That issuance is a Fixed/Floating Rate Non-Cumulative Callable Preference Shares. Dividends will accrue on a principal amount equal to £1,000 per Preference Share at a rate of 6.222 per cent. per annum in respect of the period from (and including) May 24, 2006 (the Issue Date) to (but excluding) May 24, 2019 (the First Call Date) and thereafter at a rate reset quarterly equal to 1.13 per cent. per annum above the London interbank offered rate for three-month sterling deposits. From (and including) the Issue Date to (but excluding) the First Call Date, dividends, if declared, will be paid annually in arrear on May 24, in each year. Subject as provided herein, the first such dividend payment date will be May 24, 2007 and the last such dividend payment date will be the First Call Date. From (and including) the First Call Date, dividends, if declared, will be paid quarterly in arrear on May 24, August 24, November 24 and February 24, in each year. Subject as provided herein, the first such dividend payment date will be August 24, 2019.

(3)		From February 14, 2026, this issue will bear interest at a rate, reset every five years, of 3.75% per annum above the gross redemption yield on a five-year specified United Kingdom government security.

F-233

In accordance with Reg. S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered, Santander Finance Capital, S.A. (Unipersonal), Santander Finance Preferred, S.A. (Unipersonal) and Santander International Preferred, S.A. (Unipersonal) — issuers of registered preferred securities guaranteed by Banco Santander, S.A. — do not file the financial statements required for a registrant by Regulation S-X as:

	•		Santander Finance Preferred, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. who fully and unconditionally guarantees the preferred securities (Series 1, 4, 5, 6, 10 and 11 are listed in the United States). No other subsidiary of the Bank guarantees such securities.

	•		Santander Finance Capital, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. that fully and unconditionally guarantees the preferred securities (not listed in United States). No other subsidiary of the Bank guarantees such securities.

	•		Santander International Preferred, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. that fully and unconditionally guarantees the preferred securities (not listed in United States). No other subsidiary of the Bank guarantees such securities.

The condensed financial statements of Santander Finance Capital, S.A. (Unipersonal), Santander Finance Preferred, S.A. (Unipersonal) and Santander International Preferred, S.A. (Sociedad Unipersonal) for the years ended December 31, 2009 and 2008 are the following:

SANTANDER FINANCE CAPITAL, S.A. (UNIPERSONAL)

Santander Finance Capital, S.A. (Unipersonal) was established in Spain on July 8, 2003.

The common stock of the company is wholly owned by Banco Santander, S.A.

Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander Finance Capital, S.A. (Unipersonal), prepared in conformity with IFRS.

Balance sheets


	Thousands of Euros
SANTANDER FINANCE CAPITAL, S.A. (UNIPERSONAL)	2010			2009
Assets:
Cash		5,070			22,965
Deposits with Parent Bank		2,465,064			3,442,226
Accrual accounts		8,458			11,201
Other assets		—			—

Total Assets		2,478,592			3,476,392
Liabilities and stockholders’ equity:

LIABILITIES:
Public entities		3,946			4,409
Accrual accounts		8,465			10,043
Non-commercial debts		—			—
Commercial debts		38			74
Debts with Group companies		227			69
Provisions for taxes		—			—
Preferred securities		2,465,144			3,461,648

Total Liabilities		2,477,820			3,476,243
STOCKHOLDERS’ EQUITY:
Capital stock		151			151
Retained earnings		(2	)		243
Net income		623			(245	)

Total Stockholders’ Equity		772			149

Total Liabilities and Stockholders’ Equity		2,478,592			3,476,392

F-234

Preferred Securities


		Thousands of
	Issue Date	Euros at 12/31/10
Issuances

Series VI	03/18/2009		13,608
Series VII	03/18/2009		18,691
Series VIII	03/18/2009		313,745
Series IX	03/18/2009		153,700
Series X	06/30/2009		1,965,616

Total			2,465,360

Issuances expenses
Series VI			—
Series VII			—
Series VIII			(100	)
Series IX			(49	)
Series X			(67	)

Total			(216	)


Total			2,465,144

-		Series I: on October 3, 2003, Santander Finance Capital, S.A. (Unipersonal) issued 18,000,000 preference securities, at €25 par value. On April 7, 2009 the company redeemed the whole series.

-		Series II: on February 18, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 16,000,000 preference securities, at €25 par value. On March 31, 2009 the company redeemed the whole series.

-		Series III: on July 30, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 30,000,000 preference securities, at €25 par value. On August 17, 2009 the company redeemed the whole series.

-		Series IV: on September 30, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 27,200,000 preference securities, at €25 par value. On August 17, 2009 the company redeemed the whole series.

-		Series V: on April 12, 2005, Santander Finance Capital, S.A. (Unipersonal) issued 40,000,000 preference securities, at €25 par value. On July 12, 2010 the company redeemed the whole series.

-		Series VI: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 12,122 preference securities, at €1,500 par value.

-		Series VII: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 333 preference securities, at €75,000 par value.

-		Series VIII: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 313,745 preference securities, at €1,000 par value.

-		Series IX: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 3,074 preference securities, at €50,000 par value.

-		Series X: on June 30, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 78,624,629 preference securities, at €25 par value.

-		These issues are perpetual and can be redeemable at the option of the issuer, subject to the consent of the Bank of Spain, in whole or in part, at any time after five years from the issue date.

-		All the issues of Santander Finance Capital, S.A. (Unipersonal) are guaranteed by Banco Santander, S.A.

SANTANDER FINANCE PREFERRED, S.A. (UNIPERSONAL)

Santander Finance Preferred, S.A. (Unipersonal) was established in Spain on February 27, 2004.

The common stock of the company is wholly owned by Banco Santander, S.A.

Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander Finance Preferred, S.A. (Unipersonal), prepared in conformity with IFRS.

F-236

Balance sheets


	Thousands of Euros
SANTANDER FINANCE PREFERRED, S.A. (UNIPERSONAL)	2010			2009
Assets:
Cash		28,567			24,917
Deposits with Parent Bank		3,641,218			3,626,360
Accrual accounts		71,895			69,304

Total Assets		3,741,680			3,720,581
Liabilities and stockholders’ equity:

LIABILITIES:
Public entities		18			254
Accrual accounts		53,890			69,017
Commercial debts		36			25
Non-commercial debts		—			—
Deferred income		—			—
Debts with group companies		1,259,534			928,206
Provisions for taxes		—			—
Preferred securities		2,426,482			2,720,256

Total Liabilities		3,739,960			3,717,758
STOCKHOLDERS’ EQUITY:
Capital stock		151			151
Retained earnings		2,672			1,340
Net income		(1,103	)		1,332

Total Stockholders’ Equity		1,720			2,823

Total Liabilities and Stockholders’ Equity		3,741,680			3,720,581

Statement of income


	Thousands of Euros
SANTANDER FINANCE PREFERRED, S.A. (UNIPERSONAL)	2010			2009

Interest income		302,097			182,125
Interest expenses		(301,946	)		(179,748	)
Non interest income		—			—
Non interest expenses		(1,254	)		(1,042	)
Corporate income tax		—			(3	)

Net income / (loss)		(1,103	)		1,332

Statement of changes in stockholders’ equity



					Retained						Total
	Capital stock				Earnings			Net income			Stockholders’ Equity
Changes in Stockholders’ Equity	Common Shares		Thousands of Euros
Balance at January 31, 2009		1,505		151		2,084			(744	)		1,491

2008 Income allocation		—		—		(744	)		744			—
Net income 2009		—		—		—			1,332			1,332

Balance at December 31, 2009		1,505		151		1,340			1,332			2,823

2009 Income allocation		—		—		1,332			(1,332	)		—
Net income 2010		—		—		—			(1,103	)		(1,103	)

Balance at December 31, 2010		1,505		151		2,672			(1,103	)		1,720

F-237

In October 2005, the board of directors authorized a capital increase of 903 shares of common stock with a €100 par value. This capital increase was fully subscribed and paid by Banco Santander, S.A.

After this capital increase, the capital stock of Santander Finance Preferred, S.A. (Unipersonal), as of December 31, 2005, amounted to 1,505 shares of common stock with a €100 par value, fully subscribed and paid by Banco Santander, S.A. (wholly owner of this company).

Preferred Securities


		Thousands of
	Issue Date	Euros at 12/31/10
Issuances
Series 1- $190,000	03/11/2004		142,194
Series 2- €300,000	09/30/2004		300,000
Series 3- €200,000	10/08/2004		200,000
Series 4- $500,000	11/21/2006		374,195
Series 5- $600,000	31/01/2007		449,035
Series 6- $350,000	05/03/2007		261,937
Series 7- £250,000	07/10/2007		290,444
Series 8- £679,400	07/27/2009		789,312
Series 9- €125,700	07/27/2009		125,700
Series 10- $825,110	09/29/2009		617,505
Series 11- $161,587	09/29/2009		120,930

			3,671,252

Issuances expenses
Series 1	—		—
Series 2	—		—
Series 3	—		—
Series 4	—		(1.358	)
Series 5	—		(1.896	)
Series 6	—		(59	)
Series 7	—		(27	)
Series 8	—		(89	)
Series 9	—		(89	)
Series 10	—		(93	)
Series 11	—		(93	)

			(3,704	)


Total			3,667,548


-		Series 1: on March 11, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 7,600,000 preferred securities, at $25 par value.

-		Series 2: on September 30, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 300,000 preferred securities, at €1,000 par value.

-		Series 3: on October 8, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 200,000 preferred securities, at €1,000 par value.

-		Series 4: on November 21, 2006 Santander Finance Preferred, S.A. (Unipersonal) issued 20,000,000 preferred securities, at €25 par value.

-		Series 5: on January 31, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 24,000,000 preferred securities, at $25 par value.

-		Series 6: on March 5, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 14,000,000 preferred securities, at $25 par value.

-		Series 7: on July 10, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 5,000 preferred securities, at £50,000 par value.

-		Series 8: on July 27, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 13,588 preferred securities, at £50,000 par value.

-		Series 9: on July 27, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 2,514 preferred securities, at €50,000 par value.

-		Series 10: on September 29, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 33,004,383 preferred securities, at $25 par value.

-		Series 11: on September 29, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 161,587 preferred securities, at $1,000 par value.

-		These issues are perpetual and can be redeemable at the option of the issuer, subject to the consent of the Bank of Spain, in whole or in part, at any time after five years from the issue date.

-		All the issues of Santander Finance Preferred, S.A. (Unipersonal) are guaranteed by Banco Santander, S.A.

-		On July 9, 2009, we published on the international markets offers to exchange issues of securities eligible to be included in capital issued by Santander and its subsidiaries. The exchange envisaged the delivery of new securities that meet the current market standards and regulatory requirements to be classified as equity at the consolidated Group level. For this purpose Santander Finance Preferred, S.A. (Unipersonal) issued Series 8, 9, 10 and 11 above.

F-238

SANTANDER INTERNATIONAL PREFERRED, S.A. (SOCIEDAD UNIPERSONAL)

Santander International Preferred, S.A. (Sociedad Unipersonal) was established in Spain on February 17, 2009.

The common stock of the company is wholly owned by Banco Santander, S.A.

Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander International Preferred, S.A. (Sociedad Unipersonal), prepared in conformity with IFRS.

Balance sheets


SANTANDER INTERNATIONAL PREFERRED, S.A.	Thousands of Euros			Thousands of Euros
(SOCIEDAD UNIPERSONAL)	2010			2009
Assets:
Cash		142			225
Deposits with Parent Bank		742,455			689,271
Accrual accounts		11,904			10,904
Other current assets		—			4

Total Assets		754,501			700,404

Liabilities and stockholders’ equity:

LIABILITIES:
Public entities		—			7
Commercial debts		26			71
Debts with group companies		9			—
Accrual accounts		11,762			10,882
Preferred securities		742,622			689,401

Total Liabilities		754,419			700,361
STOCKHOLDERS’ EQUITY:
Capital stock		60			60
Retained earnings		(17	)		—
Net income		39			(17	)

Total Stockholders’ Equity		82			43

Total Liabilities and Stockholders’ Equity		754,501			700,404

Statement of income


SANTANDER INTERNATIONAL PREFERRED, S.A.	Thousands of Euros			Thousands of Euros
(SOCIEDAD UNIPERSONAL)	2010			2009

Interest income		15,171			11,078
Interest expenses		(15,034	)		(11,066	)
Non interest income		—			2
Non interest expenses		(89	)		(31	)
Corporate income tax		(9	)		—

Net income / (loss)		39			(17	)

F-239

Statement of changes in stockholders’ equity



					Retained						Total
	Capital stock				Earnings			Net income			Stockholders’ Equity
Changes in Stockholders’ Equity	Common Shares		Thousands of Euros
Balance at February 17, 2009		—		—		—			—			—

Capital increase		—		60		—			—			60
Net income 2009		—		—		—			(17	)		(17	)

Balance at December 31, 2009		602		60		—			(17	)		43

2009 Income allocation		—		—		(17	)		17			—
Net income 2010		—		—		—			39			39

Balance at December 31, 2010		602		60		(17	)		39			82

At December 31, 2010, the capital stock of Santander International Preferred, S.A. (Sociedad Unipersonal) amounted to 602 shares of common stock with a €100 par value, fully subscribed and paid by Banco Santander, S.A. (wholly owner of this company).

Preferred Securities


		Thousands of
	Issue Date	Euros at 12/31/10
Issuances
Series 1 ($)	03/19/2009		734,166
Series 2 (€)	03/19/2009		8,582

			742,748

Issuances expenses			(126	)


Total			742,622


-		Series 1: on March 19, 2009, Santander International Preferred, S.A. (Sociedad Unipersonal) issued 653,995 preferred securities, at $1,500 par value.

-		Series 2: on March 19, 2009, Santander International Preferred, S.A. (Sociedad Unipersonal) issued 8,582 preferred securities, at €1,000 par value.

-		These issues are perpetual and can be redeemable at the option of the issuer, subject to the consent of the Bank of Spain, in whole or in part, at any time after ten years from the issue date.

-		All the issues of Santander Finance Preferred, S.A. (Sociedad Unipersonal) are guaranteed by Banco Santander, S.A.

55.3

US Registered senior debt

SANTANDER US DEBT, S.A. (Sociedad Unipersonal)

Santander US Debt, S.A. (Sociedad Unipersonal) was established in Spain on February 27, 2004.

The common stock of the company is wholly owned by Banco Santander, S.A. The entity issues senior debt and the issuances are guaranteed fully and unconditionally by Banco Santander, S.A.

On December 31, 2010, no entity of Grupo Santander has issued senior debt that is registered in the U.S. It is expected that Santander US Debt, S.A. (Sociedad Unipersonal) issue U.S. registered senior debt during 2011.

Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander US Debt, S.A. (Sociedad Unipersonal), prepared in conformity with IFRS.

F-240

Statement of changes in stockholders’ equity



					Retained					Total
	Capital stock				Earnings		Net income			Stockholders’ Equity
Changes in Stockholders’	Common
Equity	Shares		Thousands of Euros
Balance at January 1, 2009		1,200		120		332		100			552

2008 Income allocation		—		—		99		(100	)		(1	)
Net income 2009		—		—		—		12			12

Balance at December 31, 2009		1,200		120		431		12			563

2009 Income allocation		—		—		12		(12	)		—
Net income 2010		—		—		—		(240	)		(240	)

Balance at December 31, 2010		1,200		120		443		(240	)		323

At December 31, 2010, the capital stock of Santander US Debt, S.A. (Sociedad Unipersonal) amounted to 1,200 shares of common stock with a €100 par value, fully subscribed and paid by Banco Santander, S.A. (wholly owner of this company).

55.4

Acquisition of Sovereign Bancorp, Inc (“Sovereign”).

On May 31, 2006, Santander acquired shares of common stock of Sovereign equal to 19.8% of Sovereign’s outstanding shares after giving effect to such purchase. The purchase price was $27 per share ($25.65 post-stock dividend), for an aggregate purchase price of $2.4 billion and generated goodwill of $760 million.

Under the terms of the definitive transaction agreement, which was unanimously approved by the non-Santander directors of Sovereign and by the Executive Committee of Santander, Sovereign shareholders will receive 0.2924 Banco Santander American Depository Shares (ADSs) for every 1 ordinary Sovereign share they own (or 1 Banco Santander ADS for every 3.42 Sovereign shares). Based on the closing price of Santander ADSs on Friday, October 10, 2008, the transaction had an aggregate value of approximately USD 1,900 million (€1,400 million), or USD 3.81 per share, and met Santander’s criteria for acquisitions, both strategically, by significantly enhancing the geographical diversification of the Group, and financially, with a projected net profit for Sovereign of USD 750 million in 2011.

On January 26, 2009, Banco Santander held an Extraordinary General Meeting at which the shareholders approved the capital increase to cater for the acquisition of 75.65% of the US entity Sovereign Bancorp Inc., which was agreed upon in October 2008. The resolution was adopted with the vote of 96.9% of the capital present in person or by proxy.

On January 28, 2009, the shareholders at the General Meeting of Sovereign approved the acquisition.

On January 30, 2009, the acquisition of Sovereign was completed and Sovereign became a wholly-owned subsidiary of the Santander Group. The transaction involved the issue of 0.3206 ordinary shares of Banco Santander for each ordinary share of Sovereign (equivalent to the approved exchange of 0.2924 ADSs adjusted for the dilution arising from the capital increase carried out in December 2008). To this end, 161,546,320 ordinary shares were issued for a cash amount (par value plus share premium) of €1,302,063,339.20.

Under SEC Regulation S-X, Sovereign was an equity method investee significant to the Group in 2008 and thus we present below its summarized balance sheets as of December 31, 2008 and income statements for the fiscal year ended December 31, 2008. At December 31, 2009 Sovereign was fully consolidated in Santander Group.

On February 1, 2010 Sovereign Bancorp changed its name to Santander Holdings USA, Inc.

The financial information for 2008 disclosed below, differs from that included in our 2008 Form 20F due to reclassifications for comparative purposes reported in Sovereign’s form 10-K as of December 31, 2009. Such reclassifications bear no impact on our financial statements for 2008.

F-242

CONSOLIDATED BALANCE SHEET — SOVEREIGN BANCORP, INC.


	2008
	(Thousands of euros)
Assets
Cash and amounts due from depository institutions		2,697,796
Investment securities available for sale		6,683,437
Investment securities held to maturity		—
Other investments		516,470
Net loans held for investment		39,117,012
Loans held for sale		235,203
Premises and equipment		395,308
Accrued interest receivable		180,795
Goodwill		2,465,676
Core deposits and other intangibles		192,909
Bank owned life insurance		1,327,648
Other assets		1,583,067
Total assets		55,395,321

Liabilities
Deposits and other customer accounts		34,805,327
Borrowings and other debt obligations		15,063,724
Advance payments by borrowers for taxes and insurance		66,986
Other liabilities		1,437,789
Total liabilities		51,373,826

Non-controlling interests-preferred securities of subsidiaries		—

Stockholders’ Equity
Preferred stock		140,436
Common stock		5,546,289
Warrants and employee stock options issued		251,902
Unallocated common stock held by Employee Stock Ownership Plan		—
Treasury stock		(6,739	)
Accumulated other comprehensive loss		(564,642	)
Retained earnings		(1,345,751	)
Total Stockholders’ Equity		4,021,495
Total Liabilities and Stockholders’ Equity		55,395,321

CONSOLIDATED INCOME STATEMENT — SOVEREIGN BANCORP, INC.


	2008
	(Thousands of euros)
Interest income		2,679,882
Interest expense		(1,394,001	)
Provision for credit losses		(622,297	)
Interest income / (Charges) after provision for credit losses		663,584
Fees and other income		434,746
Net (loss)/gain on investment securities		(994,022	)
Non-interest income		(559,277	)
General and administrative expenses		(1,013,917	)
Other expenses		(206,312	)
Income before income taxes		(1,115,922	)
Income tax benefit/(provision)		(494,269	)
Net income		(1,610,191	)

F-243

Exhibit I

Subsidiaries of Banco Santander, S.A. (1)


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
2 & 3 Triton Limited (m)	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY		12			4			12
A & L CF (Guernsey) Limited (n)	Guernsey		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF (Jersey) Limited (n)	Jersey		0.00	%		100.00	%		100.00	%	LEASING		93			(1	)		88
A & L CF (Jersey) No.2 Limited (n)	Jersey		0.00	%		100.00	%		100.00	%	LEASING		107			0			91
A & L CF December (1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		13			1			0
A & L CF December (10) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		36			(1	)		33
A & L CF December (11) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		12			0			11
A & L CF June (1) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		4			1			1
A & L CF June (2) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		2			0			0
A & L CF June (3) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(1	)		1			0
A & L CF June (5) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF June (6) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF June (7) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF June (8) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF March (1) Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(1	)		1			0
A & L CF March (3) Limited (d) (j)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF March (5) Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF March (6) Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF March (7) Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			(1	)		0
A & L CF March (8) Limited (d) (j)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF March (9) Limited (d) (j)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF September (2) Limited (f)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF September (3) Limited (f)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			1			0
A & L CF September (4) Limited (f)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(3	)		1			0
A & L CF September (5) Limited (f)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		2			0			0
A N (123) plc	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		985			4			990
Abbey Business Services (India) Private Limited (d)	India		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		1			0			0
Abbey Covered Bonds (Holdings) Limited	United Kingdom		—			(b	)		—		SECURITISATION		0			0			0
Abbey Covered Bonds (LM) Limited	United Kingdom		—			(b	)		—		SECURITISATION		0			0			0
Abbey Covered Bonds LLP	United Kingdom		—			(b	)		—		SECURITISATION		599			190			0
Abbey National (America) Holdings Inc.	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		34			0			34
Abbey National (America) Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		34			0			27
Abbey National (CF Trustee) Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		0			0			0

F-244


												Millions of euros (a)
												Capital			Net profit		Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for		ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year		interest
Abbey National (Gibraltar) Limited (j)	Gibraltar		0.00	%		100.00	%		100.00	%	BROKER-DEALER		0			0		0
Abbey National (Holdings) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		22			0		19
Abbey National 1986 Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		7			0		6
Abbey National Alpha Investments (d)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		1			0		1
Abbey National American Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		302			1		294
Abbey National Baker Street Investments	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		4			0		4
Abbey National Beta Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		115			16		99
Abbey National Business Cashflow Finance Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	FACTORING		5			0		4
Abbey National Business Equipment Leasing Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		1			0		0
Abbey National Business Office Equipment Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		5			0		0
Abbey National Capital LP I	United States		—			(b	)		—		FINANCE		0			0		0
Abbey National Financial Investments 3 B.V.	Netherlands		0.00	%		100.00	%		100.00	%	FINANCE		4			1		1
Abbey National Financial Investments 4 B.V.	Netherlands		0.00	%		100.00	%		100.00	%	FINANCE		294			0		291
Abbey National General Insurance Services Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES		(44	)		44		0
Abbey National GP (Jersey) Limited	Jersey		0.00	%		100.00	%		100.00	%	FINANCE		0			0		0
Abbey National Group Pension Schemes Trustees Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		0			0		0
Abbey National Homes Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		(44	)		0		0
Abbey National International Limited	Jersey		0.00	%		100.00	%		100.00	%	BANKING		212			19		174
Abbey National Investments	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		128			1		124
Abbey National Legacy Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0		0
Abbey National Legacy Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0		0
Abbey National Legacy Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0		0
Abbey National Nominees Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BROKER-DEALER		0			0		0
Abbey National North America Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0		0
Abbey National North America LLC	United States		0.00	%		100.00	%		100.00	%	FINANCE		0			0		0
Abbey National Pension (Escrow Services) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PENSION FUND MANAGEMENT COMPANY		16			6		0
Abbey National Personal Pensions Trustee Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		0			0		0
Abbey National PLP (UK) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0		0
Abbey National Properties (2) Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(3	)		3		0
Abbey National Property Investments	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		394			5		161
Abbey National Property Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY		(15	)		0		0
Abbey National Securities Inc.	United States		0.00	%		100.00	%		100.00	%	BROKER-DEALER		43			1		34

F-245


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Abbey National September Leasing (3) Limited (f)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(9	)		0			0
Abbey National Sterling Capital plc	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		3			0			0
Abbey National Treasury Investments	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		219			18			214
Abbey National Treasury Services (Transport Holdings) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			4			4
Abbey National Treasury Services Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		880			2			871
Abbey National Treasury Services Overseas Holdings	United Kingdom		0.00	%		99.99	%		99.99	%	HOLDING COMPANY		1,229			316			1,184
Abbey National Treasury Services plc	United Kingdom		0.00	%		100.00	%		100.00	%	BANKING		4,070			534			3,310
Abbey National UK Investments	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		830			4			704
Abbey Stockbrokers (Nominees) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BROKER-DEALER		0			0			0
Abbey Stockbrokers Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BROKER-DEALER		6			(1	)		8
ABN AMRO Administradora de Cartões de Crédito Ltda. (l)	Brazil		0.00	%		0.00	%		0.00	%	CARDS		—			—			—
ABN AMRO Brasil dois Participações S.A. (l)	Brazil		0.00	%		0.00	%		0.00	%	HOLDING COMPANY		—			—			—
ABN AMRO Brasil Partipações e Investimentos S.A. (l)	Brazil		0.00	%		0.00	%		0.00	%	HOLDING COMPANY		—			—			—
Adelfa Servicios a Instalaciones Fotovoltaicas, S.L.	Spain		0.00	%		100.00	%		100.00	%	ELECTRICITY		0			0			0
Administración de Bancos Latinoamericanos Santander, S.L.	Spain		24.11	%		75.89	%		100.00	%	HOLDING COMPANY		558			243			524
AEH Purchasing, Ltd.	Ireland		—			(b	)		—		SECURITISATION		0			0			0
Afisa S.A.	Chile		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		10			0			3
Agencia de Seguros Santander, Ltda.	Colombia		0.00	%		100.00	%		100.00	%	INSURANCE		4			(3	)		1
Agrícola Tabaibal, S.A.	Spain		0.00	%		66.80	%		100.00	%	AGRICULTURE AND LIVESTOCK		0			0			0
Agropecuaria Tapirapé S.A.	Brazil		0.00	%		80.62	%		99.07	%	AGRICULTURE AND LIVESTOCK		3			0			1
AIG Bank Polska Spólka Akcyjna	Poland		0.00	%		70.00	%		100.00	%	BANKING		255			20			80
AKB Marketing Services Sp. Z.o.o.	Poland		0.00	%		70.00	%		100.00	%	MARKETING		6			0			0
Aktúa Soluciones Financieras, S.A.	Spain		0.00	%		90.04	%		100.00	%	FINANCIAL SERVICES		3			6			0
Alcaidesa Golf, S.L.	Spain		0.00	%		45.03	%		50.01	%	SPORTS OPERATIONS		5			(1	)		3
Alcaidesa Holding, S.A. (consolidated)	Spain		0.00	%		45.03	%		50.01	%	PROPERTY		65			(3	)		27
Alcaidesa Inmobiliaria, S.A.	Spain		0.00	%		45.03	%		50.01	%	PROPERTY		60			(1	)		15
Alcaidesa Servicios, S.A.	Spain		0.00	%		45.03	%		50.01	%	SERVICES		9			0			4
ALCF Investments Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Aljarafe Golf, S.A.	Spain		0.00	%		80.51	%		89.41	%	PROPERTY		14			0			0
Aljardi SGPS, Lda.	Portugal		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		1,163			800			1,148
Alliance & Leicester (Holdings) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0			0

F-246


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Alliance & Leicester (Isle of Man) Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	BANKING		6			0			6
Alliance & Leicester (Jersey) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		3			0			0
Alliance & Leicester Cash Solutions Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		(24	)		0			0
Alliance & Leicester Commercial Bank plc	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		26			0			26
Alliance & Leicester Commercial Finance (Holdings) plc	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		46			0			79
Alliance & Leicester Covered Bonds (LM) Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITISATION		0			0			0
Alliance & Leicester Covered Bonds LLP (j)	United Kingdom		—			(b	)		—		SECURITISATION		0			0			0
Alliance & Leicester Equity Investments (Guarantee) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Estate Agents (Holdings) Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0			0
Alliance & Leicester Estate Agents (Mortgage & Finance) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Estates Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY		6			0			0
Alliance & Leicester Finance Company Limited (j) (n)	Cayman Islands		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Financing plc (j)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		8			0			7
Alliance & Leicester Independent Financial Advisers Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester International Holdings Limited	Isle of Man		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		30			0			30
Alliance & Leicester International Limited	Isle of Man		0.00	%		100.00	%		100.00	%	BANKING		141			0			30
Alliance & Leicester Investment (No 3) LLP	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		22			0			22
Alliance & Leicester Investment (No. 4) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		12			0			12
Alliance & Leicester Investments (Derivatives No. 3) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		17			0			17
Alliance & Leicester Investments (Derivatives) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Investments (Jersey) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Investments (No. 2) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		3			1			1
Alliance & Leicester Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		3			2			1
Alliance & Leicester LM Holdings Limited (j)	United Kingdom		—			(b	)		—		SECURITISATION		0			0			0
Alliance & Leicester Personal Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		(256	)		20			0
Alliance & Leicester plc	United Kingdom		0.00	%		100.00	%		100.00	%	BANKING		108			85			1,149
Alliance & Leicester Print Services Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	SERVICES		3			0			0
Alliance & Leicester Share Ownership Trust Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Unit Trust Managers Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGER		9			0			5
Alliance Bank Limited	United Kingdom		100.00	%		0.00	%		100.00	%	FINANCE		29			(3	)		30
Alliance Corporate Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		10			0			0
Almacenadora Serfin, S.A. de C.V.	Mexico		0.00	%		98.58	%		98.71	%	WAREHOUSING		0			0			2
Almacenadora Somex, S.A. de C.V.	Mexico		0.00	%		97.10	%		97.24	%	WAREHOUSING		8			0			1
Altamira Santander Real Estate, S.A.	Spain		93.62	%		6.38	%		100.00	%	PROPERTY		(627	)		(179	)		0

F-247


												Millions of euros (a)
												Capital		Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and		(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves		the year			interest
Andaluza de Inversiones, S.A.	Spain		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		45		(1	)		27
ANDSH Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		3		0			2
ANFP (US) LLC	United States		0.00	%		100.00	%		100.00	%	FINANCE		0		0			0
ANITCO Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0		0			0
Aquanima Brasil Ltda.	Brazil		0.00	%		99.44	%		100.00	%	e-COMMERCE		0		1			0
Aquanima Chile S.A.	Chile		0.00	%		99.44	%		100.00	%	e-COMMERCE		1		0			0
Aquanima México S. de R.L. de C.V.	Mexico		0.00	%		99.44	%		100.00	%	e-COMMERCE		1		0			1
Aquanima S.A.	Argentina		0.00	%		99.44	%		100.00	%	SERVICES		0		0			0
Argenline, S.A.	Uruguay		0.00	%		100.00	%		100.00	%	FINANCE		0		0			0
Asesoría Estratega, S.C.	Mexico		0.00	%		100.00	%		100.00	%	SERVICES		0		0			0
Aurum S.A.	Chile		0.72	%		99.28	%		100.00	%	HOLDING COMPANY		6		3			80
Ausant Holding Gesellschaft m.b.H. in liquidation (j)	Austria		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0		0			0
Aviación Antares, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	LEASING		30		1			30
Aviación Intercontinental, A.I.E.	Spain		65.00	%		0.00	%		65.00	%	LEASING		54		3			35
Aviación RC II, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	LEASING		9		0			9
Aviación Real, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	LEASING		4		0			10
Aviación Regional Cántabra, A.I.E.	Spain		73.58	%		0.00	%		73.58	%	LEASING		28		1			22
Aviación Scorpius, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	LEASING		26		0			26
Aviación Tritón, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	LEASING		21		0			21
Aymoré Crédito, Financiamento e Investimento S.A.	Brazil		0.00	%		81.38	%		100.00	%	FINANCE		296		135			278
Bajondillo, S.A.	Spain		0.00	%		90.04	%		100.00	%	PROPERTY		0		0			0
Baker Street Risk and Insurance (Guernsey) Limited (e)	Guernsey		0.00	%		100.00	%		100.00	%	INSURANCE		14		1			2
Banbou S.A.R.L.	France		0.00	%		90.00	%		100.00	%	HOLDING COMPANY		0		0			0
Banco ABN AMRO Real S.A. (l)	Brazil		0.00	%		0.00	%		0.00	%	BANKING		—		—			—
Banco Alicantino de Comercio, S.A.	Spain		0.00	%		90.04	%		100.00	%	BANKING		9		0			8
Banco Bandepe S.A.	Brazil		0.00	%		81.38	%		100.00	%	BANKING		1,810		108			1,259
Banco Banif, S.A.	Spain		100.00	%		0.00	%		100.00	%	BANKING		391		33			184
Banco Comercial e de Investimento Sudameris S.A. (l)	Brazil		0.00	%		0.00	%		0.00	%	BANKING		—		—			—
Banco de Albacete, S.A.	Spain		100.00	%		0.00	%		100.00	%	BANKING		12		0			9
Banco de Asunción, S.A. (j)	Paraguay		0.00	%		99.33	%		99.33	%	BANKING		1		0			29
Banco Español de Crédito, S.A.	Spain		88.96	%		1.08	%		90.04	%	BANKING		4,807		436			1,300
Banco Madesant — Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%	BANKING		1,186		(167	)		1,159
Banco Santander- Chile	Chile		0.00	%		76.74	%		76.91	%	BANKING		2,395		763			1,367
Banco Santander (Brasil) S.A.	Brazil		0.00	%		81.38	%		81.38	%	BANKING		28,309		945			9,374
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander	Mexico		0.00	%		99.86	%		99.99	%	BANKING		4,010		779			2,416

F-248


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Banco Santander (Panamá), S.A.	Panama		0.00	%		100.00	%		100.00	%	BANKING		8			0			8
Banco Santander (Suisse) SA	Switzerland		0.00	%		100.00	%		100.00	%	BANKING		203			44			325
Banco Santander Bahamas International Limited	Bahamas		0.00	%		100.00	%		100.00	%	BANKING		835			88			785
Banco Santander Colombia, S.A.	Colombia		0.00	%		97.85	%		97.85	%	BANKING		235			38			471
Banco Santander Consumer Portugal, S.A.	Portugal		0.00	%		100.00	%		100.00	%	BANKING		111			7			177
Banco Santander International	United States		95.88	%		4.12	%		100.00	%	BANKING		389			36			387
Banco Santander Perú S.A.	Peru		99.00	%		1.00	%		100.00	%	BANKING		35			2			33
Banco Santander Puerto Rico	Puerto Rico		0.00	%		100.00	%		100.00	%	BANKING		478			11			418
Banco Santander Río S.A.	Argentina		8.23	%		91.07	%		99.30	%	BANKING		426			302			282
Banco Santander Totta, S.A.	Portugal		0.00	%		99.73	%		99.87	%	BANKING		1,565			217			2,747
Banco Santander, S.A.	Uruguay		98.04	%		1.96	%		100.00	%	BANKING		297			41			204
Banesto Banca Privada Gestión, S.A. S.G.I.I.C.	Spain		0.00	%		90.04	%		100.00	%	FUND MANAGEMENT COMPANY		3			0			2
Banesto Banco de Emisiones, S.A.	Spain		0.00	%		90.04	%		100.00	%	BANKING		102			1			87
Banesto Bolsa, S.A., Sdad. Valores y Bolsa	Spain		0.00	%		90.04	%		100.00	%	BROKER-DEALER		112			1			31
Banesto Financial Products, Plc.	Ireland		0.00	%		90.04	%		100.00	%	FINANCE		0			0			0
Banesto Renting, S.A.	Spain		0.00	%		90.04	%		100.00	%	FINANCE		10			0			2
Banesto Securities, Inc.	United States		0.00	%		90.04	%		100.00	%	FINANCE		4			2			2
Banif Gestión, S.A., S.G.I.I.C.	Spain		0.00	%		98.01	%		100.00	%	FUND MANAGEMENT COMPANY		25			0			15
Bansa Santander, S.A.	Chile		0.00	%		100.00	%		100.00	%	PROPERTY		4			(1	)		36
Bansamex, S.A.	Spain		50.00	%		0.00	%		50.00	%	CARDS		6			1			1
Beacon Abstract, L.P.	United States		0.00	%		70.00	%		70.00	%	INSURANCE		0			1			0
Bel Canto SICAV Erodiade (c)	Luxembourg		0.00	%		100.00	%		100.00	%	OPEN-END INVESTMENT COMPANY		2			0			2
Beta Cero, S.A.	Spain		0.00	%		79.24	%		88.00	%	FINANCE		0			0			0
Bracken Securities Holdings Limited	United Kingdom		—			(b	)		—		SECURITISATION		0			0			0
Bracken Securities Option Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITISATION		0			0			0
Bracken Securities plc	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITISATION		0			0			0
Bradford & Bingley International Limited	Isle of Man		0.00	%		100.00	%		100.00	%	BANKING		205			12			118
Brazil Foreign Diversified Payment Rights Finance Company	Cayman Islands		—			(b	)		—		SECURITISATION		0			0			0
BRS Investments, S.A.	Argentina		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		28			0			73
BST International Bank, Inc.	Puerto Rico		0.00	%		99.73	%		100.00	%	BANKING		4			18			4
CA Premier Banking Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BANKING		5			0			5
Caja de Emisiones con Garantía de Anualidades Debidas por el Estado, S.A.	Spain		0.00	%		56.61	%		62.87	%	FINANCE		0			0			0
Cántabra de Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		(18	)		(16	)		154
Cantabric Financing LLC.	United States		—			(b	)		—		SECURITISATION		0			0			0

F-249


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Cantabric Financing, Plc.	Ireland		—			(b	)		—		SECURITISATION		0			0			0
Cántabro Catalana de Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		188			2			140
Capital Riesgo Global, SCR de Régimen Simplificado, S.A.	Spain		92.91	%		7.09	%		100.00	%	VENTURE CAPITAL COMPANY		599			(5	)		553
Capital Street Delaware LP	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0			0
Capital Street GP (j)	Cayman Islands		—			(b	)		—		HOLDING COMPANY		0			0			0
Capital Street S.A.	Luxembourg		0.00	%		100.00	%		100.00	%	FINANCE		(1	)		0			0
Carfax (Guernsey) Limited (n)	Guernsey		0.00	%		100.00	%		100.00	%	INSURANCE BROKERAGE		26			0			23
Carpe Diem Salud, S.L.	Spain		100.00	%		0.00	%		100.00	%	SECURITIES INVESTMENT		0			0			0
Cartera Mobiliaria, S.A., SICAV	Spain		0.00	%		80.69	%		92.75	%	SECURITIES INVESTMENT		643			(3	)		227
Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander	Mexico		0.00	%		99.83	%		99.97	%	BROKER-DEALER		46			22			37
Cater Allen Holdings Limited	United Kingdom		0.00	%		99.99	%		100.00	%	HOLDING COMPANY		110			290			100
Cater Allen International Limited	United Kingdom		0.00	%		99.99	%		100.00	%	BROKER-DEALER		141			55			137
Cater Allen Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BANKING		280			38			258
Cater Allen Lloyd’s Holdings Limited	United Kingdom		0.00	%		99.99	%		100.00	%	HOLDING COMPANY		(11	)		0			0
Cater Allen Pensions Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PENSION FUND MANAGEMENT COMPANY		0			0			0
Cater Allen Syndicate Management Limited	United Kingdom		0.00	%		99.99	%		100.00	%	ADVISORY SERVICES		2			0			0
Cater Tyndall Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		32			0			0
Catmoll, S.L.	Spain		100.00	%		0.00	%		100.00	%	PROPERTY		9			0			6
Certidesa, S.L.	Spain		0.00	%		100.00	%		100.00	%	LEASE OF AIRCRAFT		(19	)		(5	)		3
Chatsworth Securities LLP (j) (g)	United Kingdom		—			(b	)		—		SECURITISATION		0			0			0
CitiFinancial Auto Issuance Trust 2009-1	United States		—			(b	)		—		SECURITISATION		0			11			0
Clínica Sear, S.A.	Spain		0.00	%		45.54	%		50.58	%	HEALTHCARE		4			0			1
Club Zaudin Golf, S.A.	Spain		0.00	%		85.64	%		95.11	%	SERVICES		15			0			12
Comercializadora Al-fin, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	RETAIL TRADE		0			0			0
Companhia Santander de Valores — Distribuidora de Títulos e Valores Mobiliários	Brazil		0.00	%		81.38	%		100.00	%	ASSET MANAGEMENT		37			2			28
Costa Canaria de Veneguera, S.A.	Spain		0.00	%		66.80	%		74.19	%	PROPERTY		13			0			9
Crawfall, S.A.	Uruguay		100.00	%		0.00	%		100.00	%	SERVICES		1			0			1
Credicenter Empreendimentos e Promoções Ltda. (l)	Brazil		0.00	%		0.00	%		0.00	%	FINANCIAL SERVICES		—			—			—

F-250


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Credisol, S.A. (j)	Uruguay		0.00	%		100.00	%		100.00	%	CARDS		0			0			7
Crefisa, Inc.	Puerto Rico		100.00	%		0.00	%		100.00	%	FINANCE		310			(16	)		279
Cruzeiro Factoring Sociedade de Fomento Comercial Ltda. (l)	Brazil		0.00	%		0.00	%		0.00	%	FACTORING		—			—			—
Darep Limited	Ireland		0.00	%		100.00	%		100.00	%	REINSURANCE		5			1			4
Depósitos Portuarios, S.A.	Spain		0.00	%		90.04	%		100.00	%	SERVICES		1			0			1
Digital Procurement Holdings N.V.	Netherlands		0.00	%		99.44	%		100.00	%	HOLDING COMPANY		2			2			1
Diners Club Spain, S.A.	Spain		75.00	%		0.00	%		75.00	%	CARDS		9			2			9
Dirección Estratega, S.C.	Mexico		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
Drive Residual Holdings GP LLC	United States		0.00	%		91.50	%		100.00	%	HOLDING COMPANY		0			0			0
Drive Residual Holdings LP	United States		0.00	%		91.50	%		100.00	%	AUXILIARY		(8	)		(4	)		0
Drive Trademark Holdings LP	United States		0.00	%		91.50	%		100.00	%	AUXILIARY		0			0			0
Drive Warehouse GP LLC	United States		0.00	%		91.50	%		100.00	%	HOLDING COMPANY		0			0			0
Drive Warehouse LP	United States		0.00	%		91.50	%		100.00	%	AUXILIARY		0			17			0
Dudebasa, S.A.	Spain		0.00	%		90.04	%		100.00	%	FINANCE		32			(4	)		22
Elerco, S.A.	Spain		0.00	%		90.04	%		100.00	%	PROPERTY		194			(91	)		170
Empresas Banesto 1, Fondo de Titulización de Activos	Spain		—			(b	)		—		SECURITISATION		0			0			0
Empresas Banesto 2, Fondo de Titulización de Activos	Spain		—			(b	)		—		SECURITISATION		0			0			0
Empresas Banesto 3, Fondo de Titulización de Activos	Spain		—			(b	)		—		SECURITISATION		0			0			0
Empresas Banesto 4, Fondo de Titulización de Activos	Spain		—			(b	)		—		SECURITISATION		0			0			0
Empresas Banesto 5, Fondo de Titulización de Activos	Spain		—			(b	)		—		SECURITISATION		0			0			0
Erestone S.A.S.	France		0.00	%		90.00	%		90.00	%	PROPERTY		63			0			57
Evansgrove Limited (f) (j)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
FFB — Participações e Serviços, Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		3,667			20			1,020
Fideicomiso 100740 SLPT	Mexico		0.00	%		99.86	%		100.00	%	FINANCE		53			6			34
Fideicomiso Financiero Río Personales I	Argentina		—			(b	)		—		SECURITIES		1			0			0
Fideicomiso GFSSLPT Banca Serfín, S.A.	Mexico		0.00	%		99.86	%		100.00	%	FINANCE		47			2			28
Fideicomiso Super Letras Hipotecarias Clase I	Argentina		—			(b	)		—		SECURITIES		2			0			0
Fideicomiso Super Letras Hipotecarias Clase II	Argentina		—			(b	)		—		SECURITIES		4			0			0
Financiación Banesto 1, Fondo de Titulización de Activos	Spain		—			(b	)		—		SECURITISATION		0			0			0
Financiera Alcanza, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada	Mexico		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
First National Motor Business Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
First National Motor Contracts Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
First National Motor Facilities Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
First National Motor Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES		0			0			0
First National Motor Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
First National Motor plc	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
First National Tricity Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		213			5			119

F-251


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Fomento e Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		35			27			17
Fondo de Titulización de Activos Santander 1	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander 2	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Consumer Spain 07-2	Spain					(b	)				SECURITISATION		(39	)		(4	)		0
Fondo de Titulización de Activos Santander Consumer Spain 08-1	Spain					(b	)				SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Consumer Spain 09-1	Spain					(b	)				SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Consumer Spain Auto 06	Spain					(b	)				SECURITISATION		(8	)		0			0
Fondo de Titulización de Activos Santander Consumer Spain Auto 07-1	Spain					(b	)				SECURITISATION		(33	)		0			0
Fondo de Titulización de Activos Santander Consumer Spain Auto 2010-1	Spain					(b	)				SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Empresas 1	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Empresas 2	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Empresas 3	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Empresas 4	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Empresas 5	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Empresas 6	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Empresas 7	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Hipotecario 6	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Público 1	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización Hipotecaria Banesto 2	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización Hipotecaria Banesto 3	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización Hipotecaria Banesto 4	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización Santander Financiación 1	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización Santander Financiación 2	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización Santander Financiación 3	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondo de Titulización Santander Financiación 4	Spain		—			(b	)		—		SECURITISATION		0			0			0
Fondos Santander, S.A. Administradora de Fondos de Inversión (in liquidation) (j)	Uruguay		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		0			0			0
Formación Integral, S.A.	Spain		0.00	%		90.04	%		100.00	%	TRAINING		1			0			1
Fortensky Trading, Ltd.	Ireland		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Fosse (Master Issuer) Holdings Limited	United Kingdom		—			(b	)		—		SECURITISATION		0			0			0
Fosse Funding (No.1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITISATION		52			92			0
Fosse Master Issuer PLC	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITISATION		5			28			0
Fosse PECOH Limited	United Kingdom		—			(b	)		—		SECURITISATION		0			0			0
Fosse Trustee (UK) Limited	United Kingdom		—			(b	)		—		SECURITISATION		0			0			0
Fosse Trustee Limited	Jersey		—			(b	)		—		SECURITISATION		0			0			0
FTPYME Banesto 2 Fondo de Titulización de Activos	Spain		—			(b	)		—		SECURITISATION		0			0			0

F-252


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
FTPYME Santander 2 Fondo de Titulización de Activos	Spain		—			(b	)		—		SECURITISATION		0			0			0
Garilar, S.A.	Uruguay		0.00	%		100.00	%		100.00	%	INTERNET		0			0			0
GEOBAN Deutschland GmbH	Germany		0.00	%		100.00	%		100.00	%	SERVICES		1			(1	)		0
Geoban UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
Geoban, S.A.	Spain		100.00	%		0.00	%		100.00	%	SERVICES		17			1			24
Gesban México Servicios Administrativos Globales, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
Gesban Santander Servicios Profesionales Contables Limitada	Chile		0.00	%		100.00	%		100.00	%	INTERNET		0			0			0
Gesban Servicios Administrativos Globales, S.L.	Spain		99.99	%		0.01	%		100.00	%	SERVICES		0			0			1
Gesban UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	COLLECTION AND PAYMENT SERVICES		0			0			0
Gescoban Soluciones, S.A.	Spain		0.00	%		90.04	%		100.00	%	FINANCE		6			1			1
Gestión de Instalaciones Fotovoltaicas, S.L. Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%	ELECTRICITY		0			0			0
Gestión Santander, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión, Grupo Financiero Santander	Mexico		0.00	%		99.87	%		100.00	%	FINANCE		3			5			1
Gestora de Procesos S.A., in liquidation (j)	Peru		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		1			0			1
Giro Investments Limited (j) (n)	Cayman Islands		0.00	%		100.00	%		100.0	%	FINANCE		0			0			0
Girobank Carlton Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		7			0			1
Girobank Investments Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		1			0			0
Golden Bar (Securitisation) S.r.l.	Italy		—			(b	)		—		SECURITISATION		0			0			0
Golden Bar Securitization Programme I	Italy		—			(b	)		—		SECURITISATION		0			0			0
Golden Bar Securitization Programme II	Italy		—			(b	)		—		SECURITISATION		0			0			0
Golden Bar Securitization Programme III	Italy		—			(b	)		—		SECURITISATION		(11	)		0			0
Golden Bar Securitization Programme IV	Italy		—			(b	)		—		SECURITISATION		0			0			0
Grupo Alcanza, S.A. de C.V.	Mexico		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		1			0			13
Grupo Empresarial Santander, S.L.	Spain		99.11	%		0.89	%		100.00	%	HOLDING COMPANY		3,180			499			3,759
Grupo Financiero Santander, S.A. B de C.V.	Mexico		74.75	%		25.12	%		99.87	%	HOLDING COMPANY		4,143			837			4,066
Guaranty Car, S.A., Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%	AUTOMOTIVE		3			0			1
Hansar Finance Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		1			0			1
Hipototta No. 1 FTC	Portugal		—			(b	)		—		SECURITISATION		3			(2	)		0
Hipototta No. 1 plc	Ireland		—			(b	)		—		SECURITISATION		(3	)		(1	)		0
Hipototta No. 10 FTC	Portugal		—			(b	)		—		SECURITISATION		2			(1	)		0
Hipototta No. 10 Limited	Ireland		—			(b	)		—		SECURITISATION		(3	)		0			0
Hipototta No. 11	Portugal		—			(b	)		—		SECURITISATION		0			0			0
Hipototta No. 2 FTC	Portugal		—			(b	)		—		SECURITISATION		12			(5	)		0
Hipototta No. 2 plc	Ireland		—			(b	)		—		SECURITISATION		(11	)		0			0
Hipototta No. 3 FTC	Portugal		—			(b	)		—		SECURITISATION		18			(7	)		0

F-253


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Hipototta No. 3 plc	Ireland		—			(b	)		—		SECURITISATION		(17	)		(4	)		0
Hipototta No. 4 FTC	Portugal		—			(b	)		—		SECURITISATION		18			(7	)		0
Hipototta No. 4 plc	Ireland		—			(b	)		—		SECURITISATION		(18	)		(3	)		0
Hipototta No. 5 FTC	Portugal		—			(b	)		—		SECURITISATION		9			(5	)		0
Hipototta No. 5 plc	Ireland		—			(b	)		—		SECURITISATION		(8	)		(1	)		0
Hipototta No. 7 FTC	Portugal		—			(b	)		—		SECURITISATION		10			(7	)		0
Hipototta No. 7 Limited	Ireland		—			(b	)		—		SECURITISATION		(10	)		(2	)		0
Hipototta No. 8 FTC	Portugal		—			(b	)		—		SECURITISATION		5			(3	)		0
Hipototta No. 8 Limited	Ireland		—			(b	)		—		SECURITISATION		(5	)		0			0
Hispamer Renting, S.A. Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%	FULL-SERVICE LEASE		12			0			1
Holbah II Limited	Bahamas		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		986			702			1,475
Holbah Limited	Bahamas		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			947			0
Holmes Financing (Nº1) plc	United Kingdom		—			(b	)		—		SECURITISATION		8			(8	)		0
Holmes Financing (Nº10) plc	United Kingdom		—			(b	)		—		SECURITISATION		(1	)		1			0
Holmes Financing (Nº9) plc	United Kingdom		—			(b	)		—		SECURITISATION		1			(1	)		0
Holmes Funding 2 Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITISATION		(276	)		276			0
Holmes Funding Limited	United Kingdom		—			(b	)		—		SECURITISATION		(100	)		28			0
Holmes Holdings Limited	United Kingdom		—			(b	)		—		SECURITISATION		0			0			0
Holmes Master Issuer 2 PLC	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITISATION		146			(146	)		0
Holmes Master Issuer plc	United Kingdom		—			(b	)		—		SECURITISATION		0			7			0
Holmes Trustees Limited	United Kingdom		—			(b	)		—		SECURITISATION		0			0			0
Holneth B.V.	Netherlands		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		9			67			12
HRE Investment Holdings II-A S.à.r.l. (c)	Luxembourg		0.00	%		69.91	%		0.00	%	HOLDING COMPANY		0			(39	)		0
HSBC Automotive Trust (USA) 2006-3	United States		—			(b	)		—		SECURITISATION		0			0			0
HSBC Automotive Trust (USA) 2007-1	United States		—			(b	)		—		SECURITISATION		0			0			0
HSH Delaware L.P. (c)	United States		0.00	%		69.60	%		0.00	%	HOLDING COMPANY		12			(4	)		5
Hualle, S.A.	Spain		0.00	%		90.04	%		100.00	%	SECURITIES INVESTMENT		74			1			5
Ibérica de Compras Corporativas, S.L.	Spain		91.63	%		7.82	%		100.00	%	e-COMMERCE		14			4			5
Independence Community Bank Corp.	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		4,367			89			4,693
Independence Community Commercial Reinvestment Corp.	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		100			4			103
Infraestructuras Americanas, S.L.	Spain		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		45			(43	)		129
Ingeniería de Software Bancario, S.L.	Spain		100.00	%		0.00	%		100.00	%	IT SERVICES		76			14			86
Inmo Francia 2, S.A.	Spain		0.00	%		100.00	%		100.00	%	PROPERTY		57			0			58

F-254


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Instituto Santander Serfin, A.C.	Mexico		0.00	%		99.86	%		100.00	%	NOT-FOR-PROFIT INSTITUTE		1			0			0
Insurance Funding Solutions Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		(7	)		2			0
Integritas (Canada) Trustee Corporation Ltd.	Canada		100.00	%		0.00	%		100.00	%	ASSET MANAGEMENT COMPANY		1			0			0
Integritas New Zealand Ltd.	New Zealand		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		0			0			0
Integritas Trust SA	Switzerland		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		4			1			0
Interfinance Holanda B.V.	Netherlands		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		0			0			0
Inversiones Marítimas del Mediterráneo, S.A.	Spain		100.00	%		0.00	%		100.00	%	INACTIVE		4			0			3
Isban Argentina S.A.	Argentina		87.42	%		12.58	%		100.00	%	FINANCIAL SERVICES		3			0			2
Isban Brasil S.A.	Brazil		0.00	%		100.00	%		100.00	%	SERVICES		16			7			22
Isban Chile S.A.	Chile		0.00	%		100.00	%		100.00	%	IT SERVICES		13			2			23
Isban DE GmbH	Germany		0.00	%		100.00	%		100.00	%	IT SERVICES		1			0			0
Isban México, S.A. de C.V.	Mexico		100.00	%		0.00	%		100.00	%	IT SERVICES		78			1			60
ISBAN PT — Engenheria e Software Bancário, S.A.	Portugal		0.00	%		100.00	%		100.00	%	IT SERVICES		1			0			0
Isban U.K., Ltd.	United Kingdom		0.00	%		100.00	%		100.00	%	IT SERVICES		7			3			0
Island Insurance Corporation	Puerto Rico		0.00	%		100.00	%		100.00	%	INSURANCE		3			0			4
Itasant — Sociedade Gestora de Participações Sociais Sociedade Unipessoal, Lda.	Portugal		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		92			596			92
J.C. Flowers II-A L.P.	Canada		0.00	%		70.32	%		4.43	%	HOLDING COMPANY		64			(5	)		52
JCF BIN II-A (o)	Mauritania		0.00	%		69.47	%		4.43	%	HOLDING COMPANY		4			0			3
JCF II-A AIV K L.P.	Canada		0.00	%		69.53	%		0.00	%	HOLDING COMPANY		3			0			3
JCF II-A Special AIV K L.P.	Canada		0.00	%		72.29	%		4.99	%	HOLDING COMPANY		3			0			3
Jupiter III C.V. (c)	Netherlands		0.00	%		72.33	%		4.99	%	HOLDING COMPANY		147			(39	)		79
Jupiter JCF AIV II A C.V.	Netherlands		0.00	%		69.33	%		4.99	%	HOLDING COMPANY		18			3			15
La Unión Resinera Española, S.A. (consolidated)	Spain		74.87	%		21.30	%		96.26	%	CHEMICALS		47			1			28
Laboratorios Indas, S.A. (e)	Spain		0.00	%		73.22	%		73.22	%	HEALTH PRODUCTS		50			26			255

F-255


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Langton Funding (No.1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITISATION		0			0			0
Langton Mortgages Trustee (UK) Limited	United Kingdom		—			(b	)		—		SECURITISATION		0			0			0
Langton Mortgages Trustee Limited	Jersey		—			(b	)		—		SECURITISATION		0			0			0
Langton PECOH Limited	United Kingdom		—			(b	)		—		SECURITISATION		0			0			0
Langton Securities (2008-1) plc	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITISATION		0			0			0
Langton Securities (2008-2) plc	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITISATION		0			0			0
Langton Securities (2008-3) plc	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITISATION		0			0			0
Langton Securities (2010-1) PLC	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITISATION		0			0			0
Langton Securities (2010-2) PLC	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITISATION		0			0			0
Langton Securities Holdings Limited	United Kingdom		—			(b	)		—		SECURITISATION		0			0			0
Laparanza, S.A.	Spain		61.59	%		0.00	%		61.59	%	AGRICULTURE AND LIVESTOCK		31			0			16
Larix Chile Inversiones Limitada	Chile		0.00	%		90.04	%		100.00	%	FINANCE		0			0			0
Lease Totta No. 1 FTC	Portugal		—			(b	)		—		SECURITISATION		5			0			0
Leasetotta No. 1 Limited	Ireland		—			(b	)		—		SECURITISATION		(3	)		1			0
Liquidity Import Finance Limited (f)	United Kingdom		0.00	%		100.00	%		100.00	%	FACTORING		0			0			0
Liquidity Limited (f)	United Kingdom		0.00	%		100.00	%		100.00	%	FACTORING		(1	)		2			1
Luresa Inmobiliaria, S.A.	Spain		0.00	%		96.17	%		100.00	%	PROPERTY		22			1			9
Luri 1, S.A.	Spain		0.00	%		5.58	%		100.00	%	PROPERTY		101			(7	)		5
Luri 2, S.A.	Spain		0.00	%		4.81	%		100.00	%	PROPERTY		82			(17	)		3
Luri 4, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	PROPERTY		30			(3	)		32
Luri Land, S.A.	Belgium		0.00	%		5.15	%		100.00	%	PROPERTY		5			0			0
MAC No. 1 Limited (i)	United Kingdom		—			(b	)		—		MORTGAGE LOAN COMPANY		0			0			0
Magnolia Termosolar, S.L.	Spain		0.00	%		65.00	%		65.00	%	ELECTRICITY		0			0			0
Marylebone Road CBO 3 BV	Netherlands		—			(b	)		—		SECURITISATION		0			0			0
Mata Alta, S.L.	Spain		0.00	%		61.59	%		100.00	%	PROPERTY		0			0			0
Merciver, S.L.	Spain		0.00	%		90.04	%		100.00	%	SHIPPING COMPANY		0			0			0
Mesena Servicios de Gestión Inmobiliaria, S.A.	Spain		0.00	%		90.04	%		100.00	%	PROPERTY		750			(127	)		102
Mitre Capital Partners Limited	United Kingdom		0.00	%		100.00	%		100.00	%	MORTGAGE LOAN COMPANY		(63	)		(18	)		0
Money Card (Holdings) Limited	United Kingdom		0.00	%		80.00	%		100.00	%	HOLDING COMPANY		(6	)		21			2
Money Card Limited	United Kingdom		0.00	%		80.00	%		100.00	%	FINANCIAL SERVICES		0			0			0
Mugo Termosolar, S.L.	Spain		0.00	%		65.00	%		65.00	%	ELECTRICITY		0			0			0
Multinegocios S.A.	Chile		0.00	%		99.54	%		100.00	%	ADVISORY SERVICES		0			0			0
Multirent — Aluguer e Comércio de Automóveis, S.A.	Portugal		0.00	%		60.00	%		100.00	%	FULL-SERVICE LEASE		13			1			14
Multiservicios de Negocios Limitada	Chile		0.00	%		100.00	%		100.00	%	FINANCIAL SERVICES		1			0			0

F-256


												Millions of euros (a)
												Capital		Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and		(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves		the year			interest
N&P (B.E.S.) Loans Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		4		0			4
Naviera Mirambel, S.L.	Spain		0.00	%		100.00	%		100.00	%	FINANCE		0		0			0
Naviera Trans Gas, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	SHIPPING COMPANY		10		(3	)		61
Naviera Trans Ore, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	LEASING		18		0			18
Nebraska Wind I LLC	United States		0.00	%		100.00	%		100.00	%	ELECTRICITY		5		0			5
New Menta Public Corp.	United States		0.00	%		100.00	%		100.00	%	INACTIVE		0		0			0
NIB Special Investors IV-A LP	Canada		0.00	%		99.70	%		4.99	%	HOLDING COMPANY		40		4			66
NIB Special Investors IV-B LP (c)	Canada		0.00	%		95.86	%		4.99	%	HOLDING COMPANY		13		2			29
Norbest AS	Norway		7.94	%		92.06	%		100.00	%	SECURITIES INVESTMENT		257		(21	)		1,356
NW Services CO.	United States		0.00	%		99.44	%		100.00	%	e-COMMERCE		2		0			2
Oil-Dor, S.A.	Spain		0.00	%		90.04	%		100.00	%	FINANCE		158		2			110
Open Bank, S.A.	Spain		100.00	%		0.00	%		100.00	%	BANKING		161		(4	)		137
Optimal Alternative Investments, S.G.I.I.C., S.A.	Spain		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		1		0			1
Optimal Investment Services SA	Switzerland		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		44		(8	)		5
Optimal Multiadvisors Ireland Plc / Optimal Strategic US Equity Ireland EUR Fund (c)	Ireland		73.56	%		8.66	%		80.73	%	FUND MANAGEMENT COMPANY		27		0			0
Optimal Multiadvisors Ireland Plc / Optimal Strategic US Equity Ireland USD Fund (c)	Ireland		2.98	%		92.98	%		95.80	%	FUND MANAGEMENT COMPANY		3		0			0
Optimal Multiadvisors Ltd — Strategic US Equity Series (consolidated) (c)	Bahamas		0.00	%		69.25	%		68.29	%	FUND MANAGEMENT COMPANY		28		1			0
Parasant SA	Switzerland		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		1,528		697			1,440
Patagon Euro, S.L.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		693		3			590
PBE Companies, LLC	United States		0.00	%		100.00	%		100.00	%	PROPERTY		67		(5	)		82
PECOH Limited	United Kingdom		—			(b	)		—		SECURITISATION		0		0			0
Pereda Gestión, S.A.	Spain		99.99	%		0.01	%		100.00	%	HOLDING COMPANY		27		16			4
Perevent Empresa de Servicios Eventuales S.A.	Argentina		0.00	%		99.97	%		100.00	%	SERVICES		0		0			1
Pingham International, S.A.	Uruguay		0.00	%		100.00	%		100.00	%	SERVICES		0		0			0
Polskie Towarzystwo Finansowe S.A.	Poland		0.00	%		100.00	%		100.00	%	SERVICES		3		0			24
Portada S.A., in liquidation (j)	Chile		0.00	%		96.17	%		96.17	%	FINANCE		0		0			0

F-257


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Portal Universia Argentina S.A.	Argentina		0.00	%		84.18	%		84.18	%	INTERNET		1			(1	)		0
Portal Universia Portugal, Prestação de Serviços de Informática, S.A.	Portugal		0.00	%		100.00	%		100.00	%	INTERNET		1			(1	)		0
Portal Universia, S.A.	Spain		0.00	%		56.56	%		56.56	%	INTERNET		2			0			2
Préstamos de Consumo S.A.	Argentina		0.00	%		99.97	%		100.00	%	FINANCE		0			0			4
Procura Digital de Venezuela, S.A.	Venezuela		0.00	%		99.44	%		100.00	%	e-COMMERCE		(1	)		0			0
Produban Servicios Informáticos Generales, S.L.	Spain		98.44	%		1.56	%		100.00	%	SERVICES		1			9			1
Produban Serviços de Informática S.A.	Brazil		0.00	%		100.00	%		100.00	%	IT SERVICES		6			5			5
Promociones y Servicios Monterrey, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	PROPERTY		7			0			7
Promociones y Servicios Polanco, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	PROPERTY		66			1			64
Promociones y Servicios Santiago, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	SERVICES		74			0			65
Promodomus Desarrollo de Activos, S.L.	Spain		0.00	%		45.92	%		51.00	%	PROPERTY		(5	)		(6	)		0
PSB Inmobilien GmbH	Germany		0.00	%		100.00	%		100.00	%	PROPERTY		0			0			0
Real Corretora de Seguros, S.A. (l)	Brazil		0.00	%		0.00	%		0.00	%	INSURANCE BROKERAGE		—			—			—
REB Empreendimentos e Administradora de Bens, S.A.	Brazil		0.00	%		100.00	%		100.00	%	PROPERTY		2			0			0
Redes y Procesos, S.A.	Spain		52.17	%		13.24	%		66.87	%	CARDS		1			0			1
Reintegra Comercial España, S.L.	Spain		0.00	%		100.00	%		100.00	%	SERVICES		3			1			3
Reintegra Contact Center, S.L. Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%	SERVICES		1			1			1
Reintegra, S.A.	Spain		55.00	%		45.00	%		100.00	%	COLLECTION AND PAYMENT SERVICES		6			1			9
Retail Financial Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		(45	)		0			0
Riobank International (Uruguay) SAIFE (j)	Uruguay		0.00	%		100.00	%		100.00	%	BANKING		0			0			0
Ruevilliot 26, S.L.	Spain		0.00	%		70.00	%		70.00	%	PROPERTY		25			0			18
S C Servicios y Cobranzas S.A. in liquidation (j)	Colombia		0.00	%		97.96	%		100.00	%	COLLECTION AND PAYMENT SERVICES		0			0			0
Sánchez Ramade Santander Financiera, S.L.	Spain		0.00	%		50.00	%		50.00	%	FINANCIAL SERVICES		0			0			0
Saninv — Gestão e Investimentos, S.A.	Portugal		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		23			(20	)		5
Sansol S.r.l.	Italy		0.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION		0			0			0
Santander (CF Trustee Property Nominee) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
Santander Administradora de Consórcios Ltda.	Brazil		0.00	%		81.38	%		100.00	%	FINANCE		2			0			1
Santander Advisory Services S.A.	Brazil		0.00	%		81.38	%		100.00	%	ADVISORY SERVICES		59			13			44
Santander Agente de Valores Limitada	Chile		0.00	%		76.97	%		100.00	%	BROKER-DEALER		74			7			24
Santander Ahorro Inmobiliario 2 S.I.I., S.A.	Spain		69.11	%		0.01	%		69.12	%	PROPERTY		59			(6	)		41
Santander Airplus Corporate Payment Solutions, S.A.	Spain		75.00	%		0.00	%		75.00	%	PAYMENT SYSTEMS		0			0			0
Santander AM Holding, S.L.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		76			(8	)		29

F-258


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Santander Asset Finance (December) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(1	)		1			0
Santander Asset Finance plc	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		107			43			169
Santander Asset Management — Sociedade Gestora de Fundos de Investimento Mobiliário, S.A.	Portugal		0.00	%		99.73	%		100.00	%	FUND MANAGEMENT COMPANY		20			6			7
Santander Asset Management Chile S.A.	Chile		0.01	%		99.83	%		100.00	%	SECURITIES INVESTMENT		1			0			10
Santander Asset Management Corporation	Puerto Rico		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT		(5	)		9			2
Santander Asset Management Distribuidora de Títulos e Valores Mobiliários Ltda. (l)	Brazil		0.00	%		0.00	%		0.00	%	ASSET MANAGEMENT		—			—			—
Santander Asset Management Ireland, Ltd.	Ireland		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		16			1			0
Santander Asset Management Luxembourg, S.A.	Luxembourg		0.00	%		98.01	%		100.00	%	FUND MANAGEMENT COMPANY		10			3			0
Santander Asset Management S.A. Administradora General de Fondos	Chile		0.00	%		76.75	%		100.00	%	FUND MANAGEMENT COMPANY		55			41			9
Santander Asset Management UK Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		109			0			109
Santander Asset Management UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGER		11			(1	)		7
Santander Asset Management, S.A., S.G.I.I.C.	Spain		28.30	%		69.71	%		100.00	%	FUND MANAGEMENT COMPANY		94			22			33
Santander Back-Offices Globales Especializados, S.A.	Spain		99.99	%		0.01	%		100.00	%	SERVICES		0			0			0
Santander Back-Offices Globales Mayoristas, S.A.	Spain		100.00	%		0.00	%		100.00	%	SERVICES		1			1			1
Santander BanCorp	Puerto Rico		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		444			57			137
Santander Bank & Trust Ltd.	Bahamas		0.00	%		100.00	%		100.00	%	BANKING		1,165			427			1,188
Santander Benelux, S.A./N.V.	Belgium		83.20	%		16.80	%		100.00	%	BANKING		1,150			54			1,125
Santander Brasil Administradora de Consórcio Ltda.	Brazil		0.00	%		81.38	%		100.00	%	SERVICES		42			11			9
Santander Brasil Arrendamento Mercantil S.A. (l)	Brazil		0.00	%		0.00	%		0.00	%	LEASING		—			—			—
Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A.	Brazil		0.00	%		81.38	%		100.00	%	ASSET MANAGEMENT		62			34			67
Santander Brasil S.A. Corretora de Títulos e Valores Mobiliários (l)	Brazil		0.00	%		0.00	%		0.00	%	BROKER-DEALER		—			—			—
Santander Brasil Seguros S.A.	Brazil		0.00	%		81.38	%		100.00	%	INSURANCE		65			11			43
Santander Capital Desarrollo, SGECR, S.A.	Spain		100.00	%		0.00	%		100.00	%	VENTURE CAPITAL COMPANY		2			0			0
Santander Capitalização S.A.	Brazil		0.00	%		81.38	%		100.00	%	INSURANCE		160			63			100
Santander Carbón Finance, S.A.	Spain		99.98	%		0.02	%		100.00	%	SECURITIES INVESTMENT		(20	)		2			0

F-259


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Santander Cards Ireland Limited	Ireland		0.00	%		100.00	%		100.00	%	CARDS		(4	)		(2	)		0
Santander Cards Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCIAL SERVICES		90			(51	)		257
Santander Cards UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		549			70			994
Santander Carteras, S.G.C., S.A.	Spain		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		21			0			8
Santander Central Hispano Finance (Delaware) Inc.	United States		100.00	%		0.00	%		100.00	%	FINANCE		3			(2	)		0
Santander Central Hispano Financial Services Limited	Cayman Islands		100.00	%		0.00	%		100.00	%	FINANCE		3			(2	)		0
Santander Central Hispano International Limited	Cayman Islands		100.00	%		0.00	%		100.00	%	FINANCE		2			(1	)		0
Santander Central Hispano Issuances Limited	Cayman Islands		100.00	%		0.00	%		100.00	%	FINANCE		2			0			0
Santander Chile Holding S.A.	Chile		22.11	%		77.43	%		99.54	%	HOLDING COMPANY		1,141			274			309
Santander CHP S.A.	Brazil		0.00	%		75.50	%		92.78	%	ASSET MANAGEMENT		0			2			2
Santander Commercial Paper, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE		1			1			0
Santander Consumer (UK) plc	United Kingdom		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES		170			69			181
Santander Consumer Acquired Receivables Trust 2010-WO	United States		—			(b	)		—		SECURITISATION		0			0			0
Santander Consumer Bank AG	Germany		0.00	%		100.00	%		100.00	%	BANKING		1,489			433			1,569
Santander Consumer Bank AS	Norway		0.00	%		100.00	%		100.00	%	FINANCE		492			71			612
Santander Consumer Bank GmbH	Austria		0.00	%		100.00	%		100.00	%	FINANCE		826			29			856
Santander Consumer Bank S.p.A.	Italy		0.00	%		100.00	%		100.00	%	FINANCE		312			(50	)		437
Santander Consumer Bank Spólka Akcyjna	Poland		0.00	%		70.00	%		70.00	%	BANKING		332			7			217
Santander Consumer Beteiligungsverwaltungsgesellschaft mbH	Germany		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		1			0			1
Santander Consumer Chile S.A.	Chile		51.00	%		0.00	%		51.00	%	FINANCE		15			2			8
Santander Consumer Credit Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		(36	)		(2	)		0
Santander Consumer Debit GmbH	Germany		0.00	%		100.00	%		100.00	%	SERVICES		0			2			0
Santander Consumer Finance a.s.	Czech Republic		0.00	%		100.00	%		100.00	%	LEASING		36			3			26
Santander Consumer Finance Benelux B.V.	Netherlands		0.00	%		100.00	%		100.00	%	FINANCE		15			4			33
Santander Consumer Finance Media S.r.l.	Italy		0.00	%		65.00	%		65.00	%	FINANCE		8			1			5
Santander Consumer Finance Oy	Finland		0.00	%		100.00	%		100.00	%	FINANCE		129			8			157
Santander Consumer Finance Zrt.	Hungary		0.00	%		100.00	%		100.00	%	FINANCE		2			(5	)		0
Santander Consumer Finance, S.A.	Spain		63.19	%		36.81	%		100.00	%	BANKING		7,275			420			5,195
Santander Consumer Finanzia S.r.l.	Italy		0.00	%		100.00	%		100.00	%	FACTORING		34			(15	)		31
Santander Consumer France (j)	France		0.00	%		100.00	%		100.00	%	FINANCE		3			0			3
Santander Consumer Holding Austria GmbH	Austria		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		863			0			863
Santander Consumer Holding GmbH	Germany		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		820			(255	)		2,051
Santander Consumer Iber-Rent, S.L.	Spain		0.00	%		60.00	%		60.00	%	FULL-SERVICE LEASE		60			(2	)		18

F-260


												Millions of euros (a)
												Capital		Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and		(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves		the year			interest
Santander Consumer Leasing GmbH	Germany		0.00	%		100.00	%		100.00	%	LEASING		6		22			6
Santander Consumer Leasing s.r.o.	Czech Republic		0.00	%		100.00	%		100.00	%	FINANCE		1		0			1
Santander Consumer Multirent Spółka z ograniczoną odpowiedzialnością	Poland		0.00	%		42.00	%		60.00	%	LEASING		5		0			3
Santander Consumer Receivables 2 LLC	United States		0.00	%		91.50	%		100.00	%	AUXILIARY		82		150			82
Santander Consumer Receivables 3 LLC	United States		0.00	%		91.50	%		100.00	%	AUXILIARY		0		(29	)		0
Santander Consumer Receivables 4 LLC	United States		0.00	%		91.50	%		100.00	%	AUXILIARY		0		(3	)		0
Santander Consumer Receivables 5 LLC	United States		0.00	%		91.50	%		100.00	%	AUXILIARY		0		(14	)		0
Santander Consumer Receivables 7 LLC	United States		0.00	%		91.50	%		100.00	%	AUXILIARY		0		(45	)		0
Santander Consumer Receivables 8 LLC	United States		0.00	%		91.50	%		100.00	%	AUXILIARY		0		0			0
Santander Consumer Receivables 9 LLC	United States		0.00	%		91.50	%		100.00	%	AUXILIARY		0		0			0
Santander Consumer Receivables Funding LLC	United States		0.00	%		91.50	%		100.00	%	SECURITISATION		0		0			0
Santander Consumer Receivables LLC	United States		0.00	%		91.50	%		100.00	%	AUXILIARY		106		(63	)		106
Santander Consumer Services GmbH	Austria		0.00	%		100.00	%		100.00	%	SERVICES		0		0			0
Santander Consumer USA Inc.	United States		0.00	%		91.50	%		91.50	%	FINANCE		546		328			500
Santander Consumer, EFC, S.A.	Spain		0.00	%		100.00	%		100.00	%	FINANCE		307		(40	)		505
Santander Consumo, S.A. de C.V., SOFOM, E.R.	Mexico		0.00	%		99.86	%		100.00	%	CARDS		162		205			597
Santander Corredora de Seguros Limitada	Chile		0.00	%		76.80	%		100.00	%	INSURANCE BROKERAGE		83		3			57
Santander Corretora de Câmbio e Valores Mobiliários S.A.	Brazil		0.00	%		81.38	%		100.00	%	BROKER-DEALER		134		20			47
Santander de Titulización S.G.F.T., S.A.	Spain		81.00	%		19.00	%		100.00	%	FUND MANAGEMENT COMPANY		4		2			1
Santander Drive Auto Receivables LLC	United States		0.00	%		91.50	%		100.00	%	SECURITISATION		0		0			0
Santander Drive Auto Receivables Trust 2007-2	United States		—			(b	)		—		SECURITISATION		18		(9	)		0
Santander Drive Auto Receivables Trust 2007-3	United States		—			(b	)		—		SECURITISATION		15		(5	)		0
Santander Drive Auto Receivables Trust 2010-1	United States		—			(b	)		—		SECURITISATION		0		123			0
Santander Drive Auto Receivables Trust 2010-2	United States		—			(b	)		—		SECURITISATION		0		39			0
Santander Drive Auto Receivables Trust 2010-3	United States		—			(b	)		—		SECURITISATION		0		20			0
Santander Drive Auto Receivables Trust 2010-A	United States		—			(b	)		—		SECURITISATION		0		108			0
Santander Drive Auto Receivables Trust 2010-B	United States		—			(b	)		—		SECURITISATION		0		11			0
Santander Drive Auto Receivables Trust 2010-H	United States		—			(b	)		—		SECURITISATION		0		28			0
Santander Energías Renovables I, SCR de Régimen Simplificado, S.A.	Spain		56.76	%		0.00	%		56.76	%	VENTURE CAPITAL COMPANY		13		(1	)		8
Santander Envíos, S.A.	Spain		100.00	%		0.00	%		100.00	%	TRANSFER OF FUNDS FOR IMMIGRANTS		1		0			1
Santander Factoring S.A.	Chile		0.00	%		99.54	%		100.00	%	FACTORING		35		3			7
Santander Factoring y Confirming, S.A., E.F.C.	Spain		100.00	%		0.00	%		100.00	%	FACTORING		207		20			126
Santander Financial Exchanges Limited	United Kingdom		100.00	%		0.00	%		100.00	%	FINANCE		313		27			309
Santander Financial Products plc	Ireland		0.00	%		100.00	%		100.00	%	FINANCE		191		0			162
Santander Financial Services, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%	LENDING COMPANY		77		32			103

F-261


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Santander Gestão de Activos, SGPS, S.A.	Portugal		0.00	%		99.73	%		100.00	%	HOLDING COMPANY		14			0			7
Santander Gestión de Recaudación y Cobranzas Ltda.	Chile		0.00	%		99.54	%		100.00	%	FINANCIAL SERVICES		5			(3	)		2
Santander Gestión Inmobiliaria, S.A.	Spain		0.01	%		99.99	%		100.00	%	PROPERTY		2			0			0
Santander Getnet Serviços para Meios de Pagamento S.A.	Brazil		0.00	%		40.69	%		50.00	%	SERVICES		6			0			2
Santander Global Consumer Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		59			6			51
Santander Global Facilities, S.A. de C.V.	Mexico		100.00	%		0.00	%		100.00	%	PROPERTY MANAGEMENT		119			(4	)		130
Santander Global Facilities, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	SERVICES		3			0			1
Santander Global Property Alemania GmbH	Germany		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
Santander Global Property México, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	PROPERTY		0			0			0
Santander Global Property U.S.A., Inc.	United States		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
Santander Global Property, S.L.	Spain		97.21	%		2.79	%		100.00	%	SECURITIES INVESTMENT		231			6			227
Santander Global Services, S.A. (j)	Uruguay		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
Santander Global Sport, S.A.	Spain		100.00	%		0.00	%		100.00	%	SPORTS OPERATIONS		36			(1	)		32
Santander Guarantee Company	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		4			0			3
Santander Harp 1 Limited	Ireland		0.00	%		100.00	%		100.00	%	INACTIVE		0			0			0
Santander Harp 2 Limited	Ireland		0.00	%		100.00	%		100.00	%	INACTIVE		0			0			0
Santander Harp 3 Limited	Ireland		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
Santander Hipotecario 1 Fondo de Titulización de Activos	Spain		—			(b	)		—		SECURITISATION		0			0			0
Santander Hipotecario 2 Fondo de Titulización de Activos	Spain		—			(b	)		—		SECURITISATION		0			0			0
Santander Hipotecario 3 Fondo de Titulización de Activos	Spain		—			(b	)		—		SECURITISATION		0			0			0
Santander Hipotecario 4 Fondo de Titulización de Activos	Spain		—			(b	)		—		SECURITISATION		0			0			0
Santander Hipotecario 5 Fondo de Titulización de Activos	Spain		—			(b	)		—		SECURITISATION		0			0			0
Santander Holanda B.V.	Netherlands		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		12			0			0
Santander Holding Gestión, S.L.	Spain		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		(79	)		0			0
Santander Holding Internacional, S.A.	Spain		99.95	%		0.05	%		100.00	%	HOLDING COMPANY		47			836			0
Santander Holdings USA, Inc.	United States		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		7,503			465			9,304
Santander Infrastructure Capital Limited (j)	United Kingdom		100.00	%		0.00	%		100.00	%	LEASING		0			0			0
Santander Infrastructure Capital Management Limited (j)	United Kingdom		100.00	%		0.00	%		100.00	%	LEASING		1			0			0

F-262


												Millions of euros (a)
												Capital			Net profit		Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for		ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year		interest
Santander Insurance Agency, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%	INSURANCE BROKERAGE		3			2		4
Santander Insurance Agency, U.S., LLC	United States		0.00	%		100.00	%		100.00	%	INSURANCE		0			0		0
Santander Insurance Holding, S.L.	Spain		99.99	%		0.01	%		100.00	%	HOLDING COMPANY		369			21		357
Santander Insurance Services UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		27			2		35
Santander International Bank of Puerto Rico, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%	BANKING		121			2		76
Santander International Debt, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE		2			1		0
Santander Inversiones Limitada	Chile		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		2,021			101		953
Santander Investimentos em Participações S.A. (l)	Brazil		0.00	%		0.00	%		0.00	%	COLLECTION AND PAYMENT SERVICES		—			—		—
Santander Investment Bank Limited	Bahamas		0.00	%		100.00	%		100.00	%	BANKING		98			0		98
Santander Investment Bolsa, S.V., S.A.	Spain		0.00	%		100.00	%		100.00	%	BROKER-DEALER		147			15		104
Santander Investment Chile Limitada	Chile		0.00	%		100.00	%		100.00	%	FINANCE		292			16		129
Santander Investment Colombia S.A.	Colombia		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		7			0		39
Santander Investment I, S.A.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		(1,487	)		393		0
Santander Investment Limited	Bahamas		0.00	%		100.00	%		100.00	%	BROKER-DEALER		(51	)		8		0
Santander Investment Securities Inc.	United States		0.00	%		100.00	%		100.00	%	BROKER-DEALER		89			16		131
Santander Investment Trust Colombia S.A., Sociedad Fiduciaria	Colombia		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		12			2		13
Santander Investment Valores Colombia S.A., Comisionista de Bolsa Comercial	Colombia		0.00	%		97.96	%		100.00	%	BROKER-DEALER		5			4		1
Santander Investment, S.A.	Spain		100.00	%		0.00	%		100.00	%	BANKING		239			130		14
Santander ISA Managers Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGER		18			3		13
Santander Issuances, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE		0			1		0
Santander Lease, S.A., E.F.C.	Spain		70.00	%		30.00	%		100.00	%	LEASING		77			3		35
Santander Leasing S.A. Arrendamento Mercantil	Brazil		0.00	%		81.37	%		99.99	%	LEASING		5,259			448		3,697
Santander Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		1			0		0
Santander Mediación Operador de Banca-Seguros Vinculado, S.A.	Spain		21.00	%		76.00	%		100.00	%	INSURANCE BROKERAGE		2			0		1
Santander Merchant S.A.	Argentina		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		2			0		3
Santander Microcrédito Assessoria Financiera S.A.	Brazil		0.00	%		81.38	%		100.00	%	FINANCIAL SERVICES		3			3		1

F-263


												Millions of euros (a)
												Capital		Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and		(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves		the year			interest
Santander Operaciones Retail, S.A.	Spain		0.00	%		100.00	%		100.00	%	SERVICES		10		1			10
Santander Overseas Bank, Inc. (h)	Puerto Rico		0.00	%		100.00	%		100.00	%	BANKING		450		14			207
Santander PB UK (Holdings) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		159		0			211
Santander Pensiones, S.A., E.G.F.P.	Spain		21.20	%		76.81	%		100.00	%	PENSION FUND MANAGEMENT COMPANY		57		10			50
Santander Pensões — Sociedade Gestora de Fundos de Pensões, S.A.	Portugal		0.00	%		99.73	%		100.00	%	PENSION FUND MANAGEMENT COMPANY		5		1			1
Santander Perpetual, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE		0		1			0
Santander Portfolio Management UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		18		(2	)		13
Santander Private Advisors, Ltd.	United States		100.00	%		0.00	%		100.00	%	ADVISORY SERVICES		2		1			0
Santander Private Banking s.p.a.	Italy		100.00	%		0.00	%		100.00	%	BANKING		52		(15	)		103
Santander Private Banking UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY		310		(10	)		317
Santander Private Equity, S.A., S.G.E.C.R.	Spain		90.00	%		9.97	%		100.00	%	VENTURE CAPITAL MANAGEMENT COMPANY		4		1			4
Santander Private Real Estate Advisory, S.A. Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%	PROPERTY		4		2			0
Santander Real Estate, S.G.I.I.C., S.A.	Spain		0.00	%		99.20	%		100.00	%	FUND MANAGEMENT COMPANY		107		2			0
Santander Río Asset Management Gerente de Fondos Comunes de Inversión S.A.	Argentina		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		3		1			0
Santander Río Seguros S.A.	Argentina		0.00	%		100.00	%		100.00	%	INSURANCE		8		8			8
Santander Río Servicios S.A.	Argentina		0.00	%		99.97	%		100.00	%	ADVISORY SERVICES		0		0			0
Santander Río Sociedad de Bolsa S.A.	Argentina		0.00	%		99.34	%		100.00	%	BROKER-DEALER		3		1			2
Santander Río Trust S.A.	Argentina		0.00	%		99.96	%		100.00	%	FINANCIAL SERVICES		0		0			0
Santander S.A. — Corretora de Câmbio e Títulos (l)	Brazil		0.00	%		0.00	%		0.00	%	BROKER-DEALER		—		—			—
Santander S.A. — Serviços Técnicos, Administrativos e de Corretagem de Seguros	Brazil		0.00	%		81.38	%		100.00	%	INSURANCE BROKERAGE		64		5			52
Santander S.A. Corredores de Bolsa	Chile		0.00	%		88.14	%		100.00	%	BROKER-DEALER		76		10			33
Santander S.A. Sociedad Securitizadora	Chile		0.00	%		76.83	%		100.00	%	FUND MANAGEMENT COMPANY		2		0			1
Santander Securities (Brasil) Corretora de Valores Mobiliários S.A.	Brazil		0.00	%		81.38	%		100.00	%	BROKER-DEALER		31		2			23
Santander Securities Corporation	Puerto Rico		0.00	%		100.00	%		100.00	%	BROKER-DEALER		44		10			18
Santander Seguros de Vida S.A.	Chile		0.00	%		100.00	%		100.00	%	INSURANCE		164		56			11
Santander Seguros Generales S.A.	Chile		99.51	%		0.49	%		100.00	%	INSURANCE		22		0			23
Santander Seguros S.A.	Brazil		0.00	%		81.38	%		100.00	%	INSURANCE		972		109			876

F-264


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Santander Seguros y Reaseguros, Compañía Aseguradora, S.A.	Spain		0.00	%		96.12	%		100.00	%	INSURANCE		555			105			251
Santander Seguros, S.A.	Uruguay		0.00	%		100.00	%		100.00	%	INSURANCE		4			1			5
Santander Service GmbH	Germany		0.00	%		100.00	%		100.00	%	SERVICES		0			0			2
Santander Servicios de Recaudación y Pagos Limitada	Chile		0.00	%		76.74	%		100.00	%	SERVICES		7			1			5
Santander Tecnología y Operaciones A.E.I.E.	Spain		—			(b	)		—		SERVICES		0			0			0
Santander Totta Seguros, Companhia de Seguros de Vida, S.A.	Portugal		0.00	%		99.86	%		100.00	%	INSURANCE		98			21			47
Santander Totta, SGPS, S.A.	Portugal		0.00	%		99.86	%		99.86	%	HOLDING COMPANY		2,812			280			3,321
Santander Trade Services Limited	Hong Kong		0.00	%		100.00	%		100.00	%	SERVICES		17			1			17
Santander UK Foundation Limited	United Kingdom		—			(b	)		—		SECURITISATION		12			1			0
Santander UK Investments	United Kingdom		100.00	%		0.00	%		100.00	%	LEASING		50			0			46
Santander UK Loans Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		9			1			1
Santander UK Nominee Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Santander UK plc	United Kingdom		77.67	%		22.33	%		100.00	%	BANKING		12,816			1,616			20,477
Santander Unit Trust Managers UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGER		18			(1	)		17
Santander US Debt, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE		1			0			0
Santander Venezuela Sociedad Administradora de Entidades de Inversión Colectiva, C.A.	Venezuela		0.00	%		90.00	%		100.00	%	FUND MANAGEMENT COMPANY		0			0			0
Santotta-Internacional, SGPS, Sociedade Unipessoal, Lda.	Portugal		0.00	%		99.73	%		100.00	%	HOLDING COMPANY		64			0			14
Santusa Holding, S.L.	Spain		69.76	%		30.24	%		100.00	%	HOLDING COMPANY		9,833			448			9,215
Saturn Japan II Sub C.V.	Netherlands		0.00	%		69.23	%		0.00	%	HOLDING COMPANY		18			3			15
Saturn Japan III Sub C.V.	Netherlands		0.00	%		72.29	%		0.00	%	HOLDING COMPANY		106			5			79
SC Germany Auto 08-2 Limited	Ireland		—			(b	)		—		SECURITISATION		(4	)		1			0
SC Germany Auto 2009-1 Limited	Ireland		—			(b	)		—		SECURITISATION		0			0			0
SC Germany Auto 2010-1 UG (haftungsbeschränkt)	Germany		—			(b	)		—		SECURITISATION		0			0			0
SC Germany Consumer 08-1 Limited	Ireland		—			(b	)		—		SECURITISATION		0			0			0
SC Germany Consumer 09-1 Limited	Ireland		—			(b	)		—		SECURITISATION		0			0			0
SC Germany Consumer 10-1 Limited	Ireland		—			(b	)		—		SECURITISATION		0			(1	)		0
SC Private Cars 2010-1 Limited	Ireland		—			(b	)		—		SECURITISATION		0			0			0
SCI BANBY PRO	France		0.00	%		90.00	%		100.00	%	PROPERTY		56			(1	)		57
Scottish Mutual Pensions Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		6			0			99
Seguros Santander, S.A., Grupo Financiero Santander	Mexico		0.00	%		99.87	%		100.00	%	INSURANCE		65			27			32
Serfin International Bank and Trust, Limited	Cayman Islands		0.00	%		99.73	%		100.00	%	BANKING		32			0			24
Services and Promotions Delaware Corporation	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		57			0			57
Services and Promotions Miami LLC	United States		0.00	%		100.00	%		100.00	%	PROPERTY		57			0			57

F-265


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Servicio de Alarmas Controladas por Ordenador, S.A.	Spain		99.99	%		0.01	%		100.00	%	SECURITY		2			0			1
Servicios Administrativos y Financieros Ltda.	Chile		0.00	%		100.00	%		100.00	%	SERVICES		1			1			0
Servicios Corporativos Seguros Serfin, S.A. de C.V. (j)	Mexico		0.00	%		99.87	%		100.00	%	SERVICES		0			0			0
Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	SERVICES		10			2			1
Servicios de Cobranzas Fiscalex Ltda.	Chile		0.00	%		99.54	%		100.00	%	SERVICES		0			0			0
Servicios Universia Venezuela S.U.V., S.A.	Venezuela		0.00	%		82.99	%		82.99	%	INTERNET		0			0			0
Sheppards Moneybrokers Limited	United Kingdom		0.00	%		99.99	%		100.00	%	ADVISORY SERVICES		18			0			17
Sherlock Intermediación Correduría de Seguros, S.A.	Spain		0.00	%		100.00	%		100.00	%	INSURANCE BROKERAGE		11			1			9
Silk Finance No. 3 Limited	Ireland		—			(b	)		—		SECURITISATION		(10	)		4			0
Sinvest Inversiones y Asesorías Limitada	Chile		0.00	%		100.00	%		100.00	%	FINANCE		89			7			2
Sistema 4B, S.A.	Spain		52.17	%		13.24	%		66.87	%	CARDS		51			2			9
Sociedad Integral de Valoraciones Automatizadas, S.A.	Spain		100.00	%		0.00	%		100.00	%	APPRAISALS		1			1			1
Sodepro, S.A.	Spain		0.00	%		90.04	%		100.00	%	FINANCE		16			0			12
Solarlaser Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY		56			0			46
Southern Cone Water Management Ltd. (j)	United Kingdom		100.00	%		0.00	%		100.00	%	FINANCE		0			0			0
SOV APEX, LLC	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		28,853			436			24,045
SOV Charter LTD (UK)	United Kingdom		0.00	%		100.00	%		100.00	%	BROKER-DEALER		0			0			0
Sovereign Bank	United States		0.00	%		100.00	%		100.00	%	BANKING		8,578			507			10,303
Sovereign Capital Trust IV	United States		0.00	%		100.00	%		100.00	%	FINANCE		19			0			19
Sovereign Capital Trust IX	United States		0.00	%		100.00	%		100.00	%	FINANCE		3			0			3
Sovereign Capital Trust V	United States		0.00	%		100.00	%		100.00	%	FINANCE		4			0			4
Sovereign Capital Trust VI	United States		0.00	%		100.00	%		100.00	%	FINANCE		7			0			7
Sovereign Community Development Company	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		35			(3	)		33
Sovereign Delaware Investment Corporation	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		101			5			55
Sovereign Leasing LLC	United States		0.00	%		100.00	%		100.00	%	LEASING		1			1			0
Sovereign Precious Metals, LLC	United States		0.00	%		100.00	%		100.00	%	TRADING OF PRECIOUS METALS		84			41			11
Sovereign REIT Holdings, Inc.	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		5,538			58			4,040
Sovereign Securities Corporation, LLC	United States		0.00	%		100.00	%		100.00	%	BROKER-DEALER		42			0			40
Sovereign Spirit Limited (n)	Bermuda		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
Sovereign Trade Services (HK) Limited (j)	Hong Kong		0.00	%		100.00	%		100.00	%	FINANCIAL SERVICES		0			0			0
Sterrebeeck B.V.	Netherlands		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		5,188			670			11,110
Suleyado 2003, S.L.	Spain		0.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT		0			0			0

F-266


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Suzuki Servicios Financieros, S.L.	Spain		0.00	%		51.00	%		51.00	%	INTERMEDIATION		0			0			0
Swesant SA	Switzerland		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		1			1,114			0
Task Moraza, S.L. (e)	Spain		0.00	%		73.22	%		73.22	%	HOLDING COMPANY		24			1			27
Taxagest Sociedade Gestora de Participações Sociais, S.A.	Portugal		0.00	%		99.73	%		100.00	%	HOLDING COMPANY		63			(2	)		0
Teatinos Siglo XXI Inversiones Limitada	Chile		50.00	%		50.00	%		100.00	%	HOLDING COMPANY		1,235			365			516
Teylada, S.A. in liquidation (j)	Spain		11.11	%		88.89	%		100.00	%	SECURITIES INVESTMENT		0			0			0
The Alliance & Leicester Corporation Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY		14			0			14
The HSH AIV 4 Trust	United States		0.00	%		69.60	%		4.99	%	HOLDING COMPANY		6			(2	)		5
The JCF HRE AIV II-A Trust	United States		0.00	%		69.91	%		4.99	%	HOLDING COMPANY		0			0			0
The National & Provincial Building Society Pension Fund Trustees Limited (d) (j)	United Kingdom		—			(b	)		—		ASSET MANAGEMENT COMPANY		0			0			0
The Prepaid Card Company Limited	United Kingdom		0.00	%		80.00	%		80.00	%	FINANCE		(27	)		14			0
The WF Company Limited (j)	United Kingdom		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES		1			0			0
Time Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
Time Retail Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SERVICES		2			0			2
Títulos de Renta Fija, S.A.	Spain		100.00	%		0.00	%		100.00	%	SECURITIES INVESTMENT		0			0			0
Tornquist Asesores de Seguros S.A. (j)	Argentina		0.00	%		99.99	%		99.99	%	ADVISORY SERVICES		0			0			0
Totta & Açores Inc. Newark	United States		0.00	%		99.73	%		100.00	%	BANKING		1			0			1
Totta (Ireland), PLC (h)	Ireland		0.00	%		99.73	%		100.00	%	FINANCE		276			68			341
Totta Crédito Especializado, Instituição Financiera de Crédito, S.A. (IFIC)	Portugal		0.00	%		99.84	%		100.00	%	LEASING		134			25			42
Totta Urbe — Empresa de Administração e Construções, S.A.	Portugal		0.00	%		99.73	%		100.00	%	PROPERTY		116			(1	)		148
Triad Automobile Receivables Trust 2006-B	United States		—			(b	)		—		SECURITISATION		2			5			0
Triad Automobile Receivables Trust 2006-C	United States		—			(b	)		—		SECURITISATION		3			9			0
Triad Automobile Receivables Trust 2007-A	United States		—			(b	)		—		SECURITISATION		6			17			0
Triad Automobile Receivables Trust 2007-B	United States		—			(b	)		—		SECURITISATION		3			12			0
Triad Financial Residual Special Purpose LLC	United States		0.00	%		91.50	%		100.00	%	AUXILIARY		0			0			0
Triad Financial Special Purpose LLC	United States		0.00	%		91.50	%		100.00	%	SECURITISATION		0			0			0
Tuttle & Son Limited	United Kingdom		0.00	%		100.00	%		100.00	%	COLLECTION AND PAYMENT SERVICES		1			0			1
UNIFIN S.p.A.	Italy		0.00	%		100.00	%		100.00	%	FINANCE		40			7			82
Universia Brasil S.A.	Brazil		0.00	%		100.00	%		100.00	%	INTERNET		3			(2	)		1

F-267


												Millions of euros (a)
												Capital			Net profit			Amount of
		% Ownership held by the Bank						% of voting power				and			(loss) for			ownership
Entity	Location	Direct			Indirect			(k)			Line of business	Reserves			the year			interest
Universia Chile S.A.	Chile		0.00	%		82.42	%		82.42	%	INTERNET		1			(1	)		0
Universia Colombia, S.A.	Colombia		0.00	%		99.95	%		99.95	%	INTERNET		1			0			0
Universia Holding, S.L.	Spain		99.98	%		0.02	%		100.00	%	HOLDING COMPANY		28			(20	)		11
Universia México, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	INTERNET		1			(1	)		0
Universia Perú, S.A.	Peru		0.00	%		77.50	%		77.50	%	INTERNET		1			(1	)		0
Universia Puerto Rico, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%	INTERNET		1			0			0
UPFC Auto Receivables Trust 2007-A	United States		—			(b	)		—		SECURITISATION		0			3			0
UPFC Auto Receivables Trust 2007-B	United States		—			(b	)		—		SECURITISATION		0			4			0
Valores Santander Casa de Bolsa, C.A.	Venezuela		0.00	%		90.00	%		90.00	%	BROKER-DEALER		6			1			8
Viking Collection Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Vista Capital de Expansión, S.A. SGECR	Spain		0.00	%		50.00	%		50.00	%	VENTURE CAPITAL MANAGEMENT COMPANY		4			(3	)		0
Vista Desarrollo, S.A. SCR de Régimen Simplificado	Spain		100.00	%		0.00	%		100.00	%	VENTURE CAPITAL COMPANY		251			(13	)		158
W.N.P.H. Gestão e Investimentos Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT		0			0			0
Wallcesa, S.A.	Spain		100.00	%		0.00	%		100.00	%	SECURITIES INVESTMENT		(678	)		(127	)		0
Waypoint Insurance Group, Inc.	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		3			0			13
Webmotors S.A.	Brazil		0.00	%		81.38	%		100.00	%	SERVICES		18			5			8
Wex Point España, S.L.	Spain		0.00	%		90.04	%		100.00	%	SERVICES		1			0			1
Whitewick Limited	Jersey		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0			0
WIM Servicios Corporativos, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES		0			0			0
ZS Insurance América, S.L.	Spain		0.00	%		100.00	%		100.00	%	COMPANY MANAGEMENT		0			0			0


(a)		Amount per books of each company at December 31, 2010, disregarding any interim dividends paid in the year. The amount of the ownership interest (net of allowances) is the figure per the books of each holding company multiplied by the Group’s percentage of ownership, disregarding impairment of goodwill on consolidation. The data on foreign companies were translated to euros at the year-end exchange rates.

(b)		Companies over which effective control is exercised.

(c)		Data from the latest approved financial statements at December 31, 2009.

(d)		Data from the latest approved financial statements at March 31, 2010.

(e)		Data from the latest approved financial statements at June 30, 2010.

(f)		Data from the latest approved financial statements at September 30, 2010.

(g)		Data from the latest approved financial statements at April 30, 2010.

F-268

Exhibit II

Companies in which Santander Group has ownership interests of more than 5% (g), associates of Santander Group and jointly controlled entities


												Millions of euros (a)
		% of Ownership held by the Bank												Capital and			Net profit (loss)
Entity	Location	Direct			Indirect			% of voting power (f)			Line of business	Assets		Reserves			for the year
26 Rue Villiot S.A.S.	France		0.00	%		35.00	%		50.00	%	PROPERTY		132		51			2
ABSLine Multimedia, S.L.	Spain		0.00	%		47.50	%		47.50	%	MARKETING		0		0			(1	)
Administrador Financiero de Transantiago S.A.	Chile		0.00	%		15.35	%		20.00	%	COLLECTION AND PAYMENT SERVICES		81		4			2
Affirmative Insurance Holdings Inc. (b)	United States		0.00	%		5.00	%		0.00	%	INSURANCE		562		166			(29	)
Affirmative Investment LLC	United States		0.00	%		9.86	%		4.99	%	HOLDING COMPANY		16		24			(8	)
Agres, Agrupación Restauradores, S.L.	Spain		0.00	%		38.73	%		43.01	%	RESTAURANTS		3		2			0
Aguas de Fuensanta, S.A.	Spain		0.00	%		38.01	%		42.21	%	FOOD		37		10			0
Alcover AG	Switzerland		27.91	%		0.00	%		27.91	%	INSURANCE		419		153			(16	)
Algebris Global Financials Fund (b)	Cayman Islands		9.14	%		0.00	%		9.14	%	HOLDING COMPANY		797		699			54
Allfunds Alternative, S.V., S.A. (Sole-Shareholder Company)	Spain		0.00	%		50.00	%		50.00	%	BROKER-DEALER		4		4			0
Allfunds Bank, S.A.	Spain		50.00	%		0.00	%		50.00	%	BANKING		246		99			12
Allfunds International S.A.	Luxembourg		0.00	%		50.00	%		50.00	%	FINANCIAL SERVICES		3		2			0
Allfunds Nominee Limited	United Kingdom		0.00	%		50.00	%		50.00	%	HOLDING COMPANY		0		0			0
Andalucarthage Holding Société Holding Offshore S.A.	Morocco		0.00	%		20.11	%		20.11	%	HOLDING COMPANY		165		126			0
Anekis, S.A.	Spain		24.75	%		24.75	%		49.50	%	ADVERTISING		4		2			0
Arena Communications Network, S.L.	Spain		20.00	%		0.00	%		20.00	%	ADVERTISING		54		4			1
Attijari Bank Société Anonyme (consolidated) (b)	Tunisia		0.00	%		10.97	%		10.97	%	BANKING		1,818		134			24
Attijari Factoring Maroc, S.A.	Morocco		0.00	%		28.41	%		28.41	%	FACTORING		11		4			2
Attijari International Bank Société Anonymé	Morocco		50.00	%		0.00	%		50.00	%	BANKING		14		2			1
Autopistas del Sol S.A. (b)	Argentina		0.00	%		14.17	%		14.17	%	MOTORWAY CONCESSIONS		257		33			(31	)
Banco Caixa Geral Totta de Angola, S.A.	Angola		0.00	%		24.92	%		24.99	%	BANKING		800		159			31
Banco Internacional da Guiné-Bissau, S.A. (d) (l)	Guinea Bissau		0.00	%		48.87	%		49.00	%	BANKING		12		(30	)		(1	)
Base Central Rede Serviços Imobiliarios, S.A.	Portugal		0.00	%		49.80	%		49.80	%	PROPERTY SERVICES		1		0			0
Bee Cave (TX) HC Apartments Syndicated Holdings, LLC	United States		0.00	%		33.33	%		33.33	%	PROPERTY		2		1			1
Benim-Sociedade Imobiliária, S.A. (consolidated) (b)	Portugal		0.00	%		25.74	%		25.81	%	PROPERTY		12		7			(1	)
Cantabria Capital, SGECR, S.A.	Spain		50.00	%		0.00	%		50.00	%	VENTURE CAPITAL MANAGEMENT COMPANY		0		0			0
Carnes Estellés, S.A.	Spain		0.00	%		19.28	%		21.41	%	FOOD		27		5			(3	)

F-270


												Millions of euros (a)
		% of Ownership held by the Bank												Capital and			Net profit (loss)
Entity	Location	Direct			Indirect			% of voting power (f)			Line of business	Assets		Reserves			for the year
Cartera del Norte, S.A.	Spain		0.00	%		32.51	%		36.10	%	FINANCE		1		1			0
Centro de Compensación Automatizado S.A.	Chile		0.00	%		25.58	%		33.33	%	COLLECTION AND PAYMENT SERVICES		2		1			0
Centro para el Desarrollo, Investigación y Aplicación de Nuevas Tecnologías, S.A.	Spain		0.00	%		44.12	%		49.00	%	TECHNOLOGY		1		1			0
Charta Leasing No. 1 Limited (j)	United Kingdom		0.00	%		50.00	%		50.00	%	LEASING		107		(9	)		(4	)
Charta Leasing No. 2 Limited	United Kingdom		0.00	%		50.00	%		50.00	%	LEASING		53		(10	)		(4	)
Companhia de Arrendamento Mercantil RCI Brasil	Brazil		0.00	%		32.45	%		39.88	%	LEASING		310		209			20
Companhia de Crédito, Financiamento e Investimento RCI Brasil	Brazil		0.00	%		32.21	%		39.58	%	FINANCE		1,186		98			31
Compañía Concesionaria del Túnel de Sóller, S.A.	Spain		0.00	%		29.44	%		32.70	%	CONSTRUCTION		45		18			1
Compañía Española de Seguros de Crédito a la Exportación, S.A., Compañía de Seguros y Reaseguros (b)	Spain		13.95	%		6.47	%		21.08	%	CREDIT INSURANCE		842		140			22
Comprarcasa Servicios Inmobiliarios, S.A.	Spain		0.00	%		47.50	%		47.50	%	PROPERTY SERVICES		2		1			0
Dirgenfin, S.L.	Spain		0.00	%		36.02	%		40.00	%	REAL ESTATE DEVELOPMENT		56		5			0
Ensafeca Holding Empresarial, S.L.	Spain		0.00	%		31.82	%		31.82	%	TELECOMMUNICATIONS		9		10			(2	)
Espais Promocat, S.L.	Spain		0.00	%		45.02	%		50.00	%	PROPERTY		24		(1	)		(2	)
Faviren Ahorro SICAV, S.A.	Spain		0.00	%		18.56	%		20.61	%	OPEN-END INVESTMENT COMPANY		3		8			0
FC2Egestión, S.L.	Spain		0.00	%		50.00	%		50.00	%	ENVIRONMENTAL MANAGEMENT		1		0			1
Federal Home Loan Bank of Pittsburgh (b)	United States		0.00	%		14.76	%		14.76	%	BANKING		48,863		2,779			(28	)
Fondo de Titulización de Activos UCI 11	Spain		—			(h	)		—		SECURITISATION		300		0			0
Fondo de Titulización de Activos UCI 14	Spain		—			(h	)		—		SECURITISATION		770		0			0
Fondo de Titulización de Activos UCI 15	Spain		—			(h	)		—		SECURITISATION		878		0			0
Fondo de Titulización de Activos UCI 16	Spain		—			(h	)		—		SECURITISATION		1,271		0			0
Fondo de Titulización de Activos UCI 17	Spain		—			(h	)		—		SECURITISATION		1,086		0			0
Fondo de Titulización de Activos UCI 18	Spain		—			(h	)		—		SECURITISATION		1,427		0			0
Fondo de Titulización de Activos UCI 19	Spain		—			(h	)		—		SECURITISATION		966		0			0
Fondo de Titulización Hipotecaria UCI 10	Spain		—			(h	)		—		SECURITISATION		207		0			0
Fondo de Titulización Hipotecaria UCI 12	Spain		—			(h	)		—		SECURITISATION		404		0			0
Friedrichstrasse, S.L.	Spain		0.00	%		35.00	%		35.00	%	PROPERTY		42		43			0
Gire S.A.	Argentina		0.00	%		57.92	%		58.33	%	COLLECTION AND PAYMENT SERVICES		59		6			6
Granoller’s Broker, S.L.	Spain		0.00	%		12.50	%		25.00	%	FINANCE		0		0			0
Grupo Alimentario de Exclusivas, S.A.	Spain		0.00	%		36.43	%		40.46	%	FOOD		6		0			0
Grupo Konecta Centros Especiales de Empleo, S.L.	Spain		0.00	%		48.25	%		48.25	%	TELEMARKETING		0		0			0
Grupo Konecta Maroc S.A.R.L. à associé unique	Morocco		0.00	%		48.25	%		48.25	%	TELEMARKETING		0		0			0

F-271


												Millions of euros (a)
		% of Ownership held by the Bank												Capital and			Net profit (loss)
Entity	Location	Direct			Indirect			% of voting power (f)			Line of business	Assets		Reserves			for the year
Grupo Konecta UK Limited	United Kingdom		0.00	%		48.20	%		48.20	%	FINANCE		0		(1	)		0
Grupo Konectanet México, S.A. de C.V.	Mexico		0.00	%		48.25	%		48.25	%	TELEMARKETING		0		0			0
Grupo Konectanet, S.L.	Spain		0.00	%		48.25	%		48.25	%	HOLDING COMPANY		19		6			0
Helican Desarrollo Eólico, S.L.	Spain		0.00	%		46.00	%		46.00	%	ELECTRICITY		0		0			0
HLC — Centrais de Cogeração, S.A. (c)	Portugal		0.00	%		24.45	%		24.49	%	ELECTRICITY		2		(2	)		(2	)
Home Services On Line Solutions, S.L.	Spain		0.00	%		48.25	%		48.25	%	SERVICES		0		0			0
Hyundai Capital Germany GmbH	Germany		0.00	%		49.99	%		49.99	%	SERVICES		2		2			0
Imperial Holding S.C.A. (i)	Luxembourg		0.00	%		37.06	%		37.06	%	SECURITIES INVESTMENT		190		39			0
Inmo Alemania Gestión de Activos Inmobiliarios, S.A.	Spain		0.00	%		19.22	%		20.00	%	HOLDING COMPANY		99		99			0
J.C. Flowers I L.P. (b)	United States		16.80	%		0.00	%		4.99	%	HOLDING COMPANY		100		73			25
JC Flowers AIV II L.P. (b)	United States		0.00	%		9.80	%		4.99	%	HOLDING COMPANY		10		8			2
JC Flowers AIV P L.P. (b)	Canada		0.00	%		6.90	%		4.99	%	HOLDING COMPANY		119		119			(2	)
Kassadesign 2005, S.L.	Spain		0.00	%		45.02	%		50.00	%	PROPERTY		55		4			(1	)
Konecta Activos Inmobiliarios, S.L.	Spain		0.00	%		49.08	%		49.08	%	PROPERTY		8		0			0
Konecta Brazil Outsourcing Ltda.	Brazil		0.00	%		48.24	%		48.24	%	SERVICES		0		0			0
Konecta Broker, S.L.	Spain		0.00	%		48.25	%		48.25	%	SERVICES		0		1			0
Konecta Bto, S.L.	Spain		0.00	%		48.25	%		48.25	%	TELECOMMUNICATIONS		40		37			3
Konecta Chile S.A.	Chile		0.00	%		35.70	%		35.70	%	SERVICES		5		5			0
Konecta Colombia Grupo Konecta Colombia Ltda	Colombia		0.00	%		48.25	%		48.25	%	TELEMARKETING		0		0			0
Konecta Field Marketing, S.A.	Spain		0.00	%		48.25	%		48.25	%	MARKETING		0		0			0
Konecta Marketing & Publicidad, S.L.	Spain		0.00	%		30.88	%		30.88	%	SERVICES		0		0			0
Konecta Portugal, Lda.	Portugal		0.00	%		48.25	%		48.25	%	MARKETING		1		1			0
Konecta Servicios Administrativos y Tecnológicos, S.L.	Spain		0.00	%		48.25	%		48.25	%	SERVICES		0		0			0
Konecta Servicios de Empleo ETT, S.A.	Spain		0.00	%		48.25	%		48.25	%	TEMPORARY EMPLOYMENT AGENCY		0		(1	)		0
Konectanet Andalucía, S.L.	Spain		0.00	%		48.25	%		48.25	%	SERVICES		1		0			1
Konectanet Comercialización, S.L.	Spain		0.00	%		48.25	%		48.25	%	MARKETING		1		1			0
Kontacta Comunicaciones, S.A.	Spain		0.00	%		36.19	%		36.19	%	SERVICES		2		1			1
Kontacta Top Ten, S.L.	Spain		0.00	%		36.19	%		36.19	%	SERVICES		0		0			0
Luri 3, S.A.	Spain		0.00	%		9.62	%		10.00	%	PROPERTY		36		30			1
Maxamcorp Holding, S.L. (consolidated) (e)	Spain		0.00	%		22.62	%		22.62	%	HOLDING COMPANY		582		150			6
Medimobiliario Edições Period. e Multimedia, S.A. (k)	Portugal		0.00	%		0.00	%		0.00	%	PROPERTY SERVICES		—		—			—
Metrovacesa, S.A. (consolidated) (b)	Spain		14.51	%		8.22	%		23.63	%	PROPERTY		8,626		1,768			(889	)
Neoen, SGPS, S.A.	Portugal		0.00	%		50.00	%		50.00	%	ELECTRICITY		42		0			0

F-272


												Millions of euros (a)
		% of Ownership held by the Bank												Capital and			Net profit (loss)
Entity	Location	Direct			Indirect			% of voting power (f)			Line of business	Assets		Reserves			for the year
New PEL S.a.r.l. (b)	Luxembourg		0.00	%		6.90	%		0.00	%	HOLDING COMPANY		46		33			11
Norchem Holdings e Negócios S.A.	Brazil		0.00	%		17.70	%		21.75	%	HOLDING COMPANY		100		43			4
Norchem Participações e Consultoria S.A.	Brazil		0.00	%		40.69	%		50.00	%	BROKER-DEALER		59		24			2
Olivant Investments Switzerland S.A. (b)	Luxembourg		0.00	%		34.97	%		34.97	%	HOLDING COMPANY		76		(1,827	)		289
Olivant Limited (consolidated) (m)	Guernsey		0.00	%		9.00	%		9.00	%	HOLDING COMPANY		244		239			(237	)
Omega Financial Services GmbH	Germany		0.00	%		50.00	%		50.00	%	SERVICES		2		0			2
Operadora de Activos Alfa, S.A. De C.V.	Mexico		0.00	%		49.98	%		49.98	%	FINANCE		1		1			0
Operadora de Activos Beta, S.A. de C.V.	Mexico		0.00	%		49.99	%		49.99	%	FINANCE		2		2			0
Parque Solar la Robla, S.L.	Spain		0.00	%		85.54	%		25.00	%	ELECTRICITY		14		0			0
Parque Solar Saelices, S.L.	Spain		0.00	%		85.54	%		25.00	%	ELECTRICITY		72		4			2
Partang, SGPS, S.A.	Portugal		0.00	%		48.87	%		49.00	%	HOLDING COMPANY		95		87			5
Private Estate Life S.A. (m)	Luxembourg		0.00	%		5.87	%		0.00	%	INSURANCE		2,662		53			14
Prodesur Mediterráneo, S.L.	Spain		0.00	%		45.02	%		50.00	%	PROPERTY		51		17			(2	)
Programa Multi Sponsor PMS, S.A.	Spain		24.75	%		24.75	%		49.50	%	ADVERTISING		5		5			0
Proinsur Mediterráneo, S.L.	Spain		0.00	%		45.02	%		50.00	%	PROPERTY		67		22			(2	)
Promoreras Desarrollo de Activos, S.L.	Spain		0.00	%		31.51	%		35.00	%	PROPERTY		140		14			(5	)
PSA Finance PLC	United Kingdom		0.00	%		50.00	%		50.00	%	LEASING		5		5			0
Puntoform, S.L.	Spain		0.00	%		48.25	%		48.25	%	TRAINING		1		0			0
Q 205 Real Estate GmbH	Germany		0.00	%		17.50	%		17.50	%	PROPERTY		252		62			3
Quiero Televisión, S.A., Sole-Shareholder Company	Spain		0.00	%		31.82	%		31.82	%	TELECOMMUNICATIONS		78		7			0
Real Seguros Vida e Previdência S.A. (k)	Brazil		0.00	%		0.00	%		0.00	%	INSURANCE		—		—			—
Redbanc S.A.	Chile		0.00	%		25.66	%		33.43	%	SERVICES		20		7			1
Redbanc, S.A.	Uruguay		0.00	%		25.00	%		25.00	%	SERVICES		2		0			0
Renova Energía S.A. (b)	Brazil		0.00	%		6.77	%		8.32	%	ELECTRICITY		132		63			(1	)
Retama Real Estate, S.L.	Spain		0.00	%		50.00	%		50.00	%	SERVICES		49		0			(3	)
RFS Holdings B.V. (n)	Netherlands		1.03	%		0.00	%		1.03	%	HOLDING COMPANY		4,059		(743	)		1,407
Saniso S.r.l.	Italy		0.00	%		50.00	%		50.00	%	ELECTRICITY PRODUCTION		15		0			0
Saudi Hollandi Bank (consolidated) (b)	Saudi Arabia		0.00	%		11.16	%		11.16	%	BANKING		12,042		1,130			18
SC Littleton HH LLC	United States		0.00	%		24.10	%		24.10	%	PROPERTY		1		1			0
Shinsei Bank, Ltd. (consolidated) (e)	Japan		0.00	%		6.72	%		1.85	%	BANKING		104,710		7,134			(1,290	)
Sistarbanc S.R.L. (b)	Uruguay		0.00	%		20.00	%		20.00	%	CARDS		2		2			0
Sociedad Interbancaria de Depósitos de Valores S.A.	Chile		0.00	%		22.48	%		29.29	%	SECURITIES DEPOSITORY INSTITUTION		3		2			1
Sociedad Promotora Bilbao Plaza Financiera, S.A. (b)	Spain		7.74	%		25.04	%		33.90	%	ADVISORY SERVICES		2		2			0
Solar Energy Capital Europe S.à.r.l.	Luxembourg		0.00	%		33.33	%		33.33	%	HOLDING COMPANY		7		2			0
Tecnologia Bancária S.A.	Brazil		0.00	%		20.82	%		20.82	%	ATMs		1,145		72			5
Teka Industrial, S.A. (consolidated) (b)	Spain		0.00	%		10.00	%		10.00	%	DOMESTIC APPLIANCES		674		285			(4	)
Trabajando.com Chile S.A.	Chile		0.00	%		33.33	%		33.33	%	SERVICES		6		7			(2	)
Transbank S.A.	Chile		0.00	%		25.11	%		32.71	%	CARDS		332		8			2
Transolver Finance EFC, S.A.	Spain		0.00	%		50.00	%		50.00	%	LEASING		146		26			(15	)

F-273


												Millions of euros (a)
		% of Ownership held by the Bank												Capital and		Net profit (loss)
Entity	Location	Direct			Indirect			% of voting power (f)			Line of business	Assets		Reserves		for the year
Turyocio Viajes y Fidelización, S.A.	Spain		0.00	%		32.21	%		32.21	%	TRAVEL		0		0		0
U.C.I., S.A.	Spain		50.00	%		0.00	%		50.00	%	HOLDING COMPANY		211		108		(3	)
UCI Mediação de Seguros Unipessoal, Lda.	Portugal		0.00	%		50.00	%		50.00	%	INSURANCE BROKERAGE		0		0		0
UFI Servizi S.r.l. (b)	Italy		0.00	%		23.17	%		23.17	%	SERVICES		0		0		0
Unicre-Instituição Financeira de Crédito, S.A.	Portugal		0.00	%		21.44	%		21.50	%	FINANCE		303		62		11
Unión de Créditos Inmobiliarios, S.A., EFC	Spain		0.00	%		50.00	%		50.00	%	MORTGAGE LOAN COMPANY		8,318		212		25
Vector Software Factory, S.L.	Spain		0.00	%		21.60	%		21.60	%	IT		13		1		2
Viking Consortium Holdings Limited (consolidated)	United Kingdom		0.00	%		25.04	%		25.04	%	HOLDING COMPANY		1		0		0
Wtorre Empreendimentos Imobiliários S.A. (consolidated) (b)	Brazil		0.00	%		6.95	%		8.55	%	PROPERTY		1,703		264		(67	)


(a)		Amounts per the books of each company generally at December 31, 2010, unless otherwise stated, because the financial statements have not yet been authorised for issue. The data on foreign companies were translated to euros at the year-end exchange rates.

(b)		Data from the latest approved financial statements at December 31, 2009.

(c)		Data from the latest approved financial statements at December 31, 2003.

(d)		Data from the latest approved financial statements at April 30, 2002.

(e)		Data at March 31, 2010, this entity’s year-end.

(f)		Pursuant to Article 3 of Royal Decree 1159/2010, of September 17, approving the rules for the preparation of consolidated financial statements, in order to determine voting power, the voting power relating to subsidiaries or to other parties acting in their own name but on behalf of Group companies were added to the voting power directly held by the Parent. Accordingly, the number of votes corresponding to the Parent in relation to companies over which it exercises indirect control is the number corresponding to each subsidiary holding a direct ownership interest in such companies.

(g)		Excluding the Group companies listed in Appendix I and those the interest of which with respect to the fair presentation that the consolidated financial statements must express (pursuant to Article 48 of the Spanish Commercial Code and Article 260 of the Spanish Limited Liability Companies Law (Ley de Sociedades de Capital)) is not material.

(h)		Companies over which effective control is exercised.

(i)		Data from the latest approved financial statements at July 31, 2010.

(j)		Data from the latest approved financial statements at September 30, 2010.

(k)		Company in merger process with another Group company. Awaiting registration at Mercantile Registry.

(l)		Company in liquidation at December 31, 2010.

(m)		Data from the latest approved financial statements at December 31, 2008.

(n)		Considered an associate.

F-274

Exhibit 4

Exhibit IV

Notifications of acquisitions and disposals of investments in 2010

(Article 155 of the Spanish Limited Liability Companies Law (Ley de Sociedades de Capital) and Article 53 of Securities Market Law 24/1998):

On January 14, 2010, the CNMV registered a notification from Banco Santander rectifying the significant ownership interest (exceeding the threshold of 3%) of Banco Santander, S.A. in GRUPO FERROVIAL, S.A. registered at the CNMV on December 24, 2009, in which 2008 instead of 2009 was indicated as the date on which the ownership interest exceeded 3% (December 18, 2009).

On February 26, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BME had fallen below 3% on February 22, 2010.

On April 28, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER had exceeded 3% on April 20, 2010.

On May 10, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER had fallen below 3% on May 3, 2010.

On May 19, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER had exceeded 3% on May 11, 2010.

On June 1, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANESTO had exceeded 90% on May 24, 2010.

On June 1, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANESTO had fallen below 90% on May 27, 2010.

On June 4, 2010, the CNMV registered a Notification of Financial Instruments submitted by Banco Santander relating to financial instruments tied to shares of TELEFONICA, since the threshold of 3% had been exceeded on May 27, 2010.

On June 24, 2010, the CNMV registered a Notification of Financial Instruments submitted by Banco Santander relating to financial instruments tied to shares of TELEFONICA, since the ownership interest had fallen below the threshold of 3% on June 18, 2010.

On July 8, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER had fallen below 3% on June 30, 2010.

On July 8, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER had exceeded the threshold of 3% on July 1, 2010.

F-276

On July 20, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in SOS CORPORACIÓN ALIMENTARIA, S.A. had exceeded the threshold of 3% on July 15, 2010.

On July 30, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in SOS CORPORACIÓN ALIMENTARIA, S.A. had fallen below 3% on July 16, 2010.

On August 24, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER had fallen below 3% on August 16, 2010.

On September 16, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER had reached 3% on September 8, 2010.

On September 16, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER had fallen below 3% on September 9, 2010.

On September 22, 2010, the CNMV registered a Notification of Financial Instruments submitted by Banco Santander relating to financial instruments tied to shares of TELEFONICA, since the threshold of 3% had been exceeded on September 14, 2010.

On September 22, 2010, the CNMV registered a Notification of Financial Instruments submitted by Banco Santander relating to financial instruments tied to shares of TELEFONICA, since the ownership interest had fallen below the threshold of 3% on September 17, 2010.

On September 29, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER had exceeded 3% on September 21, 2010.

On September 29, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER had fallen below 3% on September 27, 2010.

On October 11, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER had exceeded 3% on October 1, 2010.

On October 11, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER had fallen below 3% on October 6, 2010.

On October 19, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER had exceeded 3% on October 11, 2010.

On October 19, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER had fallen below 3% on October 12, 2010.

On October 29, 2010, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANESTO had exceeded 90% on October 21, 2010.

F-277

Exhibit 5

Exhibit V

Other information on the share capital of the Group’s banks

Following is certain information on the share capital of the Group’s banks.

1) Banco Santander (Brasil) S.A.

a) Number of equity instruments held by the Group

The Group holds 174,700,972,307 ordinary shares and 150,024,316,265 preference shares through its subsidiaries Sterrebeeck B.V., Grupo Empresarial Santander, S.L. and Santander Insurance Holding, S.L.

The shares composing the share capital of Banco Santander (Brasil) S.A., have no par value, and there are no capital payments payable.

In accordance with current Bylaws (Article 5.7), the preference shares do not confer voting rights on their holders, except under the following circumstances:

a) In the event of the transformation, merger, consolidation or spin-off of the company.

b) In the event of approval of agreements between the company and the shareholders, either directly through third parties or other companies in which the shareholders hold a stake, provided that, due to legal or Bylaw provisions, they are submitted to a general meeting.

c) In the event of an assessment of the assets used to increase the company’s share capital.

d) The selection of a specialized institution or company to determine the economic value of the company.

e) Amendments and repeals of bylaw provisions that change any of the requirements envisaged in point 4.1 of Level 2 of Best Practices for Corporate Governance of BM&FBOVESPA (Brazilian Stock, Mercantile and Futures Exchange), although the voting rights prevailed upon entry into force of the Agreement for the Adoption of Best Practices on Corporate Governance, Level 2.

The shareholders at the annual general meeting can decide to convert the preference shares into ordinary shares at any time and to establish a ratio for the conversion.

However, the preference shares do have the following advantages (Article 5.6):

a) Their dividends are 10% higher than those on ordinary shares.

b) Priority in the distribution of dividends.

c) Participation, on the same terms as ordinary shares, in capital increases resulting from the capitalization of reserves and profits and in the distribution of bonus shares arising from the capitalization of retained earnings, reserves or any other funds.

d) Priority in the reimbursement of capital in the event of the dissolution of the company.

F-278

e) In the event of a public offering due to a change in control of the company, the holders of preference shares are guaranteed the right to sell the shares at the same price paid for the block of shares that changed hands as part of the change in control, i.e. they are treated the same as shareholders with voting rights.

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the annual general meeting

The company is authorized to increase share capital, subject to approval by the board of directors, up to a limit of 500,000,000,000 ordinary shares or preference shares, and without the need to maintain any ratio between any of the different classes of shares, provided they remain within the limits of the maximum number of preference shares established by Law.

At present the share capital consists of 399,044,116,905 shares (212,841,731,754 ordinary shares and 186,202,385,151 preference shares).

As approved by the directors at board meetings, Banco Santander (Brasil), S.A. carried out two capital increases within its authorized share capital limits, as follows:

The first was on August 18, 2009, in which 28,875,000,000 registered ordinary shares and 26,250,000,000 registered preference shares were issued, with no par value.

The second was on October 29, 2009, in which the Bank issued 35,955,648 shares (“Units”), representing 55 ordinary shares and 50 preference shares which, in total, amount to 1,977,560,640 ordinary shares and 1,797,782,400 preference shares.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Not applicable.

e) Specific circumstances that restrict the availability of reserves

The only restriction on the availability of Banco Santander (Brasil) S.A.’s reserves relates to the legal reserve (restricted reserves), which can only be used to offset losses or to increase capital.

The legal reserve is provided for in Article 196 of the Public Limited Liability Companies Law which establishes that before being allocated to any other purpose, 5% of profit must be transferred to the constitution of a legal reserve which must not exceed 20% of share capital.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Listed equity instruments

All the shares are listed on the BM&FBOVESPA and the share deposit certificates (Units) are listed on the New York Stock Exchange (NYSE).

F-279

2) Banco Español de Crédito, S.A. (Banesto)

a) Number of equity instruments held by the Group

The share capital of Banco Español de Crédito, S.A. consists of 687,386,798 fully subscribed and paid shares of EUR 0.79 par value each, all with identical voting and dividend rights.

At December 31, 2010, the Parent and its subsidiaries held 89.27% of the share capital (613,696,098 ordinary shares), of which Banco Santander, S.A. held 606,345,555 shares (88.21%) and Cántabro Catalana de Inversiones, S.A. held 7,350,543 shares (1.069%). At that date the Banesto Group held 3,382,126 treasury shares previously acquired under authorization of the annual general meeting, within the limits set forth in Articles 144 et seq. of the Spanish Limited Liability Companies Law (Ley de Sociedades de Capital).

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the annual general meeting

The annual general meeting of Banco Español de Crédito, S.A. held at first call on February 26, 2008 authorized the board of directors to increase capital at one or several times and at any time, within five years from the date of the annual general meeting, by an amount (par value) of up to half the share capital of the Bank at the date of the meeting, through the issuance of new shares, with or without share premium and with or without voting rights; the consideration for the new shares to be issued will be monetary contributions, and the Board may set the terms and conditions of the capital increase. Also, the Board was empowered to disapply preemptive subscription rights, fully or partially, in accordance with Article 506 of the Spanish Limited Liability Companies Law.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

At December 31, 2010, no shares with these characteristics had been issued.

e) Specific circumstances that restrict the availability of reserves

The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount (10% of any net profit reported each year must be transferred to the legal reserve until the balance of this reserve reaches 20% of share capital). Pursuant to the Spanish Limited Liability Companies Law, a restricted reserve has been recorded for an amount equal to the carrying amount of the Banesto shares owned by subsidiaries.

The revaluation reserve recorded pursuant to Royal Decree-Law 7/1996, of June 7, can be used to increase capital. On February 26, 2008, the shareholders at the annual general meeting resolved to reduce capital with a charge to voluntary reserves and the corresponding amount was deducted from the restricted reserves to which Article 148 c) of the Spanish Limited Liability Companies Law refers and a reserve for retired capital of EUR 5,485,207 (the same amount as the par value of the retired shares) was recorded. This reserve will be unrestricted under the same conditions as for the share capital reduction, in accordance with Article 335 c) of the Spanish Limited Liability Companies Law.

F-280

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Listed equity instruments

All the shares are listed on the Spanish Stock Exchanges.

3) Banco Santander Totta, S.A. (Totta)

a) Number of equity instruments held by the Group

The Group holds 619,297,399 ordinary shares through its subsidiaries Santander Totta SGPS, S.A., holding 604,651,319 shares, and Taxagest Sociedade Gestora de Participaçoes Sociais, S.A., holding 14,593,315 shares. Banco Santander Totta, S.A. holds 52,765 treasury shares, all of which have a par value of EUR 1 each, are fully subscribed and paid and carry the same voting and dividend rights.

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the annual general meeting

Not applicable.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

At December 31, 2010, no shares with these characteristics had been issued.

e) Specific circumstances that restrict the availability of reserves

Under Article 296 of the Portuguese Companies’ Code, the legal and merger reserves can only be used to offset losses or to increase capital.

Non-current asset revaluation reserves are regulated by Decree-Law 31/1998, under which losses can be offset or capital increased by the amounts for which the underlying asset is depreciated, amortized or sold.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Listed equity instruments

Totta’s shares are not listed.

F-281

4) Banco Santander — Chile

a) Number of equity instruments held by the Group

The Group holds 66,822,519,695 ordinary shares through Santander Chile Holding, S.A., 78,108,391,607 ordinary shares through Teatinos Siglo XXI Inversiones Limitada and 16,577 ordinary shares through Santander Inversiones Limitada, all of which have no par value, are fully subscribed and paid and carry the same voting and dividend rights.

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the annual general meeting

Share capital amounted to CLP 891,302,881,691 at December 31, 2010. However, each year the annual general meeting must approve the balance sheet at December 31, of the previous year and, therefore, approve the share capital amount.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

At December 31, 2010, no shares with these characteristics had been issued.

e) Specific circumstances that restrict the availability of reserves

Remittances to foreign investors in relation to investments made under the Statute of Foreign Investment (Decree-Law 600/1974) and the amendments thereto require the prior authorization of the foreign investment committee.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Listed equity instruments

All the shares are listed on the Chilean Stock Exchanges and, through American Depositary Receipts (ADRs), on the New York Stock Exchange (NYSE).

5) Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander

a) Number of equity instruments held by the Group

At December 31, 2010, the Group held 78,284,357,776 ordinary shares through Grupo Financiero Santander, S.A. B de C.V., 99.99% of the share capital of Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander.

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the annual general meeting

The shareholders at the extraordinary and annual general meeting held on August 18, 2008 resolved to set the authorized share capital of Banco Santander (México), S.A. Institución de Banca Múltiple, Grupo Financiero Santander at MXN 7,829,149,572, represented by a total of 78,291,495,726 fully subscribed and paid shares of MXN 0.10 par value each.

F-282

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

In previous years, the entity issued unsecured subordinated preference debentures of USD 300 million that are voluntarily convertible into ordinary shares by their holders. These issues were private and they were bought by the shareholders of the Grupo Financiero. Although the issue was launched with maturity of 10 years, on September 23, 2010 the full amount of the issue, of which Santander Group held 75% was redeemed early.

The shareholders at the extraordinary general meeting held on March 17, 2009 resolved to approve the arrangement of a group loan of USD 1,100,000,000 from the shareholders through the placement of unsecured subordinated non-preferential debentures which are not convertible into shares. It should be noted that although approved by the general meeting, this issue had not yet been launched at the reporting date.

e) Specific circumstances that restrict the availability of reserves

Pursuant to the Mexican Credit Institutions Law and the general provisions applicable to credit institutions, to Mexican Companies Law and to the institution’s own bylaws, universal banking institutions are required to constitute or increase capital reserves for the purposes of ensuring solvency and protecting payment systems and savers.

The bank increases its legal reserve annually directly from the profit obtained in the year. The legal reserve can be used for any purpose but the balance must be replenished.

The bank must recognize the various reserves as stipulated in the legal provisions applicable to credit institutions. Credit loss reserves are calculated on the basis of the credit rating assigned to each loan and are released when the rating of the related loan improves or when the loan is settled.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Listed equity instruments

The company does not have any equity instruments listed on a stock exchange.

6) Santander UK plc

a) Number of equity instruments held by the Group

The Group holds ordinary shares amounting to GBP 31,051,786,866 though Banco Santander, S.A. (24,117,268,865 shares of GBP 0.10 par value each), Cántabro Catalana de Inversiones, S.A. (1 share of GBP 0.10 par value each) and Santusa Holding, S.L. (6,934,500,000 shares of GBP 0.10 par value each).

Santander UK plc. issued subordinated bonds, for a total of GBP 200 million, which are convertible into non-cumulative preference shares with a par value of GBP 1 each. At the discretion of the issuer, the exchange may be performed on any interest payment date provided that holders receive between 30 and 60 days’ notice. The Group holds 63,913,355 securities through Santander Financial Exchanges Limited.

F-283

Santander UK plc. also issued subordinated bonds, for a total of GBP 125 million, which are convertible into non-cumulative preference shares with a par value of GBP 1 each. At the discretion of the issuer, the exchange may be performed on any interest payment date, provided that holders receive between 30 and 60 days’ notice. The Group holds 100,487,938 securities through Santander Financial Exchanges Limited.

On April 28, 2010, Santander UK plc. issued 300 million preference shares of GBP 1 par value each to replace, pursuant to current legislation, a previous issue launched by Alliance & Leicester Plc under the same terms and conditions. As part of this new issue, the Group holds 107.3 million shares through Banco Santander, S.A. and 155.7 million shares through Santander Financial Exchanges Limited.

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the annual general meeting

The shareholders at the annual general meeting held on June 10, 2010 resolved to unconditionally authorize directors, as established by Section 551 of the Companies Act 2006, to make full use of the company’s authorization to assign the number of shares deemed appropriate up to a total nominal value of (the original value of the shares as indicated in the latest capital statement submitted to the Mercantile Registry):

(a) GBP 674,699,998, This total consists of no more than 674,699,998 preference shares denominated in pounds sterling.

(b) USD 10,000,000, This total consists of no more than 1,000,000,000 preference shares denominated in US dollars, and

It is hereby stated that this authorization will expire at the date of the next annual general meeting of the company unless it is renewed, amended or revoked by the Company. However, prior to such expiry, the company may make offers or enter into agreements which could require the allocation of shares, and the directors may allocate shares pursuant to any offer or agreement, irrespective of the expiry of the authorization granted by this resolution.

Pursuant to this resolution, any previously unexercised authorizations granted to directors to allocate shares are revoked and replaced without prejudice to any allocation of shares or grant of rights already performed, offered or agreed.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Not applicable.

e) Specific circumstances that restrict the availability of reserves

Not applicable.

F-284

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Listed equity instruments

Not applicable.

7) Santander Holdings USA, Inc.

a) Number of equity instruments held by the Group

At December 31, 2010, Banco Santander, S.A. held 517,107,043 ordinary shares, all of which held the same voting and dividend rights.

b) Capital increases in progress

No approved capital increases are in progress.

On January 20, 2010, the board of directors resolved to increase capital by USD 1,500,000,000, which was approved by Banco Santander, S.A. This capital increase was carried out in two parts: USD 750,000,000 though a direct capital increase on March 1, 2010; and USD 750,000,000 through a direct capital increase on December 28, 2010.

c) Capital authorized by the shareholders at the annual general meeting

Banco Santander, S.A. is the sole shareholder.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

In 2004 Sovereign Capital Trust IV issued debentures with shares of Sovereign Bancorp as the underlying (these were subsequently replaced by the American Depository Receipts (ADRs) of Banco Santander, S.A. when the Bank acquired Sovereign Bancorp). These debentures mature in 2034 although there are certain early redemption and conversion rights.

e) Specific circumstances that restrict the availability of reserves

Not applicable.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Listed equity instruments

Class C preference shares and equity securities are listed on the New York Stock Exchange (NYSE).

F-285

Exhibit 6

Exhibit VI


	Year end December 31,
	2010				2009						2008				2007				2006
	Including		Excluding		Including			Excluding			Including		Excluding		Including		Excluding		Including		Excluding
	interest on		interest on		interest on			interest on			interest on		interest on		interest on		interest on		interest on		interest on
IFRS:	deposits		deposits		deposits			deposits			deposits		deposits		deposits		deposits		deposits		deposits
FIXED CHARGES:
Fixed charges and preferred stock dividends		23,208,389		9,475,888		26,392,227			10,540,180			37,041,015		17,756,819		30,569,963		15,980,396		24,143,967		11,033,379
Preferred dividends		60,689		60,689		92,294			92,294			37,374		37,374		47,290		47,290		85,229		85,229
Fixed charges		23,147,699		9,415,198		26,299,933			10,447,886			37,003,641		17,719,445		30,522,673		15,933,106		24,058,738		10,948,150

EARNINGS:
Income from continuing operations before taxes and extraordinary items		12,051,873		12,051,873		10,587,800			10,587,800			10,849,325		10,849,325		10,970,494		10,970,494		8,853,774		8,853,774
Less: Earnings from associated companies		16,910		16,910		(5,870	)		(5,870	)		695,880		695,880		291,401		291,401		259,269		259,269
Fixed charges		23,147,699		9,415,198		26,299,933			10,447,886			37,003,641		17,719,445		30,522,673		15,933,106		24,058,738		10,948,150

Total earnings		35,182,662		21,450,161		36,893,603			21,041,556			47,157,086		27,872,890		41,201,766		26,612,199		32,653,243		19,542,655

Ratio of earnings to fixed charges		1.52		2.28		1.40			2.01			1.27		1.57		1.35		1.67		1.36		1.79
Ratio of earnings to combined fixed charges and preferred stock dividends		1.52		2.26		1.40			2.01			1.27		1.57		1.35		1.67		1.36		1.78

F-286


	Page

Presentation of Financial and Other Information		5

Cautionary Statement Regarding Forward-Looking Statements		6

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		8

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE		8

ITEM 3. KEY INFORMATION		8

A. Selected financial data		8

B. Capitalization and indebtedness		13

C. Reasons for the offer and use of proceeds		13

D. Risk factors		13

ITEM 4. INFORMATION ON THE COMPANY		21

A. History and development of the company		21

B. Business overview		34

C. Organizational structure		94

D. Property, plant and equipment		94

ITEM 4A. UNRESOLVED STAFF COMMENTS		94

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS		94

A. Operating results		101

B. Liquidity and capital resources		132

C. Research and development, patents and licenses, etc.		133

D. Trend information		133

E. Off-balance sheet arrangements		135

F. Tabular disclosure of contractual obligations		136

G. Other disclosures		136

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		139

A. Directors and senior management		139

B. Compensation		147

C. Board practices		173

D. Employees		182

E. Share ownership		184


	Page

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		185

A. Major shareholders		185

B. Related party transactions		186

C. Interests of experts and counsel		187

ITEM 8. FINANCIAL INFORMATION		187

A. Consolidated statements and other financial information		187

B. Significant Changes		196

ITEM 9. THE OFFER AND LISTING		196

A. Offer and listing details		196

B. Plan of distribution		198

C. Markets		198

D. Selling shareholders		203

E. Dilution		203

F. Expense of the issue		203

ITEM 10. ADDITIONAL INFORMATION		203

A. Share capital		203

B. Memorandum and articles of association		203

C. Material contracts		212

D. Exchange controls		212

E. Taxation		212

F. Dividends and paying agents		217

G. Statement by experts		217

H. Documents on display		217

I. Subsidiary information		217

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		218

Introduction		218

Part 1. Corporate principles of risk management, control and risk appetite		218

Part 2. Corporate governance of the risks function		221

Part 3. Integral control of risk		222

Part 4. Credit risk		224

Part 5. Operational risk		255

Part 6. Reputational risk		260

Part 7. Adjustment to the new regulatory framework		262

Part 8. Economic capital		263

Part 9. Risk training activities		266

Part 10. Market risk		267


	Page

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		293

A. Debt Securities		293

B. Warrants and Rights		293

C. Other Securities		293

D. American Depositary Shares		293

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		295

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		295

ITEM 15. CONTROLS AND PROCEDURES		295

ITEM 16 [Reserved]		298

A. Audit committee financial expert		298

B. Code of Ethics		298

C. Principal Accountant Fees and Services		299

D. Exemptions from the Listing Standards for Audit Committees		300

E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers		300

F. Changes in Registrant’s Certifying Accountant		300

G. Corporate Governance		300

PART III

ITEM 17. FINANCIAL STATEMENTS		304

ITEM 18. FINANCIAL STATEMENTS		304

ITEM 19. EXHIBITS		304

Exhibit 12.1
Exhibit 12.2
Exhibit 12.3
Exhibit 13.1
Exhibit 15.1


(*)		Allowances for the impairment losses on the assets making up the balances of “Loans and receivables — Loans and advances to customers”, “Loans and receivables — Loans and advances to credit institutions” and “Loans and receivables — Debt securities”. See “Item 3. Key information — A. Selected Financial Data”

(1)		The line items titled “Addition of acquired companies’ credit loss allowances” refer to the valuation allowance as of the acquisition date for the loans acquired in the business combinations carried out during the period after the acquired receivables have been measured at their acquisition fair values. This disclosure is no longer applicable in 2010 because the fair value of loans acquired in business combinations is disclosed net of allowances.

(2)		We have not included separate line items for charge-offs of loans not previously provided for (loans charged-off against income) and recoveries of loans previously charged-off as these are not permitted.

(3)		The changes in “Other Movements” from 2006, to 2007, to 2008, to 2009 and to 2010 principally reflect foreign exchange differences.


		Director
Name	Position with Santander	Since
Emilio Botín (1)	Chairman	1960
Fernando de Asúa	First vice chairman	1999
Alfredo Sáenz	Second vice chairman and chief executive officer	1994
Matías R. Inciarte (2)	Third vice chairman	1988
Manuel Soto	Fourth vice chairman	1999
Assicurazioni Generali, S.p.A.	Director	1999
Antonio Basagoiti	Director	1999
Ana P. Botín (1)	Director	1989
Javier Botín (1)	Director	2004
Lord Burns	Director	2004
Guillermo de la Dehesa	Director	2002
Rodrigo Echenique	Director	1988
Antonio Escámez	Director	1999
Ángel Jado	Director	2010
Francisco Luzón	Director	1997
Abel Matutes	Director	2002
Juan R. Inciarte (2)	Director	2008
Luis Alberto Salazar-Simpson	Director	1999
Isabel Tocino	Director	2007


(1)		Ana P. Botín and Javier Botín are daughter and son, respectively, of Emilio Botín.

(2)		Matías R. Inciarte and Juan R. Inciarte are brothers.


	LTV < 50%		50%<LTV<80%		80%<LTV < 100%		LTV > 100%

Gross amount		20,583		31,519		8,299		986
Of which: doubtful		247		638		440		33


Main segments	RORAC			Creation of value
Continental Europe		21.2	%		1,444
UK		38.5	%		1,284
Latin America		36.5	%		3,549
Sovereign		14.0	%		13
Subtotal of operating areas		28.3	%		6,290
Financial management and equity stakes		(44.3	)%		(3,879	)
Group total		18.5	%		2,411


	Minimum			Average			Maximum			Last
*TOTAL TRADING ()**
Total VaR		21.2			28.7			37.5			29.6

Diversification effect		(15.7	)		(29.1	)		(45.4	)		(27.8	)
Fixed-Income VaR		9.4			16.4			25.4			19.0
Equity VaR		4.4			8.0			14.4			8.8
FX VaR		4.6			11.4			23.6			13.9
Credit Spread VaR		13.9			20.9			27.1			14.7
Commodities VaR		0.5			1.3			2.1			1.0

LATIN AMERICA
VaR Total		12.5			18.2			34.8			13.9

Diversification effect		(1.3	)		(8.3	)		(21.5	)		(12.6	)
Fixed-Income VaR		12.0			14.5			20.1			14.8
Equity VaR		1.7			5.8			15.0			5.3
FX VaR		2.8			7.1			27.6			6.5

USA and Asia
VaR Total		0.7			1.3			5.9			0.9

Diversification effect		(0.1	)		(0.7	)		(1.8	)		(0.3	)
Fixed-Income VaR		0.7			1.2			2.7			0.9
Equity VaR		0.0			0.2			1.4			0.0
FX VaR		0.3			0.6			5.5			0.3

EUROPE
VaR Total		9.2			14.8			31.3			25.1

Diversification effect		(3.6	)		(18.9	)		(28.4	)		(14.6	)
Fixed-Income VaR		4.9			8.9			17.5			12.5
Equity VaR		4.0			6.7			14.5			6.5
FX VaR		2.0			9.8			15.8			9.6
Credit Spread VaR		3.5			7.0			14.4			9.0
Commodities VaR		0.5			1.3			2.1			2.1


(*)		Total VaR of trading includes transactions that are not assigned to any particular country, such as Active Credit Portfolio Management and Non-core Legacy Portfolio.


Metrics	2010			2009
Loans/net assets		75	%		79	%
Customer deposits, insurance and medium and long-term funding/loans		115	%		106	%
Customer deposits, insurance and medium and long-term financing shaeholders’ funds and other liabilities/total loans and fixed assets		117	%		110	%
Short-term financing/net liabilities		3	%		5	%


BANCO SANTANDER, S.A.

By:		/s/ José Antonio Álvarez Name: José Antonio Álvarez
		Title: Chief financial officer


	Thousands of euros
	Private debt		Sovereign debt		Total		%

AAA		25,617,724		14,036,432		39,654,156		26.33	%
AA		5,427,856		35,842,396		41,270,252		27.41	%
A		6,152,279		6,067,139		12,219,418		8.11	%
BBB (*)		6,217,191		41,731,814		47,949,005		31.84	%
Below BBB		1,039,586		1,585,525		2,625,111		1.74	%
Unrated		6,875,521		—		6,875,521		4.57	%

		51,330,157		99,263,306		150,593,463		100.00	%


	Thousands
	of euros
Securitized mortgage bonds		6,830,223
Other asset-backed bonds		2,815,226
Floating rate debt		19,475,694
Fixed rate debt		22,209,014

TOTAL		51,330,157

			The impairment losses on available-for-sale financial assets (EUR 118,637 thousand at December 31, 2010) are disclosed in Note 8. Also, the impairment losses on financial assets classified as loans and receivables (EUR 25,418 thousand at December 31, 2010) are disclosed in Note 10.

			Note 29 contains a detail of the valuation adjustments recognized in equity on available-for-sale financial assets.

			Note 51 contains a detail of the residual maturity periods of available-for-sale financial assets and of loans and receivables and of the related average interest rates.


							December 31, 2010
							Outstanding
							issue amount in
							foreign		Annual
	Millions of euros						currency		interest
Currency of issue	2010		2009		2008		(millions)		rate (%)

Euro		120,705		122,454		135,330		120,705		2.61	%
US dollar		33,680		36,535		27,459		45,004		1.52	%
Pound sterling		17,735		13,829		21,493		15,265		1.64	%
Brazilian real		7,391		3,768		2,531		16,391		10.77	%
Chilean peso		3,777		3,180		2,380		2,361,620		4.04	%
Other currencies		2,581		3,484		5,097

Balance at end of year		185,869		183,250		194,291


							December 31, 2010
							Outstanding
							issue amount
							in foreign		Annual
	Thousands of euros						currency		interest rate
Currency of issue	2010		2009		2008		(millions)		(%)

Euro		13,700,799		16,598,441		19,660,053		13,701		5.48	%
US dollar		6,259,098		9,297,611		7,877,340		8,363		6.71	%
Pound sterling		4,876,061		6,440,827		7,952,179		4,197		7.64	%
Brazilian real		4,371,694		3,490,034		2,442,517		9,695		10.78	%
Other currencies		1,266,985		977,688		941,161

Balance at end of year		30,474,637		36,804,601		38,873,250

Of which, preference shares		435,365		430,152		1,051,272


	Thousands of Euros			Thousands of Euros
SANTANDER US DEBT, S.A. (SOCIEDAD UNIPERSONAL)	2010			2009
Assets:
Cash		739			433
Deposits with Parent Bank		4,212,792			2,605,191
Other current assets		—			4

Total Assets		4,213,531			2,605,628
Liabilities and stockholders’ equity:

LIABILITIES:
Public entities		23			—
Commercial debts		35			36
Debts with group companies		5,081			9,040
Senior debt		4,208,069			2,595,989

Total Liabilities		4,213,208			2,605,065
STOCKHOLDERS’ EQUITY:
Capital stock		120			120
Retained earnings		443			431
Net income		(240	)		12

Total Stockholders’ Equity		323			563

Total Liabilities and Stockholders’ Equity		4,213,531			2,605,628


(a)		Amounts per the books of each company at December 31, 2010, translated to euros (in the case of foreign companies) at the year-end exchange rates.

(b)		Companies over which effective control is exercised.