SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

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

OR

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

For the fiscal year ended December 31, 2012

OR

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

for the transition period from                      to                     

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

Date of event requiring this shell company report

Commission file number 001-12518

BANCO SANTANDER, S.A.

(Exact name of Registrant as specified in its charter)

Kingdom of Spain

(Jurisdiction of incorporation)

Ciudad Grupo Santander

28660 Boadilla del Monte (Madrid), Spain

(address of principal executive offices)

José Antonio Álvarez

Banco Santander, S.A.

Ciudad Grupo Santander

28660 Boadilla del Monte

Madrid, Spain

Tel: +34 91 289 32 80

Fax: +34 91 257 12 82

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

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

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

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

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

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

None.

(Title of Class)

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

None.

(Title of Class)

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

Yes  x             No  ¨

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

Yes  ¨            No  x

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

Yes  x             No  ¨

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

Yes  ¨             No  ¨

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

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

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

US GAAP  ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board  x Other  ¨

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

Item 17  ¨             Item 18  ¨

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

Yes  ¨             No  x

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

10,538,683,145 shares

BANCO SANTANDER, S.A.

TABLE OF CONTENTS

		Page
Presentation of Financial and Other Information			5
Cautionary Statement Regarding Forward-Looking Statements			6
PART I
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		8
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE		8
ITEM 3.	KEY INFORMATION		8
	A. Selected financial data		8
	B. Capitalization and indebtedness		13
	C. Reasons for the offer and use of proceeds		13
	D. Risk factors		13
ITEM 4.	INFORMATION ON THE COMPANY		29
	A. History and development of the company		29
	B. Business overview		44
	C. Organizational structure		114
	D. Property, plant and equipment		114
ITEM 4A.	UNRESOLVED STAFF COMMENTS		114
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS		114
	A. Operating results		123
	B. Liquidity and capital resources		154
	C. Research and development, patents and licenses, etc.		155
	D. Trend information		155
	E. Off-balance sheet arrangements		156
	F. Tabular disclosure of contractual obligations		157
	G. Other disclosures		158
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		160
	A. Directors and senior management		160
	B. Compensation		167
	C. Board practices		179
	D. Employees		188
	E. Share ownership		190
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		191
	A. Major shareholders		191
	B. Related party transactions		192
	C. Interests of experts and counsel		193
ITEM 8.	FINANCIAL INFORMATION		193
	A. Consolidated statements and other financial information		193
	B. Significant Changes		205

ITEM 9.	THE OFFER AND LISTING	205
	A. Offer and listing details	205
	B. Plan of distribution	207
	C. Markets	207
	D. Selling shareholders	212
	E. Dilution	213
	F. Expense of the issue	213
ITEM 10.	ADDITIONAL INFORMATION	213
	A. Share capital	213
	B. Memorandum and articles of association	213
	C. Material contracts	222
	D. Exchange controls	223
	E. Taxation	223
	F. Dividends and paying agents	228
	G. Statement by experts	228
	H. Documents on display	229
	I. Subsidiary information	229
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK	229
	Introduction	229
	Part 1. Corporate principles of risk management, control and risk appetite	229
	Part 2. Corporate governance of the risks function	236
	Part 3. Integrated risk control and internal risk validation	238
	Part 4. Credit risk	240
	Part 5. Liquidity risk and funding	274
	Part 6. Operational risk	288
	Part 7. Compliance and reputational risk	297
	Part 8. Capital	303
	Part 9. Market risk	309
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	334
	A. Debt Securities	334
	B. Warrants and Rights	334
	C. Other Securities	334
	D. American Depositary Shares	334
PART II
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	336
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	336
ITEM 15.	CONTROLS AND PROCEDURES	336
ITEM 16	[Reserved].
	A. Audit committee financial expert	339
	B. Code of Ethics	339
	C. Principal Accountant Fees and Services	340
	D. Exemptions from the Listing Standards for Audit Committees	341
	E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers	341
	F. Changes in Registrant’s Certifying Accountant	341
	G. Corporate Governance	341
	H. Mine Safety Disclosure	344

PART III
ITEM 17.	FINANCIAL STATEMENTS	345
ITEM 18.	FINANCIAL STATEMENTS	345
ITEM 19.	EXHIBITS	345

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, 2012 in conformity with the EU-IFRS and Bank of Spain’s Circular 4/2004. Differences between EU-IFRS, Bank of Spain’s Circular 4/2004 and International Financial Reporting Standards as issued by the International Accounting Standard Board (IFRS-IASB) are not material. Therefore, we assert that the financial information contained in this annual report on Form 20-F complies with IFRS-IASB.

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

Our auditors, Deloitte, S.L., an independent registered public accounting firm, have audited our consolidated financial statements in respect of the three years ended December 31, 2012, 2011 and 2010 in accordance with IFRS-IASB. See page F-1 to our consolidated financial statements for the 2012, 2011 and 2010 report prepared by Deloitte, S.L.

General Information

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

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

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

• “one billion”, we mean 1 billion.

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

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

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

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

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

Management makes use of certain financial measures in local currency to help in the assessment of on-going operating performance. These non-GAAP financial measures include the results of operations of our subsidiary banks located outside the

5

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

• exposure to various types of market risks;

• management strategy;

• capital expenditures;

• earnings and other targets; and

• asset portfolios.

Forward-looking statements may be identified by words such as “expect,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “VaR,” “RORAC,” “target,” “goal,” “objective,” “estimate,” “future” and similar expressions. We include forward-looking statements in the “Operating and Financial Review and Prospects,” “Information on the Company,” and “Quantitative and Qualitative Disclosures About 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.

6

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

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

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

• a further deterioration of the Spanish economy;

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

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

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

• inflation or deflation;

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

• changes in competition and pricing environments;

• the inability to hedge some risks economically;

• the adequacy of loss reserves;

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

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

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

Political and Governmental Factors

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

• changes in Spanish, U.K., EU, Latin American, U.S. or other jurisdictions’ 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

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

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

• a downgrade in our credit rating;

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

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

The forward-looking statements contained in this 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.

7

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 annual report on Form 20-F, the audited financial statements for the years 2012, 2011 and 2010 are presented. The audited financial statements for 2009 and 2008 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 year ended December, 31, 2011 reflects the impact of the consolidation of Bank Zachodni WBK, S.A. and the income statement for the year ended December, 31, 2009 reflects the impact of the consolidation of Banco Real, Alliance & Leicester, Bradford & Bingley’s branch network and retail deposits, Sovereign and other consumer businesses.

8

	Year ended December 31,
	2012			2011			2010			2009			2008
	(in millions of euros, except percentages and per share data)
Interest and similar income		59,024			60,856			52,907			53,173			55,044
Interest expense and similar charges		(28,877	)		(30,035	)		(23,683	)		(26,874	)		(37,506	)
Interest income / (charges)		30,147			30,821			29,224			26,299			17,538
Income from equity instruments		423			394			362			436			553
Income from companies accounted for using the equity method		427			57			17			(1	)		792
Fee and commission income		12,827			12,749			11,681			10,726			9,741
Fee and commission expense		(2,519	)		(2,277	)		(1,946	)		(1,646	)		(1,475	)
Gains/losses on financial assets and liabilities (net)		3,329			2,838			2,164			3,802			2,892
Exchange differences (net)		(189	)		(522	)		441			444			582
Other operating income		6,693			8,050			8,195			7,929			9,436
Other operating expenses		(6,585	)		(8,032	)		(8,089	)		(7,785	)		(9,163	)
Total income		44,553			44,078			42,049			40,204			30,896
Administrative expenses		(17,928	)		(17,781	)		(16,255	)		(14,825	)		(11,666	)
Personnel expenses		(10,323	)		(10,326	)		(9,329	)		(8,451	)		(6,813	)
Other general administrative expenses		(7,605	)		(7,455	)		(6,926	)		(6,374	)		(4,853	)
Depreciation and amortization		(2,189	)		(2,109	)		(1,940	)		(1,596	)		(1,240	)
Provisions (net)		(1,622	)		(2,601	)		(1,133	)		(1,792	)		(1,641	)
Impairment losses on financial assets (net)		(18,906	)		(11,868	)		(10,443	)		(11,578	)		(6,283	)
Impairment losses on other assets (net)		(508	)		(1,517	)		(286	)		(165	)		(1,049	)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		906			1,846			350			1,565			101
Gains/(losses) on non-current assets held for sale not classified as discontinued operations		(757	)		(2,109	)		(290	)		(1,225	)		1,731
Operating profit/(loss) before tax		3,549			7,939			12,052			10,588			10,849
Income tax		(575	)		(1,776	)		(2,923	)		(1,207	)		(1,836	)
Profit from continuing operations		2,974			6,163			9,129			9,381			9,013
Profit/(loss) from discontinued operations (net)		(7	)		(24	)		(27	)		31			319
Consolidated profit for the year		2,967			6,139			9,102			9,412			9,332
Profit attributable to the Parent		2,205			5,351			8,181			8,942			8,876
Profit attributable to non-controlling interest		762			788			921			470			456
Per share information:
Average number of shares (thousands) (1)		9,766,689			8,892,033			8,686,522			8,554,224			7,271,470
Basic earnings per share (euros)		0.23			0.60			0.94			1.05			1.22
Basic earnings per share continuing operation (euros)		0.23			0.60			0.94			1.04			1.18
Diluted earnings per share (euros)		0.22			0.60			0.94			1.04			1.21
Diluted earnings per share continuing operation (euros)		0.22			0.60			0.94			1.04			1.17
Remuneration paid (euros) (2)		0.60			0.60			0.60			0.60			0.63
Remuneration paid (US$) (2)		0.80			0.78			0.80			0.86			0.88

9

	Year ended December 31,
	2012			2011			2010			2009			2008
	(in millions of euros, except percentages and per share data)
Total assets		1,269,628			1,251,526			1,217,501			1,110,529			1,049,632
Loans and advances to credit institutions (net) (3)		73,900			51,726			79,855			79,837			78,792
Loans and advances to customers (net) (3)		720,482			750,100			724,153			682,551			626,888
Investment securities (net) (4)		152,066			154,015			174,258			173,990			124,673
Investments: Associates and joint venture		4,454			4,155			273			164			1,323
Contingent liabilities (net)		45,033			48,042			59,795			59,256			65,323
Liabilities
Deposits from central banks and credit institutions (5)		152,966			143,138			140,112			142,091			129,877
Customer deposits (5)		626,639			632,533			616,376			506,975			420,229
Debt securities (5)		205,969			197,372			192,873			211,963			236,403
Capitalization
Guaranteed subordinated debt excluding preferred securities and preferred shares (6)		5,207			6,619			10,934			13,867			15,748
Other subordinated debt		8,291			10,477			12,189			15,193			14,452
Preferred securities (6)		4,319			5,447			6,917			7,315			7,622
Preferred shares (6)		421			449			435			430			1,051
Non-controlling interest (including net income of the period)		9,672			6,445			5,897			5,203			2,415
Stockholders’ equity (7)		74,654			76,414			75,018			68,667			57,587
Total capitalization		102,564			105,851			111,390			110,675			98,875
Stockholders’ equity per share (7)		7.64			8.59			8.64			8.03			7.92
Other managed funds
Mutual funds		89,176			102,611			113,510			105,216			90,306
Pension funds		10,076			9,645			10,965			11,310			11,128
Managed portfolio		18,889			19,200			20,314			18,364			17,289
Total other managed funds		118,141			131,456			144,789			134,890			118,723
Consolidated ratios
Profitability ratios:
Net yield (8)		2.52	%		2.74	%		2.68	%		2.62	%		2.05	%
Return on average total assets (ROA)		0.24	%		0.50	%		0.76	%		0.86	%		1.00	%
Return on average stockholders’ equity (ROE)		2.80	%		7.14	%		11.80	%		13.90	%		17.07	%
Capital ratio:
Average stockholders’ equity to average total assets		6.12	%		6.10	%		5.82	%		5.85	%		5.55	%
Ratio of earnings to fixed charges (9)
Excluding interest on deposits		1.27	%		1.63	%		2.28	%		2.01	%		1.57	%
Including interest on deposits		1.11	%		1.27	%		1.52	%		1.40	%		1.27	%
Credit quality data
Loans and advances to customers
Allowances for impaired balances including country risk and excluding contingent liabilities as a percentage of total gross loans		3.42	%		2.46	%		2.65	%		2.55	%		1.95	%
Impaired balances as a percentage of total gross loans		4.74	%		4.07	%		3.75	%		3.43	%		2.19	%
Allowances for impaired balances as a percentage of impaired balances		72.17	%		60.52	%		70.58	%		74.32	%		89.08	%
Net loan charge-offs as a percentage of total gross loans		1.36	%		1.38	%		1.31	%		1.27	%		0.60	%
Ratios adding contingent liabilities to loans and advances to customers and excluding country risk (*)
Allowances for impaired balances (**) as a percentage of total loans and contingent liabilities		3.30	%		2.39	%		2.58	%		2.44	%		1.83	%
Impaired balances (**) (10) as a percentage of total loans and contingent liabilities		4.54	%		3.89	%		3.55	%		3.24	%		2.02	%
Allowances for impaired balances (**) as a percentage of impaired balances (**)		72.56	%		61.37	%		72.74	%		75.33	%		90.64	%
Net loan and contingent liabilities charge-offs as a percentage of total loans and contingent liabilities		1.27	%		1.29	%		1.21	%		1.17	%		0.55	%

(*) 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.

10

(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 dividends in cash or new shares. The remuneration per share for 2009, 2010, 2011 and 2012 disclosed above, €0.60, is calculated assuming that the four dividends for these years were paid in cash.

(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”.

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

	IFRS-IASB
	Year Ended December 31,
	2012		2011		2010		2009		2008
Allowances refers to:	(in millions of euros)
Allowances for impaired balances (*) (excluding country risk)		26,194		19,661		20,748		18,497		12,863
Less: Allowances for contingent liabilities and commitments (excluding country risk)		614		648		1,011		623		622
Allowances for Balances of Loans (excluding country risk):		25,580		19,013		19,737		17,874		12,241
Allowances relating to country risk and other		98		210		121		192		660
Allowances for impaired balances (excluding contingent liabilities)		25,678		19,223		19,858		18,066		12,901
Of which:
Allowances for Loans and receivables:		25,549		18,988		19,739		17,899		12,720
Allowances for Customers		25,504		18,936		19,697		17,873		12,466
Allowances for Credit institutions and other financial assets		30		36		17		26		254
Allowances for Debt Instruments		15		16		25		0		0
Allowances for Debt Instruments available for sale		129		235		119		167		181

(*) 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 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
Calendar Period	Period End ($)		Average Rate ($)
2008		1.39		1.47
2009		1.44		1.39
2010		1.34		1.33
2011		1.29		1.39
2012		1.32		1.28

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	Rate During Period
Last six months	High $		Low $
2012
October		1.31		1.29
November		1.30		1.27
December		1.33		1.29
2013
January		1.36		1.30
February		1.36		1.31
March		1.31		1.28
April (through April 17)		1.31		1.28

On April 17, 2013, the exchange rate for euros and dollars (expressed in dollars per euro), as published by the ECB, was $1.31.

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 economies of Continental Europe, the United Kingdom or certain Latin American countries could adversely affect our financial condition.

Our loan portfolio is concentrated in Continental Europe (in particular, Spain), the United Kingdom and Latin America. At December 31, 2012, Continental Europe accounted for 40% of our total loan portfolio (Spain accounted for 28% of our total loan portfolio), while the United Kingdom and Latin America accounted for 34% and 20%, respectively. Accordingly, the recoverability of these loan portfolios in particular, and our ability to increase the amount of loans outstanding and our results of operations and financial condition in general, are dependent to a significant extent on the level of economic activity in Continental Europe (in particular, Spain), the United Kingdom and Latin America. Continued recessionary economic conditions in the economies of Continental Europe (in particular, Spain), or a return to recessionary conditions in the United Kingdom or the Latin American countries in which we operate, would likely have a significant adverse impact on our loan portfolio and, as a result, on our financial condition, cash flows and results of operations. See “Item 4. Information on the Company—B. Business Overview.”

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

In the past five years, financial systems worldwide have experienced difficult credit and liquidity conditions and disruptions leading to less liquidity, greater volatility, general widening of spreads and, in some cases, lack of price transparency on interbank lending rates. Global economic conditions deteriorated significantly between 2007 and 2009, and many of the countries in which we operate fell into recession. Recessionary conditions continue in some countries. Many major financial institutions, including some of the world’s largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies experienced, and some continue to experience, significant difficulties. Around the world, there have also been runs on deposits at several financial institutions, numerous institutions have sought additional capital or have been assisted by governments, and many lenders and institutional investors have reduced or ceased providing funding to borrowers (including to other financial institutions).

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

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

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• Reduced demand for our products and services.

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

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

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

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

• The recoverability of our retail loans in particular may be increasingly vulnerable to macroeconomic shocks that could negatively impact the household income of our retail customers and result in increased loan losses.

Some uncertainty remains concerning the future economic environment. While certain segments of the global economy are currently experiencing a moderate recovery, we expect such uncertainty will continue, which could have a negative impact on our business and results of operations. Global investor confidence remains cautious and downgrades of the sovereign debt of Ireland, Greece, Portugal, Spain, Italy and France, as well as the recent developments and banking crisis in Cyprus, have caused volatility in the capital markets. A slowing or failing of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.

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

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

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

Eurozone markets and economies continue to show signs of fragility and volatility, with recession in several economies, including Germany, and only sporadic access to capital markets in others. Interest rate differentials among eurozone countries are affecting government finance and borrowing rates in those economies.

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

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

We have direct and indirect exposure to financial and economic conditions throughout the eurozone economies. Although we believe the possibility to be remote following the measures taken in 2012, if a wide-scale break-up of the eurozone were to occur, it would most likely be associated with a deterioration in the economic and financial environment and could have a material adverse impact on the whole financial sector, creating new challenges in sovereign and corporate lending and resulting in significant disruptions in financial activities at both the market and retail levels. This could materially and adversely affect our operating results, financial position and prospects.

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

In the past five years, financial markets have been subject to significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to volatility in global financial markets and the resulting widening of credit

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spreads. We have material exposures to securities and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then prevailing market conditions, may result in negative changes in the fair values of our financial assets and these may also translate into increased impairments. In addition, the value ultimately realized by us on disposal may be lower than the current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition or prospects.

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

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

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

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

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

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

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

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

Changes in regulations may also cause us to face increased compliance costs and limitations on our ability to pursue certain business opportunities and provide certain products and services. As some of the banking laws and regulations have

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

Extensive legislation affecting the financial services industry has recently been adopted in Spain, the United States, the European Union and other jurisdictions, and regulations are in the process of being implemented.

The European Union has created a European Systemic Risk Board to monitor financial stability and has implemented rules 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.

Regulators in the U.K. have produced a range of proposals for future legislative and regulatory changes, which could force us to comply with certain operational restrictions or take steps to raise further capital, or could increase our expenses, or otherwise adversely affect our operating results, financial condition and prospects. These proposals include (i) the introduction of recovery and resolution planning requirements (popularly known as “living wills”) for banks and other financial institutions as contingency planning for the failure of a financial institution that may affect the stability of the financial system, (ii) implementation of the Financial Services Act 2012, which enhances the FSA’s disciplinary and enforcement powers, (iii) the introduction of more regular and detailed reporting obligations, (iv) a move to pre-funding of the deposit protection scheme in the U.K., (v) a proposal to require large U.K. retail banks to hold a minimum Core Tier 1 to risk-weighted assets ratio of at least 10 percent., which is, broadly, 3 percent higher than the minimum capital levels required under Basel III, and to have a minimum primary loss-absorbing capacity of 17 percent of risk-weighted assets, and (vi) proposed revisions to the approaches for determining trading book capital requirements and banking book risk-weighted assets from the Basel Committee.

In December 2010, the Basel Committee on Banking Supervision (the “Basel Committee”) reached agreement on comprehensive changes to the capital adequacy framework, known as Basel III. A revised version of Basel III was published in June 2011. Basel III is intended to raise the resilience of the banking sector by increasing both the quality and quantity of the regulatory capital base and enhancing the risk coverage of the capital framework. Among other things, Basel III introduces new eligibility criteria for Common Equity Tier 1, Additional Tier 1 and Tier 2 capital instruments that are intended to raise the quality of regulatory capital, and increases the amount of regulatory capital that institutions are required to hold. Basel III also requires institutions to maintain a capital conservation buffer above the minimum capital ratios in order to avoid certain capital distribution constraints. The capital conservation buffer, to be comprised of Common Equity Tier 1 capital, would result in an effective Common Equity Tier 1 capital requirement of 7 percent of risk-weighted assets. In addition, Basel III directs national regulators to require certain institutions to maintain a counter-cyclical capital buffer during periods of excessive credit growth. Basel III introduces a leverage ratio for institutions as a backstop measure, to be applied alongside current risk-based regulatory capital requirements. The implementation of Basel III in the European Union is being performed through the Capital Requirements Directive IV & Capital Requirements Regulation (“CRDIV/CRR”) legislative package. In early 2013 the draft legislation remains under discussion between the European Parliament, the European Commission and the Council of Ministers. The final capital framework to be established in the EU under CRDIV/CRR is likely to differ from Basel III in certain areas and the implementation date is still subject to uncertainty.

In addition to the changes to the capital adequacy framework published in December 2010 described above, the Basel Committee also published its global quantitative liquidity framework, comprising the Liquidity Coverage Ratio (“LCR”) and Net Stable Funding Ratio (“NSFR”) metrics, with objectives to (1) promote the short-term resilience of banks’ liquidity risk profiles by ensuring they have sufficient high-quality liquid assets to survive a significant stress scenario; and (2) promote resilience over a longer time horizon by creating incentives for banks to fund their activities with more stable sources of funding on an ongoing basis. The LCR has been subsequently revised by the Basel Committee in January 2013 which amended the definition of high-quality liquid assets and agreed a revised timetable for phase-in of the standard from 2015 to 2019, as well as making some technical changes to some of the stress scenario assumptions. As with the Basel Committee’s proposed changes to the capital adequacy framework, the draft liquidity framework remains under discussion within the EU and the final framework to be established could differ from Basel III in certain areas. The implementation date is still subject to uncertainty.

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

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

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

In September 2011, the European Commission (the “Commission”) tabled a proposal for a common system of financial transactions taxes (“FTT”). Despite intense discussions on this proposal there was no unanimity amongst the 27 Member States. Eleven Member States (“participating Member State”) requested enhanced cooperation on a FTT based upon the Commission’s original proposal. The Commission presented a decision to this effect which was adopted by the EU’s Council of Finance Ministers at its committee meeting on January 22, 2013. The formal Directive was published on February 14, 2013, under which participating Member States may charge a FTT on all financial transactions with effect from January 1, 2014 where (i) at least one party to the transaction is established in the territory of a participating Member State and (ii) a financial institution established in the territory of a participating Member State is a party to the transaction acting either for its own account or for the account of another person, or is acting in the name of a party to the transaction. We are still assessing the proposals to determine the likely impact on us.

In the United Kingdom, on June 16, 2010, the Chancellor of the Exchequer announced the creation of the Independent Commission on Banking (the ‘ICB’), chaired by Sir John Vickers. The ICB was asked to consider structural and related non-structural reforms to the U.K. banking sector to promote financial stability and competition, and to make recommendations to the U.K. Government. The ICB gave its recommendations on September 12, 2011 and proposed: (i) implementation of a retail ring fence; (ii) increased capital requirements; and (iii) improvement of competition – which were broadly endorsed by the Government in its response published on December 19, 2011. A White Paper was published on June 14, 2012 detailing how the Government intends to implement the recommendations of the ICB. A draft of the initial bill to implement the ICB recommendations was published on October 12, 2012, in the format of framework legislation to put in place the architecture to effect the reforms, with detailed policy being provided for through secondary legislation. On February 4, 2013, the Financial Services (Banking Reform) Bill was introduced to Parliament. The Government expects the legislation to be in place by 2015 and to take effect by 2019. Implementation of the proposals may require us to make changes to our structure and business.

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

With respect to OTC derivatives, the Dodd-Frank Act provides for an extensive framework for the regulation of OTC derivatives, including mandatory clearing, exchange trading and transaction reporting of certain OTC derivatives. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants will be required to register with the SEC or the CFTC, or both, and will become subject to new capital, margin, business conduct, recordkeeping, clearing, execution, reporting and other requirements. We will likely register one or more entities as swap dealers with the CFTC or SEC, or both. Although the full impact of U.S. derivatives regulation on us is still unclear, registration with the CFTC and SEC could materially increase our operating costs and adversely affect our derivatives business.

In June 2012, U.S. bank regulators proposed a broad revision of the regulatory capital rules applicable to U.S. banks, bank holding companies and other U.S. banking organizations. The proposals would implement the Basel III capital standards in the United States and modify existing standardized risk weights for certain types of asset classes, including residential mortgages and securitization exposures. The proposals are intended to comply with the Dodd-Frank Act’s minimum risk-based capital requirements and would be phased in over a multi-year period. Once fully implemented, the new rules would generally increase both the quality and quantity of regulatory capital that U.S. banking organizations are required to maintain. It was originally contemplated that the revised capital rules would be phased in beginning in January 2013. In November 2012, however, U.S. bank regulators announced that the proposals would not become effective in January 2013. The announcement did not specify new implementation or phase-in dates. U.S. bank regulators are working to finalize the proposals.

In addition, in December 2012, pursuant to the Dodd-Frank Act’s systemic risk regulation provisions, the Board of Governors of the Federal Reserve System (“Federal Reserve”) proposed to apply enhanced prudential standards to the U.S.

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operations of large foreign banking organizations, including us. Under the Federal Reserve’s proposal, a number of large foreign banking organizations would be required to establish a separately capitalized top-tier U.S. intermediate holding company (“IHC”) that would hold all of the large foreign banking organization’s U.S. bank and nonbank subsidiaries. Under the Federal Reserve’s proposal, an IHC would be subject to U.S. capital, liquidity, single counterparty credit limits, risk management, stress testing and other enhanced prudential standards on a consolidated basis, and the Federal Reserve would have the authority to examine any IHC and any subsidiary of an IHC. Although U.S. branches and agencies of foreign banks would not be required to be held beneath an IHC, such branches and agencies would be subject to liquidity, single counterparty credit limits, and, in certain circumstances, asset maintenance requirements. The rules have a proposed effective date of July 1, 2015. The Federal Reserve is currently accepting comments on its proposal.

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

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

Changes in taxes and other assessments may adversely affect us.

The Spanish Government regularly enacts reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms have not been, and cannot be, quantified and there can be no assurance that these reforms will not, once implemented, have an adverse effect upon our business. Furthermore, such changes may increase the cost of borrowing and contribute to the increase in our non-performing credit portfolio.

We cannot predict if tax reforms will be implemented in the future. The effects of these changes, if enacted, and any other changes that could result from the enactment of additional tax reforms, cannot be quantified.

Changes in accounting standards could impact reported earnings.

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

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

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

Our current loan loss reserves may not be adequate to cover any increase in the amount of non-performing loans or any future deterioration in the overall credit quality of our total loan portfolio. Our loan loss reserves are based on our current assessment of and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of

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

Mortgage loans are one of our principal assets, comprising 51% of our loan portfolio as of December 31, 2012. As a result, we are exposed to developments in housing markets, especially in Spain and the United Kingdom. In addition, we have exposure to a number of large real estate developers in Spain. From 2002 to 2007, demand for housing and mortgage financing in Spain increased significantly driven by, among other things, economic growth, declining unemployment rates, demographic and social trends, the desirability of Spain as a vacation destination and historically low interest rates in the eurozone. The United Kingdom experienced an increase in housing and mortgage demand driven by, among other things, economic growth, declining unemployment rates, demographic trends and the increasing prominence of London as an international financial center. During late 2007, the housing market began to adjust in Spain and the United Kingdom as a result of excess supply (particularly in Spain) and higher interest rates. Since 2008, as economic growth stalled in Spain and the United Kingdom, persistent housing oversupply, decreased housing demand, rising unemployment, subdued earnings growth, greater pressure on disposable income, a decline in the availability of mortgage finance and the continued effect of global market volatility have caused home prices to decline, while mortgage delinquencies increased. As a result of these and other factors, our NPL ratio increased from 0.94% at December 31, 2007, to 2.02% at December 31, 2008, to 3.24% at December 31, 2009, to 3.55% at December 31, 2010 and to 3.89% at December 31, 2011. At December 31, 2012, our NPL ratio was 4.54%. 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.

The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including macroeconomic factors affecting Europe, the United States and Latin American countries. The real estate market is particularly vulnerable in the current economic climate and this may affect us as real estate represents a significant portion of the collateral securing our residential mortgage loan portfolio. We may also not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral. If this were to occur, we may need to make additional provisions to cover actual impairment losses of our loans, which may materially and adversely affect our results of operations and financial condition.

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

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

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

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

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

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

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

The fees and 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 represent a significant source of our revenues.

Market downturns have led and are likely to continue 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 revenues. In addition, because the fees that we charge for managing our clients’ portfolios are in many cases based on the value or performance of those portfolios, a market downturn that reduces the value of our clients’ portfolios or increases the amount of withdrawals would reduce the revenues we receive from our asset management, private banking and custody businesses and adversely affect our results of operations. Moreover, 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.

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 and adversely affect our results of operations.

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

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

• net interest income;

• the volume of loans originated;

• the market value of our securities holdings; and

• gains from sales of loans and securities.

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

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

If interest rates decrease, although this is likely to decrease our funding costs, it is likely to adversely impact the income we receive arising from our investments in securities as well as loans with similar maturities. In addition, we may also experience increased delinquencies in a low interest rate environment when such an environment is accompanied by high unemployment and recessionary conditions.

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

Increases in interest rates may reduce gains or require us to record losses on sales of our loans or securities.

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

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

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

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

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

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

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

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

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

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

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

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

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

Banco Santander, S.A.’s long-term debt is currently rated investment grade by the major rating agencies—Baa2 by Moody’s Investors Service España, S.A., BBB by Standard & Poor’s Ratings Services and BBB+ by Fitch Ratings Ltd.—all of which have a negative outlook due to the difficult economic environment in Spain. All three agencies downgraded our rating in February 2012 together with that of the other main Spanish banks, due to the weaker-than-previously-anticipated macroeconomic and financial environment in Spain with dimming growth prospects in the near term, depressed real estate market activity and heightened turbulence in the capital markets. In addition, Standard & Poor’s Ratings Services downgraded our rating by two notches in April 2012 together with that of 15 other Spanish banks following that rating agency’s decision to downgrade Spain’s sovereign debt rating by two notches. Moody’s Investors Service España, S.A. further downgraded our rating in May 2012, together with downgrades of 15 other Spanish banks and Santander UK plc, our United Kingdom-domiciled subsidiary. In June 2012, Fitch Ratings Ltd. cut the rating of Spanish sovereign debt three notches to BBB with a negative outlook, and Moody’s followed shortly thereafter by downgrading Spanish sovereign debt three notches to Baa3, its lowest investment grade rating. Following its downgrade of Spanish sovereign debt, Fitch Ratings Ltd. further downgraded our rating on June 11, 2012 from A to BBB+. Moody’s Investors Service downgraded our rating on June 25, 2012 from A3 to Baa2. Santander UK’s long-term debt is currently rated investment grade by the major rating agencies: A2 with negative outlook by Moody’s Investors Service, A with negative outlook by Standard & Poor’s Ratings Services and A with stable outlook by Fitch Ratings. All three agencies revised Santander UK’s ratings during 2012 following the downgrades of the Kingdom of Spain.

We conduct substantially all of our material derivative activities through Banco Santander, S.A. and Santander UK. We estimate that as of December 31, 2012, if all the rating agencies were to downgrade Banco Santander, S.A.’s long-term senior debt ratings by one notch we would be required to post up to €3 million in additional collateral pursuant to derivative and other financial contracts. A hypothetical two notch downgrade would result in a requirement to post up to €14 million in additional collateral. We estimate that as of December 31, 2012, if all the rating agencies were to downgrade Santander UK’s long-term credit ratings by one notch, and thereby trigger a short-term credit rating downgrade, this could result in outflows from Santander UK’s total liquid assets of £2.0 billion of cash and £6.6 billion in additional collateral that Santander UK would be required to post under the terms of secured funding and derivatives contracts. A hypothetical two notch downgrade would result in an additional outflow of £0.4 billion of cash and £1.4 billion of collateral under secured funding and derivatives contracts.

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

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

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

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

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

Competition with other financial institutions could adversely affect us.

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

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

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

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

We are exposed to risks faced by other financial institutions.

We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties. In 2012, the financial health of a number of European governments was shaken by the European sovereign debt crisis, contributing to volatility of the capital

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and credit markets, and the risk of contagion throughout and beyond the eurozone remains, as a significant number of financial institutions throughout Europe have substantial exposures to sovereign debt issued by nations which are under considerable financial pressure. These liquidity concerns have had, and may continue to have, an adverse effect on interbank financial transactions in general. Should any of these nations default on their debt, or experience a significant widening of credit spreads, major financial institutions and banking systems throughout Europe could be destabilized. A default by a significant financial counterparty, or liquidity problems in the financial services industry generally, could have a material adverse effect on us.

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

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

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

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

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

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

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

• manage efficiently the operations and employees of expanding businesses;

• maintain or grow our existing customer base;

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

• finance strategic investments or acquisitions;

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

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

• apply our risk management policy effectively to an enlarged Group; and

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

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

Operational risks, including risks relating to data collection, processing and storage systems are inherent in our business.

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

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

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

In addition, our businesses are exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter employee misconduct and the precautions we take to prevent and detect this activity may not always be effective.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We rely on third parties for important products and services.

Third party vendors provide key components of our business infrastructure such as loan and deposit servicing systems, internet connections and network access. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to customers and otherwise to conduct business. Replacing these third party vendors could also entail significant delays and expense.

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

We and our subsidiaries and affiliates have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others. In addition, we have entered into services agreements with certain affiliates to allow these companies to offer their products and services within our branch network or that assist with our activities in consideration for certain fees.

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

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

Our business could be affected if its capital is not managed effectively or if changes limiting our ability to manage our capital position are adopted.

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

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.

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

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

Negative and fluctuating economic conditions, such as a changing interest rate environment, impact our profitability by causing lending margins to decrease and leading to decreased demand for higher margin products and services. Negative and fluctuating economic conditions in these Latin American regions could also result in government defaults on public debt. This

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could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is high in these Latin American regions.

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

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

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

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

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

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

Like many other European banks, we invest in debt securities of European governments, including debt securities of the countries that have been most affected by the deterioration in economic conditions in Europe, such as Spain, Portugal, Italy and Ireland. A failure by any such government to make timely payments under the terms of these securities, or a significant decrease in their market value, could have a material adverse effect on us. For more information, see Item 4-B. Business overview—Exposure to sovereign counterparties by credit rating.

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

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

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

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

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

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

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

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

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

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

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

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

Item 4. Information on the Company

A. History and development of the company

Introduction

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

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

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

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

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

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Principal Capital Expenditures and Divestitures

Acquisitions, Dispositions, Reorganizations

Our principal acquisitions and dispositions in 2012, 2011 and 2010 were as follows:

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

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

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

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

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

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

Valores Santander

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

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

Invitation to tender certain securitization bonds for cash

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

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

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

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Sale of our Colombian unit to the Chilean group Corpbanca

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

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

Agreement with Abbey Life Assurance

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

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

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

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

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

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

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

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

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

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

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Invitation to tender offer

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

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

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

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

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

Santander and Elavon agreement

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

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

The agreement values the transferred business at €165.8 million and will generate a capital gain of approximately €87 million after tax.

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

Mergers by absorption of Banesto and Banco Banif

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

After the end of the reporting period, at their respective board of directors meetings held on January 9, 2013, the directors of the Bank and Banco Español de Crédito, S.A. (Banesto) approved the common draft terms of the merger by absorption of Banesto into the Bank with the dissolution without liquidation of the former and the transfer en bloc of all its assets and liabilities to the Bank, which will acquire, by universal succession, the rights and obligations of the absorbed entity. As a result of the merger, the shareholders of Banesto, other than the Bank, will receive in exchange shares of the Bank.

The ratio at which shares of Banesto will be exchanged for shares of the Bank, which was determined based on the fair value of their assets and liabilities, will be 0.633 shares of the Bank, of €0.5 par value each, for each share of Banesto, of €0.79 par value each, without provision for any additional cash payment.

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

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

After the end of reporting period, the directors of Banco Banif, S.A., at its board of directors meeting held on January 28, 2013, and the directors of Banco Santander, S.A., at its board of directors meeting held on that same day, approved the

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common drafts terms of the merger by absorption of Banco Banif, S.A. into Banco Santander, S.A. with the dissolution without liquidation of the former and the transfer en bloc of all its assets and liabilities to Banco Santander, S.A., which will acquire, by universal succession, the rights and obligations of the absorbed entity.

As of the date of this annual report on Form 20-F the mergers of Banesto and Banif with the Bank are subject to the condition precedent of authorization of the Minister of Economy and Competitiveness.

Insurance business in Spain

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

The transaction is subject to the receipt of the relevant authorizations from the Directorate-General of Insurance and Pension Funds and the European competition authorities and, therefore, it is scheduled to be completed by the first half of 2013.

Acquisition of the Polish institution Bank Zachodni WBK

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

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

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

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

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

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

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

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

Sales of 1.9% and 7.8% of Banco Santander Chile

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

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

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

Following the transaction, we held 67% of the share capital of Banco Santander Chile.

Agreement with Zurich Financial Services Group

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

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

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

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

Santander Banif Inmobiliario

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

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

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

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

Metrovacesa, S.A. (“Metrovacesa”)

On March 17, 2011, Banco de Sabadell, S.A., Caja de Ahorros y Monte de Piedad de Madrid (now Bankia, S.A.), Banco Bilbao Vizcaya Argentaria, S.A., Banco Popular Español, S.A., Banco Santander, S.A. and Banco Español de Crédito, S.A., holders in aggregate of shares representing 65.52% of Metrovacesa’s share capital (of which a 23.63% stake was held by the Group), entered into a capitalization and voting agreement relating to Metrovacesa (which was subject to certain conditions

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precedent, including the implementation by Metrovacesa of a capital increase through cash contributions and the conversion of debt into equity referred to below) whereby said credit entities collectively undertook to capitalize approximately €1,360 million credits to Metrovacesa, the Group’s share of which was €492 million. On June 28, 2011, Metrovacesa’s shareholders approved the aforementioned capital increase for a par value of €1,949 million, subject to certain conditions precedent including the CNMV releasing the Group from the obligation to launch a mandatory takeover bid for the entire share capital of Metrovacesa as a result of the increase of the Group’s holding in the share capital of Metrovacesa above 30% of the company’s voting rights. This release was granted by the CNMV on July 6, 2011. On August 1, 2011, and following the execution of the abovementioned capital increase of Metrovacesa, Banco Santander, S.A. and the individuals and legal entities whose voting rights are attributed to the Bank pursuant to the assumptions provided in article 5 of Royal Decree 1066/2007, of July 27, governing the legal framework for public take-over bids of securities, held 344,530,740 shares in Metrovacesa, representing 34.88% of the company’s voting rights.

On December 19, 2012, Banco de Sabadell, S.A., Bankia, S.A., Banco Bilbao Vizcaya Argentaria, S.A., Banco Popular Español, S.A., Banco Santander, S.A. and Banco Español de Crédito, S.A. announced that they had reached an agreement to promote the delisting of the shares of Metrovacesa through a delisting tender offer to be launched by Banco de Sabadell, S.A., Banco Bilbao Vizcaya Argentaria, S.A., Banco Popular Español, S.A. and Banco Santander, S.A. at a price of €2.28 per Metrovacesa share. Bankia, S.A. and Banco Español de Crédito, S.A. agreed to not tender their shares in Metrovacesa in any such tender offer. On January 29, 2013, Metrovacesa’s shareholders approved the company’s delisting and the delisting tender offer. On April 18, 2013, the CNMV authorized the delisting tender offer, which will be open for acceptance until May 13, 2013. The Group’s share of the delisting tender offer will be 45.56% and, as a result, if all the eligible shareholders of Metrovacesa tendered their shares pursuant to the offer, the Group would acquire an additional 2.007% of Metrovacesa for a total consideration of €45 million.

New partners for Santander Consumer USA

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

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

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

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

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

The Shareholders Agreement also provides that each of Auto Finance Holdings and DDFS will have the right to sell, and SHUSA will be required to purchase, their respective shares of SCUSA common stock, at its then fair market value, and Auto

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Finance Holdings and DDFS, if applicable, will receive the payment referred to above at that time (i) at the fourth, fifth and seventh anniversaries of the closing of the investments, unless an initial public offering of SCUSA common stock has been previously consummated or (ii) in the event there is a deadlock with respect to certain specified matters which require the approval of the board of directors or shareholders of SCUSA.

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

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

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

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

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

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

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

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

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

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

Offer to repurchase preferred securities and subscribe Banco Santander shares

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

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

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

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

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

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

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

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

Capital requirements

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

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

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.

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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 Polish zlotys (€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.

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 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

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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.

Agreement with Qatar Holding by which it subscribed a bond issue

On October 18, 2010, Banco Santander announced that it had reached an agreement with Qatar Holding, by which the latter subscribed 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.

In January and March 2012 the Group transferred shares representing 4.41% and 0.77% of Banco Santander (Brasil) S.A. to two leading international financial institutions that have undertaken to deliver these shares to the holders of the bonds convertible into shares of Banco Santander (Brasil) S.A. issued by Banco Santander, S.A. in October 2010 upon the maturity of the bonds and under the terms laid down therein.

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.

Capital Increases

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.

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

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

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

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

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

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

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

Other Material Events

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

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

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

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

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

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

Financial assistance to recapitalize the Spanish Banking Sector

1. Assessment of balance sheets

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

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

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

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

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

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

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

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

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

The main results from the analysis were the following:

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

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

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

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

2. Loan request to European authorities.

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

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

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

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

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

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

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

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

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

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

The capital to be injected by FROB into Group 1 banks amounted to €36,968 million. In December 2012, this amount was transferred from the European Stability Mechanism to FROB, together with €2,500 million for FROB’s contribution to SAREB, which recapitalized these banks before the end of the year.

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

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

The sector is in the final phases of its recapitalization, which is expected to enable those banks to meet the targeted capital ratio requirement of 9%.

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

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

Recent Events

Scrip dividend

At its meeting of January 11, 2013, 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, whereby the shareholders were offered the option of receiving an amount equivalent to said dividend, the gross amount of which was €0.152 per share, in shares or cash.

On January 30, 2013, the holders of 86.40% of the free allotment rights have chosen to receive new shares. Consequently, Banco Santander has acquired 1,403,540,519 rights for a total gross consideration of €213 million.

On January 31, 2013, pursuant to the Santander Dividendo Elección shareholder remuneration program, the Group announced that it would offer shareholders the option of receiving an amount equal to the 2012 final interim dividend in cash or in new shares. From May 2, 2013, the Bank will pay €0.150 per share in cash to shareholders who opt for this method of receiving their remuneration. Therefore, the total envisaged shareholder remuneration in respect of the 2012 financial year will amount to approximately €0.60 per share.

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Invitation to tender American Securities for purchase

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

The amount in cash to be paid for each American Security will be equal to the sum of the purchase price (expressed as a percentage of the outstanding principal amount as of the settlement date) plus the interest accrued and unpaid from (and including) the last interest payment date to (but excluding) the settlement date of the tender offers. The purchase price has been established as a fixed amount for each US$100,000 outstanding principal amount as of the settlement date of the American Securities and is specified in the annex hereto.

Banco Santander will obtain the funds needed to fulfill its payment obligations arising from the American Invitation from its ordinary available liquidity and reserves its right to amend the terms and conditions of the American Invitation as well as to extend, reopen, amend, revoke or terminate the American Invitation at any moment.

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

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

Invitation to tender European Securities for purchase

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

The European Invitation is only addressed to those holders of European Securities that are not located in, or are not resident of, the U.S. and to those holders of European Securities that are not acting in the name of or on behalf of persons that are located in, or are resident of, the U.S.

The amount in cash to be paid for each European Security will be equal to the sum of the purchase price (expressed as a percentage of the outstanding principal amount as of the settlement date) of each series of European Securities plus the interest accrued and unpaid from (and including) the last interest payment date to (but excluding) the settlement date of the tender offers. The purchase price has been established as a fixed amount for each €1 or GBP1 outstanding principal amount as of the settlement date of the European Securities.

We will obtain the funds needed to fulfill our payment obligations arising from the European Invitation from our ordinary available liquidity and we reserve our right to amend the terms and conditions of the European Invitation as well as to extend, reopen, amend, revoke or terminate the Invitation at any moment.

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

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

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

On March 18, 2013, KBC and Banco Santander announced a secondary offering of up to 19,978,913 shares in BZ WBK by way of a fully marketed follow-on offering (the “WBK Offering”). Through the WBK Offering, KBC plans to sell 15,125,964 shares (constituting 16.17% of BZ WBK shares outstanding at that date) and Santander is expected to sell not less than 195,216 but up to 4,852,949 shares (constituting between 0.21% and 5.19% of BZ WBK shares outstanding at that date). Assuming the Offering is completed in full, the free float of BZ WBK following the Offering would be 30%.

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

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

On March 22, 2013, we announced that Banco Santander and KBC Bank had completed the placement of 19,978,913 shares of Bank Zachodni WBK at a final price of 245 zlotys per share, amounting to a total of €1,171 million. Santander sold 4,852,949 shares, equal to 5.2% of BZ WBK’s capital, for €285 million, while KBC obtained €887 million for its 16.17% stake in BZ WBK.

The placement of these shares will enable Banco Santander to meet its commitment to the Polish regulator that the free float of the Polish unit would be at least 30% by the end of 2014. Moreover, the transaction has allowed KBC to divest the stake in BZ WBK it had obtained as a result of the merger of its Polish subsidiary, Kredyt Bank, with Banco Santander’s unit, Bank Zachodni WBK. The remaining 70% of the capital will be held by Santander, the controlling shareholder.

B. Business overview

At December 31, 2012, we had a market capitalization of €63.0 billion, stockholders’ equity of €74.65 billion and total assets of €1,269.6 billion. We had an additional €118.1 billion in mutual funds, pension funds and other assets under management at that date. As of December 31, 2012, we had 58,074 employees and 6,437 branch offices in Continental Europe, 26,186 employees and 1,189 branches in the United Kingdom, 90,576 employees and 6,044 branches in Latin America, 9,525 employees and 722 branches in the United States and 2,402 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” herein).

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

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

Grupo Santander maintained in 2012 the general criteria used in 2011, with the following exceptions:

• The geographic areas of Continental Europe, the U.K. and Latin America are maintained and one for the U.S. is created which includes Sovereign Bank and Santander Consumer USA, which exits Continental Europe (and, within this area, Santander Consumer Finance in which it was integrated). As a result, the segment reporting figures for 2011 and 2010 have been restated in order to facilitate their comparison with the figures for 2012.

• The consumer business in the U.K. has been consolidated into Santander UK and exits Continental Europe (and, within this area, Santander Consumer Finance in which it was integrated). The figures for 2011 and 2010 have been restated.

• The annual adjustment was made to the Global customer relationship Model and resulted in a net increase of 36 new clients. This does not mean any changes in the principal (geographic) segments, but it does affect the figures for retail Banking and Global Wholesale Banking. The figures for 2011 and 2010 have been restated.

None of these changes was significant for the Group as a whole.

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.

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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 Banif, the specialized private bank), wholesale banking and asset management and insurance conducted in this region. This segment includes the following units: the Santander Branch Network, Banesto, Santander Consumer Finance, Portugal and Bank Zachodni BWK.

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

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

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

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

• Retail Banking. This area covers all customer banking businesses, including private banking (except those of Corporate Banking, managed through the Global Customer Relationship Model).

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

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

In addition to these operating units, which cover everything by geographic area and business, we continue to maintain a separate Corporate Activities area. This area incorporates the centralized activities relating to equity stakes in financial companies, financial management of the structural exchange rate position and of the Parent bank’s structural interest rate risk, as well as management of liquidity and of stockholders’ equity through issues and securitizations. The Corporate Activities segment also manages all the real state exposure held by the Group in Spain through a corporate area created in 2009 and specialized in this type of property asset. As the Group’s holding entity, it manages all capital and reserves and allocations of capital and liquidity. It also incorporates amortization of goodwill but not the costs related to the Group’s central services except for corporate and institutional expenses related to the Group’s functioning.

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

First level (or geographic):

Continental Europe

This area covers the banking activities of the different networks and specialized units in Europe, principally with individual clients and Small and Medium Enterprises (“SMEs”), as well as private and public institutions. During 2012, there were five main units within this area: the Santander Branch Network, Banesto, Santander Consumer Finance, Portugal and Bank Zachodni WBK which was incorporated in April 2011. It also includes Banif (the specialized private bank), wholesale banking and asset management and insurance conducted in this region. Santander Consumer USA was removed from Santander Consumer Finance and incorporated in the United States. Similarly, the consumer business in the U.K. has been incorporated into Santander UK and exits Continental Europe (and within it, Santander Consumer Finance in which it was integrated).

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Continental Europe is the largest business area of Grupo Santander by assets. At the end of 2012, it accounted for 37.8% of total customer funds under management, 39.8% of total loans to customers and 26.8% of profit attributed to the Parent bank of the Group’s main business areas.

The area had 6,437 branches and 58,074 employees (direct and assigned) at the end of 2012.

In 2012, this segment obtained attributable profit of €2,305 million, an increase of 0.8% on the previous year, heavily affected by the booking of 17.0% higher impairment losses on financial assets than 2011. Return on equity (“ROE”) in 2012 was 7.4%, as compared to 7.7% in 2011.

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 2012, we had 2,894 branches and a total of 17,880 employees (direct and assigned), of which 10 were hired on a temporary basis, dedicated to retail banking in Spain.

In 2012, profit attributable to the Parent bank from the Santander Branch Network was €790 million, 7.4% more than in 2011, while the ROE reached 11.0% (as compared to 9.6% in 2011). This increase was mainly due by an increase in net interest income of 10.2% and effective cost control, which remained flat (+0.1%) in 2012. The increase in operating income was partially offset by an increase in credit loss provision due to higher non-performing loans (“NPL”).

These results were obtained in a still difficult environment characterized by contractions of GDP, domestic demand and consumption, rising unemployment rates, interest rates that fell to all-time lows, with the consequent impact on spreads, non-preforming loans reaching records highs, and the restructuring of the Spanish financial system.

In 2012, the Santander Branch Network lending decreased by approximately 7.3%, customer funds under management increased by 18.4%, deposits increased 21.7%, mutual funds fell 11.2% and pension funds increased 3.9%. The activity reflected the scant demand for loans and a strategy which focused on customer funds in order to gain market share and narrow the commercial gap. The ratio of NPL for Santander Branch Network and Banco Santander, S.A. grew to 9.65% and 7.29%, from 8.47% and 5.99%, in 2011, respectively, as a result of the weak situation in Spain.

Banesto

At the end of 2012, Banesto had 1,647 branches and 9,136 employees (direct and assigned), of which 53 employees were temporary.

In 2012, profit attributable to the Parent bank from Banesto was €94 million, a 28.1% decrease from 2011, while the ROE reached 2.0% as compared to 2.8% in 2011. These results were produced in a very complicated scenario of recession, low business volumes and interest rates, and the system’s NPLs reaching historic highs.

The balance sheet management and the improved customer spread to a large extent offset the impact of the decrease in business activity and the low interest rates, making it possible to increase Banesto’s net interest income by 7.6% to €1,454 million. Higher credit loss provisions offset the increase in net interest income.

At the end of 2012, the balance of loans was 10.4% lower than a year earlier, deposits decreased 4.9%, customer funds under management diminished by 7.5%, mutual funds fell 7.0% and pension funds increased 1.6%. Spain’s recession is pushing up NPL entries, largely in the real estate sector, although the recoveries and sale of portfolios are containing the rise in the balance of bad loans. At the end of 2012, Banesto’s NPL ratio was 6.28% compared to 5.0% in 2011.

For accounting purposes, Banesto was merged by absorption into Banco Santander, S.A. beginning January 1, 2013 (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).

Santander Consumer Finance

Our consumer financing activities are conducted through our subsidiary Santander Consumer Finance (SCF) and its group of companies. Most of the activity of 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,

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Poland, Finland and Sweden. We also conduct business in Portugal, Austria and the Netherlands, among others. Santander Consumer USA and the consumer business in the U.K. have been incorporated in the United States and Santander UK segments, respectively, as of 2012 and exited SCF in which they were previously integrated.

At the end of 2012, this unit had 629 branches and 12,279 employees (direct and assigned), of which 1,292 employees were temporary.

In 2012, this unit generated €727 million in profit attributable to the Parent bank, a 9.0% increase from 2011, while the ROE reached 6.7% (as compared to 7.0% in 2011). The increase in profit attributable to the Parent bank is mainly explained by a decrease in credit loss provisions due to improved credit quality.

Customer loans stood still at €57 billion, deposits decreased 3.9%, and customer funds under management fell by 1.8%. The NPL ratio improved for the third year running and ended 2012 at 3.90% (3.97% in 2011).

Portugal

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

At the end of 2012, Portugal operated 667 branches and had 5,709 employees (direct and assigned), of which 158 employees were temporary.

In 2012, profit attributable to the Parent bank was €124 million, a 28.7% decrease from 2011, due to the impact of the contraction of activity in Portugal and the strengthening of the credit loss provisions. Before provisions, the net operating income was up by 20.4%. There was a rise in credit loss provisions due to the increase in non-performing loans as a result of the economic cycle that was partially offset by the high gains obtained on financial assets and liabilities.

At year end 2012, the NPL ratio stood at 6.56% compared to a 4.06% a year earlier. The ROE was 4.9%, as compared to 7.0% in 2011.

Business continues to be adversely affected by the adjustment plan and the restructuring of the Portuguese banking system agreed with international institutions. In this very difficult economic and financial environment, Santander Totta has focused on strengthening its balance sheet. Lending reflected the deterioration of economic conditions and dropped 8.6% to €25,960 million. Deposits increased 2.2%, customer funds under management declined 4.2%, mutual funds decreased 17.3% and pension funds increased 3.5%.

Retail Poland (BZ WBK)

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

At the end of 2012, this unit had 519 branches and 8,849 employees (direct and assigned), of which 641 employees were temporary.

BZ WBK posted profit attributable to the Parent bank in its first consolidated year of €330 million, 42.0% more than in 2011 when it consolidated three quarters. On a like-for-like basis (considering four quarters in both 2011 and 2012) and in local criteria growth was 21.1% due to higher revenues and lower costs, which comfortably absorbed the increase in provisions. The ROE stood at 19.0% an increase of 1.04 percentage points from 17.9% in 2011.

Others

The other businesses of Continental Europe (Global Banking and Markets, asset management, insurance and Banif) obtained attributable profit of €321 million in 2012, which was 24.2% less than in 2011, with the performance of the global businesses strongly affected by the economic situation.

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United Kingdom

In 2012, the consumer business in the U.K. was incorporated into the Santander UK segment and exited the Continental Europe segment.

As of December 31, 2012, the United Kingdom accounted for 32.1% for the total customer funds under management of the Group’s operating areas. Furthermore it also accounted for 34.9% of total loans to customers and 13.7% of profit attributed to the Parent bank of the Group’s main business areas.

Santander UK remained firmly focused on the U.K., around 85% of customer assets consist of prime U.K. residential mortgages. The mortgage portfolio is of a good quality, with no exposure to self-certified or subprime mortgages and buy to let loans around 1% of assets.

At the end of 2012, we had 1,189 branches and a total of 26,186 employees (direct and assigned) of which 1,580 employees were temporary, in the United Kingdom.

In 2012, Santander UK contributed €1,175 million profit attributable to the Parent bank (a 3.9% decrease from 2011). ROE was 8.2% (as compared to 9.6% in 2011). This was mainly due to low interest rates and the higher cost of funds, together with the maturity of interest rate hedges made in previous years. Credit loss provisions were higher than in 2011, although growth in provisions slowed down in the second half of the year.

The NPL ratio at the end of 2012 increased to 2.05% from 1.84% at the end of 2011. Loans and advances to customers decreased by 2.0% and customer funds under management decreased 0.5% during the same period.

Latin America

At December 31, 2012, we had 6,044 offices and 90,576 employees (direct and assigned) in Latin America, of which 1,867 were temporary employees. At that date, Latin America accounted for 25.6% of the total customer funds under management, 19.5% of total loans to customers and 50.6% of profit attributed to the Parent bank of the Group’s main business areas.

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

	Percentage held at December 31, 2012			Percentage held at December 31, 2012
Banco Santander (Brasil), S.A.		75.21	Banco Santander, S.A. (Uruguay)		100.00
Banco Santander Chile		67.01	Banco Santander Puerto Rico		100.00
Banco Santander (Mexico), S.A., Institución de Banca Múltiple, Grupo Financiero Santander		75.11	Banco Santander Perú, S.A.		100.00
Banco Santander Río, S.A. (Argentina)		99.30

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.

Profit attributable to the Parent bank from Latin America by Santander Group in 2012 was €4,305 million, a decrease of 7.7%, while the ROE reached 19.4% (as compared to 21.8% in 2011). Excluding the effect of the changes in the scope of consolidation (the sale in Colombia, the sale of insurance and the increase of non-controlling interests in Brazil, Mexico and Chile), profit attributable to the Parent would have risen by 3.7%.

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

Brazil. Santander Brazil is one of the three third largest private sector banks in terms of assets, and the leading foreign bank, with a market share of 10% in loans. At the end of 2012, the institution had 3,788 branches, 53,707 employees and 27.3 million customers.

During 2012, total loans declined 5%. Nevertheless, in local currency total loans rose 6%, mainly backed by growth in the retail segment. Particularly noteworthy was lending to individuals and SMEs and companies. Deposits excluding repos fell 4% (in local currency rose 3%).

Profit attributable to the Parent bank from Brazil in 2012 was €2,212 million, a 15.2% decrease as compared to 2011 (-8.8% in local currency). Net interest income grew soundly by 6.4% (14.5% in local currency). This, however, did not feed through to profits mainly because of higher credit loss provisions (due to the growth in lending and the rise in NPLs) and the increase in non-controlling interests. ROE was 17.9% (as compared to 23.3% in 2011). The NPL ratio stood at 6.86% at the end of 2012 (5.38% in December 2011).

Mexico. Banco Santander (Mexico), S.A., Institución de Banca Múltiple, Grupo Financiero Santander, is one of the leading financial services companies in Mexico. Santander is the third largest banking group in Mexico by business volume, with a market share in loans of 13.9% and 13.7% in deposits. As of December 31, 2012, we had a network of 1,170 branches, 13,954 employees and 10 million customers in Mexico. Banco Santander Mexico went to the international markets in November for the first time with a $1 billion senior bond issue, the largest, with the longest maturity (10 years) and the lowest funding cost of a Mexican bank in the country’s history.

In 2012, lending rose 12.1%, mainly due to growth in consumer credit and mortgage loans. In addition, bank savings increased 15.3% and customer funds under management up by 15.1%.

Profit attributable to the Parent bank from Mexico in 2012 increased 8.5% to €1,015 million (6.2% in local currency). Disregarding non-controlling interests, which were affected by the sale of 24.9% of the capital in September 2012, there was a 12.2% increase in net profit, in local currency. The growth was founded on net interest income and net commissions which more than covered the rising costs. The number of branches for Select customers was doubled to over 70 specialized branches to serve the high income segment. There is also an expansion plan for 200 branches over the next three years in order to strengthen the distribution network and take advantage of the growth expected in the market.

For 2012 ROE was 25.1% (as compared to 21.2% in 2011) and at the end of 2012, the NPL ratio slightly increased by 12 percentage points to 1.94% and the NPL coverage ratio was 157%.

Chile. Banco Santander Chile is the principal component of the largest financial group in Chile in terms of assets. As of December 31, 2012, we had 504 branches, 12,355 employees and more than 3.5 million customers and market shares of 19.1% in loans and 16.5% in deposits.

In 2012 savings rose 11%, while mutual funds declined 6%. Customer loans increased 15%.

Profit attributable to the Parent bank from Chile decreased 18.5% in 2012 to €498 million (a 24.2% decrease as compared to 2011 in local currency). On a like-for- like basis, excluding the effect of the change in the scope of consolidation as a result of the placement made at the end of 2011, the reduction in local currency was 9.9% and was heavily impacted by the credit loss provisions. For 2012, the ROE was 22.1%, the NPL ratio increased to 5.17% and the NPL coverage ratio was 58%.

Argentina. Santander Río is one of the country’s leading banks, with market shares of 8.6% in lending and 9.3% in savings. It has 370 branches, 6,805 employees and 2.4 million customers.

During the year, lending (+9%) continued to grow strongly. Deposits rose 5%, and mutual funds were down by 8%.

Profit attributable to the Parent bank was €329 million, 14.5% higher (16.1% in local currency). At the end of 2012, the ROE was 45.4%, NPL ratio was 1.7% and the NPL coverage ratio was 143%.

Uruguay. Santander is the largest private sector bank in the country in terms of the number of branches (84) and business (market share of 18.2% in lending and 15.6% in deposits). As of December 31, 2012, we had 1,217 employees and 266,000 customers.

Profit attributable to the Parent bank was €47 million in 2012, 134.8% higher than in 2011 (a 127.9% increase in local currency) following the purchase of Creditel and the NPL ratio was 0.88% as of December 31, 2012.

Puerto Rico. As of December 31, 2012, Banco Santander Puerto Rico had 118 branches, 1,654 employees and 526,000 customers.

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Profit attributable to the Parent bank from Puerto Rico in 2012 was €57 million, a 69.4% increase as compared to 2011 (a 56.4% increase in dollars). At the end of 2012, the NPL ratio stood at 7.14% and the NPL coverage ratio was 62%.

Peru. As of December 31, 2012, Banco Santander Perú, S.A. had 1 branch and 52 employees. The unit’s activity is focused on companies and on the Group’s global customers. At the end of 2012, and together with a front rank international partner with wide experience in Latin America, we began to operate a new entity specialized in auto finance that will work with all manufacturers and dealers in the country.

Profit attributable to the Parent bank from Peru was €16 million in 2012, 48.8% higher than in 2011, (a 31.7% increase in local currency).

United States

Santander US includes Santander Holdings USA (SHUSA), a bank holding company with two distinct lines of business: retail banking, via its subsidiary Sovereign Bank, and consumer finance business through its stake in Santander Consumer USA Inc. (SCUSA).

Sovereign Bank, with 722 branches, 2,268 ATMs and more than 1.7 million customer-households, at December 31, 2012, is developing a business model focused on retail customers and companies. At that date, Santander US had 9,525 employees (direct and assigned), of which 5 were temporary. Santander US accounted for 4.5% of the total customer funds under management, 5.8% of total loans to customers and 9.4% of profit attributed to the Parent bank of the Group’s main business areas.

Santander US obtained attributable profit of €811 million in 2012, which was 19.7% less than in 2011 (25.8% less in local currency). For 2012, ROE was 15.5% and the NPL ratio was 2.3%, which represents a 9.2 and 0.6 percentage points reduction from 2011, respectively. At December 31, 2011, SCUSA increased its capital by admitting new shareholders, with the result that the Santander Group stake in the company went from 91.5% to approximately 65%. In addition, the earnings were affected by the impact in the third quarter of the charge booked for Trust Piers due to the settlement reached in court to remunerate an investment at a higher rate of interest than it was earning.

At Sovereign Bank the profit attributable to the Parent bank in 2012 was €470 million as compared to €526 million a year earlier. The decrease was mainly due to a 36.0% reduction in total income, which reflects the fall in long-term interest rates, the reduction in the non-strategic portfolio and the increased regulatory pressure. In addition, a charge was booked after the Trust Piers settlement. Lastly, a strong reduction of impairment losses on financial assets, due to a further reduction in the non-performing loans, partially offset the above mentioned impacts.

At SCUSA, on a consolidated basis, the contribution to the Group was $436 million, lower than in 2011 for two reasons: the reduction in the stake to 65%, representing an impact of around $50 million each quarter, and the use of loan-loss provisions in the first quarter of 2011, due to a better than expected evolution of the portfolios acquired at the time of the purchase. Excluding these factors, the contribution was similar to that of 2011.

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Second or business level:

Retail Banking

Profit attributable to the Parent bank of retail banking in 2012 was €6,385 million, 7.6% lower as compared to 2011. This reduction was mainly due to higher loan-loss provisions and the impact of higher minority interests on Latin American units. In comparison with 2011, the performance of earnings was negatively affected by 6 percentage points due to the following changes in the scope of consolidation: (i) SCUSA started consolidating by the equity method in December 2011 after the entry of new partners; (ii) our insurance activities in Latin America started consolidating by the equity method after the agreement with Zurich Financial Services Group in the fourth quarter of 2011 by which we handed over control over our insurance businesses in the five key Latin American markets (Brazil, Chile, Mexico, Argentina and Uruguay); and (iii) increased non-controlling interests. For further details, 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”. The effect of interest rate variations was near zero.

Retail Banking generated 88% of the operating areas’ total income and 74.3% of profit attributable to the Parent bank. This segment had 176,714 employees as of December 31, 2012, of which 4,360 were temporary.

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

The attributable profit of retail banking in Continental Europe rose 1.7% as a result of the positive evolution of income thanks to the resilience of revenues in the current phase of the cycle (favored by the incorporation of Bank Zachodni WBK in Poland and SEB’s business in Germany) and control of costs.

The Profit attributable to the Parent in Retail Banking in U.K. was 10.8% lower, largely due to lower net interest income (higher cost of funding and low interest rates).

The Profit attributable to the Parent in Retail Banking in Latin America was 5.9% lower. The good performance of the net interest income was offset by higher administrative expenses and impairment losses and the higher impact of minority interests following the sale of shares in the banks in Brazil, Mexico and Chile.

Retail Banking earnings in the U.S. were 26.5% lower. This reflects the reduced stake in SCUSA and the one-off charge at Sovereign Bank for the Trust Piers settlement to remunerate an investment at a higher rate of interest than it was earning.

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 U.K., Italy and Latin America), as well as the units of domestic private banking in Portugal and Latin America, jointly managed with local retail banks. Attributable profit was €209 million, very similar to that registered in 2011 (+0.7%).

For accounting purposes, Banif was merged by absorption into Banco Santander, S.A. beginning January 1, 2013 (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”).

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 10.1% of the operating areas’ total income and 21.2% of profit attributable to the Parent bank in 2012. Profit attributable to the Parent bank in 2012 by Global Wholesale Banking was flat with a variation of -0.7%, when compared to 2011, at €1,827 million. After a good start, the year experienced significant levels of volatility and uncertainty in the face of the worsening eurozone crisis. This conditioned business activity to a large extent. This segment had 5,890 employees as of December 31, 2012, of which 2 were temporary.

Santander Global Banking & Markets maintained the main drivers of its business model: client-focused, global reach of the division and interconnection with local units. At the strategic level, the area focused on strengthening the results of its client franchise and maintaining active management of risk, capital and liquidity. This management intensified in the second part of the year, with an adjustment of exposures and limits by sectors and clients.

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The division continued to accompany the Group in its international development in Poland and the northeast of the U.S. in order to capture the revenues synergies derived from the new units and manage the commercial flows of current and potential clients where the Group has strong retail units.

Santander is present in global transaction banking (which includes cash management, trade finance and basic financing and custody), in corporate finance (comprising mergers and acquisitions and equity capital markets), in credit markets (which include origination and distribution of corporate loans or structured finance, bond origination and securitization teams and asset and capital structuring), in rates (which covers fixed income and exchange rate) 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, 2012, this segment accounted for 1.9% of total income and 4.5% of profit attributable to the Parent bank. Profit attributable to the Parent bank by Asset Management and Insurance was €383 million in 2012 or 11.5% lower than in 2011. This segment had 1,756 employees at the end of 2012, of which 21 were temporary.

In July 2012, an agreement was reached with Abbey Life Insurance ltd., a subsidiary of Deustche Bank AG, to reinsure all of the individual life risk portfolio of the insurance companies in Spain and Portugal. This transaction generated estimated extraordinary gross results of €435 million.

In December 2012, Santander agreed a strategic alliance with the insurer Aegon to boost its bancassurance business in Spain through commercial networks. The operation valued Santander’s insurance business in the transaction at €431 million. The agreement does not affect savings, auto and health insurance, which Santander continues to manage.

Asset Management

Santander Asset Management obtained profit attributable to the Parent bank of €69 million, a 2.9% increase as compared to 2011. This was mainly due to a decline in income partially offset by reduction in costs and lower needs for provisions.

The total volume of managed funds was €153.7 billion, 11% more than at the end of 2011. This includes the incorporation of the insurance mandate of the Group in Spain in the fourth quarter (-1% without it). Of this, around €99 billion were mutual and pension funds, €8 billion in client portfolios other than mutual funds included institutional mandates and €46 billion of management mandates on behalf of other Group units.

Insurance

Santander insurance posted an profit attributable to the Parent of €314 million, 14.1% less than in 2011. Results were impacted by the sale of 51% of the insurers in Latin America and by the reinsurance agreement of its life portfolio in Spain and Portugal, which reduced their contribution by €131 million. Eliminating these effects, profit was 19.0% higher.

Insurance business generated total revenues for the Group (including fee income paid to the commercial networks) of €2,784 million 2.3% higher on a like-for-like basis. The total results for the Group (income before taxes of insurers and brokers plus fee income received by the networks) amounted to €2,653 million, 3.0% on a like-for-like basis.

Corporate Activities

At the end of 2012, this area had 2,402 employees (direct and assigned) of which 9 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 segment also manages all the real estate exposure held by the Group in Spain through a corporate area created in 2009 and specialized in this type of property asset.

The Corporate Activities area had a loss of €6,391 million in 2012, a 66.7% increase as compared to 2011. This area assumed the provisions coverage real estate exposure in Spain (€4,110 million net of taxes) and capital gains of €983 million net of taxes.

After deducting the net figure for capital gains and writedowns, the area sustained a loss of €3,263 million compared to a loss of €2,163 million in 2011. This variation was mainly due to the decrease in income as a result of the liquidity buffer and

52

the higher cost of funding, the decrease in the share of results of entities accounted for using the equity method (due to Metrovacesa) and the increase in writedowns, which included the impairment of goodwill in Italy, the writedown of the value of the real estate investment fund and the results from real estate asset management.

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/losses 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.

Total Revenues by Activity and Geographic Location

For a breakdown of our total revenues by category of activity and geographic market, 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 arrangement 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-IASB. If these transactions did not

53

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 2012, 2011, 2010, 2009 and 2008 under IFRS-IASB.

54

Average Balance Sheet—Assets and Interest Income

	Year ended December 31,
ASSETS	2012							2011								2010
	Average Balance		Interest		Average Rate			Average Balance		Interest			Average Rate			Average Balance		Interest			Average Rate
	(in millions of euros, except percentages)
Cash and due from central banks
Domestic		21,172		91		0.44	%		8,436		187			2.22	%		8,441		87			1.03	%
International		75,572		2,602		3.44	%		73,259		3,005			4.10	%		52,936		1,846			3.49	%
		96,744		2,693		2.78	%		81,695		3,192			3.91	%		61,377		1,933			3.15	%
Due from credit entities
Domestic		25,257		136		0.54	%		22,140		190			0.86	%		29,392		206			0.70	%
International		45,600		898		1.97	%		53,123		871			1.64	%		51,382		839			1.63	%
		70,857		1,034		1.46	%		75,263		1,061			1.41	%		80,774		1,045			1.29	%
Loans and credits
Domestic		198,643		7,332		3.69	%		217,235		7,581			3.49	%		224,642		7,312			3.26	%
International		552,174		39,028		7.07	%		513,568		39,328			7.66	%		482,407		34,542			7.16	%
		750,817		46,360		6.17	%		730,803		46,909			6.42	%		707,049		41,854			5.92	%
Debt securities
Domestic		52,382		1,946		3.72	%		42,293		1,458			3.45	%		44,784		1,136			2.54	%
International		96,910		5,147		5.31	%		106,408		5,948			5.59	%		107,662		5,096			4.73	%
		149,292		7,093		4.75	%		148,701		7,406			4.98	%		152,446		6,232			4.09	%
Income from hedging operations
Domestic				211							378								169
International				472							(46	)							(76	)
				683							332								93
Other interest-earning assets
Domestic		75,008		803		1.07	%		48,716		779			1.60	%		27,769		698			2.51	%
International		47,902		357		0.75	%		40,029		1,176			2.94	%		62,757		1,052			1.68	%
		122,910		1,160		0.94	%		88,745		1,955			2.20	%		90,526		1,750			1.93	%
Total interest-earning assets
Domestic		372,462		10,520		2.82	%		338,820		10,573			3.12	%		335,028		9,608			2.87	%
International		818,158		48,504		5.93	%		786,387		50,283			6.39	%		757,144		43,299			5.72	%
		1,190,620		59,024		4.96	%		1,125,207		60,856			5.41	%		1,092,172		52,907			4.84	%
Investments in affiliated companies
Domestic		1,147		—		0.00	%		443		—			0.00	%		201		—			0.00	%
International		3,459		—		0.00	%		546		—			0.00	%		52		—			0.00	%
		4,606		—		0.00	%		989		—			0.00	%		253		—			0.00	%
Total earning assets
Domestic		373,609		10,520		2.82	%		339,263		10,573			3.12	%		335,229		9,608			2.87	%
International		821,617		48,504		5.90	%		786,933		50,283			6.39	%		757,196		43,299			5.72	%
		1,195,226		59,024		4.94	%		1,126,196		60,856			5.40	%		1,092,425		52,907			4.84	%
Other assets		91,860							102,186								97,936
Assets from discontinued operations		—							—								—
Total average assets		1,287,086		59,024					1,228,382		60,856						1,190,361		52,907

55

Average Balance Sheet—Liabilities and Interest Expense

	Year ended December 31,
	2012								2011								2010
LIABILITIES AND STOCKHOLDERS EQUITY	Average Balance		Interest			Average Rate			Average Balance		Interest			Average Rate			Average Balance		Interest			Average Rate
Due to credit entities
Domestic		55,339		761			1.38	%		33,456		756			2.26	%		28,586		389			1.36	%
International		99,347		1,729			1.74	%		113,182		2,119			1.87	%		105,991		1,283			1.21	%
		154,686		2,490			1.61	%		146,638		2,875			1.96	%		134,577		1,672			1.24	%
Customers deposits
Domestic		153,399		2,850			1.86	%		164,980		2,895			1.75	%		155,244		2,839			1.83	%
International		482,952		13,554			2.81	%		451,710		13,924			3.08	%		413,670		10,607			2.56	%
		636,351		16,404			2.58	%		616,690		16,819			2.73	%		568,914		13,446			2.36	%
Marketable debt securities
Domestic		95,054		3,175			3.34	%		91,358		3,142			3.44	%		105,411		2,876			2.73	%
International		109,647		4,102			3.74	%		104,749		3,288			3.14	%		103,595		2,083			2.01	%
		204,701		7,277			3.55	%		196,107		6,430			3.28	%		209,006		4,959			2.37	%
Subordinated debt
Domestic		10,409		637			6.12	%		15,321		752			4.91	%		19,702		1,019			5.17	%
International		10,830		1,013			9.35	%		11,352		1,188			10.47	%		14,394		1,211			8.41	%
		21,239		1,650			7.77	%		26,673		1,940			7.27	%		34,096		2,230			6.54	%
Other interest-bearing liabilities
Domestic		91,492		1,113			1.22	%		68,103		1,242			1.81	%		39,728		1,031			2.60	%
International		63,062		684			1.08	%		53,353		1,166			2.19	%		81,999		1,184			1.44	%
		154,554		1,797			1.16	%		121,456		2,408			1.98	%		121,727		2,215			1.82	%
Expenses from hedging operations
Domestic				(974	)							(805	)							(1,362	)
International				234								368								522
				(740	)							(437	)							(840	)
Total interest-bearing liabilities
Domestic		405,693		7,561			1.86	%		373,218		7,983			2.14	%		348,671		6,793			1.95	%
International		765,838		21,316			2.78	%		734,346		22,053			3.00	%		719,649		16,891			2.35	%
		1,171,531		28,877			2.46	%		1,107,564		30,036			2.71	%		1,068,320		23,684			2.22	%
Other liabilities		32,277								40,999								45,194
Non-controlling interest		8,559								5,998								5,695
Stockholders’ Equity		74,719								73,821								71,153
Liabilities from discontinued operations		—								—								—
Total average Liabilities and Stockholders’ Equity		1,287,086		28,877						1,228,382		30,036						1,190,362		23,683

56

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 2012 compared to 2011 and 2011 compared to 2010. 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 2012/2011
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in millions of euros)
Interest income
Cash and due from central banks
Domestic		134			(230	)		(96	)
International		92			(496	)		(404	)
		226			(726	)		(500	)
Due from credit entities
Domestic		24			(78	)		(54	)
International		(134	)		160			26
		(110	)		82			(28	)
Loans and credits
Domestic		(670	)		422			(248	)
International		2,844			(3,144	)		(300	)
		2,174			(2,722	)		(548	)
Debt securities
Domestic		368			120			488
International		(515	)		(287	)		(802	)
		(147	)		(167	)		(314	)
Other interest-earning assets
Domestic		334			(310	)		24
International		195			(1,014	)		(819	)
		529			(1,324	)		(795	)
Total interest-earning assets without hedging operations
Domestic		190			(76	)		114
International		2,482			(4,781	)		(2,299	)
		2,672			(4,857	)		(2,185	)
Income from hedging operations
Domestic		(167	)		—			(167	)
International		518			—			518
		351			—			351
Total interest-earning assets
Domestic		23			(76	)		(53	)
International		3,000			(4,781	)		(1,781	)
		3,023			(4,857	)		(1,834	)

57

Volume and rate analysis

	IFRS-IASB 2011/2010
	Increase (Decrease) due to changes in
	Volume			Rate		Net change
	(in millions of euros)
Interest income
Cash and due from central banks
Domestic		—			100		100
International		794			364		1,158
		794			464		1,258
Due from credit entities
Domestic		(57	)		41		(16	)
International		29			3		32
		(28	)		44		16
Loans and credits
Domestic		(247	)		516		269
International		2,306			2,480		4,786
		2,059			2,996		5,055
Debt securities
Domestic		(66	)		388		322
International		(60	)		913		853
		(126	)		1,301		1,175
Other interest-earning assets
Domestic		(79	)		160		81
International		20			104		124
		(59	)		264		205
Total interest-earning assets without hedging operations
Domestic		(449	)		1,205		756
International		3,089			3,864		6,953
		2,640			5,069		7,709
Income from hedging operations
Domestic		209			—		209
International		31			—		31
		240			—		240
Total interest-earning assets
Domestic		(240	)		1,205		965
International		3,120			3,864		6,984
		2,880			5,069		7,949

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	IFRS-IASB 2012/2011
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in millions of euros)
Interest charges
Due to credit entities
Domestic		373			(368	)		5
International		(247	)		(142	)		(389	)
		126			(510	)		(384	)
Customers deposits
Domestic		(210	)		165			(45	)
International		925			(1,296	)		(371	)
		715			(1,131	)		(416	)
Marketable debt securities
Domestic		125			(92	)		33
International		160			655			815
		285			563			848
Subordinated debt
Domestic		(275	)		159			(116	)
International		(53	)		(122	)		(175	)
		(328	)		37			(291	)
Other interest-bearing liabilities
Domestic		346			(476	)		(130	)
International		184			(667	)		(483	)
		530			(1,143	)		(613	)
Total interest-bearing liabilities without hedging operations
Domestic		359			(612	)		(253	)
International		969			(1,572	)		(603	)
		1,328			(2,184	)		(856	)
Expenses from hedging operations
Domestic		(169	)		—			(169	)
International		(134	)		—			(134	)
		(303	)		—			(303	)
Total interest-bearing liabilities
Domestic		190			(612	)		(422	)
International		835			(1,572	)		(737	)
		1,025			(2,184	)		(1,159	)

59

	IFRS-IASB 2011/2010
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in millions of euros)
Interest charges
Due to credit entities
Domestic		75			292			367
International		93			743			836
		168			1,035			1,203
Customers deposits
Domestic		174			(118	)		56
International		1,037			2,280			3,317
		1,211			2,162			3,373
Marketable debt securities
Domestic		(417	)		683			266
International		23			1,181			1,204
		(394	)		1,864			1,470
Subordinated debt
Domestic		(217	)		(50	)		(267	)
International		(285	)		262			(23	)
		(502	)		212			(290	)
Other interest-bearing liabilities
Domestic		(58	)		269			211
International		27			(44	)		(17	)
		(31	)		225			194
Total interest-bearing liabilities without hedging operations
Domestic		(443	)		1,076			633
International		895			4,422			5,317
		452			5,498			5,950
Expenses from hedging operations
Domestic		558			—			558
International		(154	)		—			(154	)
		404			—			404
Total interest-bearing liabilities
Domestic		115			1,076			1,191
International		741			4,422			5,163
		856			5,498			6,354

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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,
	2012			2011			2010
	(in millions of euros, except percentages)
Average earning assets
Domestic		373,609			315,387			335,229
International		821,617			810,809			757,196
		1,195,226			1,126,196			1,092,425
Interest
Domestic		10,520			10,573			9,608
International		48,504			50,283			43,299
		59,024			60,856			52,907
Net interest income (1)
Domestic		2,959			2,591			2,816
International		27,188			28,230			26,408
		30,147			30,821			29,224
Gross yield (2)
Domestic		2.82	%		3.35	%		2.87	%
International		5.90	%		6.20	%		5.72	%
		4.94	%		5.40	%		4.84	%
Net yield (3)
Domestic		0.79	%		0.82	%		0.84	%
International		3.31	%		3.48	%		3.49	%
		2.52	%		2.74	%		2.68	%
Yield spread (4)
Domestic		0.95	%		1.02	%		0.92	%
International		3.12	%		3.32	%		3.37	%
		2.47	%		2.69	%		2.62	%

(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)” herein.

61

Return on Equity and Assets

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

	Year Ended December 31,
	2012			2011			2010
ROA: Return on average total assets		0.24	%		0.50	%		0.76	%
ROE: Return on average stockholders’ equity		2.80	%		7.14	%		11.80	%
PAY-OUT: Dividends per average share as a percentage of net attributable income per average share (*)		48.67	%		38.57	%		40.70	%
Average stockholders’ equity as a percentage of average total assets		6.12	%		6.10	%		5.82	%

(*) 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 amounts equivalent to dividends are €5,013 million, €3,196 million, and €1,669 million for 2012, 2011 and 2010, respectively. The pay-out ratio for 2012 is an estimate that includes the part of the final dividend expected to be paid in cash in May 2013.

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,
	2012			2011			2010
Cash and due from Central Banks
Domestic		1.78	%		0.75	%		0.77	%
International		6.35	%		6.51	%		4.85	%
		8.13	%		7.26	%		5.62	%
Due from credit entities
Domestic		2.12	%		1.97	%		2.69	%
International		3.83	%		4.71	%		4.70	%
		5.95	%		6.68	%		7.39	%
Loans and credits
Domestic		16.68	%		19.31	%		20.56	%
International		46.38	%		45.64	%		44.18	%
		63.06	%		64.95	%		64.74	%
Debt securities
Domestic		4.40	%		3.76	%		4.10	%
International		8.14	%		9.46	%		9.86	%
		12.54	%		13.22	%		13.96	%
Other interest-earning assets
Domestic		6.30	%		2.21	%		2.53	%
International		4.02	%		5.68	%		5.76	%
		10.32	%		7.89	%		8.29	%
Total interest-earning assets
Domestic		31.28	%		28.00	%		30.65	%
International		68.72	%		72.00	%		69.35	%
		100.00	%		100.00	%		100.00	%

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

	IFRS-IASB At December 31,
	2012		2011		2010		2009		2008
	(in millions of euros)
Reciprocal accounts		1,863		2,658		1,264		713		663
Time deposits		15,669		11,419		13,548		21,382		25,456
Reverse repurchase agreements		25,486		10,647		36,721		29,490		18,569
Other accounts		30,882		27,002		28,322		28,252		34,104
		73,900		51,726		79,855		79,837		78,792
Of which impairment allowances		(30)		(36)		(17)		(26)		(254)

Investment Securities

At December 31, 2012, the book value of our investment securities was €152.1 billion (representing 12% of our total assets). These investment securities had a yield of 4.69% in 2012 compared with a yield of 4.61% in 2011, and a yield of 3.76% in 2010. Approximately €37.1 billion, or 26.3%, of our investment securities at December 31, 2012 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.

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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 Year Ended December 31,
	2012			2011			2010
	(in millions of euros)
Debt securities
Domestic-
Spanish Government		35,380			37,698			35,110
Other domestic issuer:
Public authorities		1,761			1,611			553
Other domestic issuer		10,046			8,409			7,915
Total domestic		47,187			47,718			43,578
International-
United States:
U.S. Treasury and other U.S. Government agencies		132			514			1,122
States and political subdivisions		6,941			1,420			1,743
Other securities		7,648			11,115			11,598
Total United States		14,721			13,049			14,463
Other:
Governments		60,149			58,619			60,737
Other securities		19,431			24,647			31,961
Total Other		79,580			83,266			92,698
Total International		94,301			96,315			107,161
Less- Allowance for credit losses		(144	)		(251	)		(144	)
Less- Price fluctuation allowance		—			—			—
Total Debt Securities		141,344			143,782			150,595
Equity securities
Domestic		3,802			3,574			5,458
International-
United States		1,417			1,283			1,931
Other		5,503			5,376			16,274
Total international		6,920			6,659			18,205
Less- Price fluctuation allowance		—			—			—
Total Equity Securities		10,722			10,233			23,663
Total Investment Securities		152,066			154,015			174,258

The following table sets out 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, 2012 (and other debt securities with aggregate values near to 10% of our stockholders’ equity).

	Aggregate as of December 31, 2012
	Book value		Market value
	(in millions of euros)
Debt securities:
Exceed 10% of stockholders’ equity:
Spanish Government and public authorities		37,141		37,141
Near 10% of stockholders’ equity:
Federative Republic of Brazil:		6,615		6,615

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The following table shows the maturities of our debt investment securities (before impairment allowances) at December 31, 2012.

	Year Ended December 31, 2012
	Maturing Within 1 Year		Maturing Between 1 and 5 Years		Maturing Between 5 and 10 Years		Maturing After 10 Years		Total
	(in millions of euros)
DEBT SECURITIES
Domestic:
Spanish Government		4,591		5,664		20,115		5,010		35,380
Other domestic issuer:
Public authorities		134		1,456		171		—		1,761
Other domestic issuer		3,251		4,126		1,545		1,124		10,046
Total domestic		7,976		11,246		21,831		6,134		47,187
International:
United States:
U.S. Treasury and other U.S. Government agencies		79		53		—		—		132
States and political subdivisions		267		86		75		6,513		6,941
Other securities		693		1,286		336		5,333		7,648
Total United States		1,039		1,425		411		11,846		14,721
Other:
Governments		23,422		25,658		6,210		4,859		60,149
Other securities		4,255		8,811		3,746		2,619		19,431
Total Other		27,677		34,469		9,956		7,478		79,580
Total International		28,716		35,894		10,367		19,324		94,301
Total debt investment securities		36,692		47,140		32,198		25,458		141,488

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Loan Portfolio

At December 31, 2012, our total loans and advances to customers equaled €746.0 billion (58.8% of our total assets). Net of allowances for credit losses, loans and advances to customers equaled €720.5 billion at December 31, 2012 (56.7% of our total assets). In addition to loans, we had outstanding at December 31, 2012, 2011, 2010, 2009 and 2008 €187.7 billion, €181.6 billion, €180.0 billion, €150.6 billion and €123.3 billion respectively, of undrawn balances available to third parties.

Loans by Geographic Area and Type of Customer

The following tables illustrate 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,
	2012			2011			2010			2009			2008
	(in millions of euros)
Loans to borrowers in Spain: (**):
Spanish Government		16,884			12,147			12,137			9,803			7,668
Commercial, financial, agricultural and industrial		61,527			65,935			67,940			70,137			56,290
Real estate and construction (*)		29,008			36,260			38,419			42,515			48,099
Other mortgages		63,886			69,297			74,462			68,866			59,784
Installment loans to individuals		12,775			12,964			15,985			20,070			21,506
Lease financing		3,857			5,043			6,195			7,534			9,253
Other		12,077			12,912			12,475			11,420			37,647
Total		200,014			214,558			227,613			230,345			240,247
Loans to borrowers outside Spain: (**):
Non-Spanish Governments		4,983			4,394			3,527			2,861			3,029
Commercial and industrial		217,358			225,961			217,747			174,763			127,839
Mortgage loans		290,825			296,330			269,893			249,065			201,112
Other		32,806			27,793			25,070			43,390			67,127
Total		545,972			554,478			516,237			470,079			399,107
Total loans and leases, gross		745,986			769,036			743,850			700,424			639,354
Allowance for loan losses (***)		(25,504	)		(18,936	)		(19,697	)		(17,873	)		(12,466	)
Loans and leases, net of allowances		720,482			750,100			724,153			682,551			626,888

(*) As of December 31, 2012, the portfolio of loans to real estate and construction companies included €15,867 million of loans, the proceeds of which were to be used for real estate purposes, defined in accordance with the Bank of Spain’s purpose-based classification guidelines, compared to €23,442 million of such loans in 2011.

(**) Credit of any nature granted to 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, 2012, our loans and advances to associated companies and jointly controlled entities amounted to €544 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, 2012 was €4.0 billion (0.6% of total loans and advances, including government-related loans), and the five next largest exposures totaled €8.1 billion (1.1% of total loans, including government-related loans).

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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, 2012.

	Maturity
	Less than one year					One to five years					Over five years					Total
	Balance		% of Total			Balance		% of Total			Balance		% of Total			Balance		% of Total
	(in millions of euros, except percentages)
Loans to borrowers in Spain: (*)
Spanish Government		3,161		1.69	%		8,561		4.97	%		5,162		1.34	%		16,884		2.26	%
Commercial, financial, agriculture and industrial		21,227		11.32	%		19,109		11.10	%		21,191		5.49	%		61,527		8.25	%
Real estate and construction		2,461		1.31	%		3,064		1.78	%		23,483		6.08	%		29,008		3.89	%
Other mortgages		10,001		5.33	%		1,671		0.97	%		52,214		13.52	%		63,886		8.56	%
Installment loans to individuals		5,602		2.99	%		4,199		2.44	%		2,974		0.77	%		12,775		1.71	%
Lease financing		551		0.29	%		1,870		1.09	%		1,436		0.37	%		3,857		0.52	%
Other		7,491		3.99	%		1,960		1.14	%		2,626		0.68	%		12,077		1.62	%
Total borrowers in Spain		50,494		26.93	%		40,434		23.48	%		109,086		28.24	%		200,014		26.81	%
Loans to borrowers outside Spain: (*)
Non-Spanish Governments		1,754		0.94	%		1,198		0.70	%		2,031		0.53	%		4,983		0.67	%
Commercial and Industrial		97,418		51.96	%		81,261		47.20	%		38,679		10.01	%		217,358		29.14	%
Mortgage loans		16,531		8.82	%		41,567		24.14	%		232,727		60.24	%		290,825		38.99	%
Other		21,295		11.36	%		7,716		4.48	%		3,795		0.98	%		32,806		4.40	%
Total loans to borrowers outside Spain		136,998		73.07	%		131,742		76.52	%		277,232		71.76	%		545,972		73.19	%
Total loans and leases, gross		187,492		100.00	%		172,176		100.00	%		386,318		100.00	%		745,986		100.00	%

(*) Credit of any nature granted to 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, 2012.

	Fixed and variable rate loans having a maturity of more than one year
	Domestic		International		Total
	(in millions of euros)
Fixed rate		25,965		202,460		228,425
Variable rate		122,455		354,934		477,389
Total		148,420		557,394		705,814

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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
	2012					2011					2010
			% of total assets					% of total assets					% of total assets
	(in millions of euros, except percentages)
OECD (1) (2) Countries:
Total OECD Countries		19,325		1,52	%		17,736		1.12	%		13,613		1.12	%
Non-OECD Countries:
Total Latin American Countries (2) (3)		10,861		0.86	%		11,000		0.88	%		13,943		1.15	%
Other Non-OECD		7,418		0.58	%		6,944		0.55	%		7,153		0.59	%
Total Non-OECD		18,279		1.44	%		17,944		1.73	%		21,096		1.73	%
Total		37,604		2.96	%		35,680		2.85	%		34,709		2.85	%

(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, 2012, 2011 and 2010, we had allowances for country-risk equal to €8.5 million, €16.6 million, and €30.3 respectively. Such allowances for country-risk exceeded the Bank of Spain’s minimum requirements at such dates.

As of December 31, 2012, 2011 and 2010, we did not have any cross-border outstanding to any single borrower that exceeded 0.75% of total assets.

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 and our exposure to private and sovereign debt organized by origin of the issuer is included in Note 7 to the Financial Statements.

Additionally, in Note 10 to our consolidated financial statements we present the disclosure by credit rating of our exposure to sovereign counterparties recorded under the caption “loans and advances to customers”.

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The detail of Santander Group’s total risk exposure (excluding the value of any collateral associated with the corresponding balances) to the peripheral countries of the eurozone at December 31, 2012, based on the country of the issuer or borrower in terms of sovereign risk and private sector exposure, is as follows:

12/31/12
Sovereign risk by country of issuer/borrower (**)
	Millions of euros
	Balances with central banks		Debt instruments (Note 7)						Loans and advances to customers (Note 10) (*)		Derivatives (***)				Total on-balance- sheet exposure		Contingent liabilities and commitments (Note 35)		Total exposure
			Financial assets held for trading and other financial assets at fair value through profit or loss		Available-for- sale financial assets		Loans and receivables				Other than CDSs		CDSs
Spain		1,218		6,680		29,288		1,173		16,884		148		—		55,391		2,341		57,732
Portugal		1,156		94		1,998		125		644		1,174		1		5,192		33		5,325
Italy		3		353		267		—		40		—		—		663		204		867
Greece		—		—		—		—		—		—		—		—		—		—
Ireland		—		—		—		—		—		277		—		277		—		277

(*) Presented excluding valuation adjustments and impairment losses recognized (€20 million).

(**) Exposure to reverse repurchase agreements is included under Balances with central banks and Loans and advances to customers.

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying party. “CDSs” refers to the exposure to CDSs based on the location of the underlying party.

12/31/12
Private sector exposure by country of issuer/borrower (**)
	Reverse repurchase agreements (Note 6)		Millions of euros
			Debt instruments (Note 7)						Loans and advances to customers (Note 10) (*)		Derivatives (***)						Total on-balance- sheet exposure		Contingent liabilities and commitments (Note 35)		Total exposure
			Financial assets held for trading and other financial assets at fair value through profit or loss		Available-for- sale financial assets		Loans and receivables				Other than CDSs			CDSs
Spain		11,471		2,391		6,525		1,130		183,130		6,798			(40	)		211,405		63,101		274,506
Portugal		—		903		518		1,422		25,215		635			(4	)		28,689		7.397		36,086
Italy		—		176		116		83		7,473		(2	)		8			7,854		3,234		11,088
Greece		—		—		—		—		96		—			—			96		135		231
Ireland		—		146		414		179		481		351			—			1,571		224		1,795

(*) Presented excluding valuation adjustments and impairment losses recognized (€12,671 million).

(**) Exposure to reverse repurchase agreements is included under Balances with central banks and Loans and advances to customers.

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

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The following information presents the notional amount of our CDSs at December 31, 2012 detailed in the foregoing tables:

12/31/12
Millions of euros
		Notional amount							Fair value
		Bought		Sold		Net			Bought		Sold			Net
Spain	Sovereign		—		—		—			—		—			—
	Private		2,202		2,952		(750	)		3		(43	)		(40	)
Portugal	Sovereign		225		207		18			14		(13	)		1
	Private		398		418		(20	)		7		(11	)		(4	)
Italy	Sovereign		518		608		(90	)		12		(12	)		—
	Private		1,077		1,025		52			40		(32	)		8
Greece	Sovereign		—		—		—			—		—			—
	Private		20		20		—			1		(1	)		—
Ireland	Sovereign		9		9		—			—		—			—
	Private		16		16		—			—		—			—

In addition, our total risk exposure to Cyprus at December 31, 2012 was €12.9 million, mainly secured loans granted in Spain and the U.K. to individuals resident in Cyprus.

Classified Assets

In the following pages, we describe the Bank of Spain’s 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.

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Bank of Spain’s 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.

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(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.

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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.

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• 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,
	2012		2011		2010
	(in millions of euros)
Non accrued interest on the basis of contractual terms owed on impaired assets
Domestic		566		463		359
International		1,315		1,263		1,118
Total		1,881		1,726		1,477
Non accrued interest on the basis of contractual terms received on impaired assets
Domestic		190		215		165
International		229		199		180
Total		419		414		345

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The balances of impaired loans as of December 31, 2012, 2011 and 2010 are as follows:

	Millions of Euros
	2012		2011		2010
Other impaired loans (*)		4,735		4,591		4,872
Impaired loans more than ninety days past due		31,365		27,445		23,650
Total impaired loans		36,100		32,036		28,522

(*) 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 situations:

• 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 manage credit risk and to calculate the allowances for both credit risk and country-risk based on historical experience. We detail below the main characteristics of our internal models.

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 of 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.

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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. The estimation of the exposure at default 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

• 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 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.

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 calculation of PD applies both to loans that are 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 credit enhancements, such as collateral and guarantees associated with the transaction. The LGD calculation is based on the analysis of recoveries of past due transactions, considering not only revenues and loans associated with the collection process, but also the moment when these revenues and costs take place and all direct costs linked to the collecting activity.

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.

The calculation obtained based on the output from the internal models described above reflects with best estimate of the Group as to probable credit losses and constitute an appropriate basis for determining loan loss allowances.

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As of July 2008, the Bank of Spain approved the Group’s internal models for regulatory capital calculation purposes with respect to the vast majority of the Group’s credit risk net exposure. The Bank of Spain continues to review the models for the purpose of calculating allowances for loan losses.

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:

a. Specific allowance (individuals):

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. The allowances percentages are determined 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. 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. 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.

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. 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 economic 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—In these cases 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 doubtful. 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%.

b. General allowance for inherent losses (collective):

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.

c. 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 respect of country risk are not material with respect to the credit loss allowances recognized.

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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, 2012.

Guarantees

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

Bank of Spain’s 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).

After the initial registration of a foreclosed assets, the Bank of Spain establishes that if the fair value of the foreclosed asset less the estimated selling cost is lower than the carrying amount, the entity should recognize the corresponding impairment.

The Bank of Spain considers the amount of time acquired assets have been held is a clear indication of impairment. Accordingly, it determines that Spanish entities will recognize impairment (unless the bids received indicate a higher amount) at least as large as the amount resulting from applying the following discounts to the initial valuation:

Terms from acquisition	% Coverage
Over 12 months		20
Over 24 month		30
Over 36 month		40

For the purpose of ensuring that the provisions determined in accordance with the abovementioned policy are reasonable under IFRS-IASB we develop an estimation of the fair value of our foreclosed assets using external valuations. The difference between both estimations was not material for any of the three years ending December 31, 2012

Bank of Spain’s 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.

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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,
	2012			2011			2010			2009			2008
	(in millions of euros)
Allowance for credit losses at beginning of year
Borrowers in Spain		6,907			6,810			6,993			5,949			4,512
Borrowers outside Spain		12,081			12,929			10,906			6,771			4,284
Total		18,988			19,739			17,899			12,720			8,796
Consolidation/deconsolidation of companies’ credit loss allowances (1)
Borrowers in Spain		—			—			—			—			—
Borrowers outside Spain		(266	)		(1,267	)		—			1,426			2,310
Total		(266	)		(1,267	)		—			1,426			2,310
Net provisions for credit losses charged to income statement (2)
Borrowers in Spain		8,847			3,169			2,326			2,615			1,058
Borrowers outside Spain		11,030			9,671			9,142			9,388			5,539
Total		19,877			12,840			11,468			12,003			6,597
Charge offs against credit loss allowance
Borrowers in Spain		(2,747	)		(2,798	)		(2,174	)		(1,237	)		(732	)
Borrowers outside Spain		(8,700	)		(9,632	)		(8,739	)		(8,558	)		(3,821	)
Total		(11,447	)		(12,430	)		(10,913	)		(9,795	)		(4,553	)
Other movements (3)		(1,603	)		106			1,285			1,545			(430	)
Allowance for credit losses at end of year (4) (5)
Borrowers in Spain		11,711			6,907			6,810			6,993			5,949
Borrowers outside Spain		13,838			12,081			12,929			10,906			6,771
Total		25,549			18,988			19,739			17,899			12,720
Recoveries of loans previously charged off against income statement
Borrowers in Spain		272			297			201			115			130
Borrowers outside Spain		1,056			1,503			1,000			800			570
Total		1,328			1,800			1,201			915			700
Average loans outstanding
Borrowers in Spain		198,643			217,235			224,642			230,642			235,002
Borrowers outside Spain		552,174			513,568			482,407			436,857			340,939
Total		750,817			730,803			707,049			667,499			575,941
Net charge-offs against loan loss allowance to average loans ratio (6)
Borrowers in Spain		1.25	%		1.15	%		0.88	%		0.49	%		0.26	%
Borrowers outside Spain		1.38	%		1.58	%		1.60	%		1.78	%		0.95	%
Total		1.35	%		1.45	%		1.37	%		1.33	%		0.67	%

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(1) The line items titled “Consolidation/deconsolidation of 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 was not applicable in 2010 because the fair value of loans acquired in business combinations was disclosed net of allowances. The negative net balance in 2011 is related to the deconsolidation of Santander Consumer USA Inc. (SCUSA) which was accounted for by the equity method in December 2011.

(2) We have not included a separate line item for charge-offs of loans not previously provided for (loans charged-off against income) as these are not permitted.

(3) The changes in “Other Movements” from 2012, to 2011, to 2010, to 2009 and to 2008 principally reflect foreign exchange differences.

(4) 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”.

(5) The segregation of the allowance for credit losses between Spain and outside Spain was made by geographical location of the Group’s company that accounts for the risk.

(6) For the purpose of calculating the ratio, net charge-offs consist of Charge offs against credit loss allowance less Recoveries of loans previously charged off.

The net charge-offs against loan loss allowance to average loans ratio was lower in Spain than in foreign jurisdictions as of December 31, 2012, 2011 and 2010 primarily due to the different mix of products of our credit portfolio in the various countries in which we operate (our mortgage portfolio is focused in Spain and United Kingdom while in Latin America (including Brazil) the main products are non-collateral loans (credit cards or consumer loans)). In Spain, the percentage of loans with collateral (secured by mortgages on finished homes, offices and multi-purpose premises and rural properties or by pledges on monetary deposits, listed equity instruments and debt securities of issuers with high credit ratings) as of December 31, 2012 was 62%. The figure outside Spain includes certain countries such as Brazil where mortgages (which are Brazil’s main type of collateral) represent approximately a 5%, which means that the amount of loan write-offs contributed each year by these countries is far higher, since these entities of the Group have fewer possibilities of recovering the loans once they have fallen into arrears.

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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,
	2012			2011			2010			2009			2008
	(in millions of euros)
Recoveries of loans previously charged off against income statement
Domestic:
Commercial, financial, agricultural, industrial		85			135			41			32			30
Real estate and construction		38			31			32			15			5
Other mortgages		10			37			32			24			11
Installment loans to individuals		137			92			89			43			75
Lease finance		—			1			1			1			6
Other		2			1			6			—			3
Total Borrowers in Spain		272			297			201			115			130
Borrowers outside Spain
Government and official institutions		—			—			4			—			—
Commercial and industrial		877			1,208			877			732			484
Mortgage loans		79			197			72			35			28
Other		100			98			47			33			58
Borrowers outside Spain		1,056			1,503			1,000			800			570
Total		1,328			1,800			1,201			915			700
Net provisions for credit losses charged to income statement
Domestic:
Commercial, financial, agricultural, industrial		1,290			1,070			688			785			295
Real estate and construction		5,378			672			706			543			(72	)
Other mortgages		1,291			818			164			288			288
Installment loans to individuals		709			489			663			891			475
Lease finance		57			122			83			74			33
Other		122			(2	)		22			34			39
Total Borrowers in Spain		8,847			3,169			2,326			2,615			1,058
Borrowers outside Spain
Government and official institutions		—			(4	)		48			14			(8	)
Commercial and industrial		9,673			7,962			8,134			8,400			3,194
Mortgage loans		624			1,163			525			568			271
Other		733			550			435			406			2,082
Borrowers outside Spain		11,030			9,671			9,142			9,388			5,539
Total		19,877			12,840			11,468			12,003			6,597
Charge offs against credit loss allowance
Domestic:
Commercial, financial, agricultural, industrial		(755	)		(980	)		(704	)		(356	)		(122	)
Real estate and construction		(676	)		(133	)		(191	)		(137	)		(34	)
Other mortgages		(400	)		(592	)		(369	)		(236	)		(62	)
Installment loans to individuals		(839	)		(870	)		(841	)		(481	)		(503	)
Lease finance		(27	)		(220	)		(61	)		(26	)		(3	)
Other		(50	)		(3	)		(8	)		(1	)		(8	)
Total Borrowers in Spain		(2,747	)		(2,798	)		(2,174	)		(1,237	)		(732	)
Borrowers outside Spain
Government and official institutions		—			—			(43	)		—			—
Commercial and industrial		(7,402	)		(8,445	)		(7,994	)		(7,827	)		(2,807	)
Mortgage loans		(477	)		(791	)		(445	)		(393	)		(2	)
Other		(821	)		(396	)		(257	)		(338	)		(1,012	)
Borrowers outside Spain		(8,700	)		(9,632	)		(8,739	)		(8,558	)		(3,821	)
Total		(11,447	)		(12,430	)		(10,913	)		(9,795	)		(4,553	)

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

Allowances for Credit Losses

	IFRS-IASB Year Ended December 31,
	2012		%		2011		%		2010		%		2009		%		2008		%
	(in millions of euros, except percentages)
Borrowers in Spain:
Commercial, financial, agricultural, industrial		1,775		6.95		1,579		8.32		1,499		7.59		1,743		9.74		1,690		13.29
Real estate and construction (*)		7,511		29.40		3,210		16.91		2,723		13.80		1,896		10.59		1,490		11.72
Other mortgages		1,420		5.56		1,325		6.98		1,329		6.73		1,375		7.68		1,272		10.00
Installment loans to individuals		823		3.22		690		3.63		1,065		5.40		1,674		9.35		1,182		9.29
Lease finance		103		0.40		101		0.53		169		0.85		216		1.21		113		0.89
Other		79		0.31		2		0.01		25		0.13		89		0.50		202		1.59
Total Borrowers in Spain		11,711		45.84		6,907		36.37		6,810		34.50		6,993		39.07		5,949		46.77
Borrowers outside Spain:
Government and official institutions		30		0.12		31		0.17		31		0.16		19		0.11		14		0.11
Commercial and industrial		10,628		41.60		9,334		49.16		9,811		49.70		8,529		47.65		4,518		35.52
Mortgage loans		2,054		8.04		1,791		9.43		1,876		9.50		1,555		8.69		1,615		12.70
Other		1,126		4.41		925		4.87		1,211		6.14		803		4.48		624		4.91
Total Borrowers outside Spain		13,838		54.16		12,081		63.63		12,929		65.50		10,906		60.93		6,771		53.23
Total		25,549		100.00		18,988		100.00		19,739		100.00		17,899		100.00		12,720		100.00

(*) As of December 31, 2012, 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 €7,032 million. In this table, loans to construction and property development companies are defined as loans granted to companies that belong to that sector, irrespective of the purpose of the loan.

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	2012		2011		2010		2009		2008
	(in millions of euros)
Past-due and other non-performing balances (1) (2) (3):
Domestic		16,623		15,340		12,474		10,406		6,406
International		19,477		16,696		16,048		14,148		7,785
Total		36,100		32,036		28,522		24,554		14,191

(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 €5,176 million, €5,106 million, €4,843 million, €2,997 million and €2,878 million, at December 31, 2012, 2011, 2010, 2009 and 2008, respectively.

(2) Non-performing balances due to country risk were €6 million, €7 million, €8 million, €8 million, and €3 million, at December 31, 2012, 2011, 2010, 2009 and 2008, respectively.

(3) We estimate that at December 31, 2012, 2011, 2010, 2009 and 2008 (i) the total amount of our non-performing past-due balances was €31,365 million, €27,445 million, €23,650 million, €21,270 million and €11,773 million, respectively, and (ii) the total amount of our other non-performing was €4,735 million, €4,591 million, €4,872 million, €3,284 million and €2,418 million, respectively.

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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, 2012 (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, 2012, 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 months past due		With balances past due by
			3 to 6 months		6 to 9 months		9 to 12 months		More than 12 months		Total
Spain		3,268		3,364		2,058		1,263		6,372		16,325
European Union (excluding Spain)		233		3,821		1,232		821		3,280		9,387
United States and Puerto Rico		327		216		111		83		484		1,221
Other OECD countries		12		42		40		43		—		137
Latin America		535		3,263		1,641		1,282		1,548		8,269
Rest of the world		—		—		—		—		1		1
		4,375		10,706		5,082		3,492		11,685		35,340

The financial assets classified under the caption “loans and receivables” of our balance sheet as of December 31, 2012 that are considered to be impaired due to credit risk and bear past-due amounts of more than 12 months amounted to €11,685 million (33.1% of total impaired loans).

Evolution of Impaired Balances

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

	IFRS
(in millions of euros)	Quarter ended												Year ended Dec. 31,			Year ended Dec. 31,			Year ended Dec. 31,			Year ended Dec. 31,			Year ended Dec. 31,
	Mar. 31, 2012			Jun. 30, 2012			Sep. 30, 2012			Dec. 31, 2012			2012			2011			2010			2009			2008
Opening balance		32,036			32,560			34,365			35,826			32,036			28,522			24,554			14,191			6,179
Increases		8,334			10,024			8,152			8,594			35,103			35,252			31,764			36,067			23,545
Cash recoveries		(3,994	)		(4,088	)		(3,741	)		(4,486	)		(16,309	)		(16,316	)		(15,802	)		(15,951	)		(11,133	)
Foreclosed assets		(701	)		(483	)		(574	)		(388	)		(2,146	)		(2,699	)		(2,484	)		(1,882	)		(1,066	)
Changes in scope of consolidation		(602	)		(25	)		(1	)		—			(628	)		69			257			1,033			2,089
Exchange differences		37			(71	)		(40	)		(435	)		(509	)		(362	)		1,147			890			(871	)
Write-offs		(2,550	)		(3,552	)		(2,335	)		(3,011	)		(11,447	)		(12,430	)		(10,914	)		(9,794	)		(4,552	)
Closing balance		32,560			34,365			35,826			36,100			36,100			32,036			28,522			24,554			14,191

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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,
	2012			2011			2010			2009			2008
	(in millions of euros, except percentages)
Computable credit risk (1)		794,901			822,657			804,036			758,347			697,200
Non-performing balances by category:
Individuals		16,867			15,981			15,606			14,590			10,114
Mortgages		7,281			6,872			6,304			6,111			3,239
Consumer loans		5,961			6,254			6,487			6,164			5,711
Credit cards and others		3,625			2,855			2,815			2,315			1,164
Enterprises		18,155			14,995			11,321			7,812			2,860
Corporate Banking		991			954			1,550			2,127			1,130
Public sector		87			106			45			25			87
Total non performing balances		36,100			32,036			28,522			24,554			14,191
Allowances for non-performing balances		26,194			19,661			20,748			18,497			12,863
Ratios
Non-performing balances (2) to computable credit risk		4.54	%		3.89	%		3.55	%		3.24	%		2.04	%
Coverage ratio (3)		72.56	%		61.37	%		72.74	%		75.33	%		90.64	%
Balances charged-off to total loans and contingent liabilities		1.27	%		1.29	%		1.21	%		1.17	%		0.55	%

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

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

Non-performing loan (NPL) balances were €36,100 million at December 31, 2012, a €4,064 million increase as compared to €32,036 million at December 31, 2011. The Group’s NPL ratio as of December 31, 2012 was 4.54%, as compared to 3.89% as of December 31, 2011.

The NPL coverage ratio as of December 31, 2012 was 72.6%, as compared to a coverage ratio of 61.4% at the end of 2011. This ratio is calculated as allowances for non-performing balances as a percentage of non-performing balances.

The main reasons for the increases in the NPL ratio are the following:

• The still weak situation in some markets continues to push up NPLs due to the rise in bad and doubtful loans and slower growth in lending, or reductions in lending volumes in some cases.

• 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.

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The NPL ratios by country as of December 31, 2012 are set out below.

• The NPL ratio in Spain was 6.74% (+125 basis points more than at December 2011). Spain’s recession is pushing up NPL entries, largely in the real estate sector, although the recoveries and sale of portfolios is containing the rise in the balance of bad loans. The provisions made for the real estate sector brought the coverage level to 70.6% up from 45.5% at the end of 2011. Excluding the portfolio with real estate purpose, the NPL ratio was 4.0% (+65 basis points more than December 2011) mainly due to the worsening of Spain’s macroeconomic situation as a result of economic slowdown, falling consumer spending and job market deterioration and also due to the reduction in lending. The NPL ratio of the portfolio with mortgage guarantee was slightly lower than in 2011 and ended 2012 at 2.6%, well below that for the rest of businesses in Spain. See Item 4. Information on the Company—Other Material Events.

• In Portugal, the NPL ratio increased again in December 2012 to 6.56%, compared to 4.06% as of December 31, 2011) due to the difficult economic environment and mainly concentrated in loans to enterprises. Coverage was 53% as of December 31, 2012.

• Santander Consumer Finance’s NPL ratio was 3.90%, below that at the end of December 2011 (3.97%). Coverage ratio remained virtually unchanged in December 2012 (110%) compared to December 31, 2011.

• Poland’s Bank Zachodni WBK has a NPL ratio of 4.72%, less than at the end of December 2011 (4.9%) and well below the 6.4% recorded in June 2011 when it was consolidated into the Group. Coverage ratio was 68% as of December 31, 2012.

• In the U.K., the NPL ratio was 2.05% (1.86% in December 2011). Coverage ratio was 45% as of December 31, 2012. Loan-loss provisions rose 22.8%, although the rate of growth slowed. Both the stock of residential properties in possession (0.06%) as well as the NPL ratio of residential mortgages (1.74%) remained low with underlying performance stable and both better than the sector average, according to the Council of Mortgage Lenders (CML).

• The NPL for Latin America ratio increased from 4.32% to 5.42%, while coverage decreased from 97% to 88%. Brazil’s NPL ratio is 6.86%, up 148 basis points since December 2011. Provisions for loan losses were 46.2% higher, due to worsening of credit quality in the system, given the environment of low economic growth. However, they started to decline in the third and fourth quarters. Coverage ratio was 90% as of December 31, 2012. The increase in NPL was mainly driven by the commercial, financial and industrial loan portfolios due to unfavorable economic conditions resulting from a slowdown in Brazilian economic activity in 2012 and 2011 and by the installment loans to individuals lending portfolio due to a high level of household debt of Brazilian families combined with inflation.

• Sovereign’s NPL ratio was 2.29% and coverage 106%. The evolution of both in the first half of 2012 was good and the NPL ratio has declined and coverage increased in every quarter since the end of 2009 due to the improved composition of the portfolio and strict management of risk.

Allowances for non performing balances were €26,194 million at December 31, 2012, a €6,533 million increase as compared to €19,661 million at December 31, 2011. The Group has significantly increased provisions in 2012, mainly in the real estate sector in Spain (see Item 4 “Information of the Company. B-Business Overview-Other Material Events”) and in Latin America largely influenced by increased lending, collective provisions and a worsening of non-performing loans in some markets.

In Spain, the increase in provisions recognized in 2012 was the result of the downturn in the Spanish economy. During 2012, the Spanish economy contracted, provoking a deterioration in the unemployment rate; this situation has affected the amounts expected to be recovered (as a result of the worsening economic situation of borrowers) and has resulted in a decrease in the value of collateral. The impact of these factors was felt in the portfolios of financing to the real estate sector. The real estate sector is being particularly impacted by the Spanish economy and the restructuring of the sector itself, prompted by a drastic reduction in business volume, which is leading to a substantial reduction in installed capacity. Partially offsetting the effect on the market of the decline in construction activity are the volumes of properties foreclosed by financial institutions in the last few years. The excess supply derived from the stock of unsold properties continues to push down the prices of the real estate assets.

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In addition to the real estate provisions in Spain explained above, the main increases in the allowances for non performing balances are the following:

In Brazil the allowances for non performing balances increased during 2012 in €852 million due to worsening credit quality in the banking system given the environment of low economic growth. This increase in allowances is concentrated in installment loans to individuals.

In the U.K. the allowances for non performing balances increased during 2012 in €383 million (or 21%) due to an increase of 96.5% in provisions during the year. This increase in provisions mainly relates to the review and full re-assessment of the assets held in the non-core corporate and legacy portfolios in run-off. The provisions relate to assets acquired from Alliance & Leicester plc (particularly the shipping portfolio) as well as certain assets within the old Abbey Commercial Mortgages book. The amount of the provision reflects the increasing losses experienced in these portfolios.

In Portugal the allowances for non performing balances increased during 2012 in €306 million due to the difficult economic environment and mainly concentrated in loans to enterprises.

Other non-accruing balances

As described previously herein 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 interest. However, we treat category 5 (doubtful countries) country-risk outstandings as both a non-accruing and impaired balance.

Summary of non-accrual balances	IFRS-IASB Year Ended December 31,
	2012		2011		2010		2009		2008
	(in millions of euros)
Balances classified as non-performing balances		36,100		32,036		28,522		24,554		14,191
Non-performing balances due to country risk		6		7		8		7		2
Total non-accruing balances		36,106		32,043		28,530		24,561		14,193

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Foreclosed Assets and Assets Received in Payment of Customer Debts

The tables below set forth the movements in our foreclosed assets and assets acquired in payment of customer debts for the periods shown.

	IFRS-IASB
	Quarterly movements												Year Ended December 31,
	Mar. 31, 2012			Jun. 30, 2012			Sep. 30, 2012			Dec. 31, 2012			2012			2011			2010
	(in millions of euros, except percentages)
Opening balance		9,624			9,316			9,115			8,998			9,624			8,376			7,034
Foreclosures		672			695			675			561			2,603			2,699			3,353
Sales		(649	)		(989	)		(655	)		(955	)		(3,248	)		(1,591	)		(2,182	)
Other movements		(331	)		93			(137	)		7			(368	)		140			171
Gross foreclosed assets and assets acquired in payment of customer debts		9,316			9,115			8,998			8,611			8,611			9,624			8,376
Of which: in Spain		8,603			8,400			8,286			7,846			7,846			8,552			7,509
Allowances established		4,368			4,388			4,315			4,416			4,416			4,512			2,512
Of which: in Spain		4,158			4,180			4,189			4,170			4,170			4,278			2,313
Closing balance (net) (*)		4,948			4,727			4,683			4,195			4,195			5,112			5,864
Of which: in Spain		4,445			4,220			4,097			3,676			3,676			4,274			5,196
Allowance as a percentage of foreclosed assets and assets acquired in payment of customer debts		46.9	%		48.1	%		47.9	%		51.3	%		51.3	%		46.9	%		30.0	%
Of which: in Spain		48.3	%		49.8	%		50.6	%		53.2	%		53.1	%		50.0	%		30.8	%

(*) The gross balance of foreclosed assets as of December 31, 2012 amounted to €8,611 million. Of this amount, €5,275 million were assets acquired through foreclosure and €3,336 million were assets acquired in payment of customer debts.

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 2012, 2011 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 19.7% at December 31, 2012, according to figures published by the Spanish Banking Association (“AEB”) and the Confederación Española de Cajas de Ahorros (“CECA”). See “—Competition” herein.

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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,
	2012		2011		2010
	(in millions of euros)
Deposits from central banks and credit institutions-
Reciprocal accounts		508		604		423
Time deposits		92,491		82,817		57,233
Other demand accounts		3,225		3,396		2,678
Repurchase agreements		50,742		51,316		78,197
Central bank credit account drawdowns		6,000		5,005		1,580
Other financial liabilities associated with transferred financial assets		—		—		—
Hybrid financial liabilities		—		—		1
Total		152,966		143,138		140,112
Customer deposits-
Demand deposits-
Current accounts		144,305		155,455		148,066
Savings accounts		167,389		140,583		136,694
Other demand deposits		3,443		3,179		3,431
Time deposits-		—		—		—
Fixed-term deposits		257,583		257,498		275,629
Home-purchase savings accounts		132		174		231
Discount deposits		1,345		732		448
Funds received under financial asset transfers		—		—		—
Hybrid financial liabilities		3,128		4,594		4,754
Other financial liabilities associated with transferred financial assets		—		—		—
Other time deposits		590		139		154
Notice deposits		969		1,338		1,316
Repurchase agreements		47,755		68,841		45,653
Total		626,639		632,533		616,376
Total deposits		779,605		775,671		756,488

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

	IFRS-IASB At December 31,
	2012		2011		2010
	(in millions of euros)
Deposits from central banks and credit institutions-
Due to credit institutions
Offices in Spain		87,053		69,411		43,998
Offices outside Spain:
Other EU countries		34,894		33,989		60,145
United States		12,648		10,652		11,529
Other OECD countries (1)		55		82		26
Central and South America (1)		18,313		29,003		24,414
Other		3		1		—
Total offices outside Spain		65,913		73,727		96,114
Total		152,966		143,138		140,112
Customer deposits
Offices in Spain		192,588		202,022		218,788
Offices outside Spain:
Other EU countries		261,135		260,529		230,929
United States and Puerto Rico		45,129		43,437		40,855
Other OECD countries (1)		788		939		998
Central and South America (1)		126,842		125,343		124,334
Other		157		263		472
Total offices outside Spain		434,051		430,511		397,588
Total		626,639		632,533		616,376
Total deposits		779,605		775,671		756,488

(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, 2012. Large denomination customer deposits may be a less stable source of funds than demand and savings deposits.

	Year Ended December 31, 2012
	Domestic		International		Total
	(in millions of euros)
Under 3 months		6,247		32,139		38,386
3 to 6 months		3,432		9,643		13,075
6 to 12 months		14,991		17,619		32,610
Over 12 months		19,843		31,274		51,117
Total		44,513		90,675		135,188

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The aggregate amount of deposits held by non-resident depositors (banks and customers) in our domestic branch network was €55 billion, €57 billion and €64 billion, at December 31, 2012, 2011 and 2010, respectively.

Short-Term Borrowings

	IFRS-IASB At December 31,
	2012					2011					2010
	Amount		Average Rate			Amount		Average Rate			Amount		Average Rate
	(in millions of euros, except percentages)
Securities sold under agreements to repurchase (principally Spanish Treasury notes and bills):
At December 31		98,497		3.27	%		120,156		3.60	%		123,859		2.38	%
Average during year		115,755		3.34	%		124,788		3.46	%		98,171		3.01	%
Maximum month-end balance		133,725					129,570					123,859
Other short-term borrowings:
At December 31		21,984		3.01	%		11,774		1.78	%		6,871		4.48	%
Average during year		19,403		2.74	%		7,761		2.69	%		20,384		1.51	%
Maximum month-end balance		22,304					11,774					29,273
Total short-term borrowings at year-end		120,481		3.22	%		131,930		3.43	%		130,730		2.49	%

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

At the end of December 2012, Banco Bilbao Vizcaya Argentaria, S.A. and Banco Santander, S.A. accounted for approximately 50.4% of loans and 55.7% of deposits of all Spanish banks, which in turn represented 31.0% of loans and 33.1% of deposits of the financial system, according to figures published by the AEB and the 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, 2012, there were 85 foreign banks (of which 77 were from European Union countries) with branches in Spain. In addition, there were 20 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.

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Once the Bank of Spain receives the notice, it notifies the financial institution, thereby permitting the branch to be registered in the Mercantile Register and, then, in the Special Register of the Bank of Spain.

Spanish law requires prior approval by the Bank of Spain for a Spanish bank to acquire a significant interest in a bank organized outside the European Union, create a new bank outside the European Union or open a branch outside the European Union. Spanish banks must provide prior notice to the Bank of Spain to conduct any other business outside of Spain.

When a new bank is created by a Spanish bank outside of Spain, the following information has to be provided to the Bank of Spain:

• amount of the investment;

• percentage of the share capital and of the total voting rights;

• name of the companies through which the investment will be made;

• draft of the by-laws;

• program of activities, setting out the types of business envisaged, the administrative and accounting organization and the internal control procedures, including those established to prevent money laundering transactions;

• list of the persons who will be members of the first board of directors and of the senior management;

• list of partners with significant holdings; and

• detailed description of the banking, tax and anti-money laundering regulations of the country where it will be located.

The opening of branches outside Spain requires prior application to the Bank of Spain, including information about the country where the branch will be located, the address, program of activities and names and resumes of the branch’s managers. The opening of representative offices requires prior notice to the Bank of Spain detailing the activities to be performed.

In addition, we face strong competition outside Spain, particularly in Argentina, Brazil, Chile, Mexico, Portugal, the United Kingdom, Germany, Poland, 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 U.S. and U.K. 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 U.K. is from U.K. banks and from large foreign financial institutions that are also active and offer combined investment and commercial banking capabilities. Santander U.K.’s main competitors are established U.K. banks, building societies and insurance companies and other financial services providers (such as supermarket chains and large retailers).

In the U.K. credit card market large retailers and specialist card issuers, including major U.S. operators, are active in addition to the U.K. banks. In addition to physical distribution channels, providers compete through direct marketing activity and the Internet.

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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 U.S. in large corporate lending and specialized finance markets, and in fixed-income trading and sales. Competition is principally with the large U.S. 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 provided strong competition for the demand and savings deposits through a vast network of offices in Spain. Royal Decree-Law 2/2011, of February 18, was designed to reinforce the Spanish financial system and opened up a new stage in the process of restructuring and strengthening the Spanish savings banks. The focus was set on recapitalizing institutions that needed 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. As of December 31, 2012, the downsizing of the savings sector within this framework has been finalized and the savings banks have completed their conversion into commercial banks.

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 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.

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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 ensure the performance of the tasks entrusted to the Eurosystem. 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 General Council is the transitional body which carries out the tasks taken over from the European Monetary Institute which the ECB is required to perform in Stage III of the European Monetary Union on account of the fact that not all EU Member States have adopted the euro yet.

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:

• defining and 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, as the Spanish national central bank, 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;

• supervising and compliance with the specific rules of credit institutions, other entities and financial markets, for which it has been assigned supervisory responsibility;

• 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;

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• 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 Competitiveness:

• 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 1% 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, amended by Directives 2009/111/EC and 2010/76/EU) 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 Law 36/2007 amending Law 13/1985, the Royal Decree 216/2008 published on February 16, 2008, and Bank of Spain’s Circular 3/2008 published on June 10, 2008, partially amended by Circular 9/2010 and Circular 4/2011, introduced these European Directives into the Spanish regulatory framework, and

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BIS II was incorporated into the Spanish regulations, following its adoption by the European Union. This is the current capital regulation in effect. New capital regulation by the European Union (which will be in accordance with Basel III or “BIS III”) is pending implementation, and will be introduced on a gradual basis from 2013 to 2019, when the new European Capital Directive and Regulation are developed.

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, insurance and securitization companies.

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 Group intends to adopt, over the next few years, the Basel II advanced internal ratings-based (“AIRB”) approach for substantially all its banks, until the percentage of net exposure of the loan portfolio covered by this approach exceeds 90%.

Accordingly, the Group continued in 2012 with the progressive implementation of the technology platforms and methodological improvements required for the roll-out of the AIRB approaches. In 2012 we obtained approval for the SMEs portfolio of Santander Totta, S.A. and the integration of Santander UK’s advanced approaches for mortgages. During 2011, in the course of the year the Group obtained regulatory authorization for various units, most notably Santander Consumer España, Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander and the global corporate customer portfolios in Brazil and Chile. In addition, in 2008 the Group obtained authorization from the supervisory authorities to use advanced approaches for the calculation of regulatory capital requirements for credit risk for the Parent bank and the main subsidiaries in Spain, the United Kingdom and Portugal. 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 the Basel Capital Accord, Grupo Santander was authorized to use its internal model for market risk with respect to the treasury’s trading activities of units in Spain, Mexico, Chile and Portugal, 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 Grupo Santander. The Group has made numerous acquisitions in recent years and, as a result, a longer maturity period will be required 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 Advance Measurement Approach (AMA) approaches once it has collected sufficient data using its own management model in order to make full use of the positive qualities that are characteristic of the Group.

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Also, Royal Decree-Law 2/2011, approved on February 18, 2011, established the implementing regulations of the plan to strengthen the financial sector published in January 2011 by the Spanish Ministry of Economy and Competitiveness, which aimed, among others, to establish certain minimum requirements for core capital, in advance of those established by Basel III, to be met before autumn 2011. At the reporting date, the Group had complied with these minimum core capital requirements.

Furthermore, in December 2011 the European Banking Authority (“EBA”) published the new capital requirements for the main European credit institutions. These requirements are part of a package of measures adopted by the European Council in the second half of 2011 with the aim of restoring stability and confidence in the European markets.

At June 30, 2012, the institutions selected for the EBA sample must have a Tier 1 core capital ratio, determined on the basis of EBA rules of at least 9%. These capital requirements are expected to be of an exceptional and temporary nature.

The EBA published the capital requirements of each credit institution and required them to submit, on January 20, 2012, their capital plans to reach the required ratio by June 30, 2012.

The EBA estimated a €15,302 million capital shortfall for the Santander Group. In January 2012, the Group reported the measures it had taken -detailed in its capital plan submitted to the Bank of Spain- and which had enabled it to attain the required 9% ratio. These capital raising measures are summarized as follows: i) €6,829 million relating to Valores Santander -securities that are mandatorily convertible before the end of October 2012; ii) the exchange of €1,943 million of preference shares for new shares in December 2011; iii) €1,660 million from application of the Santander Dividendo Elección program at the date of the final dividend for 2011; and iv) €4,890 million obtained through the organic generation of capital, write-downs and the transfer of various ownership interests, most notably those held in Chile and Brazil.

At December 31, 2012, our eligible capital exceeded the minimum required by the Bank of Spain by over €21.2 billion. Our Spanish subsidiary banks were, at December 31, 2012, 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% of the bank’s own funds. Where that customer is a credit institution or investment firm, or where the economic group includes one or more credit institutions or investment firms, the value of all exposures may not exceed 25% of the bank’s own funds or €150 million, whichever the higher, provided that the sum of exposure values to all customers in the economic group that are not credit institutions or investment firms does not exceed 25% of the bank’s own funds. Any exposure to a person or group exceeding 10% of a bank’s own funds is deemed a concentration (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” herein.

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Employee Pension Plans

At December 31, 2012, 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” herein) 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 Competitiveness 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. Law 9/2012, of 14 November, on restructuring and dissolution of credit entities (which enacts all the provisions of the Royal Decree-

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law 24/2012, of 31 August), which has strengthened the position of the Fund for the Orderly Restructuring of the Banking Sector (Fondo de Restructuración Ordenada Bancaria or FROB) giving it a prominent role within the restructuring and resolution processes of credit entities, clarified the role of the FGD, being now limited to guaranteeing deposits. However, taking into account the principle of minimal capital impact, the FGD may participate in resolution proceedings by granting financial support in exceptional cases.

The FGD is funded by annual contributions from member banks. The amount of such bank’s contributions will not exceed 3 per thousand of the year-end amount of deposits to which the guarantee extends depending of the kind of credit institution. Nevertheless, further contributions will be suspended when the FGD’s funds exceed the requirement by 1% or more of the calculation basis.

As of December 31, 2012, 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 Spanish 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 Spanish Data Protection Agency. The Data Protection Agency, which has investigatory and sanctioning capabilities, is the Spanish Authority responsible for the control and supervision of the enforcement of this law.

Recent Legislation

Law 6/2011 of April 11, 2011 amended Law 13/1985 of May 25, 1985 on investment ratios, own funds and reporting requirements for financial intermediaries, Law 24/1988 of July 28, 1988 on the securities market and Legislative Royal Decree 1298/1986 of June 28, 1986 on the adaptation of current regulatory credit institutions law to EU legislation. The purpose of this Law is to commence transposition of Directive 2009/111/EC of the European Parliament and of the Council of September 16, 2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements and crisis management. In connection with this, Royal Decree 771/2011 of June 3, 2011 amended Royal Decree 216/2008 of February 15, 2008 on financial institutions’ own funds and Royal Decree 2606/1996 of December 20, 1996 on credit institutions deposit guarantee funds. The most noteworthy developments from this financial regulation are (i) that it makes it compulsory for credit institutions and investment firms to meet certain requirements to allow them to assume exposures to securitization positions and to initiate such securitization; (ii) adapts the legal regime governing credit institution preference shares to conform international requirements ensuring accordingly that they are an effective instrument for meeting solvency requirements; (iii) changes the limit on large exposures of credit institutions generally maintaining it such that the value of that exposures of a credit institution to a customer (entity or economic group) may not exceed 25% of its own funds; (iv) changes the risk management policy of credit institutions, especially that regarding liquidity risk, and sets up new credit institution remuneration policies; (v) strengths the competence and cooperation between supervisors; and (vi) amends the legislation on credit institution deposit guarantee funds, introducing a new regime for additional contributions to these funds based on the remuneration of the deposits in them. Circular 4/2011, of 30 November 2011, of the Bank of Spain, which amended Circular 3/2008, of 22 May 2008, on the determination and control of minimum own funds, completed the transposition of EU legislation on own funds in force at that time. This transposition was initiated with Sustainable Economy Law 2/2011 of 4 March 2011 and followed up by Law 6/2011 of 11 April 2011, which amended Law 13/1985 of 25 May 1985 on investment ratios, own funds and reporting requirements for financial intermediaries, Law 24/1988 of 28 July 1988 on the securities market and Legislative Royal Decree 1298/1986 of 28 June 1986 on the adaptation of current credit institution law to EU legislation, and, finally, by Royal Decree 771/2011 of 3 June 2011 amending Royal Decree 216/2008 of 15 February 2008 on the own funds of financial institutions.

Law 7/2011 of April 11, 2011 amended Law 41/2009 of November 12, 1999 on payment and securities settlement systems and Royal Decree-Law 5/2005 of March 11, 2005 on urgent reforms to boost productivity and improve public procurement. The purpose of this Law is to transpose Directive 2009/44/EC of the European Parliament and of the Council of May 6, 2009 amending Directive 98/26/EC on settlement finality in payment and securities settlement systems and

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Directive 2002/47/EC on financial collateral arrangements as regards linked systems and credit claims. More specifically, this Law is intended to recognize so-called interoperable systems and extend to them the legislation on settlement finality of credit transfer orders given through these systems. The main changes introduced by this law are (i) updates to the definition of “credit transfer order” and (ii) an extension to interoperable systems the rules on the irrevocability and finality of settlement of transfer orders given through such systems and to extend to these interoperable systems the legal regime under Law 41/2009 for insolvency of a system participant the procedures establishes and the effects on transfer orders and on collateral.

Law 15/2011 of June 16, 2011, which came into force last June 18, 2011, amended certain financial legislation applying to the Spanish legal system Regulation 1060/2009 of the European Parliament and of the Council of September 16, 2009 on credit rating agencies, and was aiming at establishing the obligation for certain financial institutions (specifically, credit institutions, investment firms, mortgage securitization special purposes entities and collective investment institution custodians) to use the ratings issued by credit ratings agencies, which, from the standpoint of solvency, shall require that these have been issued or endorsed by an ESMA established in the European Union and registered according to Regulation 1060/2009.

Law 16/2011 of June 24, 2011 on credit agreements for consumers, which transposed into Spanish Law Directive 2008/48/EC of the European Parliament and of the Council of April 23, 2008 on credit agreements for consumers and repealed Law 7/1995 of March 23, 1995 on consumer credit, and came into force on September 25, 2011, is basically intended to improve consumer information and applies to those contracts whereby a creditor grants to a consumer credit in the form of a deferred payment, loan, credit line or other similar financial accommodation.

Law 21/2011 of July 26, 2011 on electronic money establishes a new regulatory framework for electronic money institutions and for the issuance of electronic money, which partially transposed Directive 2009/110/EC of September 16, 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directive 200/46/EC of September 18, 2000.

Law 25/2011 of August 1, 2011, which entered into force on October 2, 2011, partially amends the Spanish Corporate Enterprises Act and transposes Directive 2007/36/EC of the European Parliament and of the Council dated July 11, 2007. The most important novelties of the law are (i) the recognition of the company’s electronic corporate address or corporate website for legal corporate purposes; (ii) the introduction of appraisal rights for dissenting shareholders in the event a substantial amendment to the corporate purposes and in the event of non-listed companies not distributing a third of distributable profits “derived from activities within their core corporate purpose” from their fifth year of the existence; (iii) the possibility for companies to introduce additional circumstances in the articles of association which would grant the company the right to forcibly redeem the shares of such shareholders; and (iv) other amendments of the Spanish Corporate Enterprises Act in relation to the winding-up and liquidation of all form of companies and the general shareholders meeting.

Royal Decree Law 16/2011 of October 14, 2011, as amended by Royal Decree Law 19/2011 of December 2, 2011, which came into force on October 15, 2011, establishes the Deposit Guarantee Fund for Credit Institutions, which replaces the three existing funds up to then and consolidates the existing funds in into the Single Deposit Guarantee Fund for Credit Institutions; and (ii) increases the possibility of improving the solvency of the affected institutions, expanding the situations in which the Fund may act.

Royal Decree-Law 9/2011 of August 19, provides certain temporary measures which affect corporate income tax, increasing the rate applied to determine the interim payments to be filed by certain large companies from October 2011 to December 2013; limiting for tax years 2011 to 2013 the maximum amount of carried forward tax losses that can be offset to 75% of the taxable base for companies whose turnover within the 12 months preceding the beginning of the tax year is between 20 and 60 million euros, and to 50% if such turnover is over 60 million euros; and reducing in those years the deduction for financial goodwill to a maximum annual limit of 1%. In addition, effective for tax periods beginning as of January 1 2012, the maximum period for offsetting tax losses from previous years is extended from 15 to 18 years.

Royal Decree-Law 13/2011, of September 16, temporarily restores the wealth tax for 2011 and 2012, abolishing the existing 100% tax rebate, and increases the value of the exemption for dwelling houses to €300,000 and the general tax-free amount to €700,000, extending this general tax-free amount to non-residents in Spain.

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Law 31/2011, of October 4, 2011, amended Collective Investment Institutions Law 35/2003 of November 4 in order to adapt it to recent EU legislation. It introduced certain technical improvements and various qualifications in respect of the requirements for taking up and pursuing the activity of Collective Investment Institutions and also the “Community passport” for the cross-border management of investment funds, as envisaged by Directive 2009/65/EC.

Law 32/2011, of October 4, 2011, which came into force on 6 October 2011, amended Law 24/1988, of July 28, on the Securities Market, and is intended, among other aspects, to reform securities clearing, settlement and registration arrangements. The Law 32/2011 imposed the obligation to carry out all equity transactions traded, in both, official secondary markets and multilateral trading systems through a central counterparty. Likewise, it removed the references to the mechanism for ensuring delivery allowing, ultimately, for cash settlement when securities cannot be obtained. In addition, Law 32/2011 sets up the basis of the regulatory regime of the central counterparty, establishing, among others: (i) the obligation to take the form of public limited company; (ii) the need to be authorized by the Ministry of Economy and Finance; (iii) that it will be subject to the supervisory regime of Spanish Securities Commission (CNMV) and Bank of Spain; (iv) that it will be subject to the significant shareholding regime of Law 24/1988, of July 28, on the Securities Market; (v) regulation of the committees that will form part of the central counterparty; and (vi) regulation of the insolvency of the central counterparty, any of its members or any client of a member. The Law 32/1001 also amended IBERCLEAR’s regulatory regime in connection with: (i) new corporate law rules that will facilitate the relationship between IBERCLEAR and the other agents of the trading and post-trading system and (ii) the regulation on the agreements that IBERCLEAR may carry out is completed to provide a better coverage to the TARGET2-Securities project.

Royal Decree 1360/2011 of October 7, 2011, amending Royal Decree 1816/1991 of 20 December 1991, on cross-border economic transactions, and Ministerial Order EHA 2670/2011 of 7 October 2011, amending the Order dated December 27, 1991, which implemented Royal Decree 1816/1991, was aimed at aligning Spanish regulations in this area to those in force in practically all the Member States, and at acting in anticipation of the forthcoming reform of Regulation 924/2009, of the European Parliament and of the Council of September 16, 2009 on cross-border payments in the Community. Apart from certain improvements in aspects relating to the accreditation of resident and non-resident status, the main content of the recent regulations amended the reporting system for statistical purposes of cross-border economic transactions. Under the previous system, entities had to identify transactions entailing a cross-border payment, demanding data of customers to complete the information on the transactions in which they were taking part, and to submit such information to the Bank of Spain. The new regulations eliminated the obligation to submit that information which is not immediately available to them and automatable. Furthermore, for those making cross-border transactions, the obligation is included to furnish the information that the Bank of Spain may require of them. The Royal Decree and the Order became effective on June 1, 2012.

Law 38/2011, of October 10, 2011, reforming Insolvency Law 22/2003 of July 9, which became effective on January 1, 2012, introduces a series of amendments in order to correct errors of approach detected in practice and to update the attendant regulations on the basis of the experience and the application thereof. It also affords insolvency proceedings greater legal certainty; the opening up of alternatives which seek to strike a balance between the firm’s viability and the necessary legal guarantees; the promotion of electronic media, and simplified and more flexible proceedings.

Royal Decree-Law 9/2012, of March 16, 2012, on simplification of reporting and documentation requirements in the case of mergers and divisions of share capital companies amended the consolidated text of the Share Capital Companies Law enacted by Legislative Royal Decree 1/2010 of July 2, 2010 and Law 3/2009 of April 3, 2009 on structural changes to companies, aiming at transposing into Spanish law Directive 2009/109/EC of the European Parliament and of the Council of September 16, 2009 amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EEC, and Directive 2005/56/EC regarding reporting and documentation requirements in the case of mergers and divisions. The Royal Decree-Law 9/2012 became effective on March 18, 2012. Law 1/2012, of June 22, 2012, on simplification of reporting and documentation requirements in the case of mergers and divisions of share capital companies, repealed Royal Decree-Law 9/2012 of March 16, 2012.

Royal Decree 778/2012 of May 4, 2012, on the legal regime for electronic money institutions (ELMIs), implementing Law 21/2011 of July 26, 2011 on electronic money, established a new regulatory framework for ELMIs and the issuance of electronic money. This Royal Decree completed the transposition of Directive 2009/110/EC of September 16, 2009 on the taking up, pursuit and prudential supervision of the business of ELMIs amending Directives 2005/60/EC of October 26, 2005 and 2006/48/EC of June 14, 2006 and repealing Directive 2000/46/EC of September 18, 2000. The Royal Decree became effective on May 6, 2012.

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Royal Decree 1336/2012, of September 21, 2012 amended certain royal decrees relating to the powers of European Services Authorities. This Royal Decree, which completes the transposition of Directive 2010/78/EU of the European Parliament and of the Council of November 24, 2010, incorporates into Spanish law the obligation of the competent authorities (Bank of Spain and CNMV) to cooperate with, inform and communicate with their European counterparts (the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA)) on certain matters, some of which were initially regulated in Royal Decree-Law 10/2012 of March 23, 2012 amending certain financial legal provisions relating to the powers of the ESAs, and which are now addressed in their respective implementing provisions.

Royal Decree 1082/2012 of July 13, 2012, approved the implementing Regulations of Collective Investment Institutions (CIIs) Law 35/2003 of November 4, 2012, ended by Law 31/2011 of October 4, 2012. It also repealed the previous regulations in Royal Decree 1309/2005 of November 4, 2005. Among other things, the Royal Decree includes the amendments recently made by Law 31/2011 to Law 35/2003 and advances the transposition of EU legislation. The Royal Decree became effective on July 21, 2012.

Royal Decree-Law 20/2012 of July 13, 2012 on measures to ensure budgetary stability and the promotion of competitiveness which, among other reforms, amended Law 24/1988 of July 28, 1988 on the Securities Market (and Law 44/2002 of November 22, 2002 on financial system reform measures) to include a new financial instrument in the Spanish legal system, the so-called “internationalization covered bonds” (“cédulas de internacionalización”). These bonds are similar to “territorial covered bonds” (“cédulas territoriales”), introduced by Law 44/2002 and are fixed-income securities that may be issued by credit institutions, whose capital and interest are especially secured by loans and credits granted for the internationalization of companies. The total amount of internationalization covered bonds issued by a credit institution may not exceed 70% of the amount of the unrepaid “eligible” loans and credits.

The Royal Decree-Law 20/2012 also introduces new tax measures on a range of taxes which, in some cases, amends or expands the reforms previously introduced by the Royal Decree-Law 9/2011, 20/2011 and 12/2012. The following are the most important tax measures in the Corporate Income Tax: (i) In 2012 and 2013 the offsetting of negative tax bases generated in previous years will be restricted to 50% for those entities whose turnover during the previous year was between €20 million and €60 million (the figure was previously 75%) and to 25% if the turnover exceeds €60 million (previously 50%). Over this same period, the deduction for goodwill arising from acquisitions of businesses will be subject to the maximum annual limit of 1% of the related amount (5% previously) (ii) Likewise, for fiscal years 2012 and 2013, the ceiling on the tax deduction for intangible fixed assets with an indefinite useful life is reduced from 10% to 2%. Regarding indirect taxation, as from September 1, 2012, the Royal Decree-Law also sets up that the standard rate of VAT increases from 18% to 21%, the reduced rate from 8% to 10%, and the super-reduced rate is held at 4%, which is applicable to staple goods and services. Certain goods and services hitherto taxed at the reduced rate (8%) will now be taxed at the standard rate (21%). Finally, the tax rate applicable to the delivery of housing units is maintained at 4% until December 31, 2012.

Law 16/2012, of December 27, by which different tax measures are adopted in the aim of consolidating public finances and the impulse of the economic activity (the Tax Measures Act). The following are the most significant measures in the Corporate Income Tax: the legal and tax regime of Real Estate Investment Trusts (SOCIMI) has been modified; the tax neutrality regime has been broadened to cover certain transactions of restructuring and winding-up of credit institutions; and, only with effect for fiscal years starting in 2013 and 2014, the tax depreciation of fixed tangible and intangible assets and real estate properties has been limited for large sized companies to 70% of the amount that would have been tax deductible before the limitation. The Law also creates the “tax on deposits at credit institutions”, aimed to tax deposits of all types placed at credit institutions throughout the country, though an initial tax rate of 0% has been established. Additionally, this Law has extended the enforcement of Wealth Tax for tax year 2013.

Law 7/2012, of October 29, which amends taxation and budgetary regulations and adapts financial regulation to permit increased action to prevent and combat fraud. Among other measures, it introduces the obligation for Spanish tax residents (whether they are private people or companies located in Spain) to make a tax declaration informing of all the assets they might have abroad, and limits to €2,500 the amount for cash transactions involving a professional or a business. In the VAT, new cases of reverse VAT charge are included in the supply of real estate where certain exemptions are waived, or the supply derives from the execution of a guarantee imposed on that property. In addition, article 108 of the Stock Exchange Law (Law 24/1988), regarding indirect taxation in the transfer of securities of companies that hold real estate assets, has been modified and simplified reducing its scope and being characterized as an anti-abuse provision.

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Organic Law 7/2012, of December 27, on the amendment of the Criminal Code with respect to transparency and fighting tax and social security fraud. The reform includes an increase of the penalties and an extension to ten years in the statute of limitations for those who commit tax fraud when the quota exceeds €600,000 defrauded, fraud is done through a criminal group or organization, or the tax fraud is committed by the interposition of entities, business, tax havens or tax-free jurisdictions. The reform also contemplates the possibility of mitigating a penalty where the alleged tax offender admits the commission of the offence and pays the tax liability due.

On June 29, 2012, Argentina unilaterally terminated the Tax Treaty signed with Spain with effects from January 1, 2013. Nevertheless, on March 13, 2013, a new Tax Treaty and protocol was signed between both countries, which still needs to be ratified, but that will take effect retroactively from January 1, 2013. Among the most significant changes included in the new Tax Treaty was the elimination of the exclusive taxation in the country of residence of assets consisting of shares in a company and the Most Favorable Nation clause (affecting interest, royalties and capital gains) of the previous protocol.

On January 14, 2013 the U.S. and the Kingdom of Spain signed a protocol amending the Tax Treaty, which needs to be ratified by both countries and will enter into force three months following the later of the dates on which any of the countries give notice that their internal procedures for entry into force have been fulfilled. Among the most significant changes included in the Tax Treaty was the elimination of the taxation at source for interest, royalties and for dividends if the beneficial owner is a company that has owned shares in the last year representing 80% of the voting capital (withholding will be 5% if the recipient does not reach that percentage, but at least 10%). Capital gains will not be subject to taxation at source, unless they derive from the sale of real estate or companies whose assets consist mainly of real estate.

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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-Law 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 Competitiveness 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 Competitiveness 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.

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• 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-Law 628/2010 of May 14, 2010, amending Royal Decree-Law 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 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 to five days.

• 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-Law 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 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-Law 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.

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• Royal Decree-Law 20/2011, of December 30, on urgent budgetary, tax and financial measures to correct the public deficit, introduces different temporary amendments in the tax system. The most significant of these are:

a) Individual Income Tax: effective for tax years 2012 and 2013, an additional tax (increase on the tax rate) ranging from 0.75% to 7% has been established on the general tax base, bringing the total tax rate to a range between 24.75% and 52%. Similarly, an additional tax ranging from 2% to 6% would be applicable on the “savings” tax base, bringing the total tax rate to a range between 21% and 27%. Withholdings rates have been modified accordingly.

b) Non-resident Income Tax: Effective on January 1, 2012 until December 31, 2013, the applicable tax rate to income obtained by non-resident taxpayers without a permanent establishment is increased from 24% to 24.75%. Over the same period, the tax rate applicable to dividends, branch profits distributions, interest payments and capital gains obtained from the transfer of assets is increased from 19% to 21%. These changes are mirrored in the withholding rates applicable.

c) VAT: the reduced 4% VAT rate for deliveries of buildings (or part of them) suitable to be used as dwellings introduced by Royal Decree-Law 9/2011 has been extended until December 31, 2012.

• Royal Decree-Law 12/2012 of March 30, which introduces several tax and administrative measures designed to reduce the public deficit. The most significant measures approved refer to the Corporate Income Tax, some of them with a permanent nature, such as the limitation of the deductibility of financial expenses, the non-deductibility of certain intragroup financial expenses, and the elimination of the accelerated depreciation regime for large sized companies; and others temporary which will only affect tax years beginning within 2012 and 2013, such as the limitation of the deductibility of goodwill, and the introduction of a minimum advanced staged payment for larger companies.

• Royal Decree-Law 2/2012 of February 3, which came into force on February 4, is primarily aimed at strengthening and rationalizing the balance sheets of Spanish financial institutions and consolidated group of credit institutions in relation to the large exposures to real estate assets through loans to real estate developers and repossessed assets, by increased provisioning combined with a requirement for an additional capital buffer on impaired assets. This Royal Decree-Law is also aimed at promoting consolidation of the financial sector, giving incentives to new integration processes among the Spanish financial institutions and introducing operational changes to the Fund for Orderly Bank Restructuring (“FROB”) and reinforcing new corporate governance rules for financial institutions which have received financial support from the FROB. (See Item 4. Information on the Company—A. History and development of the company—Recent Events’ herein)

• Royal Decree-Law 10/2012, of March 23, 2012, amended certain financial legislation in relation to the powers of the European Supervisory Authorities, aiming at adapting national supervisory arrangements to the new European supervisory framework so that Spain acts in coordination with the new European Supervisory Authorities, as well as with other Member States. In general, this Royal Decree-Law introduces the obligation for the Spanish supervisory authorities of the different financial institutions (Bank of Spain, CNMV and Directorate General of Insurance and Pension Funds) to cooperate with their European counterparts (European Banking Authority, European Securities and Markets Authority, and European Insurance and Occupational Pensions Authority, respectively), as well as with the European Systemic Risk Board. Furthermore, they shall provide these authorities with all the information that they need in order to perform their functions as conferred under European regulations.

• Royal Decree-Law 3/2012, of February 10, 2012, on urgent labour reform measures was enacted. From the standpoint of financial regulation, the seventh additional provision of Royal Decree-Law 3/2012 complements Royal Decree-Law 2/2012 of February 3, 2012 on clean-up of the financial sector balance sheet in respect to the establishment of a specific remuneration regime applicable to the directors and managers of credit institutions that receive government financial support for balance sheet clean-up and restructuring, as regards limitations on severance payments. Additionally, it sets certain rules on the termination of credit institution directors’ or managers’ contracts due to the imposition of sanctions and on the suspension of those contracts due to suspension of the directors or managers or certain cases of provisional replacement thereof. Credit institutions majority owned or financially supported by the FROB may in no case make severance payments for contract termination exceeding the lower of the following amounts: (i) twice the maximum bases set in Royal Decree-Law 2/2012 of February 3, 2012 on clean-up of the financial sector balance sheet; or (ii) two years of stipulated fixed remuneration.

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• Royal Decree-Law 6/2012, of March 9, 2012, which became effective on March 11, 2012, on urgent measures to protect mortgagors without funds established measures to foster the restructuring of the mortgage debt of persons suffering extraordinary difficulty in meeting payments, and to set in place mechanisms to make mortgage foreclosure procedures more flexible. The protection model designed is based on a code of good practices for the viable restructuring of mortgage debts on the principle residence, which is supplemented by tax measures. It shall apply to debtors within the exclusion threshold who hold loans for the purchase of houses the purchase price of which does not exceed certain levels applicable at the date of its entry into force.

• Royal Decree-Law 4/2012, of February 24, 2012, set out information obligations and procedures necessary to establish a financing mechanism for payments to local government suppliers, and Royal Decree-Law 7/201, both of March 9, 2012, amended by Royal Decree-Law 10/2012 of March 23, 2012 and set up the Fund for Financing Payments to Suppliers. Royal Decree-Law 4/2012 is aimed to provide the conditions necessary for local governments to meet their outstanding payment obligations to suppliers stemming from the tendering out of works, supplies or services. For this purpose it sets in place an extraordinary financing mechanism, of which regional governments can also avail themselves. Royal Decree-Law 7/2012 sets up the Fondo para la Financiación de los Pagos a Proveedores (Fund for Financing Payments to Suppliers, hereafter “the Fund”) and regulates the terms and conditions of transactions for paying the outstanding obligations of local governments and, where applicable, of the regional governments that have availed themselves of this financing mechanism.

• Royal Decree-Law 18/2012, of May 11, 2012, on write-downs and sales of the financial sector’s real estate assets, which builds on Royal Decree-Law 2/2012 of February 3, 2012, and which became effective on May 12, 2012, required credit institutions to create new provisions for their portfolio of loans and assets foreclosed or received in payment of debts relating to development land and to real estate construction or development. The new requirements must be complied with before December 31, 2012, except in the case of institutions that carry out integration processes during 2012, which will have 12 months from when such processes are authorized. These processes must involve a significant transformation of the institutions concerned, involve institutions that do not belong to the same group and comply with the following conditions: (i) They must be carried out through operations that entail structural modifications or the acquisition of institutions in which the Fund for the Orderly Restructuring of the Banking Sector (FROB) has a majority holding, or for which the latter has been appointed provisional administrator; (ii) they will include measures tending to improve their corporate governance; and (iii) they must incorporate a plan for the divestment of assets related to real estate exposures, as well as commitments to increase lending to households and small and medium-sized enterprises. For this purpose, credit institutions and consolidable groups of credit institutions had to submit a plan to the Bank of Spain, by June 11, 2012, detailing the measures they intended to adopt to comply with the new requirements.

Those institutions that, as a consequence of these write-downs, have a capital or core capital shortfall according to the rules in effect will have to capitalize themselves in the market or, failing that, request financial support from the FROB. This might consist in subscription for instruments convertible into shares (contingent convertible bonds, known as “CoCos”) or contributions to share capital, irrespective of whether they participate in integration processes. Institutions that seek this support must submit a restructuring plan which, inter alia, must set out the support measures that the envisaged FROB intervention would include.

In order for real estate assets to be identified and sold, the Royal Decree-Law 18/2012 envisages the creation of share capital companies to which credit institutions must transfer all the real estate assets foreclosed or received in payment of debts relating to land or real estate construction or development, and other real estate assets foreclosed or received in payment of debts since December 31, 2011.

The transfers must be made at fair value and by the end of the period for setting aside the new provisions established in Royal Decree-Laws 2/2012 and 18/2012 (i.e. before December 31, 2012, unless integration processes are carried out). In the event of absence of and difficulty estimating a fair value, the value in the accounts of the institution contributing the asset may be used instead, taking into account the provisions that must be created for the assets pursuant to Royal Decree-Laws 2/2012 and 18/2012.

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Where credit institutions have received financial support from the FROB, the exclusive corporate objects of the companies to which they transfer their assets will be the management and disposal, directly or indirectly, of such assets. In addition, they will be obliged to dispose each year of at least 5% of their assets to a third party other than the transferor credit institution or any other company in the same group. The directors of such companies must have proven experience in the management of real estate assets.

Finally, these credit institutions will have a period of three years, from the effective date of this Royal Decree-Law, to adopt and implement the necessary measures to ensure that the link of the asset management company to the institution is, at most, that of an associate.

• Law 8/2012 of October 30, 2012 on write-downs and sales of the financial sector’s real estate assets, which became effective on October 31, 2012, gives the provisions of Royal Decree-Law 18/2012, May 11, 2012 the status of a law. Among other things, it required additional provisions to those already established in Royal Decree-Law 2/2012 of February 3, 2012, consolidating the financial sector in the wake of the impairment of its loans to the property business. These new requirements must have been complied with by the credit institutions by December 31, 2012. It also clarified a number of points regarding Royal Decree-Law 2/2012 to ensure consistency with Royal Decree-Law 18/2012, and the opportunity was taken to modify a number of financial regulations.

The Law 8/2012 also introduced special treatment for preference shares under the terms of Royal Decree-Law 18/2012. Thus, credit institutions facing equity capital difficulties as a result of applying the new provisions may include in their consolidation plan an application to defer for up to 12 months the envisaged remuneration on preference shares or mandatory convertible debt instruments in circulation before May 12, 2012 (date of entry into force of Royal Decree-Law 18/2012) or on instruments exchanged for the foregoing. Once this period has expired, deferred remuneration may only be paid if sufficient distributable profits or reserves are available and there is no capital shortfall at the parent credit institution. The Law also empowers the government to stipulate under what circumstances institutions issuing preferred shares or subordinate bonds are to offer to exchange them for shares or subordinate bonds in the issuing institution or a member of its group, and the criteria for determining the percentage of the nominal value of the instruments to be exchanged.

• Royal Decree-Law 21/2012 of July 13, 2012 on liquidity measures for general government and in the financial field, which became effective on July 15, 2012, introduced certain amendments to the Spanish regulation from the financial regulation standpoint. Among others, it authorized the FROB to subscribe to the agreements and contracts necessary to formalize and place at the disposal of the State and the FROB itself the financial assistance that it may receive, directly or indirectly through the State, in cash or in debt securities, not being this assistance subject to the limits envisaged in article 2.5 of Royal Decree-Law 9/2009 of June 26, 2009 on bank restructuring and the strengthening of credit institutions’ own funds. As part of the recapitalization processes envisaged in Royal Decree-Law 9/2009, the FROB may advance in the form of a loan, in cash, or in debt securities the amount of the financial support that the institutions participating in these processes had requested. The decision to grant these advances will be conditional upon a series of circumstances which, in the opinion of the Bank of Spain, may determine that the institution in question is subject to liquidity tensions that may affect its stability during the period needed for the effective subscription and disbursement of the support from the FROB.

The Royal Decree-Law also envisaged the institution of a territorial financing mechanism which involves the creation of a Regional Government Liquidity Fund that will be funded with a charge to the State budget with an extraordinary budgetary appropriation for an amount of €18 billion. The Fund was assigned to the Ministry of Economy and General Government through the Secretariat of State for General Government, and it will be managed by the Official Credit Institute (OCI). It will extend loans to the Regional Governments, in order to cover their financial liquidity needs.

The Royal Decree-Law also exempted the Bank of Spain from the duty of professional secrecy so it may provide the European Commission, the European Central Bank, the European Banking Authority, the IMF, the European Financial Stability Facility and, where appropriate, the European Stability Mechanism with the information needed for the proper performance of their functions in respect of financial assistance for the recapitalization of Spanish financial institutions.

• Royal Decree-Law 24/2012 of August 31, 2012, on restructuring and resolution of credit institutions, which repeals Royal Decree-Law 9/2009 of June 26, 2009 on bank restructuring and strengthening of the capital of credit

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institutions, as well as certain sections of Royal Decree-Law 2/2011 of February 18, 2011 on the strengthening of the Spanish financial system, and of Royal Decree-Law 2/2012 of February 3, 2012 on restructuring of the financial sector, also, introduced various amendments to a large number of provisions with the status of Law. The Royal Decree-Law included the following measures: (i) a new enhanced framework for the management of credit institution crises, which will allow such institutions to be effectively restructured and, where necessary, resolved (wound up) in an orderly manner; (ii) new regulation of the FROB, which delimits its powers and significantly enhances the tools for intervention in all phases of the management of credit institution crises; (iii) a system of burden sharing to distribute the costs of credit institution restructuring and resolution between the public and private sectors; (iv) the legal framework for the incorporation of an Asset Management Company; (v) greater protection for retail investors; (vi) a new regime of “capital principal” requirements that must be complied with by institutions, which covers both the definition and level of such capital; (vii) the transfer of certain powers to the Bank of Spain; (viii) new functions of the Deposit Guarantee Fund for Credit Institutions, and (ix) new limits on the remuneration of executives of credit institutions that receive financial support.

The Royal Decree-Law, besides modifying the definition of “capital principal” (core capital) to adapt it to the one used by the European Banking Authority, also modified with effect from January 1, 2013, the “capital principal” (core capital) requirements established by Royal Decree-Law 2/2011 of February 18 on the strengthening of the financial system that institutions and consolidable groups must comply with. Specifically, the requirements of 8% (general) and 10% (for institutions that have not sold at least 20% of the securities representing their capital to third parties, and that have a wholesale funding ratio of more than 20%) were converted into a single 9% requirement. The Royal Decree-Law became effective on August 31, 2012. Law 9/2012, of November 14, 2012 on restructuring and resolution of credit institution was published on November 15, 2012, and raised the content of Royal Decree-Law 24/2012 of August 31, 2012 on restructuring and resolution of credit institutions (which it repeals) to the status of a Law, and introduces some significant new provisions on the regulation of asset management companies (AMCs), and the segregated assets of AMCs’, which the Law terms “bank asset funds” (FABs). The Law also makes a number of changes of relevance to the financial sphere.

• Law 9/2012 of November 14, 2012 (discussed above) sets out the general framework for asset management companies (AMCs) established in Royal Decree-Law 24/2012 of August 31, 2012, which are envisaged as tools for credit institution restructuring and resolution, and introduces some significant changes. The general legal framework applicable to AMCs, the regulations governing them, and other additional details were recently enacted in Royal Decree 1559/2012 of November 15, 2012. AMCs’ purpose is to concentrate those assets considered problematic or which might be detrimental to credit institutions’ balance sheets or jeopardize their viability, by removing them from the balance sheet and allowing them to be independently managed. The objectives AMCs are to pursue through their operations are: (i) to help consolidate the financial system by acquiring the relevant assets, such that simultaneous with their change of ownership there is an effective transfer of the risks associated with them; (ii) to minimize public financial support; (iii) to pay the debts and obligations incurred in the course of conducting their activities; (iv) to minimize possible market distortions resulting from their activities; and (v) to dispose of the assets acquired in a way that optimizes their value within the timescale for which they have been constituted. The FROB may oblige a credit institution to transfer certain classes of assets on its balance sheet to an AMC, including those on the balance sheet of any entity over which the credit institution exercises control. Asset management companies regulated under Royal Decree Law 18/2012 of May 11, 2012, on the writing down and sale of the real estate assets of the financial sector, the regulations for which were given the status of law by Law 8/2012 of October 30, 2012, are not considered AMCs.

• Royal Decree-Law 27/2012 of November 15, 2012, on urgent measures to strengthen the protection of mortgage debtors was approved and has two main objectives: to put in place a two year moratorium on evictions of vulnerable families from their primary residence, and to create a stock of social housing. For a period of two years from the effective date of the law, evictions of families considered to be particularly vulnerable for any of the reasons enumerated below will not be permitted. Moreover, for this purpose, the home must have been awarded to the creditor, or person acting on the latter’s behalf, during the mortgage foreclosure proceedings, and other financial circumstances must also apply. The Royal Decree came into force on November 16, 2012.

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

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pursuant to the Financial Services and Markets Act 2000 (“FSMA”). It is a criminal offence 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.

The U.K. Government has announced a new regulatory framework, with effect from April 1, 2013, upon implementation of the Financial Services Act 2012 (the “Act”). Under the Act, the FSA has been replaced by two regulatory bodies, the Prudential Regulatory Authority (the “PRA”), which has responsibility for the prudential regulation of deposit takers and insurance companies, and the Financial Conduct Authority (the ‘FCA’), which supervises conduct of business, and maintain orderly financial markets for consumers.

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.

U.K. Bank Levy

HM Treasury introduced an annual U.K. bank levy (the ‘U.K. Bank Levy’) via legislation in the Finance Act 2011. The U.K. Bank Levy is imposed on (amongst other entities) U.K. banking groups and subsidiaries, and therefore applies to Santander UK. The amount of the U.K. Bank Levy is based on a bank’s total liabilities, excluding (amongst other things)

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Tier 1 Capital, insured retail deposits and repos secured on sovereign debt. A reduced rate is applied to longer-term liabilities. The U.K. Government intends that the U.K. Bank Levy should raise at least £2.5 billion each year. To offset the shortfall in U.K. Bank Levy receipts, and also to take account of the benefit to the banking sector of reductions in the rate of corporation tax, there was an increase in the rates of U.K. Bank Levy from January 1, 2012 with a further increase from January 1, 2013.

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 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 national bank that has branches throughout the Northeast U.S., and Santander Consumer USA, an auto financing company. We engage in securities activities in the United States directly through our broker-dealer subsidiaries, Santander Securities Corporation, Santander Investment Securities Inc., and Santander International Securities, Inc.

Disclosure pursuant to Section 219 of the Iran threat reduction and Syria human rights act

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.

The following activities are disclosed in response to Section 13(r) with respect to affiliates of Santander UK within the Banco Santander Group:

During the period covered by this annual report an Iranian national, resident in the U.K., who is currently designated by the U.S. and the U.K. under the Iran Sanctions regime held a mortgage with Santander UK plc that was issued prior to any such designation. No further drawdown has been made (or would be allowed) under this mortgage although we continue to receive repayment installments. In 2012, total revenue in connection with the mortgage was £10,768.38 whilst net profits were negligible relative to the overall profits of Santander UK. Santander UK does not intend to enter into any new relationships with this customer, and any disbursements will only be made in accordance with applicable sanctions.

The same Iranian national referred to above also holds two investment accounts with Santander Asset Management UK Limited, part of the Banco Santander group. The accounts have remained frozen throughout 2012. The investment returns are being automatically reinvested, and no disbursements have been made to the customer. Total revenue in connection with the investment accounts was £208.15 whilst net profits were negligible in 2012 relative to the overall profits of Banco Santander, S.A.

In addition, the Group has certain legacy export credits and performance guarantees with Bank Sepah and Bank Mellat, which are included in the U.S. Department of the Treasury’s Office of Foreign Assets Control’s Specially Designated Nationals and Blocked Persons List.

• With respect to Bank Sepah, the Bank entered into bilateral credit facilities in May 1996 and in February 2004 of US$ 95.7 million and US$ 4.2 million, respectively. The former matured on May 29, 2012 and the latter matures on September 11, 2013. As of December 31, 2012, €0.5 million remained outstanding under the 2004 bilateral credit facility.

• With respect to Bank Mellat, the Bank entered into two bilateral credit facilities in February 2000 in an aggregate principal amount of €25.9 million. Both credit facilities matured in 2012. In addition, in 2005 Banco Santander participated in a syndicated credit facility for Bank Mellat of €15.5 million, which matures on July 6, 2015. As of December 31, 2012, the Group was owed €6.5 million under this credit facility.

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Both Bank Sepah and Bank Mellat have been in default under all of these agreements in recent years and Banco Santander has been and expects to continue to be repaid any amounts due by official export credit agencies, which insure between 95% and 99% of the outstanding amounts under these credit facilities. No funds have been extended by Santander under these facilities since they were granted.

The Group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations – either under tender documents or under contracting agreements – of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007. However, should any of the contractors default in their obligations under the public bids, the Group would not be able to pay any amounts due to Bank Sepah or Bank Mellat because any such payments would be frozen pursuant to Council Regulation (EU) No. 961/2010.

In the aggregate, all of the transactions described above resulted in approximately €120,000 gross revenues and approximately €15,000 net loss to the Group in 2012, all of which resulted from the performance of export credit agencies rather than any Iranian entity. The Group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount – which payment would be frozen as explained above (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, the Group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.

Dodd-Frank Act

On July 21, 2010, the United States enacted the Dodd-Frank Act, which provides a broad framework for significant regulatory changes that will extend to almost every area of U.S. financial regulation. Implementation of the Dodd-Frank Act requires further detailed rulemaking over several years by different U.S. regulators, including the Office of the Comptroller of the Currency (the “OCC”), the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the Securities and Exchange Commission (the “SEC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Commodity Futures Trading Commission (the “CFTC”) and the newly created Financial Stability Oversight Council (the “Council”) and Consumer Financial Protection Bureau (“the CFPB”), although uncertainty remains about the final details, timing and impact of the rules.

Among other things, the Dodd-Frank Act will, pursuant to its so-called “Volcker Rule”, limit the ability of banking entities to sponsor or invest in private equity or hedge funds or to engage in certain types of proprietary trading in the United States unrelated to serving clients, although certain non-U.S. banking organizations, such as the Bank, will not be prohibited by the Dodd-Frank Act from engaging in such activities solely outside the United States. The Dodd-Frank Act also provides regulators with tools to impose greater capital, leverage and liquidity requirements and other prudential standards, particularly for financial institutions that pose significant systemic risk. However, in imposing heightened capital, leverage, liquidity and other prudential standards on non-U.S. banks such as us, the Federal Reserve Board is directed to take into account the principle of national treatment and equality of competitive opportunity, and the extent to which the foreign bank is subject to comparable home country standards (although certain of our activities will be subject to the U.S. standards).

U.S. regulators will also be able to restrict the size and growth of systemically significant non-bank financial companies and large interconnected bank holding companies and will be required to impose bright-line debt-to-equity ratio limits on financial companies that the Council determines pose a grave threat to financial stability.

Furthermore, the Dodd-Frank Act provides for an extensive framework for the regulation of over-the-counter (OTC) derivatives, including mandatory clearing, exchange trading and transaction reporting of certain OTC derivatives. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants will be required to register with the SEC or the CFTC, or both, and will become subject to capital, margin, business conduct, recordkeeping, reporting and other requirements. We may register one or more entities as swap dealers.

Regulations that the FDIC or CFPB may adopt could affect the nature of the activities that a bank, such as Sovereign Bank and Santander Puerto Rico, may conduct, and may impose restrictions and limitations on the conduct of such activities.

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The Dodd-Frank Act also grants the SEC discretionary rule-making authority to impose a new fiduciary standard on brokers, dealers and investment advisers, and expands the extraterritorial jurisdiction of U.S. courts over actions brought by the SEC or the United States with respect to violations of the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940.

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 Holdings USA and Santander BanCorp. As a result, we and our U.S. operations are subject to regulation, supervision and examination by the Federal Reserve Board.

Santander Puerto Rico is a Puerto Rico-chartered bank, and its deposits are insured by the FDIC. As such, Santander Puerto Rico is subject to regulation, supervision and examination by the Puerto Rico Office of Financial Institutions and the FDIC. Sovereign Bank is a federally-chartered national bank, the deposits of which are also insured by the FDIC. Sovereign Bank is subject to regulation, supervision and examination by the OCC and the FDIC. Our New York branch is supervised by the Federal Reserve Bank of New York and the New York State Department of Financial Services, but its deposits are not insured (or eligible to be insured) by the FDIC. Santander UK’s branch in Connecticut is supervised by the Federal Reserve Bank of New York and the Connecticut Department of Banking. Banco Santander International is supervised by the Federal Reserve Bank of Atlanta. Santander Consumer USA is regulated and supervised by the Federal Reserve Bank of Boston and various state regulators.

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 and Federal Reserve Board regulations, 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.

Under U.S. law, our activities and those of our subsidiaries in the United States are generally limited to the business of banking, and managing or controlling banks. So long as we are a financial holding company under U.S. law, we may also engage in nonbanking activities in the United States that are financial in nature, or incidental or complementary to such financial activity, including securities, merchant banking, insurance and other financial activities, subject to certain limitations on the conduct of such activities and to prior regulatory approval in some cases.

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. For our U.S. branches, these single-borrower lending limits are based on the worldwide capital of the entire foreign bank (e.g., Banco Santander, S.A. in the case of our New York branch).

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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 (i) 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), (ii) 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 or, (iii) for a foreign bank that presents a risk to the stability of the United States financial system, the home country of the foreign bank has not adopted, or made demonstrable progress toward adopting, an appropriate system of financial regulation to mitigate such risk.

The Dodd-Frank Act removed, effective in July 2011, a longstanding prohibition on the payment of interest on demand deposits by our FDIC-insured bank subsidiaries and our New York branch. The Dodd-Frank Act also requires that the lending limits applicable to Sovereign Bank, Santander Puerto Rico, and our New York branch take into account credit exposure arising from derivative transactions, and that those applicable to Sovereign Bank and our New York branch also take into account securities borrowing and lending transactions and repurchase and reverse repurchase agreements with counterparties. The OCC has issued an interim final rule to implement the Dodd-Frank Act’s provisions relating to lending limits. Also, under the so-called swap “push-out” provisions of the Dodd-Frank Act, the derivatives activities of FDIC-insured banks and U.S. branch offices of foreign banks will be restricted or prohibited, which may necessitate a restructuring of how we conduct our derivatives activities.

There are various qualitative and quantitative 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 must be secured by designated amounts of specified collateral and are subject to volume limitations. These restrictions also apply to certain transactions of our New York branch with certain of our U.S. affiliates. Effective in July 2012, the Dodd-Frank Act subjects credit exposure arising from derivative transactions, securities borrowing and lending transactions, and repurchase/reverse repurchase agreements to these collateral and volume limitations. The Federal Reserve Bank has not yet issued regulations to implement these changes made by the Dodd-Frank Act.

A major focus of U.S. governmental policy relating to financial institutions is aimed at preventing money laundering and terrorist financing and compliance with economic sanctions in respect of designated countries or activities. Failure of an institution to have policies and procedures and controls in place to prevent, detect and report money laundering and terrorist financing could in some cases have serious legal, financial and reputational consequences for the institution.

In December 2012, pursuant to the Dodd-Frank Act’s systemic risk regulation provisions, the Federal Reserve Board proposed to apply enhanced prudential standards to the U.S. operations of large foreign banking organizations, including us. Under the Federal Reserve Board’s proposal, a number of large foreign banking organizations, including Banco Santander, S.A., would be required to establish a separately capitalized top-tier U.S. intermediate holding company (“IHC”) that would hold all of the large foreign banking organization’s U.S. bank and nonbank subsidiaries. Under the proposal, an IHC would be subject to U.S. capital, liquidity, single counterparty credit limits, risk management, stress testing and other enhanced prudential standards on a consolidated basis, and the Federal Reserve Board would have the authority to examine any IHC and any subsidiary of an IHC. Although U.S. branches and agencies of foreign banks would not be required to be held beneath an IHC, such branches and agencies would be subject to liquidity, single counterparty credit limits, and, in certain circumstances, asset maintenance requirements. The rules have a proposed effective date of July 1, 2015. The Federal Reserve Board is currently accepting comments on its proposal.

Our New York branch

Our New York branch is licensed by the New York Superintendent of Financial Services 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.

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The New York State Banking Law authorizes the Superintendent of Financial Services to take possession of the business and property of a New York branch of a foreign bank under certain circumstances, generally 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 depositors and other creditors that arose out of transactions with a branch are to be accepted by the Superintendent of Financial Services 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 Financial Services will turn over the remaining assets, if any, to the foreign bank or its duly appointed liquidator or receiver.

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. 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.

In June 2012, U.S. bank regulators proposed a broad revision of the regulatory capital rules applicable to U.S. banks, bank holding companies and other U.S. banking organizations. The proposals would, among other things, implement the Basel III capital standards in the United States, revise the capital categories under the “prompt corrective action” framework to reflect the higher minimum capital ratios under Basel III, and modify existing standardized risk weights for certain types of asset classes, including residential mortgages and securitization exposures. The proposals are intended to comply with the Dodd-Frank Act’s minimum risk-based capital requirements and would be phased in over a multi-year period. Once fully implemented, the new rules would generally increase both the quality and quantity of regulatory capital that U.S. banking organizations are required to maintain. It was originally contemplated that the revised capital rules would be phased in beginning in January 2013. In November 2012, however, U.S. bank regulators announced that the proposals would not become effective in January 2013. The announcement did not specify new implementation or phase-in dates. U.S. bank regulators are working to finalize the proposals.

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.

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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, 2012 of 740 companies that consolidate by the global integration method. In addition, there are 131 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 2012, the Bank and its banking subsidiaries either leased or owned premises in Spain and abroad, which at December 31, 2012 included 4,683 branch offices in Spain and 9,709 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” herein 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.

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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.

The following subsections set forth the most important financial instruments and families of derivatives, and the related valuation techniques and inputs, by asset class.

• Fixed income and inflation

The fixed income asset class includes basic instruments such as interest rate forwards, interest rate swaps and cross currency swaps, which are valued using forward estimation of flows and calculating net present value by discounting those flows taking into account basis swap and cross currency spreads, depending on the payment frequency and currency of each leg of the derivative. Vanilla products, including regular and digital cap and floor options as well as swaptions, are priced using benchmark industry models. More exotic derivatives are priced using more complex models which are generally accepted as standard across institutions.

These pricing models are fed with observable market data such as deposits, futures, cross currency swap and constant maturity swap rates as well as basis swap spreads. These data allow us to calculate different interest rate yield curves depending on the payment frequency and discounting curves for each currency. For derivative instruments, implied volatilities are also used as model inputs. These volatilities are observable in the market for cap and floor options and swaptions. Interpolation and extrapolation of volatilities from the quoted ranges are carried out using well-accepted industry models. More exotic instruments may involve the use of non-observable data or model parameters, such as correlation (among interest rates and cross-asset), mean reversion rates and prepayment rates. These internal parameters are usually defined from historical data or through calibration.

The inflation asset class includes inflation-linked bonds and zero-coupon or year-on-year inflation-linked swaps, valued with the net present value method using forward estimation and discounting. Some derivatives on inflation indexes are also available and are priced using standard and more complex bespoke models, as appropriate. Valuation inputs of these models consider inflation-linked swap spreads observable in the market and estimations of inflation seasonality. These data allow us to calculate a forward inflation curve. Implied volatilities taken from zero-coupon and year-on-year inflation options are also inputs for the pricing of more complex derivatives.

• Equity and foreign exchange

The most important products in these asset classes are forward and futures contracts, which include vanilla, listed and OTC (over-the-counter) derivatives on single underlying assets and baskets of assets. Vanilla options are priced using the standard Black-Scholes model and more exotic derivatives involving forward returns, average performance, or digital, barrier or callable features are priced using well-accepted industry models and bespoke models, as appropriate. For derivatives on illiquid stocks, hedging is facilitated by taking into account the liquidity constraints inside models.

The inputs of equity models consider interest rate curves, spot prices, dividends, asset borrowing costs (repo margin spreads), implied volatilities, correlation among equity stocks and indexes, and cross-asset correlation. Implied volatilities are obtained from market quotes of European and American vanilla call and put options. Interpolation and extrapolation techniques allow us to obtain continuous volatility surfaces for illiquid stocks. Dividends are usually estimated for the mid and long term. Correlations are obtained from historical data or, when possible, are implied from market quotes of correlation-dependent products.

The inputs of foreign exchange models include the interest rate curve for each currency, the spot foreign exchange price and the implied volatilities and correlation among assets of this type. Volatilities are obtained from European vanilla call and put options which are quoted in markets as at-the-money, risk reversal or butterfly options. Illiquid currency pairs are usually handled by using the data of the liquid pairs from which the illiquid currency can be derived. For more exotic products, unobservable model parameters may be estimated by fitting to reference prices provided by other non-quoted market sources.

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• Credit

The most common instrument in this asset class is the credit default swap (CDS), which is used to hedge credit exposure to third parties. In addition, models for first-to-default (FTD), n-to-default (NTD) and single-tranche collateralized debt obligation (CDO) products are also available. These products are valued with standard industry models, which estimate probability of default of a single issuer (for CDSs) or the joint probability of default of more than one issuer for FTDs, NTDs and CDOs.

Valuation inputs are the interest rate curve, the CDS spread curve and the recovery rate. The CDS spread curve is obtained in the market for indexes and important individual issuers. For less liquid issuers, this spread curve is estimated using proxies (quoted instruments similar to the instrument to be valued) or other credit-dependent instruments. Recovery rates are usually set to standard values. For listed single-tranche CDOs, the correlation of joint default of several issuers is implied from the market. For FTDs, NTDs and bespoke CDOs, the correlation is estimated from proxies or historical data when no other option is available.

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 for financial instruments accounted for at amortized cost

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.

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 balances relating to impaired transactions continue to be recognized on the balance sheet, for their full amounts, until we consider that the recovery of those amounts is remote.

We consider recovery to be remote when there has been a substantial and irreversible deterioration of the borrower’s solvency, when commencement of the liquidation phase of insolvency proceedings has been ordered or when more than four years have elapsed since the borrower’s transaction was classified as doubtful due to arrears (the maximum period established by the Bank of Spain).

When the recovery of a financial asset is considered remote, it is written-off, together with the related allowance, 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.

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For the purpose of determining impairment losses, we monitor our debtors as described below:

• Individually for significant debt instruments and for instruments which, although not material, are not susceptible to being classified in a group of financial assets with similar credit risk characteristics, which are classified by the Group as “individualized”. This category includes wholesale banking enterprises, financial institutions and certain retail banking enterprises.

• Collectively, in all other cases, which are classified by the Group as “standardized” by grouping together instruments having similar credit risk characteristics indicative of the debtors’ ability to pay all principal and interest amounts in accordance with the contractual terms. The credit risk characteristics considered for the purpose of grouping the assets are, inter alia, instrument type, debtor’s industry and geographical location, type of guarantee or collateral, age of past-due amounts and any other relevant factor for the estimation of future cash flows. This category includes exposures to individuals, individual entrepreneurs and retail banking enterprises not classified as individualized customers.

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.

We have 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, and in 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, we must meet the Bank of Spain requirements, which establish that, until the Spanish regulatory authority has verified and approved the internal models for the calculation of the allowance for losses arising from credit risk (to date it has only approved the internal models to be used to calculate regulatory capital), entities must calculate their credit risk coverage as set forth below:

a. Specific allowance (individuals):

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. The allowances percentages are determined 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. 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. 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

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.

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b. General allowance for inherent losses (collective):

Additionally, 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.

c. 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, we classify 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 our country risk exposure, the allowances recognized in this connection are not material with respect to the credit loss allowances recognized.

The allowance for credit losses for financial instruments accounted for at amortized cost recorded by Grupo Santander as at December 31, 2012, using the methodology outlined above, was €26,166 million.

However, the coverage of the Group’s losses arising from credit risk must also meet the regulatory requirements of IFRS-IASB. With the objective of ensuring that the provisions resulting from the application of the above explained criteria required by the Bank of Spain are reasonable under IFRS-IASB, we estimate the allowances for credit losses using our internal models based on our own credit loss experience and management’s estimate of future credit losses in order to confirm that there are no material differences.

Our internal models (a full description of our credit risk management system is included in Item 3 Information on the Company. B Business Overview- Allowance for Credit Losses and Country Risk Requirements and in Item 11. Quantitative and Qualitative Disclosures about Market Risk Part 4. Credit Risk) determine the impairment losses on debt instruments not measured at fair value through profit or loss and on contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, impairment losses on loans are losses incurred at the reporting date, calculated using statistical methods.

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).

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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.

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 incurred 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 discounting of the guarantees associated with the transaction and the future flows that are expected to be recovered.

The methodology for determining the allowance for losses arising from credit risk seeks to identify the amounts of losses incurred at the reporting date which, regardless of whether they have been disclosed, we know, on the basis of historical experience and other specific information, will arise in the one-year period following the reporting date.

These internal models produce a result that is substantially the same as the level of provisions at which we arrive using the parameters established by the Bank of Spain. Therefore, there is no material difference in the calculation of loan allowances between the EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 (as explained above) and IFRS-IASB.

Impairment

Certain assets, including goodwill, other intangible assets, non-current assets held for sale, 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 the 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 amount to be recovered of each cash-generating unit is determined taking into consideration the carrying amount (including any fair value adjustments arising on the business combination) of all the assets and liabilities of all the independent legal entities comprising the cash-generating unit, together with the related goodwill.

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The amount to be recovered of the cash-generating unit is compared with its recoverable amount in order to determine whether there is any impairment.

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, we analyze 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, we perform estimates of the recoverable amounts of certain cash-generating units using discounted cash flow projections. In order to perform this calculation, the most significant assumptions used are: (i) cash flow projections, which are based on the five-year financial budgets approved by the directors; (ii) discount rates, which are determined as the cost of capital consisting of the risk-free rate plus a risk premium in line with the market and the business in which the units operate; and (iii) a constant growth rate used to extrapolate the cash flows in perpetuity which is determined considering the evolution of GDP of the market in which the cash-generating unit in question operates.

Given the degree of uncertainty related to these assumptions, the directors carry out sensitivity analysis using reasonably possible changes in the key assumptions on which the recoverable amounts of the cash-generating units are based in order to confirm that the recoverable amounts still continue to exceed the carrying amounts and therefore no impairment would be recorded through the income statement. As of December 31, 2012, 2011 and 2010, none of our other cash-generating units with significant goodwill had a recoverable amount below or near its carrying amount, except as for the cases described below. We consider that a cash-generating unit is “near” its carrying amount when reasonably possible changes in the key assumptions on which management has based the determination of the cash generation unit’s recoverable amount would cause such cash generation unit’s carrying amount to exceed its recoverable amount.

Each cash-generating unit corresponds to separate entities for which all of their assets and liabilities are included in the carrying amount at their consolidated book value, which includes any fair value adjustments that may have arisen as a consequence of the corresponding business combinations. For the purpose of impairment testing, goodwill acquired in business combinations is allocated to each cash-generating unit that is expected to benefit from the synergies of the combination. Apart from goodwill, the Group carries no other significant corporate assets or liabilities that contribute to the future cash flows of the different cash generating units, so no further allocation is necessary to determine their carrying amount.

In 2012, in accordance with the estimates, projections and sensitivity analysis available to the Bank’s directors, we recognized impairment charges of €156 million related to goodwill of our subsidiaries in Italy.

In 2011, our impairment reviews resulted in impairment charges of €660 million related to goodwill of our subsidiaries in Portugal and €501 million due to the review of the useful lives of our intangible assets.

Non-current assets held for sale are measured at the lower of fair value less costs to sell and the carrying amount. Therefore, we annually conduct a review of the recoverable values of these assets, taking into account the features of our assets and using specialist external appraisals. After performing this assessment at December 31, 2012, 2011 and 2010 the allowance that covers the value of our non-current assets held for sale amounted to €4,416 million, €4,512 million and €2,500 million, respectively.

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. After performing this analysis, an impairment loss of €100 million on the investment in Metrovacesa was recorded in 2011. In 2012 and 2010 there was no evidence of material impairment on the Group’s equity method investments.

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In relation to the available for sale securities (debt and equity instruments) at the end of each year, we make an assessment of whether there is any objective evidence that any our available for sale securities of is impaired. This assessment includes but is not limited to an analysis of the following information: (i) the issuer’s economic and financial position, the existence of default or late payment, analysis of the issuer’s solvency, the evolution of its business, short-term projections, trends observed with respect to its earnings and, if applicable, its dividend distribution policy; (ii) market-related information, such as changes in the general economic situation or changes in the issuer’s sector which might affect its ability to pay; (iii) changes in the fair value of the security analyzed and the reason for such changes-whether they are intrinsic or the result of the general uncertainty concerning the economy or the country-; and (iv) independent analysts’ reports and forecasts and other independent market information.

In the case of equity instruments, when the changes in the fair value of the instrument under analysis are assessed, the duration and significance of the fall in its market price below cost for us is taken into account. As a general rule, for these purposes we consider a significant fall to be a 40% drop in the value of the asset and/or a continued fall over a period of 18 months. Nevertheless, it should be noted that we assess, on a case-by-case basis each of the securities that have suffered losses, and monitors the performance of their prices, recognizing an impairment loss as soon as it is considered that the recoverable amount could be affected, even though the price may not have fallen by the percentage or for the duration mentioned above.

If, after the above assessment has been carried out, we consider that the presence of one or more of these factors could affect recovery of the cost of the asset, an impairment loss is recognized in the income statement for the amount of the loss in equity under valuation adjustments. Also, where we do not intend and/or are not able to hold the investment for a sufficient amount of time to recover the cost, the instrument is written down to its 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 the end of 2012 we performed the assessment described above and recognized in the consolidated income statement impairment losses of €13 million in respect of debt instruments (€125 million in 2011 and €14 million in 2010). The impairment losses recognised in 2011 included €106 million relating to Greek sovereign debt. At 2012, 2011 and 2010 year-end, we analyzed the additional unrealized revaluation losses related to debt instruments and 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 the end of 2012, most of the losses on government debt securities recognized in the Group’s equity (approximately 97% of the total) related to the decline in value of the Spanish and Portuguese government debt securities. This decline in value was not prompted by interest rate changes but rather by an increase in the credit risk spreads due to Eurozone debt market tensions exacerbated by the interventions in recent years of Ireland, Greece and Portugal. There had not been any default on payments of interest nor was there any evidence that the issuers would fail to continue to meet their payments obligations in the future, with respect both to principal and interest, and thus prevent recovery of the carrying amount of such securities.

During 2012, 2011 and 2010 we completed the analysis described above for equity securities and we recognized impairments amounting to €344 million (€704 million in 2011 and €319 million in 2010). The impairment losses recognized in 2011 included €592 million relating to the impairment of the ownership interests in Iberdrola, S.A. and Assicurazioni Generali SpA. These equity instruments had suffered a significant and prolonged fall in price as of December 31, 2011. No additional significant impairments were recorded in 2012 for the remainder of the equity securities that showed unrealized losses as of December 31, 2012 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.

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The actuarial valuation is dependent upon a series of assumptions; the principal ones are set forth below:

• annual discount rate-determined, when available, by reference to high-quality corporate bonds;

• 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.

On January 1, 2013 Amendments to IAS 19, Employee Benefits came into force—these amendments eliminate the “corridor” under which entities are currently able to opt for deferred recognition of a given portion of actuarial gains and losses, establishing that when the amendments come into effect, all actuarial gains and losses must be recognized immediately. The amendments include significant changes in the presentation of cost components, as a result of which the service cost relating to post-employment benefit obligations (past service cost and plan curtailments and settlements) and net interest cost will be recognized in profit or loss and the remeasurement component (comprising basically actuarial gains and losses) will be recognized in Equity—Valuation adjustments and may not be reclassified to profit or loss. The Bank’s directors consider that, had this standard been applied at December 31, 2012, equity would have been reduced by €3,051 million due mainly to the elimination of the “corridor”. In accordance with IAS 8, these amendments entail a change of accounting policy and, accordingly, they must be applied retrospectively from January 1, 2013, by adjusting the beginning balances of equity for the earliest period presented as though the new accounting policy had always been applied.

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.

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. We disclose our goodwill impairment assessment methodology in “Critical Accounting Policies—Impairment”.

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.

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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, Skandinaviska Enskilda Banken (SEB) Group’s commercial banking business in Germany (2011) and Bank Zachodni WBK, S.A. (2011), a significant amount of goodwill was recorded (see Note 3 and 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 came into force in 2012 and those with effective dates subsequent to December 31, 2012.

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/appreciation 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.

2012 Overview

In 2012 the global economy remained weak due to Europe’s sovereign debt crisis and the slow recovery of the U.S. economy. Emerging economies continued to be more positive, although some of them were also affected by the international environment. The eurozone’s crisis reached a turning point at the European Council in June and the financial aid mechanisms presented by the European Central Bank (ECB) in September, which reduced significantly the probability of a break-up of the zone accorded by the market.

In the US, the fourth quarter GDP figure showed an annualized decline of 0.1% because of the sharp cut in public spending in the face of the threat of the “fiscal cliff” and the negative contribution of stocks. Consumption and investment were positive and confirmed the continued expansion, albeit a moderate one. Growth for the whole of 2012 is 2.2% and the underlying inflation rate was within the Fed’s target range (close to 1.5%).

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The lack of inflationary pressures suggested that a rise in interest rates was unlikely until the middle of 2015. Democrats and Republicans reached a temporary agreement to avoid the “fiscal cliff”, which had it happened would have pushed the economy back into recession. The agreement gives two months to negotiate a new debt ceiling and agree specific structural spending cuts.

Latin America’s growth eased in 2012, with a varied performance by country. Growth was stronger than expected in Chile and less so in Brazil. Inflation remained controlled in the short term, interest rates softened and currencies tended to appreciate, except for the Brazilian real, in the last part of 2012.

Brazil’s GDP rose 0.9% in 2012, with a weaker than expected recovery in the second half. Despite the strengthening of consumption (thanks to job creation), the fall in investment is eroding economic growth. The central bank focused on growth as one of the priorities of its strategy and continued to cut interest rates. With the selic reaching a record low of 7.25%. Inflation was 5.8% at the end of 2012 (6.5% in 2011). The real traded against the dollar at below BRL 2 in the first half of the year, though lower than expected growth in the last part of the year modified the trend so that the currency ended 2012 at BRL 2.05/US$.

Mexico is expected to grow by almost 4%, backed by industrial exports, the residential sector and a greater participation of the services sector. Inflation remained within the Central Bank of Mexico’s target range (3% ± 1%) in the first half of the year and rose in the second half to 3.6% in December. Underlying inflation remained at around 3.5%, a comfortable level for the Central Bank of Mexico, which kept its key rate at 4.5% for the third year running. The peso was relatively stable at around MXN 13/US$ (MXN 13.02/US$ at the end of the year).

The growth of the Chilean economy was 5.6%, driven by buoyant domestic demand, mainly consumption (benefiting from growth in wages and lending) and investment. Inflation, which deteriorated at the end of 2011 and the beginning of 2012, improved in the second half and ended the year at 1.5% (4.4% in 2011). The benchmark interest rate remained stable at 5% after a cut of 25 basis points in January. The peso traded at CLP 479/US$ (after remaining for almost all the year below CLP 500/US$).

The eurozone economy shrank by 0.5% in 2012. The region returned to recession in the second half, reflecting public sector austerity measures and deleveraging of the private sector, and for a while a deterioration in the financial conditions related to the sovereign debt crisis and doubts on the future of the Monetary Union (only dispelled after the summit in June and the European Central Bank’s measures).

Inflation remained above the ECB’s target of 2% throughout the year, with an average rate of 2.5%, due to higher oil prices at the start of the year and higher indirect taxes in some countries. Even so, inflation was lower than in 2011 and remains on a downward path that could see it at around the target in 2013.

The ECB again played a key role in seeking to resolve the crisis. It began 2012 with two long-term financing operations to guarantee the financial system’s liquidity. In July, greater uncertainty led the ECB to cut its refinancing rate by 25 basis points to 0.75% and the deposit rate (the reference rate for current money markets) to 0%.

In September, the ECB unveiled Outright Monetary Transactions (OMT). The objective is to restore the transmission mechanism of monetary policy, affected by the financial fragmentation of the area associated with the perception of the risk of break-up of the eurozone. With them, the ECB can buy sovereign bonds with maturities of between one and three years provided the government requests a bail-out by the European Financial Stability facility or the European Stability Mechanism. Although the triggering of the OMTs is in the hands of national governments, the announcement helped to ease financial tensions.

Regarding the exchange rate, tensions in the eurozone caused the single currency to depreciate against the dollar since august and end the year at €1/US$1.32. The economic situation and prospects varied from country to country. The peripheral European economies suffered the impact of a tougher fiscal adjustment and deleveraging in the private sector, coupled with higher funding costs. The core countries, on the other hand, continued to be more resilient. Germany continued lowering its unemployment rate to 5.4%. GDP growth was 0.9%.

The Spanish economy shrank by 1.4% in 2012, due to the strong adjustments in both the public (fiscal consolidation) and private sectors (deleveraging).

Domestic demand reflected the sharp fall in household consumption (higher VAT, rise in withholding income tax, wage reductions and uncertainty); the significant effort to contain spending and public investment (chiefly in the last part of the year) and the adjustment in the real estate sector. The positive feature was higher than expected exports, which contributed to a current account surplus in the last part of the year.

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Inflation was 2.9%, affected by higher VAT, medical products and the rise in administered prices. The underlying inflation rate ended the year at 2.1%, in line with the evolution of prices in the eurozone.

The U.K. economy rose slightly (0.3%) in 2012. Excluding the third quarter, heavily influenced by the Olympic Games, underlying activity was weak. The factors were weaker external demand and the impact of the eurozone’s sovereign debt crisis, on the one hand, and weak domestic demand, on the other, affected by the fiscal adjustment, the need for households to reduce their debts and tighter borrowing conditions to the private sector.

Inflation was still high compared to other European economies and clearly above the Bank of England’s target, though it dropped in 2012 to 2.8% on average from 4.5% in 2011 and will probably continue to do so in 2013. The Bank of England held its base rate at 0.5%, increased its quantitative easing program to a total of £375 billion and introduced a funding for lending scheme to foster credit to households and companies by providing long-term liquidity at interest rates below the market’s. The Sterling appreciated to €1 / £0.82.

Poland’s economy grew at a slower pace in 2012 +2.2% as compared to +4.4% in 2011. However, the growth was above the European average, due to Europe’s lower growth, less buoyant domestic consumption and measures to control the budget deficit. Inflation was more moderate (2.2% in December) and in the fourth quarter the central bank cut its key rate 50 basis points to 4.25%, a trend that continued in 2013 (-50 basis points in February to 3.75%). The zloty appreciated to €1 / PLN 4.07.

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, 2012 was €2,205 million, a 58.8% or €3,146 million decrease from €5,351 million in 2011, which represented a 34.6% or €2,830 million decrease from €8,181 million in 2010.

This was due to several factors that negatively affected the 2012 as compared to 2011:

• The most important one was provisions for real estate risk in Spain of €4,110 million net of tax. These provisions were covered by: (i) €1,064 million which came from the capital gains generated from the sale of the subsidiary in Colombia and the insurance operation in Spain and Portugal, and, (ii) €3,047 million which were charged to the year’s earnings.

• A negative perimeter effect on attributable profit of 11 percentage points resulting from the difference between:

• a positive effect from the entry in April 2011 of Poland’s Bank Zachodni WBK and to a lesser extent the business acquired from SEB in Germany as of February 2011

• a negative effect from: (i) the sale of the subsidiary in Colombia, (ii) the entry of new partners in Santander Consumer USA (SCUSA) and the partial sale of insurance business in Latin America, (iii) the reinsurance of the portfolio of individual life risk of Santander’s insurers in Spain and Portugal, and (iv) the rise in minority interests in Brazil, Mexico and Chile, which was only partially offset by

• The impact of exchange rates on various currencies against the euro was negative by one percentage point for the whole Group in year-to-year comparisons for revenues and costs. The impact on the U.K. and the U.S. income statements was positive by 6 percentage points and 8 percentage points, respectively. Latin America had a total negative impact of 4 percentage points (-8 percentage points for Brazil and +5 percentage points for the rest of Latin America).

Interest Income / (Charges)

Net interest income was €30,147 million in 2012, a 2.2% or €674 million decrease from €30,821 million in 2011, which represented a 5.5% or €1,597 million increase from €29,224 million in 2010.

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2012 compared to 2011

The €674 million decrease in interest income compared to 2011 was mainly due to the change in consolidation method of SCUSA, which started consolidating by the equity accounted method in December 2011. On a like for like basis (mainly deducting the change in consolidation method of SCUSA) net interest income increased 3.6%. This increase was mainly attributable to:

• The positive effect of the improvement in the loan spreads for the Group as a whole from 3.69% in 2011 to 3.95% in 2012. This was due, on the one hand, to the growth in volumes and the appropriate management of prices in emerging markets and, on the other, to the higher return on new lending in countries such as Spain, Portugal and the United Kingdom that are currently in a situation of lower volumes and low interest rates.

• The negative effect of the higher funding costs triggered by the increased cost of credit and a conservative liquidity strategy.

• The reduction of the deposit spread from 0.31% in 2011 to 0.10% in 2012 as a result of the increased financial cost in countries where there was strong competition for deposits at certain times in the year.

On a like for like basis our net interest income by geographic areas was as follows:

• Increase of 8.5% in Spain, within an environment of lower balances of loans due to deleveraging, and with appropriate management of prices and higher volumes of deposits.

• Latin America also did well 9.4% (+14.7% excluding the perimeter and the exchange rate impact), with Brazil and Mexico up 6.4% and 20.6%, respectively. This growth reflected strong activity, with sustained rises in loans and deposits (in all countries), and management of spreads in an environment of stable or lower interest rates.

• Santander UK registered a fall of 18.3%, due to the higher cost of funding and low interest, and Santander US experienced a small decrease of 0.4%.

Average total earning assets were €1,195,226 million for 2012, a 6.1% or €69,030 million increase from €1,126,196 million in 2011. This increase was divided among the international and domestic sectors, which grew €34,345 million and €34,684 million, respectively. By line items the growth in average total earning assets was due to: (i) an increase of €34,166 million in the average balances of our other interest earning assets (mainly hedging derivatives), (ii) a rise of €20,014 million in average loans and credits, and (iii) a growth of €15,047 million in average cash and due from central banks. Although average loans increased during 2012, by year end gross loans declined 3% as compared to 2011. Eliminating the exchange rate and perimeter effects, lending was 2% lower.

The geographic distribution (principal segments) of customer loans was very different by market.

• In Continental Europe, Spain’s and Portugal’s net customer lending continued to be affected by low demand (-8% and -9%, respectively), while Santander Consumer Finance’s balances remained stable (-1%) and Bank Zachodni WBK increased its lending by 5% in local currency.

• Gross customer loans in Spain stood at €205,520 million, 6% lower. Most of the drop was due to the reduction in real estate exposure (-32%) coupled with the necessary process of deleveraging of households. On the other hand, total financing to companies, direct and indirect, remained stable.

• In Portugal, lending dropped 9%, with most segments decreasing. In addition, loans to the construction and real estate sectors, which represent only 2.9% of lending, declined 22% in 2012.

• Santander Consumer Finance’s balances remained virtually unchanged (-1%). Germany, which accounts for 52% of the area’s credit, increased its lending by 1%. Nordic countries also increased, while that of other countries, more affected by the environment and deleveraging, declined.

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New loans in 2012 rose 1%, notably those for used cars and durable goods. Financing of new cars rose more quickly than car sales in Europe.

• In Poland, Bank Zachodni WBK’s lending rose 5% (+9% to individuals and +3% to companies).

• In the United Kingdom, the balance of customer loans was 4% lower. In local criteria, the balance of residential mortgages dropped 5% due to the strategy followed to improve the risk profile, while personal loans declined 19%, due to the continuation of the reduction policy. Loans to SMEs increased 18%, gaining further market share.

• Customer loans in Latin America remained flat with a 0.2% increase.

• Lastly, customer loans in the U.S. increased 2.8%.

At the end of 2012, Continental Europe accounted for 40% of lending of the Group’s total operating areas (Spain 28%), the U.K. 34%, Latin America 20% (Brazil 11%) and the U.S.6%. These shares in 2011 were: Continental Europe 42% (Spain 29%), the U.K. 34%, Latin America 19% (Brazil 11%) and the U.S.5%.

2011 compared to 2010

The €1,597 million increase in interest income in 2011 was due to a rise in business volumes of €2,025 million partially offset by a decrease of €428 million relating to customer rates. The increase in business volumes was mainly obtained from the international sector while the decrease in rates was mainly affected by: (i) spreads on deposits, which compared negatively in the first half of 2011 although they ended 2011 at the same levels (0.28% in 2010 and 0.29% in 2011); and (ii) the negative impact from the higher cost of wholesale funding and the greater regulatory requirements for liquidity in some countries, mainly the U.K.

Our overall net yield spread increased from 2.62% in 2010 to 2.69% in 2011. Domestic net yield spread increased from 0.92% in 2010 to 1.02% in 2011. International net yield spreads decreased from 3.37% in 2010 to 3.32% in 2011.

Average total earning assets were €1,126,196 million for 2011, a 3.1% or €33,771 million increase from €1,092,425 million in 2010. This was due to an increase of €53,612 million in the average balances of our international total earning assets (mainly due to an increase of €31,161 million in the average balances of loans and credits and an increase of €20,323 million in the average balances due from central banks). This increase in international total earning assets was partially offset by a decrease of €19,841 million in the domestic sector. This decrease was mainly due to a fall of €7,406 million in average loans and credits and €7,252 million in the average of due from credits entities. The Group’s customer loans amounted to €769,036 million, 3.4% higher than in 2010. In local currencies and excluding the perimeter effects, customer loans were 3.0% higher.

Gross customer loans in Spain amounted to €225,288 million, of which loans to the public sector amounted to €12,147 million (+0.1%) and lending to individuals amounted to €84,816 million, of which €58,535 million were mortgages for homes. Loans to SMEs and companies without real estate purpose, the most relevant part of the lending portfolio, amounted to €104,883 million and accounted for 47% of the total. Loans for real estate purposes (with the greatest risk) stood at €23,442 million, after falling in every quarter of 2011. The total reduction for the year was €3,892 million (-14.2%).

In Portugal, the fall in lending (5.6%) came from all segments: -11.8% to SMEs, -13.9% to companies and -3.1% to individuals. In addition, balances in construction and real estate, which represent only 3.6% of lending in the country, declined 12.1% in 2011.

In the United Kingdom, loans and advances to customers increased 7.8%. In local criteria, the stock of residential mortgages, in a still depressed market, were very stable, while loans to SMEs increased, gaining further market share. Personal loans declined reflecting the reduction policy in the last few years.

Lending in Latin America increased 17.9%, excluding the exchange rate impact, due to organic growth and the incorporation of GE Capital Corporation’s mortgage portfolio in Mexico and of Creditel in Uruguay. Loans in local currency rose 20.3% in Brazil, 7.3% in Chile and 30.9% in Mexico (+22.4% excluding the perimeter impact).

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In the United States, loans and advances to customers decreased by 16.5% due to the change in consolidation method of SCUSA. Sovereign’s loans rose 6.0% in dollars, due to the 4.5% increase in the most attractive mortgage segments (residential and multifamily), and the acquisition of a consumer credit portfolio from GE. Both effects comfortably offset the exit from higher risk segments and from those not considered strategic for the Group.

Continental Europe accounted for 42% of the total lending of the Group’s operating areas (Spain 29%), the U.K. 34%, Latin America 19% (Brazil 11%) and United States 5%. These percentages in 2010 were 43% for Continental Europe (Spain 32%), the U.K. 33%, Latin America 18% (Brazil 10%) and United States 7%.

Income from Equity Instruments

Income from equity instruments was €423 million in 2012, a 7.4% or €29 million increase from €394 million in 2011, which was an 8.8% or €32 million increase from €362 million in 2010.

The €29 million increase in 2012 was mainly due to increased dividends from our equity portfolio (mainly Spanish blue chips).

The €32 million increase in 2011 was mainly explained by increased dividends from our equity portfolio (mainly Spanish blue chips).

Income from Companies Accounted for by the Equity Method

Income from companies accounted for by the equity method was €427 million in 2012, a €370 million increase from €57 million in 2011, which was a €40 million increase from €17 million in 2010. This was mainly due to the results obtained in a full year by Santander Consumer USA which were accounted for by the equity method in December 2011.

Fee and Commission Income (net)

Fee and commission income was €10,308 million in 2012, a 1.6% or €164 million decrease from €10,472 million in 2011. During 2011, fee and commission income increased by 7.6% as compared to €9,735 million obtained in 2010.

2012 compared to 2011

Fee and commission income for 2012 and 2011 was as follows:

	2012		2011		Amount Change			% Change
	(in millions of euros, except percentages)
Mutual and pension funds		1,178		1,236		(58	)		(4.7	%)
Insurance		2,339		2,397		(58	)		(2.4	%)
Securities services		702		668		34			5.1	%
Commissions for services		6,089		6,171		(82	)		(1.3	%)
Credit and debit cards		1,542		1,313		229			17.4	%
Account management		1,209		1,028		181			17.6	%
Bill discounting		327		309		18			5.9	%
Contingent liabilities		398		425		(27	)		(6.4	%)
Other operations		2,613		3,096		(483	)		15.6	%
Total fee and commission income (net)		10,308		10,472		(164	)		(1.6	%)

Fee and commission income decreased 1.6% to €10,308 million in 2012 compared to 2011 mainly due to lesser commissions for services, as well as mutual and pension funds and insurance.

The average balances of mutual funds under management decreased 9.6% from €109.9 billion in 2011 to €99.3 billion in 2012. Although this decrease was mainly concentrated in Brazil (-16.2% or €7.1 billion to €37.0 billion in 2012) and Spain (-17.8% or €5.4 billion to €25.1 billion in 2012). As of year-end 2012 mutual funds decreased 13% with falls in almost all countries, except in Poland, Mexico and Argentina, affected by the greater focus on capturing on-balance sheet funds.

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The average balances of pension funds decreased 7.7% from €10.5 billion in 2011 to €9.7 billion in 2012. Spain experienced a 4.3% decrease from €9.3 billion in 2011 to €8.9 billion in 2012. Our only remaining pension business abroad is in Portugal. The average balances of pension funds in Portugal decreased 33.9% from €1.2 billion in 2011 to €0.8 billion in 2012.

2011 compared to 2010

Fee and commission income for 2011 and 2010 was as follows:

	2011		2010		Amount Change			% Change
	(in millions of euros, except percentages)
Mutual and pension funds		1,236		1,267		(31	)		(2.4	%)
Insurance		2,397		2,051		346			16.9	%
Securities services		668		784		(116	)		(14.8	%)
Commissions for services		6,171		5,633		538			9.5	%
Credit and debit cards		1,313		1,138		175			15.4	%
Account management		1,028		995		33			3.3	%
Bill discounting		309		301		8			2.7	%
Contingent liabilities		425		439		(14	)		(3.2	%)
Other operations		3,096		2,760		336			12.2	%
Total fee and commission income (net)		10,472		9,735		737			7.6	%

Fee and commission income rose 7.6% to €10,472 million in 2011 compared to 2010 mainly due to the performance of insurance and services. The latter showed rises in almost all lines. On the other hand, income from securities and custody was lower, and income from mutual and pension funds were slightly lower.

Average balances of mutual funds under management in Spain decreased 16.6% from €32.7 billion in 2010 to €27.3 billion in 2011. This decrease was due to the Bank’s strategy of emphasis on balance sheet funds to the detriment of mutual funds. However, average balances of mutual funds abroad increased by 6.0% from €77.9 billion in 2010 to €82.6 billion in 2011, mainly due to increased activity in Brazil, the United Kingdom and Mexico, partially offset by a decrease in Chile and Portugal.

Average balances of pension funds in Spain decreased by 3.0% from €9.6 billion in 2010 to €9.3 billion in 2011. 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 12.2% from €1.3 billion in 2010 to €1.2 billion in 2011.

Gains (Losses) on Financial Assets and Liabilities (net)

Net gains on financial assets and liabilities in 2012 were €3,329 million, a 17.3% or €491 million increase as compared to €2,838 million in 2011, which represented a 31.1% increase from €2,164 million in 2010. 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.

2012 compared to 2011

Net gains on financial assets and liabilities increased 17.3% in 2012. In 2012 the Group performed several securities exchange and repurchase transactions for which €870 million were credited to income. For further details, see Note 44 to our consolidated financial statements.

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2011 compared to 2010

Net gains on financial assets and liabilities increased 31.1% in 2011. We registered profits in Corporate Activities’ hedges of exchange rates in 2011 as against losses in 2010 and in marking to market our trading portfolio of derivative instruments. These profits were partially offset by reduced revenues from the operating areas, mostly GBM (Global Banking and Markets), which were weak in the last three quarters of 2011 due to the economic environment, compared to strong results in 2010, mainly in the first half of the year.

Other operating income / expenses (net)

Net other operating income in 2012 was €108 million, a €90 million increase from €18 million in 2011, which was a €88 million decrease from €106 million in 2010. Under this line item we include income and expenses from insurance activity, non-financial services, other commissions and charges to the Deposit Guarantee Fund.

	2012			2011			Amount Change			% Change
	(in millions of euros, except percentages)
Insurance activity
Income from insurance and reinsurance contracts issued		593			392			201			51.3	%
Of which:		5,541			6,748			(1,207	)		(17.9	%)
Insurance and reinsurance premium income		4,667			6,547			(1,880	)		(28.7	%)
Reinsurance income		874			201			673			334.8	%
Expenses of insurance and reinsurance contracts		(4,948	)		(6,356	)		1,408			(22.2	%)
Of which:
Claims paid and other insurance-related expenses		(4,440	)		(4,852	)		412			(8.5	%)
Net provisions for insurance contract liabilities		(323	)		(1,202	)		879			(73.1	%)
Reinsurance premiums paid		(185	)		(302	)		117			(38.7	%)
Non-financial services		137			151			(14	)		(9.3	%)
Sales and income from the provision of non-financial services		369			400			(31	)		(7.8	%)
Cost of sales		(232	)		(249	)		17			(6.8	%)
Other operating income and expenses		(622	)		(525	)		(97	)		18.5	%
Other operating income		783			902			(119	)		(13.2	%)
Of which, fees and commissions offsetting direct costs		130			119			11			9.2	%
Other operating expenses		(1,405	)		(1,427	)		22			(1.5	%)
Of which, Deposit Guarantee Fund		(530	)		(346	)		(184	)		53.2	%
		108			18			90			500.0	%

The €90 million increase in net other operating income in 2012 was mainly due to an increase in insurance activity of €201 million partially offset by an increase of €97 million in other operating income and expenses.

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	2011			2010			Amount Change			% Change
	(in millions of euros, except percentages)
Insurance activity		392			378			14			3.7	%
Income from insurance and reinsurance contracts issued		6,748			7,162			(414	)		(5.8	%)
Of which:
Insurance and reinsurance premium income		6,547			6,845			(298	)		(4.4	%)
Reinsurance income		201			317			(116	)		(36.6	%)
Expenses of insurance and reinsurance contracts		(6,356	)		(6,784	)		428			(6.3	%)
Of which:
Claims paid and other insurance-related expenses		(4,852	)		(5,816	)		964			(16.6	%)
Net provisions for insurance contract liabilities		(1,202	)		(689	)		(513	)		74.5	%
Reinsurance premiums paid		(302	)		(279	)		(23	)		8.2	%
Non-financial services		151			135			16			11.9	%
Sales and income from the provision of non-financial services		400			340			60			17.6	%
Cost of sales		(249	)		(205	)		(44	)		21.5	%
Other operating income and expenses		(525	)		(407	)		(118	)		29.0	%
Other operating income		902			693			209			30.2	%
Of which, fees and commissions offsetting direct costs		119			70			49			70.0	%
Other operating expenses		(1,427	)		(1,100	)		(327	)		29.7	%
Of which, Deposit Guarantee Fund		(346	)		(307	)		(39	)		12.7	%
Other operating income/expenses, net		18			106			(88	)		(83.0	%)

In 2011, a 3.7% increase in insurance activity and an 11.9% increase in non-financial services were offset by an increase in other operating income and expenses.

Administrative Expenses

Administrative expenses were flat at €17,928 million in 2012 from €17,781 million in 2011, which was a 9.4% or €1,526 million increase from €16,255 million in 2010.

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2012 compared to 2011

Administrative expenses for 2012 and 2011 were as follows:

	2012		2011		Amount Change			% Change
	(in millions of euros, except percentages)
Personnel expenses		10,323		10,326		(3	)		0.0	%
Other general administrative expenses		7,605		7,455		150			2.0	%
Building and premises and supplies		1,918		1,845		73			4.0	%
Other expenses		1,742		1,723		19			1.1	%
Information technology		938		875		63			7.2	%
Advertising		665		695		(30	)		(4.3	%)
Communications		642		659		(17	)		(2.6	%)
Technical reports		492		467		25			5.4	%
Per diems and travel expenses		298		313		(15	)		4.8	%
Taxes (other than income tax)		417		401		16			4.0	%
Guard and cash courier services		432		412		20			4.9	%
Insurance premiums		61		65		(4	)		(6.2	%)
Total administrative expenses		17,928		17,781		147			0.8	%

In 2012, administrative expenses experienced a slight increase of 0.8%. This reflects a flat personnel expenses and a 2.0% increase in other general administrative expenses.

In Europe, both the large retail units (Spain and Portugal) registered negative growth in cost in real terms, continuing the trend begun in 2011. United States also experienced a reduction in administrative expenses of 11.4%. In Latin America expenses rose due to the increase in business capacity and the revision of wage agreements in an environment of higher inflation.

2011 compared to 2010

Administrative expenses for 2011 and 2010 were as follows:

	2011		2010		Amount Change			% Change
	(in millions of euros, except percentages)
Personnel expenses		10,326		9,329		997			10.7	%
Other general administrative expenses		7,455		6,926		529			7.6	%
Building and premises and supplies		1,845		1,731		114			6.6	%
Other expenses		1,723		1,555		168			10.8	%
Information technology		875		798		77			9.6	%
Advertising		695		634		61			9.6	%
Communications		659		670		(11	)		(1.6	%)
Technical reports		467		428		39			9.1	%
Per diems and travel expenses		313		276		37			13.4	%
Taxes (other than income tax)		401		376		25			6.6	%
Guard and cash courier services		412		401		11			2.7	%
Insurance premiums		65		57		8			14.0	%
Total administrative expenses		17,781		16,255		1,526			9.4	%

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The 9.4% increase in administrative expenses in 2011 reflected a 10.7% increase in personnel expenses and a 7.6% increase in other general administrative expenses.

In Europe, both the large retail units (Santander Branch Network, Banesto and Portugal) and the U.K. recorded slight falls in expenses in real terms while the global units (GBM and Asset Management and Insurance) registered increased expenses because of investments in equipment and technology with the double purpose of strengthening the positions attained in key markets and businesses in previous years and developing new initiatives. Moreover, there is also an increase in expenses resulting from the incorporation of new entities, mainly Bank Zachodni WBK in Poland and SEB in Germany. In Latin America, costs also rose due to the drive in new commercial projects, the increase in installed capacity, the restructuring of points of attention, particularly in Brazil, and the revision of collective bargaining agreements in an environment of higher inflation. Sovereign also registered single digit growth in costs.

Depreciation and Amortization

Depreciation and amortization was €2,189 million in 2012, a 3.8% or €80 million increase from €2,109 million in 2011, which was an 8.7% or €169 million increase from €1,940 million in 2010. This increase was mainly focused in Continental Europe.

Provisions (net)

Net provisions were €1,622 million in 2012, a 37.6% or €979 million decrease from €2,601 million in 2011, which was a 129.6% or €1,468 million increase from €1,133 million in 2010. 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 2012 is due to: (i) a €955 million decrease in other provisions, mainly due to the one-off charge in the second quarter of 2011 of €842 million from a provision made related to PPI remediation in Santander UK (€620 million net of tax) (see Item 8 of Part I, “Financial information—Legal proceedings, ii. Non-tax-related proceedings); (ii) a €245 million decrease in provisions for pensions and; (iii) a €221 million increase in contingent liabilities and commitments provisions.

The variation in 2011 was due to: (i) a €1,680 million increase in other provisions, mainly due to the above mentioned one-off charge in U.K. the second quarter of €842 million; (ii) a €10 million increase in provisions for pensions; and (iii) a €222 million decrease in contingent liabilities and commitments provisions.

For further details, see Note 25 to our consolidated financial statements.

Impairment Losses (net)

Impairment losses (net) were €19,414 million in 2012, a 45.0% or €6,029 million increase from €13,385 million in 2011, which was 24.8% or €2,656 million increase from €10,729 million in 2010.

Impairment losses are divided in the income statement as follows:

	2012		2011		2010
	(in millions of euros)
Impairment losses on financial assets (net):		18,906		11,868		10,443
Loans and receivables		18,549		11,040		10,267
Other financial assets not measured at fair value through profit and loss		357		828		176
Impairment losses on other assets (net):		508		1,517		286
Goodwill and other intangible assets		151		1,161		69
Other assets		357		356		217
Total impairment losses (net)		19,414		13,385		10,729

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2012 compared to 2011

The €7,509 million or 68.0% increase in net impairment losses for loans and receivables in 2012 compared to 2011 reflected a €7,028 million increase in provisions, a €472 million decrease in recoveries of loans previously charged-off and a €9 million increase in impairment losses of other assets.

The increase in credit loss provisions recorded in 2012 was mainly due to two factors: (i) a rise in non-performing loans in certain sectors in Spain, which increased 125 basis points to 6.74%. This rise was caused by the worsening of Spain’s macroeconomic situation as a result of an economic slowdown, falling consumer spending and job market deterioration. Particularly significant in this context was the increase in non-performing loan ratios in the real estate sector to 47.7% at December 31, 2012, compared to 28.6% in 2011 (for further details refer to Note 54 to our consolidated financial statements); and (ii) the upward shift in non-performing loan ratios in certain financial systems, including Brazil, Chile, and Portugal. For further details see Item 4 of Part I, “Information on the Company—B. Business Overview” and Item 11 of Part I. “Quantitative and Qualitative Disclosures About Risk—Part 4. Credit Risk”.

Our total allowances for credit losses (excluding country-risk) increased by €6,533 million to €26,194 million at December 31, 2012, from €19,661 million at December 31, 2011.

The €1,009 million decrease in 2012 in net impairment losses on other assets was mainly attributable to two impairments which occurred in 2011: (i) €601 million in goodwill related to Santander Totta and (ii) €491 million in other intangible assets.

The impairment losses of other financial assets not measured at fair value through profit and loss in 2012 of €357 million were mainly due to equity instruments that had suffered a significant and prolonged fall in price.

Non-performing balances (excluding country-risk) increased by €4,064 million to €36,100 million at December 31, 2011, compared to €32,036 million at December 31, 2011. Our coverage ratio was 73% at December 31, 2012 and 61% at December 31, 2011. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Impaired Balances Ratios”.

2011 compared to 2010

The €773 million or 7.5% increase in net impairment losses for loans and receivables in 2011 compared to 2010 reflected a €821 million increase in allowances, a €598 million increase in recoveries of loans previously charged-off and an €11 million decrease in impairment losses of other assets.

There was a strong increase in impairment losses in Spain and Portugal due to the economic environment and significant reductions in the U.K., Santander US and Santander Consumer Finance. Provisions in Latin America excluding Brazil also dropped. However, they rose strongly in Brazil because of the growth in lending of 10.4% and a moderate increase in NPLs of individual borrowers, principally in consumer credits and cards.

Our total allowances for credit losses (excluding country-risk) decreased by €1,087 million to €19,661 million at December 31, 2011, from €20,748 million at December 31, 2010.

The €1,231 million increase in 2011 in net impairment losses on other assets was mainly due to €601 million in pre-tax provisions to amortize goodwill related to Santander Totta and €491 million in amortization of other intangible assets.

The impairment losses of other financial assets not measured at fair value through profit and loss in 2011 of €826 million were mainly due to: (i) €125 million in debt instruments of which €106 million related to Greek sovereign debt; and (ii) €592 million in equity instruments relating to the impairment of the ownership interests in Iberdrola, S.A. and Assicurazioni Generali SpA. These equity instruments had suffered a significant and prolonged fall in price at December 31, 2011.

Non-performing balances (excluding country-risk) increased by €3,514 million to €32,036 million at December 31, 2011, compared to €28,522 million at December 31, 2010. Our coverage ratio was 61% at December 31, 2011 and 73% at December 31, 2010. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Impaired Balances Ratios”.

134

Net gains / (losses) on other assets

Net gains on other assets were €149 million in 2012, a €412 million increase from losses of €263 million in 2011, which was a €323 million decrease from gains of €60 million in 2010.

In 2012, the €906 million gains on disposal of assets not classified as non-current assets held for sale were mainly due to the sale of our stake in Banco Santander Colombia which generated €619 million in gains. 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”.

Losses on non-current assets held for sale not classified as discontinued operations in 2012 totaled €757 million. This was mainly due to impairment of foreclosed assets recorded during the year and the sale of properties. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Foreclosed assets”.

2012 compared to 2011

	2012			2011			Amount Change			% Change
	(in millions of euros, except percentages)
Gains / (losses) on disposal of assets not classified as non-current assets held for sale		906			1,846			(940	)		(50.9	)
Of which:
Disposal of investments		774			1,794			(1,020	)		(56.9	)
Gains / (losses) on non-current assets held for sale not classified as discontinued operations		(757	)		(2,109	)		1,352			(64.1	)
Of which:
Impairment of non-current assets held for sale		(449	)		(2,037	)		1,588			(78.0	)
Losses on sale of non-current assets held for sale		(308	)		(72	)		(236	)		327.8

2011 compared to 2010

	2011			2010			Amount Change			% Change
	(in millions of euros, except percentages)
Gains / (losses) on disposal of assets not classified as non-current assets held for sale		1,846			350			1,496			427.4
Of which:
Disposal of investments		1,794			153			1,641			1,072.5
Gains / (losses) on non-current assets held for sale not classified as discontinued operations		(2,109	)		(290	)		(1,819	)		627.2
Of which:
Impairment of non-current assets held for sale		(2,037	)		(298	)		(1,739	)		583.6

Income Tax

The provision for corporate income tax was €575 million in 2012, a 67.6% or €1,201 million decrease from €1,776 million in 2011, which represented a 39.2% or €1,147 million decrease from €2,923 million in 2010. The effective tax rate was 16.26% in 2012, 22.5% in 2011 and 24.3% in 2010.

The reduction in the effective tax rate in 2012 compared to the prior year is primarily due to the €4,373 million reduction in consolidated operating profit before tax, together with the fact that there is no significant variation in the net adjustments to profit before tax that applied in 2012 as compared to 2011 (see the reconciliation in Note 27.c, to our consolidated financial statements).

135

For more 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 €7 million in 2012, a €17 million decrease from €24 million in 2011, which represented a €3 million decrease from €27 million in 2010. During 2012 and 2011, we did not discontinue any significant operation.

Profit attributable to non-controlling interest

Profit attributable to non-controlling interest was €762 million in 2012, a 3.3% or €26 million decrease from €788 million in 2011, which represented a 14.4% or €133 million decrease from €921 million in 2010. For further details, see Note 28 to our consolidated financial statements.

2012 compared to 2011

The main developments in 2012 regarding non-controlling interest were: (i) in January and March 2012 the Group transferred shares accounting for 4.41% and 0.77% of Banco Santander (Brasil) S.A. to two leading international financial institutions, and (ii) in 2012 the Group sold 24.9% of its ownership interest in Grupo Financiero Santander México, S.A.B. de C.V. The related increase in profits attributable to non-controlling interest in these units was offset by losses registered to non-controlling interest in Banesto.

2011 compared to 2010

The €133 million decrease in 2011 is mainly attributable to the purchase in September 2010 of 25% of Santander Mexico. Non-controlling interest in Banco Santander Mexico was €2 million in 2011 as compared to €130 million in 2010.

Results of Operations by Business Areas

For internal information, Grupo Santander maintained in 2012 the general criteria used in 2011 for geographical and business segmentation, with the following exception:

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. In 2012, the consumer credit business relating to the United Kingdom was incorporated in the United Kingdom and that relating to the United States was incorporated in the US, in both cases after an exit from Continental Europe. As a result, the segment reporting figures for 2011 and 2010 have been restated in order to facilitate their comparison with the figures for 2012.

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”).

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First level (geographic):

Continental Europe

										Variations
	2012			2011			2010			2012/2011			2011/2010
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		9,470			8,875			8,320			6.7	%		6.7	%
Income from equity instruments		289			264			217			9.5	%		21.7	%
Income from companies accounted for by the equity method		27			14			9			92.9	%		55.6	%
Net fees and commissions		3,626			3,774			3,483			(3.9	%)		8.4	%
Gains/losses on financial assets and liabilities (net) *		461			232			837			98.7	%		(72.3	%)
Other operating income/(expenses) (net)		(17	)		119			170			(114.3	%)		(30.0	%)
TOTAL INCOME		13,856			13,278			13,036			4.4	%		1.9	%
Administrative expenses		(5,640	)		(5,660	)		(5,030	)		(0.4	%)		12.5	%
Personnel expenses		(3,496	)		(3,531	)		(3,194	)		(1.0	%)		10.6	%
Other general expenses		(2,144	)		(2,129	)		(1,836	)		0.7	%		16.0	%
Depreciation and amortization		(662	)		(600	)		(601	)		10.3	%		(0.2	%)
Provisions (net)		(38	)		(142	)		(15	)		(73.2	%)		846.7	%
Impairment losses on financial assets (net)		(4,127	)		(3,528	)		(3,134	)		17.0	%		12.6	%
Impairment losses on other assets (net)		(131	)		53			(48	)		(347.2	%)		(210.4	%)
Gains/(losses) on other assets (net)		(153	)		(303	)		(55	)		(49.5	%)		450.9	%
OPERATING PROFIT/(LOSS) BEFORE TAX		3,105			3,098			4,153			0.2	%		(25.4	%)
Income tax		(736	)		(718	)		(1,023	)		2.5	%		(29.8	%)
PROFIT FROM CONTINUING OPERATIONS		2,369			2,380			3,130			(0.5	%)		(24.0	%)
Profit/(loss) from discontinued operations (net)		(7	)		(24	)		(14	)		(70.8	%)		71.4	%
CONSOLIDATED PROFIT FOR THE YEAR		2,362			2,356			3,116			0.3	%		(24.4	%)
Profit attributable to non-controlling interest		57			69			74			(17.4	%)		(6.8	%)
Profit attributable to the Parent		2,305			2,287			3,042			0.8	%		(24.8	%)

* Includes exchange differences (net)

2012 compared to 2011¹

In 2012, Continental Europe contributed 26.8% of the profit attributable to the Group’s operating areas. This segment obtained attributable profit of €2,305 million in 2012, an increase of 0.8% to the previous year, which was heavily affected by the booking of higher credit loss provisions during the year. The earnings reflect the positive effect of the change in the scope of consolidation due to the inclusion in the Group of Bank Zachodni WBK and the SEB branches in Germany for the full year, and a slight negative effect from the agreement with Abbey Life Assurance for the reinsurance of the portfolio of individual life risk in Spain and Portugal.

Interest income was €9,470 million in 2012, which is a 6.7% or €595 million increase from the €8,875 million obtained in 2011. This increase was mainly due to the inclusion of SEB in Germany and the entry of Bank Zachodni WBK. Without this effect, the increase would have been 5.0% year to year.

Net fees and commissions were €3,626 million in 2012, a 3.9% decrease from €3,774 million in 2011, due to lower activity.

Gains/(losses) on financial assets and liabilities were €461 million in 2012, a 98.7% increase from €232 million in 2011. Most of this growth came from the results generated in the repurchase of preferred shares in Banesto and the repurchase of debt in Portugal.

¹  For a summary by countries see “Item 4. Information of the Company. B. Business Overview—Latin America”

137

Administrative expenses in 2012 were €5,640 million, a 0.4% decrease from €5,660 million in 2011. Depreciation and amortization expenses were €662 million in 2012, a 10.3% increase from €600 million in 2011. As a result, cost (administrative expenses plus depreciation and amortization) rose by 0.7% year to year due to the impact of the changes in the scope of consolidation; eliminating this effect, they continued to fall (-1.5%), with all of the units flat or decreasing. Noteworthy, however, was the 4.8% reduction in Portugal.

Impairment losses on financial assets were €4,127 million in 2012, a 17.0% increase from €3,528 million in 2011. Spain’s recession is pushing up NPL entries, although the recoveries and sale of portfolios is containing the rise in the balance of bad loans. Portugal experienced a rise in credit loss provisions also due to the increase in non-performing loans as a result of the economic cycle. A decrease of 11.7% in credit loss provisions in Santander Consumer Finance partially mitigated the increases in Spain and Portugal. The NPL ratio in Continental Europe increased from 5.18% in 2011 to 6.25% in 2012, while NPL coverage increased from 56% in 2011 to 73% in 2012.

Profit attributable to the Parent remained stable in 2012 at €2,305 million up from €2,287 million in 2011, a 0.8% increase. These results were obtained in a difficult environment, characterized by shrinking GDP, domestic demand and consumption, rising unemployment and declining interest rates, at historic lows, with their impact on spreads.

2011 compared to 2010

In 2011, Continental Europe contributed 24.9% of the profit attributable to the Group’s operating areas. The profit includes the effect of the consolidation of Bank Zachodni WBK in April and SEB’s branches in Germany in the first quarter. Overall, the positive impact of these acquisitions (perimeter effect) on the Group’s profits was around 6 percentage points.

Interest income was €8,875 million in 2011, which is a 6.7% or €555 million increase from the €8,320 million obtained in 2010. Net fees and commissions were €3,774 million in 2011, an 8.4% increase from €3,483 million in 2010. These increases were due to the improvements in commercial units and the consolidation of Bank Zachodni WBK in the second quarter.

Gains/(losses) on financial assets and liabilities were €232 million in 2011, a 72.3% decrease from €837 million in 2010. The decrease was mainly due to the tensions in the markets in the second half of the year which impacted gains on financial transactions, due, on the one hand, to lower asset valuations and, on the other, to reduced customer activity.

Administrative expenses were €5,660 million in 2011, a 12.5% increase from €5,030 million in 2010 due to the impact of the changes in the scope of consolidation. The larger units of the segment experienced, in real terms, reductions of 2.5% at Banesto, 2.1% in Portugal, and 1.2% in the Santander Branch Network.

Impairment losses on financial assets were €3,528 million in 2011, a 12.6% increase from €3,134 million in 2010, mainly due to the perimeter effect. Additionally, the evolution of NPLs in Spain was worse than expected because the downturn in the economy was more severe than envisaged and the fall in lending meant the NPL ratio increased to a greater extent than the volume of non-performing. The NPL ratio in Continental Europe increased from 4.35% in 2010 to 5.18% in 2011, while NPL coverage decreased from 65% in 2010 to 56% in 2011. The decrease in total lending in Spain caused the NPL ratio to increase to a greater extent than the volume of NPLs.

Profit attributable to the Parent was 24.8% lower at €2,287 million from €3,042 million in 2011. Profits have been hard hit by the low growth environment, deleveraging and low interest rates, as well as the negative impact of gains on financial transactions and the increase in impairment losses mentioned above. Profits fell at the three commercial networks (Santander, Banesto and Portugal) and at wholesale businesses, while Santander Consumer Finance performed well (+33.7% in profit attributable to the parent bank) and Poland’s BZ WBK was incorporated to the Group in April.

138

United Kingdom

										Variations
	2012			2011			2010			2012/2011			2011/2010
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		3,559			4,356			4,941			(18.3	%)		(11.8	%)
Income from equity instruments		1			1			-			0.0	%		n/a
Income from companies accounted for by the equity method		(5	)		1			-			(600.0	%)		n/a
Net fees and commissions		1,238			1,079			1,035			14.7	%		4.3	%
Gains/losses on financial assets and liabilities (net) *		1,231			405			462			204.0	%		(12.3	%)
Other operating income/(expenses) (net)		22			25			29			(12.0	%)		(13.8	%)
TOTAL INCOME		6,046			5,867			6,467			3.1	%		(9.3	%)
Administrative expenses		(2,356	)		(2,243	)		(2,280	)		5.0	%		(1.6	%)
Personnel expenses		(1,475	)		(1,415	)		(1,314	)		4.2	%		7.7	%
Other general expenses		(881	)		(828	)		(966	)		6.4	%		(14.3	%)
Depreciation and amortization		(385	)		(352	)		(311	)		9.4	%		13.2	%
Provisions (net)		(522	)		(964	)		(157	)		(45.9	%)		514.0	%
Impairment losses on financial assets (net)		(1,246	)		(634	)		(986	)		96.5	%		(35.7	%)
Impairment losses on other assets (net)		-			-			-			n/a			n/a
Gains/(losses) on other assets (net)		(1	)		(3	)		46			(66.7	%)		(106.5	%)
OPERATING PROFIT/(LOSS) BEFORE TAX		1,536			1,671			2,779			(8.1	%)		(39.9	%)
Income tax		(361	)		(448	)		(756	)		(19.4	%)		(40.7	%)
PROFIT FROM CONTINUING OPERATIONS		1,175			1,223			2,023			(3.9	%)		(39.5	%)
Profit/(loss) from discontinued operations (net)		-			-			-			n/a			n/a
CONSOLIDATED PROFIT FOR THE YEAR		1,175			1,223			2,023			(3.9	%)		(39.5	%)
Profit attributable to non-controlling interest		-			-			-			n/a			n/a
Profit attributable to the Parent		1,175			1,223			2,023			(3.9	%)		(39.5	%)

* Includes exchange differences (net)

2012 compared to 2011

In 2012, the United Kingdom contributed 13.7% of the profit attributable to the Parent bank’s total operating areas. This included a net gain of £65 million (€80 million, approximately) resulting from the repurchase of debt capital instruments made in the third quarter. Most of this gain was offset by provisions related to the non-core corporate and potential conduct remediation. Santander UK faced an environment of weak economic growth, low interest rates and higher funding costs.

Interest income was €3,559 million in 2012, an 18.3% or €797 million decrease from €4,356 million in 2011. This decrease reflects the negative impacts of the higher cost of funding (of both deposits and wholesale financing) and the low interest rates. These impacts were partially offset by improved volumes and higher spreads on new lending to SMEs and businesses.

Net fees and commissions were €1,238 million in 2012, a 14.7% or €159 million increase from €1,079 million in 2011 due to increased fees and ancillary income from SME and large corporates.

Gains / losses on financial assets and liabilities were €1.231 million in 2012, a 204.0% or €826 million increase from €405 million in 2011 mainly due to the repurchase of debt capital instruments previously mentioned.

Administrative expenses were €2,356 million in 2012, a 5.0% or €113 million increase from €2,243 million in 2011. Nevertheless, in local currency administrative expenses decreased 1.8% despite the impact of inflation and continued investment in business.

139

Provisions were €522 million in 2012, a 45.9% or €442 million decrease from of €964 million in 2011. In 2011 we made an one-off charge provision related to PPI remediation of €842 million (€620 million net of tax) (see Item 8 of Part I, “Financial information—Legal proceedings, ii. Non-tax-related proceedings”).

Impairment losses on financial assets were €1,246 million in 2012, a 96.5% or €612 million increase from €634 million in 2011. The NPL ratio was 2.05%, 0.21 percentage points higher than that of 2011. Both the stock of residential properties in possession (0.06%) as well as the NPL ratio of residential mortgages (1.74%) remained low with underlying performance stable and both were better than the sector average, according to the Council of Mortgage Lenders. This increase mainly relates to the review and full re-assessment of the assets held in the non-core corporate and legacy portfolios in run-off. The provisions relate to assets acquired from Alliance & Leicester plc (particularly the shipping portfolio) as well as certain assets within the old Abbey Commercial Mortgages book. The amount of the provision reflects the increasing losses experienced in these portfolios. For further details see Item 11 of Part I. “Quantitative and Qualitative Disclosures About Risk—Part 4. Credit Risk”.

Profit attributable to the Parent was €1,175 million in 2012, a 3.9% or €48 million decrease from €1,223 million in 2011. In summary, the income statement was affected by an environment of weak economic growth, low interest rates and higher funding costs. This environment negatively affected the net interest income. Gains on financial transactions were offset by provisions related to the non-core corporate and potential conduct remediation. On the other hand, in local currency cost experienced a decline.

2011 compared to 2010

In 2011, the United Kingdom contributed 13.3% of the profit attributable to the Parent bank’s total operating areas. This included the impact, net of tax, of a provision of €620 million in the second quarter, related to the payment protection insurance (PPI) remediation, in line with what has been done by other British banks. In addition, there were higher costs derived from regulatory changes affecting increased liquidity requirements and higher wholesale funding costs. All of this was in the context of weak growth and low interest rates.

Interest income was €4,356 million in 2011, an 11.8% or €585 million decrease from €4,941 million in 2010 reflecting the higher cost of liquid assets. The total commercial spread declined with higher spreads on loans more than offset by the greater cost of liquidity and funding. Increases in the proportion of customers on standard variable rate mortgages helped to partly mitigate the impact of low interest rates. Higher net interest income in SMEs and corporations reflected growth in deposits and loans, with spreads on new loans continuing to increase.

Net fees and commissions were €1,079 million in 2011, a 4.3% or €44 million increase from €1,035 million in 2010. This increase was mainly due to a new pricing structure for current accounts where overdraft interest charges have been replaced with a flat fee.

Gains / losses on financial assets and liabilities were €405 million in 2011, a 12.3% or €57 million decrease from €462 million in 2010 due to the impact of lower market activity.

Administrative expenses were €2,243 million in 2011, a 1.6% or €37 million decrease from €2,280 million in 2010. This decrease was mainly achieved by continued operational and integration cost efficiencies in the back office functions, marketing and property costs. This was partially offset by the addition of 1,100 employees to improve customer service in the first half of 2011, which enabled Santander UK to repatriate the call centers that were abroad.

Provisions were €964 million in 2011, a 514.0% or €807 million increase from €157 million in 2010, mainly due to the one-off charge in the second quarter of €842 million from a provision made related to PPI remediation (€620 million net of tax) (see Item 8 of Part I, “Financial information—Legal proceedings, ii. Non-tax-related proceedings”).

Impairment losses on financial assets were €634 million in 2011, a 35.7% or €352 million decrease from €986 million in 2010, due to the improved evolution of retail products and to a better than expected performance in the current environment.

In 2011, the NPL ratio and the coverage ratio stood at 1.84% and 40%, respectively. There was a better performance in all retail products, particularly mortgages and unsecured personal loans, and a slight deterioration in the fourth quarter

140

in corporate loans, including real estate. The stock of foreclosed properties remained very low (0.06% of the total portfolio compared to 0.05% at the end of 2010). In general, the trends were better than the sector’s, according to the data from the Council of Mortgage Lenders (CML).

Profit attributable to the Parent was €1,223 million in 2011, a 39.5% or €800 million decrease from €2,023 million in 2010. The income statement was very affected by the environment of low activity, low interest rates, regulatory changes, higher funding costs and the PPI provision. On the other hand, costs were almost flat and fewer provisions were made, reflecting the good evolution of non-performing loans.

Latin America

										Variations
	2012			2011			2010			2012/2011			2011/2010
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		17,881			16,473			14,678			8.5	%		12.2	%
Income from equity instruments		60			71			80			(15.5	%)		(11.3	%)
Income from companies accounted for by the equity method		183			37			10			394.6	%		270.0	%
Net fees and commissions		5,097			4,992			4,661			2.1	%		7.1	%
Gains/losses on financial assets and liabilities (net) *		1,071			1,067			1,409			0.4	%		(24.3	%)
Other operating income/(expenses) (net)		(357	)		(199	)		(163	)		79.4	%		22.1	%
TOTAL INCOME		23,935			22,441			20,675			6.7	%		8.5	%
Administrative expenses		(8,198	)		(7,983	)		(7,192	)		2.7	%		11.0	%
Personnel expenses		(4,617	)		(4,455	)		(3,955	)		3.6	%		12.6	%
Other general expenses		(3,581	)		(3,528	)		(3,237	)		1.5	%		9.0	%
Depreciation and amortization		(865	)		(926	)		(778	)		(6.6	%)		19.0	%
Provisions (net)		(1,027	)		(1,232	)		(990	)		(16.6	%)		24.4	%
Impairment losses on financial assets (net)		(7,381	)		(5,447	)		(4,687	)		35.5	%		16.2	%
Impairment losses on other assets (net)		(17	)		(38	)		(12	)		(55.3	%)		216.7	%
Gains/(losses) on other assets (net)		226			241			255			(6.2	%)		(5.5	%)
OPERATING PROFIT/(LOSS) BEFORE TAX		6,673			7,056			7,271			(5.4	%)		(3.0	%)
Income tax		(1,502	)		(1,653	)		(1,693	)		(9.1	%)		(2.4	%)
PROFIT FROM CONTINUING OPERATIONS		5,171			5,403			5,578			(4.3	%)		(3.1	%)
Profit/(loss) from discontinued operations (net)		—			—			—			n/a			n/a
CONSOLIDATED PROFIT FOR THE YEAR		5,171			5,403			5,578			(4.3	%)		(3.1	%)
Profit attributable to non-controlling interest		866			739			850			17.2	%		(13.1	%)
Profit attributable to the Parent		4,305			4,664			4,728			(7.7	%)		(1.4	%)

* Includes exchange differences (net)

2012 compared to 2011²

In 2012, Latin America contributed 50.1% of the profit attributable to the Parent bank’s total operating areas. Latin American financial systems displayed high levels of capital, liquidity and robust credit quality indicators. They also maintained double-digit rates of growth reflecting the dynamism of the economies. The scope of consolidation of this segment changed due to the sale of the subsidiary in Colombia, the agreement with Zurich Financial Services Group to strengthen insurance distribution and higher minority interests in Brazil, Mexico and Chile.

Interest income was €17,881 million in 2012, an 8.5% or €1,408 million increase from €16,473 million in 2011, due to higher volumes and improved management of spreads in a context of stable or declining interest rates, varying by country.

²  For a summary by countries see “Item 4. Information of the Company. B. Business Overview—Latin America”

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Net fees and commissions were €5,097 million in 2012, a 2.1% or €105 million increase from €4,992 million in 2011, affected by regulatory pressures. Excluding the exchange rate impact, the main drivers of growth were cards (+18.7%), transactional banking (+9.8%), administration of accounts (+6.8%) and insurance (+2.5%). Mutual funds dropped 15.4% because of the shift into deposits.

Gains / losses on financial assets and liabilities remained stable at €1,071 million in 2012 compared to €1,067 million in 2011.

Administrative expenses were €8,198 million in 2012, a 2.7% or €215 million increase from €7,983 million in 2011. The increase was mainly due to the opening of branches (some traditional and others focused on priority customer segments), new business projects and inflationary pressures on wage agreements and outsourcing of services.

Impairment losses on financial assets were €7,381 million in 2012, a 35.5% or €1,934 million increase from €5,447 million in 2011. This increase was largely influenced by increased lending, collective provisions and a worsening of nonperforming loans in some markets. The NPL ratio increased 110 basis points, from 4.32% to 5.42%, while coverage decreased from 97% to 88%. For further details see Item 4 of Part I, “Information on the Company—B. Business Overview—Latin America” and Item 11 of Part I. “Quantitative and Qualitative Disclosures About Risk—Part 4. Credit Risk”.

Profit attributable to the Parent was €4,305 million in 2012, a 7.7% or €359 million decrease from €4,664 million in 2011. In local currency and excluding the effect of the changes in the scope of consolidation (the sale in Colombia, the sale of insurance businesses and the increase of non-controlling interests in Brazil, Mexico and Chile), the attributable profit rose by 3.7%. Also in local currency, Retail Banking’s net profit increased 0.8%, driven by gross income (+13.9%). Global Wholesale Banking’s net profit was 1.2% lower.

2011 compared to 2010

In 2011, Latin America contributed 50.8% of the profit attributable to the Parent bank’s total operating areas with strong growth in all countries. The main developments were the notable rise in basic revenues, which did not feed through to profits as it was offset by the decrease in gains on financial transactions caused by the market situation, the increase in administrative expenses and the rise in loan-loss provisions.

Interest income was €16,473 million in 2011, a 12.2% or €1,795 million increase from €14,678 million in 2010, due to larger volumes and management of spreads in a context of higher interest rates than in 2010. Interest income was the main driver of profit growth.

Net fees and commissions were €4,992 million in 2011, a 7.1% or €331 million increase from €4,661 million in 2010. Excluding the exchange rate impact, the main drivers of growth were insurance (+31.7%) and credit cards (+23.7%), while those from managing accounts fell 16.6%. Income from insurance business grew 16.9%, affected by the impact of the agreement with Zurich (excluding this impact: +34.8%), which acquired 51% of the share capital of ZS Insurance América, S.L. (the holding company for the Group’s insurance businesses in Latin America).

Gains / losses on financial assets and liabilities were €1,067 million in 2011, a 24.3% or €342 million decrease from €1,409 million in 2010, largely due to the volatility of markets in the third and fourth quarters.

Administrative expenses were €7,983 million in 2011, an 11.0% or €791 million increase from €7,192 million in 2010. The increase was mainly due to: (i) the growth in staff in the branch networks, (ii) renegotiation of salaries and collective agreements; (iii) new business projects; (iv) increased installed capacity; and (v) redesigning points of attention.

Impairment losses on financial assets were €5,447 million in 2011, a 16.2% or €760 million increase from €4,687 million in 2010, which is below lending growth. The NPL ratio increased 21 basis points, from 4.11% to 4.32%, while coverage decreased from 104% to 97%.

Profit attributable to the Parent was €4,664 million in 2011, a 1.4% or €64 million decrease from €4,728 million in 2010. This decrease was due to increased impairment loses, reduced gains on financial transactions due to the unfavorable

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market situation, and higher commercial investment. This was partially offset thanks to the dynamism of net interest income and fee income, which lifted total income by 8.5%. By segment, in constant currency, Retail Banking’s attributable profit rose 0.8%, while Global Wholesale Banking and Asset Management and Insurance’s decreased 1.5% and 1.4%, respectively.

United States

										Variations
	2012			2011			2010			2012/2011			2011/2010
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		1,695			3,289			3,113			(48.5	%)		5.7	%
Income from equity instruments		20			1			1			n/a			0.0	%
Income from companies accounted for by the equity method		341			—			—			n/a			n/a
Net fees and commissions		378			643			596			(41.2	%)		7.9	%
Gains/losses on financial assets and liabilities (net) *		244			192			38			27.1	%		405.3	%
Other operating income/(expenses) (net)		(74	)		(56	)		(67	)		32.1	%		(16.4	%)
TOTAL INCOME		2,604			4,069			3,681			(36.0	%)		10.5	%
Administrative expenses		(1,029	)		(1,162	)		(1,065	)		(11.4	%)		9.1	%
Personnel expenses		(566	)		(640	)		(599	)		(11.6	%)		6.8	%
Other general expenses		(463	)		(522	)		(467	)		(11.3	%)		11.8	%
Depreciation and amortization		(145	)		(126	)		(117	)		15.1	%		7.7	%
Provisions (net)		(170	)		(43	)		(85	)		295.3	%		(49.4	%)
Impairment losses on financial assets (net)		(265	)		(1,005	)		(1,368	)		(73.6	%)		(26.5	%)
Impairment losses on other assets (net)		(24	)		(118	)		(19	)		(79.7	%)		521.1	%
Gains/(losses) on other assets (net)		8			—			(7	)		n/a			n/a
OPERATING PROFIT/(LOSS) BEFORE TAX		979			1,615			1,019			(39.4	%)		58.5	%
Income tax		(168	)		(557	)		(318	)		(69.8	%)		75.2	%
PROFIT FROM CONTINUING OPERATIONS		811			1,058			701			(23.3	%)		50.9	%
Profit/(loss) from discontinued operations (net)		—			—			—			n/a			n/a
CONSOLIDATED PROFIT FOR THE YEAR		811			1,058			701			(23.3	%)		50.9	%
Profit attributable to non-controlling interest		—			48			22			n/a			118.2	%
Profit attributable to the Parent		811			1,010			679			(19.7	%)		48.7	%

* Includes exchange differences (net)

2012 compared to 2011

In 2012, United States contributed 9.4% of the profit attributable to the Parent bank’s total operating areas. On December 31, 2011, SCUSA increased its capital to allow for new shareholders. This reduced Grupo Santander’s stake from 91.5% to around 65%. As a result, SCUSA is subject to the joint control of all shareholders, which led the Group to stop consolidating this company by the global integration method and to record its stake by the equity method.

Interest income for 2012 was €1,695 million, a 48.5% or €1,594 million decrease from €3,289 million for 2011, mainly due to the change in consolidation method of SCUSA. Eliminating SCUSA’s results in 2011, and in local currency, interest income was down by 6.7%, reflecting the fall in long-term interest rates and the reduction in the non-strategic portfolio.

Income from companies accounted for by the equity method for 2012 was €341 million. This income reflects SCUSA’s contribution to the Group.

Net fees and commissions for 2012 were €378 million, a 41.2% or €265 million decrease from €643 million for 2011, mainly due to the deconsolidation of SCUSA. Eliminating SCUSA’s results in 2011, in local currency, there was a 6.8% drop. The increased regulatory pressure resulted in a significant reduction in revenues linked to commissions from credit card transactions and overdrafts. This was partly offset by the business effort, which raised the quality of revenues associated with current accounts.

143

Net gains on financial assets and liabilities for 2012 were €244 million, a 27.1% or €52 million increase from €192 million for 2011, this was due to the increase in originations and sale of mortgages and greater customer activity.

Administrative expenses were €1,029 million in 2012, an 11.4% or €133 million decrease as compared to €1,162 million in 2011. Depreciation and amortization was €145 million in 2012, a 15.1% or €19 million increase as compared to €126 million in 2011. Operating expenses (administrative expenses and depreciation and amortization) grew 8.9% (eliminating SCUSA’s results in 2011 and in local currency). This increase reflects the investments in technology and in the sales and regulatory compliance teams needed to take advantage of the new status as a national bank.

Provisions (net) were €170 million in 2012, a 295.3% or €127 million increase as compared to €43 million in 2011. This increase was mainly due to provisions booked for Trust Piers due to the court settlement reached to remunerate an investment at a higher rate of interest than it was earning.

Impairment losses on financial assets were €265 million in 2012, a 73.6% or €740 million decrease as compared to €1,005 million in 2011. This was mainly due to the deconsolidation of SCUSA. Eliminating SCUSA’s results in 2011 and in local currency, loan-loss provisions dropped by 34.7%, further lowering the NPL ratio to 2.29% from 2.85% in 2011, and coverage rose to 106% from 96% in 2011. This was mainly due to the improved composition of the portfolio and strict management of risk.

Profit attributable to the Parent was €811 million in 2012, a €199 million decrease as compared to €1,010 million in 2011. The main developments were: (i) entry of new shareholders in SCUSA, with the result that the Santander Group stake in the company went from 91.5% to approximately 65%, (ii) the above mentioned provision booked for Trust Piers.

2011 compared to 2010

In 2011, United States contributed 11.0% of the profit attributable to the Parent bank’s total operating areas.

Interest income for 2011 was €3,289 million, a 5.7% or €176 million increase as compared to €3,113 million for 2010. The good performance of Santander Consumer USA was partially offset by a €57 million decrease in Sovereign. In an environment of a sharp decline in interest rates, management of volumes and prices was essential to the performance of interest income.

Net fees and commissions were €643 million in 2011, a 7.9% or €47 million increase from €596 million in 2010. The positive performance of Santander Consumer USA and the management of volumes and prices were partially offset by the negative impact of the Durbin Amendment to the Dodd-Frank Act. This amendment limits the commissions charged to clients for certain transactions. Sovereign, in a stand-alone basis, experience a decrease of €33 million.

Administrative expenses were €1,162 million in 2011, a 9.1% or €97 million increase as compared to €1,065 million in 2010. Depreciation and amortization was €126 million in 2011, a 7.7% or €9 million increase as compared to €117 million in 2010. The increase in operating expenses reflects the impact of investments in technology and the increase in commercial structures which begun in the second half of 2010.

Impairment losses on financial assets were €1,005 million in 2011, a 26.5% or €363 million decrease as compared to €1,368 million in 2010. This reduction was due to the control of NPLs and the recovery capacity throughout the credit cycle. This change caused a better than expected evolution in credit quality. Non-performing loans and coverage improved for the eighth quarter running. The NPL ratio and the coverage ratio stood in 2011 at 2.85% and 96%.

Profit attributable to the Parent was €1,010 million in 2011, a €331 million increase as compared to €679 million in 2010. Revenues and provisions performed well and costs rose because of investments in technology and commercial structures.

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Corporate Activities

										Variations
	2012			2011			2010			2012/2011			2011/2010
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		(2,458	)		(2,172	)		(1,828	)		13.2	%		18.8	%
Income from equity instruments		53			57			64			(7.0	%)		(10.9	%)
Income from companies accounted for by the equity method		(119	)		5			(2	)		n/a			n/a
Net fees and commissions		(31	)		(16	)		(40	)		93.8	%		(60.0	%)
Gains/losses on financial assets and liabilities (net) *		133			420			(141	)		(68.3	%)		n/a
Other operating income/(expenses) (net)		534			129			137			314.0	%		(5.8	%)
TOTAL INCOME		(1,888	)		(1,577	)		(1,810	)		19.7	%		(12.9	%)
Administrative expenses		(705	)		(733	)		(688	)		(3.8	%)		6.5	%
Personnel expenses		(169	)		(285	)		(267	)		(40.7	%)		6.7	%
Other general expenses		(536	)		(448	)		(420	)		19.6	%		6.7	%
Depreciation and amortization		(132	)		(105	)		(133	)		25.7	%		(21.1	%)
Provisions (net)		135			(220	)		114			n/a			n/a
Impairment losses on financial assets (net)		(5,887	)		(1,254	)		(268	)		369.5	%		367.9	%
Impairment losses on other assets (net)		(336	)		(1,414	)		(207	)		(76.2	%)		583.1	%
Gains/(losses) on other assets (net)		69			(198	)		(179	)		n/a			10.6	%
OPERATING PROFIT/(LOSS) BEFORE TAX		(8,744	)		(5,501	)		(3,170	)		59.0	%		73.5	%
Income tax		2,192			1,600			867			37.0	%		84.5	%
PROFIT FROM CONTINUING OPERATIONS		(6,552	)		(3,901	)		(2,303	)		68.0	%		69.4	%
Profit/(loss) from discontinued operations (net)		—			—			(13	)		n/a			n/a
CONSOLIDATED PROFIT FOR THE YEAR		(6,552	)		(3,901	)		(2,316	)		68.0	%		68.4	%
Profit attributable to non-controlling interest		(161	)		(68	)		(25	)		136.8	%		172.0	%
Profit attributable to the Parent		(6,391	)		(3,833	)		(2,291	)		66.7	%		67.3	%

* Includes exchange differences (net)

2012 compared to 2011

Interest income/(charges) for Corporate Activities was a loss of €2,458 million in 2012, a 13.2% increase as compared to losses of €2,172 million in 2011. The increase was largely due to a liquidity buffer kept in the European Central Bank and the greater cost of wholesale funding, which was partly offset by reduced recourse to wholesale markets because the need to finance the commercial gaps was lower. This higher cost also impacted the financing of the Group’s goodwill, which by definition has a negative nature, and which increased its cost proportionately. The net interest income of the ALCO portfolios improved in 2012 due to higher average volumes.

Gains / losses on financial assets and liabilities were a gain of €133 million in 2012 as compared to gains of €420 million in 2011. Of note were the results from liabilities management, the sale of small financial stakes and those arising from financial assets available for sale. The impact of hedging the results of subsidiaries was negative (it was positive in 2011) balancing the higher value in euros of the business units results.

Administrative expenses were €705 million in 2012, a 3.8% or €28 million decrease from €733 million in 2011, mainly due to lower personnel expenses. Depreciation and amortization stood at €132 million, a 25.7% increase from €105 million in 2011. As a result, general cost (administrative expenses plus depreciation and amortization) were almost flat with a €1 million decrease partly from higher indirect taxes, and amortizations which were offset by lower personnel expenses.

145

In 2012, Corporate Activities impairment losses on financial assets were €5,887 million a 369.5% or €4,633 million increase from €1,254 million in 2011. The main reason for this strong increase is the deterioration of the real estate segment in Spain.

Exposure to the real estate industry has taken on particular importance for Spanish financial institutions since 2008 due to a slowdown in sales, an increase in defaults, the difficulties experienced by companies related to the real estate industry in accessing credit and a fall in property prices. Accordingly, in 2009 the Group created a specialized corporate area that encompasses the entire life cycle of these transactions, including commercial management, legal processes, court procedures and recovery management, among others. This area manages the Group’s entire exposure to the property development and construction industry in Spain (including loans and non-current assets held for sale). As this area reports to Group senior management (see “Item 11. Quantitative and Qualitative Disclosures About Risk” for more detailed information), it is considered to belong to the Corporate Activities segment and is no longer considered attributable to the segment that gave rise to it. See “Item 2. Selected Statistical Information—Impaired Balances Ratios” for more detailed information.

Impairment losses on other assets were €336 million, a 76.2% or €1,078 million decrease from €1,414 million in 2011. This variation was mainly due to the following impairments that were solely recorded in 2011: €601 million to amortize goodwill related to Santander Totta, and the amortization of other intangibles, pensions and contingencies.

Loss attributable to the Parent amounted to €6,391 million in 2012, a €2,558 million increase as compared to a loss of €3,833 million in 2011. This variation was primarily due to impairment losses in real estate in Spain.

2011 compared to 2010

Interest income/(charges) for Corporate Activities was a loss of €2,171 million in 2011, an 18.8% increase as compared to 2010. The increase was largely due to the greater cost of wholesale funding. This was mainly due to the higher level of market reference interest rates and the rise in the credit spreads of issues, as well as the cost of maintaining a prudent liquidity position. This higher cost also had a negative impact on financing costs associated with of the Group’s investments and acquisitions, which costs are allocated to the Corporate Activities segment. The net interest income of the ALCO portfolios was higher in 2011 than 2010, while maintaining similar volumes, thanks to the greater return on the assets.

Gains / losses on financial assets and liabilities were a gain of €420 million in 2011 compared to losses of €141 million in 2010. The difference was mainly due to hedging. In 2011, the impact of hedging the results of subsidiaries was positive (offsetting the lower value in euros of the results of the business units) and more than €500 million above 2010. In 2010, there were higher losses from the hedging of the results of subsidiaries and writedowns of financial investments in the portfolio of equity stakes, both of which were partly offset by positive returns from the hedging of interest rates.

Administrative expenses were €733 million in 2011 a 6.5% or €45 million increase from €688 million in 2010, mainly due to an increase in rents. Depreciation and amortization stood at €105 million, a 21.1% reduction from the €133 million in 2010. The growth in general costs from the increase in rents was partially offset by lower amortizations.

In 2011, Corporate Activities impairment losses on financial assets were €1,254 million a 367.9% or €986 million increase from €268 million in 2010. Impairment losses on other assets were €1,414 million a 583.1% or €1,207 million increase from €207 million in 2010. These variations were mainly due to €1,812 million in provisions to cover real estate exposure in Spain, €601 million to amortize goodwill related to Santander Totta, and the amortization of other intangibles, pensions and contingencies.

Loss attributable to the Parent amounted to €3,833 million in 2011, a €1,542 million increase as compared to a loss of €2,291 million in 2010. This variation was primarily due to the impairment losses previously mentioned.

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Second level (business):

Retail Banking

										Variations
	2012			2011			2010			2012/2011			2011/2010
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		29,986			30,319			28,487			(1.1	%)		6.4	%
Income from equity instruments		121			95			100			27.4	%		(5.0	%)
Income from companies accounted for by the equity method		399			23			19			n/a			21.1	%
Net fees and commissions		8,804			8,929			8,042			(1.4	%)		11.0	%
Gains/losses on financial assets and liabilities (net) *		2,215			1,103			1,338			100.8	%		(17.6	%)
Other operating income/(expenses) (net)		(655	)		(556	)		(389	)		17.8	%		42.9	%
TOTAL INCOME		40,870			39,913			37,597			2.4	%		6.2	%
Administrative expenses		(15,494	)		(15,242	)		(13,911	)		1.7	%		9.6	%
Personnel expenses		(9,055	)		(8,877	)		(8,000	)		2.0	%		11.0	%
Other general expenses		(6,439	)		(6,365	)		(5,911	)		1.2	%		7.7	%
Depreciation and amortization		(1,867	)		(1,827	)		(1,609	)		2.2	%		13.5	%
Provisions (net)		(1,718	)		(2,321	)		(1,226	)		(26.0	%)		89.3	%
Impairment losses on financial assets (net)		(12,756	)		(10,469	)		(10,170	)		21.8	%		2.9	%
Impairment losses on other assets (net)		(147	)		(82	)		(68	)		79.3	%		20.6	%
Gains/(losses) on other assets (net)		71			(56	)		234			n/a			n/a
OPERATING PROFIT/(LOSS) BEFORE TAX		8,959			9,916			10,847			(9.7	%)		(8.6	%)
Income tax		(1,869	)		(2,392	)		(2,614	)		(21.9	%)		(8.5	%)
PROFIT FROM CONTINUING OPERATIONS		7,090			7,524			8,233			(5.8	%)		(8.6	%)
Profit/(loss) from discontinued operations (net)		(7	)		(24	)		(14	)		(70.8	%)		71.4	%
CONSOLIDATED PROFIT FOR THE YEAR		7,083			7,500			8,219			(5.6	%)		(8.7	%)
Profit attributable to non-controlling interest		697			591			646			17.9	%		(8.5	%)
Profit attributable to the Parent		6,386			6,909			7,573			(7.6	%)		(8.8	%)

* Includes exchange differences (net)

2012 compared to 2011

In 2012, the Group’s Retail Banking segment generated 74.3% of the profit attributed to the Group’s total operating areas. Compared to 2011, earnings were negatively affected by over 6 percentage points due to the change in the scope of consolidation (equity-method accounting of SCUSA and insurance in Latin America, and increased non-controlling interests). The effect of interest rate variations was nearly zero.

Interest income / (charges) were €29,986 million in 2012, a 1.1% or €333 million decrease from €30,319 million in 2011.

Income from companies accounted for by the equity method was €399 million in 2012, a €376 million increase from €23 million in 2011. This growth was mainly due to the change in the scope of consolidation (equity-method accounting of SCUSA and insurance companies in Latin America).

Net fees and commissions were €8,804 million in 2012, a 1.4% or €125 million decrease from €8,929 million in 2011.

Gains / (losses) on financial assets and liabilities were €2,215 million in 2012, a 100.8% or €1,112 million increase from €1,103 million in 2011. This increase was mainly due to the repurchase of debt capital instruments in the U.K..

Administrative expenses were €15,494 million in 2012, a 1.7% or €252 million increase from €15,242 million in 2011. This was mainly due to the increasing costs in Latin America related to business development, inflationary pressures on wage agreements and outsourcing of services. Depreciation and amortization costs were €1,867 million in 2012, a 2.2% or €40 million increase from €1,827 million in 2011.

147

Provisions were €1,718 million in 2012, a €603 million decrease from €2,321 million for the same period in 2011 due to the €842 million one-off provision for PPI remediation (€620 million after taxes) booked in the U.K. in 2011.

Impairment losses on financial assets were €12,756 million in 2012, a 21.8% or €2,287 million increase from €10,469 million in 2011. This increase was mainly driven by (i) growth in loan loss provisions in Spain due to the worsening economic situation in 2012, including a contraction of the economy, which fell into recession; (ii) increased provisions in the rest of Europe mainly due to the rise in the NPL ratio in Portugal, the result of an economic cycle heading towards contraction, with falling domestic demand and private consumption, and to the increase in the United Kingdom; and (iii) growth in provisions in Brazil as a result of the increased volume of total lending and a slight rise in non-performing loans.

Profit attributable to the Parent was €6,386 million in 2012, a 7.6% or €523 million decrease from €6,909 million in 2011, because of higher loan-loss provisions and the impact of higher minority interests on Latin American units.

The Profit attributable to the Parent of Retail Banking in Continental Europe rose (+1.7%). This was mainly due to the resilience of revenues in the current phase of the cycle (favored by the incorporation of Bank Zachodni WBK in Poland and SEB’s business in Germany) and control of costs.

The Profit attributable to the Parent in Retail Banking in U.K. was 10.8% lower, largely due to lower net interest income (higher cost of funding and low interest rates).

The Profit attributable to the Parent in Retail Banking in Latin America was 5.9% lower. The good performance of the net interest income was offset by higher administrative expenses and impairment losses and the higher impact of minority interests following the sale of shares in the banks in Brazil, Mexico and Chile.

Retail Banking earnings in the U.S. were 26.5% lower. This reflects the reduced stake in SCUSA and the one-off charge at Sovereign Bank for the Trust Piers settlement.

2011 compared to 2010

In 2011, the Group’s Retail Banking segment generated 75.2% of the profit attributed to the Group’s total operating areas. The profits were affected by the provision of €620 million in the second quarter for PPI remediation in the U.K.. Results were also slightly impacted by the perimeter effect (mainly the consolidation of Poland’s Bank Zachodni WBK). The impact was between three to four percentage points positive on revenues and costs. The evolution of exchange rates during the period had a negative impact of between one and two percentage points.

Interest income / (charges) were €30,319 million in 2011, a 6.4% or €1,832 million increase from €28,487 million in 2010. Net fees and commissions were €8,929 million in 2011, an 11.0% or €887 million increase from €8,042 million in 2010. These results were mainly due to the continued growth in Latin America, and the impact of the change in the scope of consolidation, which was partially offset by the effect of the changes in exchange rates.

Gains / (losses) on financial assets and liabilities were €1,103 million in 2011, a 17.6% or €235 million decrease from €1,338 million in 2010.

Administrative expenses were €15,242 million in 2011, a 9.6% or €1,331 million increase from €13,911 million in 2010. This is mainly due to the increase in cost in Latin America along related to business development. Depreciation and amortization costs were €1,827 million in 2011, a 13.5% or €218 million increase from €1,609 million in 2010.

Impairment losses on financial assets were €10,469 million in 2011, a 2.9% or €299 million increase from €10,170 million in 2010. This increase was less than the increase in 2010 and reflects the efforts made in previous years to improve risk management in the Group’s units.

Profit attributable to the Parent was €6,909 million in 2011, a 8.8% or €664 million decrease from €7,573 million in 2010.

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Retail banking in Continental Europe, despite the recovery in revenues and the positive impact of the change in the scope of consolidation, was impacted by the higher amount assigned to provisions and writedowns. Profit attributable to the Parent bank declined 14.1%.

Retail banking in the U.K. was lower as it was hit by the PPI charge. Excluding this impact, profit attributable to the Parent bank was almost the same as in 2010. Total income declined, affected by regulatory changes, but this was offset by flat costs and reduced provisions.

Retail banking revenues in Latin America continued to grow, as did costs, compatible with business development.

Global Wholesale Banking

										Variations
	2012			2011			2010			2012/2011			2011/2010
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		2,501			2,416			2,336			3.5	%		3.4	%
Income from equity instruments		249			242			197			2.9	%		22.8	%
Income from companies accounted for by the equity method		—			—			—			n/a			n/a
Net fees and commissions		1,162			1,149			1,288			1.1	%		(10.8	%)
Gains/losses on financial assets and liabilities (net) *		785			788			1,359			(0.4	%)		(42.0	%)
Other operating income/(expenses) (net)		7			12			(30	)		(41.7	%)		(140.0	%)
TOTAL INCOME		4,704			4,607			5,150			2.1	%		(10.5	%)
Administrative expenses		(1,455	)		(1,488	)		(1,346	)		(2.2	%)		10.5	%
Personnel expenses		(943	)		(987	)		(895	)		(4.5	%)		10.3	%
Other general expenses		(512	)		(501	)		(452	)		2.2	%		10.8	%
Depreciation and amortization		(155	)		(134	)		(146	)		15.7	%		(8.2	%)
Provisions (net)		(25	)		(14	)		(6	)		78.6	%		133.3	%
Impairment losses on financial assets (net)		(262	)		(144	)		(2	)		81.9	%		n/a
Impairment losses on other assets (net)		(25	)		(21	)		(10	)		19.0	%		110.0	%
Gains/(losses) on other assets (net)		2			—			5			n/a			n/a
OPERATING PROFIT/(LOSS) BEFORE TAX		2,784			2,806			3,644			(0.8	%)		(23.0	%)
Income tax		(750	)		(753	)		(972	)		(0.4	%)		(22.5	%)
PROFIT FROM CONTINUING OPERATIONS		2,034			2,053			2,672			(0.9	%)		(23.2	%)
Profit/(loss) from discontinued operations (net)		—			—			—			n/a			n/a
CONSOLIDATED PROFIT FOR THE YEAR		2,034			2,053			2,672			(0.9	%)		(23.2	%)
Profit attributable to non-controlling interest		207			214			241			(3.3	%)		(11.2	%)
Profit attributable to the Parent		1,827			1,839			2,431			(0.7	%)		(24.4	%)

* Includes exchange differences (net)

2012 compared to 2011

The Global Wholesale Banking segment generated 21.3% of the operating areas’ total profit attributable to the Group in 2012. After a good start, the year experienced significant levels of volatility and uncertainty due to the worsening eurozone crisis. This conditioned business activity to a large extent.

Interest income / (charges) were €2,501 million in 2012, a 3.5% or €85 million increase from €2,416 million in 2011. Net fees and commissions were €1,162 million in 2012, a 1.1% or €13 million increase from €1,149 million in 2011. These variations are explained by an environment of reduced activity in markets and issues in Europe.

Gains / (losses) on financial assets and liabilities was flat at €785 million in 2012 compared to €788 million in 2011.

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Administrative expenses were €1,455 million in 2012, a 2.2% or €33 million decrease from €1,488 million in 2011. The investments made in 2011 in equipment and technology in order to attain leadership positions in our core markets stabilized during 2012.

Depreciation and amortization costs were €155 million in 2012, a 15.7% or €21 million increase from €134 million in 2011.

Impairment losses on financial assets were €262 million in 2012, a €118 million increase as compared to provisions of €144 million in 2011 as a result of the increased loan loss provisions in Spain.

Profit attributable to the Parent remained stable at €1,827 million in 2012, a 0.7% or €12 million decrease from €1,839 million in 2011. The increase in total income was offset by higher impairment losses on financial assets and liabilities.

From a management standpoint, the results continued to be supported by solid and diversified client revenues (87% of total gross income). Client revenues continued to rise (+1.1%), spurred by those generated within the Global customer relationship model (+5.8%), which give the area a considerable degree of stability.

The growth in client revenues was underpinned by the stability in Continental Europe (0%), and the better evolution in the U.K. (+16%) and the U.S.(+114%), where Sovereign Bank continued to advance toward its natural share in the wholesale business. On the other hand, Latin America’s contribution was lower (-6%), following the discontinuation of some businesses in Brazil (-18%), which was not offset by the rest of the countries (Mexico: +33% and Chile: +17%).

The performance of the business sub-areas and their contribution to revenue generation was as follows:

Global Transaction Banking, which includes Cash Management, Trade Finance, Basic Financing and Custody, increased its client revenues by 2%. Of note were Cash Management revenues (+16%), due to the efforts made to capture transaction volumes as well as the increase in commercial finance. Spain, Chile and Argentina grew by more than 15%. The growth in Cash Management was partially offset by a decline of 6% in client revenues generated by custody and settlement. The stagnation in Europe, due to the evolution of the stock market and a slower than expected recovery in mutual funds, was only partially mitigated by the robustness of Mexico and Chile.

In 2012 Corporate Finance (including Mergers and Acquisitions and Equity Capital Markets) reduced its client revenues by 23% in a very complex environment.

Credit Markets, which include origination and distribution of corporate loans or structured finance, bond origination and securitization teams and Asset and Capital Structuring, maintained strong generation of client revenues (+8%). Of note was the growth in the U.K., Sovereign Bank, Mexico and Chile.

Rates, which covers fixed income and FX, reduced its client revenues by 6% in a very complex environment in the financial markets, which required larger provisions.

The client revenues of Global Equities (activities related to the equity markets) rose 11%, due to a small recovery in the equity markets in the last months of 2012, compared to 2011, which was the weakest of the last few years.

2011 compared to 2010

The Global Wholesale Banking segment generated 20.0% of the operating areas’ total profit attributable to the Group in 2011. Beginning in the spring, markets were very unstable and they continued to deteriorate in the second half of the year due to the eurozone’s sovereign debt crisis. This environment had a significant impact on revenues, particularly those derived from equities and those not related to customers.

Interest income / (charges) were €2,416 million in 2011, a 3.4% or €80 million increase from €2,336 million in 2010.

Net fees and commissions were €1,149 million in 2011, a 10.8% or €139 million decrease from €1,288 million in 2010 lower due to reduced activity in the markets.

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Gains / (losses) on financial assets and liabilities were €788 million in 2011, a 42.0% or €571 million decrease from €1,359 million in 2010.

Administrative expenses were €1,488 million in 2011, a 10.5% or €142 million increase from €1,346 million in 2010, reflecting the investment in equipment and technology.

Depreciation and amortization costs were €134 million in 2011, an 8.2% or a €12 million decrease from €146 million 2010.

Impairment losses on financial assets were €144 million in 2011, a €142 million increase as compared to provisions of €2 million in 2010 due to the further deterioration of the economic environment.

Profit attributable to the Parent was €1,839 million in 2011, a 24.4% or €592 million decrease from €2,431 million in 2010. Profits declined because of the fall in total income from the sharp reduction in gains on financial transactions and in fee income, coupled with higher costs and provisions.

The results were supported by strong and diversified client revenues, although they were impacted by the market stress in the second half of the year somewhat shaken in the last two quarters of very high stress.

Asset Management and Insurance

										Variations
	2012			2011			2010			2012/2011			2011/2010
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		118			258			229			(54.3	%)		12.7	%
Income from equity instruments		—			—			1			n/a			n/a
Income from companies accounted for by the equity method*		147			29			—			406.9	%		n/a
Net fees and commissions		373			410			445			(9.0	%)		(7.9	%)
Gains/losses on financial assets and liabilities (net)		7			5			49			40.0	%		(89.8	%)
Other operating income/(expenses) (net)		222			433			388			(48.7	%)		11.6	%
TOTAL INCOME		867			1,135			1,112			(23.6	%)		2.1	%
Administrative expenses		(274	)		(318	)		(310	)		(13.8	%)		2.6	%
Personnel expenses		(156	)		(177	)		(167	)		(11.9	%)		6.0	%
Other general expenses		(118	)		(141	)		(143	)		(16.3	%)		(1.4	%)
Depreciation and amortization		(35	)		(43	)		(52	)		(18.6	%)		(17.3	%)
Provisions (net)		(14	)		(46	)		(15	)		(69.6	%)		206.7	%
Impairment losses on financial assets (net)		(1	)		(1	)		(3	)		0.0	%		(66.7	%)
Impairment losses on other assets (net)		—			—			(1	)		n/a			n/a
Gains/(losses) on other assets (net)		7			(9	)		—			(177.8	%)		n/a
OPERATING PROFIT/(LOSS) BEFORE TAX		550			718			731			(23.4	%)		(1.8	%)
Income tax		(148	)		(231	)		(204	)		(35.9	%)		13.2	%
PROFIT FROM CONTINUING OPERATIONS		402			487			527			(17.5	%)		(7.6	%)
Profit/(loss) from discontinued operations (net)		—			—			—			n/a			n/a
CONSOLIDATED PROFIT FOR THE YEAR		402			487			527			(17.5	%)		(7.6	%)
Profit attributable to non-controlling interest		19			51			59			(62.7	%)		(13.6	%)
Profit attributable to the Parent		383			436			468			(12.2	%)		(6.8	%)

* Includes exchange differences (net)

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2012 compared to 2011

In 2012 this segment generated 4.5% of the operating areas’ total profit attributable to the Parent bank. In July, an agreement was reached with Abbey Life Insurance Ltd., a subsidiary of Deustche Bank AG, to reinsure all of the individual life risk portfolio of the insurance companies in Spain and Portugal. This transaction generated estimated gross results of €435 million.

In December, Santander agreed to a strategic alliance with the insurer Aegon to boost its bancassurance business in Spain through commercial networks. The transaction valued Santander’s insurance business at €431 million. The agreement does not affect savings, auto and health insurance, which Santander continues to manage.

Total income in 2012 was €867 million, a 23.6% or €268 million decrease from €1,135 million in 2011. Administrative expenses were €274 million in 2012, a 13.8% decrease from €318 million in 2011. Depreciation and amortization decreased by €8 million in 2012. All of these performances reflect two main changes: (i) the reduction in the stake in the Latin American insurance companies and (ii) the reinsurance agreement in Spain and Portugal.

Profit attributable to the Parent was €383 million in 2012, a decrease of 12.2% or €53 million from €436 million in 2011. Attributable profit was 16.5% higher excluding the following impact: (i) the reinsurance agreement reached with Abbey Life Insurance Ltd., and (ii) the sale of 51% of the Latin American insurers to Zurich which meant recording the contribution of these companies by the equity accounted method.

The global area of Santander Asset Management posted €69 million in profit attributable to the parent a 2.9% increase, due to a decline in gross income of 7.4%, reduced costs (-5.5%) and lower needs for provisions. The total result for the Group (profit before tax plus fees paid to the networks) was €1,043 million (-1.6%).

The total volume of managed funds was €153.7 billion, 11% more than at the end of 2011. Of this, approximately €99 billion were mutual and pension funds, €8 billion in client portfolios other than mutual funds, including institutional mandates, and €46 billion of management mandates on behalf of other Group units.

Santander Insurance posted an attributable profit of €314 million, 14.1% less than in 2011. Results were impacted by the sale of 51% of the insurers in Latin America and by the reinsurance agreement of its life portfolio in Spain and Portugal, which reduced their contribution by €131 million. Eliminating these effects, profit was 19.0% higher.

Insurance business generated total revenues for the Group (including fee income paid to the commercial networks) of €2,784 million 2.3% higher on a like-for-like basis. The total results for the Group (income before taxes of insurers and brokers plus fee income received by the networks) amounted to €2,653 million, 3.0% on a like-for-like basis.

2011 compared to 2010

In 2011 this segment generated 4.7% of the operating areas’ total profit attributable to the Parent bank.

Total income in 2011 was €1,135 million, a 2.1% or €23 million increase from €1,112 million in 2011.

Administrative expenses were €318 million in 2011, a 2.6% increase from €310 million in 2011.

Depreciation and amortization decreased by €9 million in 2011 because of the one-off impact of the change in accounting criteria for amortization of intangible insurance assets in 2010.

Profit attributable to the Parent was €436 million in 2011, a decrease of 6.8% or €32 million from €468 million in 2010, largely affected by lower revenues from insurance in the fourth quarter after the global agreement with Zurich.

The global area of Santander Asset Management experienced a reduction in profit attributable to the parent. The revenue reduction was the result of a fall in managed volumes, accelerated in the second half, which was partly offset by a better mix of products and, in consequence, an increase in average revenues.

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Total mutual and pension funds under management amounted to €112 billion, 10% less than at December 2010. The decrease in volume was due to the preference for liquidity and on-balance sheet funds, together with more unstable markets in the second half of the year and the resulting impact on prices.

Profits diminished in the global area of Santander Insurance as it was affected by the sale of 51% of the insurance companies in Latin America completed in the fourth quarter.

Financial Condition

Assets and Liabilities

Our consolidated total assets were €1,269,628 million at December 31, 2012, a 1.4% or €18,103 million increase from total assets of €1,251,526 million at December 31, 2011. 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, decreased by 3.0% to €745,986 million at December 31, 2012 from €769,036 million at December 31, 2011.

The following factors contributed to the variations in the balance sheet:

• A negative perimeter impact from the sale of our subsidiary in Colombia, and from the units that were previously consolidated by the proportional method, mainly in Spain, and changed to be accounted for by the equity method.

• The almost null effect from the evolution of non-euro currencies (end of period rates) on the one hand, the appreciation of sterling (2%), the Mexican peso (5%), the Chilean peso (6%) and the Polish zloty (9%) and, on the other, the depreciation of the dollar (2%), the Brazilian real (11%) and the Argentine peso (14%) in each case against the euro.

The impact of these factors was one percentage point negative on changes in customer balances and was offset by growth in other portfolios and in cash and deposits at central banks.

Customer deposits, which comprise deposits from clients and securities sold to clients under agreements to repurchase, decreased by 0.9% from €632,533 million at December 31, 2011, to €626,639 million at December 31, 2012. Other managed funds, including mutual funds, pension funds, managed portfolios and savings-insurance policies, decreased by 10.1% from €131,456 million at December 31, 2011, to €118,141 million at December 31, 2012 affected by the greater commercial focus placed on capturing on-balance-sheet funds.

In addition, and as part of the global financing strategy, during 2012 the Group issued €80,817 million of senior debt (including Santander UK’s medium term program), including €7,842 million of covered bonds and €2 million of subordinated debt.

During 2012, €78,706 million of senior debt (including Santander UK’s medium term program), including €7,721 million of covered bonds and €4,080 million of subordinated debt, matured.

Goodwill was €24,626 million at the end of 2012, a €463 million decrease from €25,089 million at the end of 2011 entirely due to the evolution of exchange rates in various countries and goodwill amortization in Italy.

Capital

Stockholders’ equity, net of treasury stock, at December 31, 2012, was €74,654 million, a decrease of €1,760 million or 2.3% from €76,414 million at December 31, 2011, mainly due to the increase of reserves resulting from the issuance of 1,412,136,547 shares in 2012 which was offset by the increase of negative valuation adjustments and the decrease in the consolidated income.

Our eligible stockholders’ equity under BIS II was €72,936 million at December 31, 2012. The surplus over the minimum required by the Bank of Spain was €28,374 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, 2012

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the BIS II ratio was 13.09% (13.56% at December 31, 2011), Tier I Capital was 11.17% (11.01% at December 31, 2011) and core capital was 10.33% (10.02% at December 31, 2011). 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, 2012, we had outstanding €206.0 billion of senior debt, of which €97.2 billion were mortgage bonds and €22.0 billion were promissory notes. Additionally, we had €18.2 billion in outstanding subordinated debt (which includes €4.3 billion preferred securities and €0.4 billion in preferred shares).

The following table shows the average balances during the years 2012, 2011 and 2010 of our principal sources of funds:

	2012		2011		2010
	(in millions of euros)
Due to credit entities		154,686		146,638		134,577
Customer deposits		636,351		616,690		568,915
Marketable debt securities		204,701		196,107		209,006
Subordinated debt		21,239		26,673		34,096
Total		1,016,977		986,108		946,594

The average maturity of our outstanding debt as of December 31, 2012 is as follows:

(1) Senior debt	3.7 years
(2) Mortgage debt	15.8 years
(3) Dated subordinated debt	6.9 years

For more information see Notes 22.b, 23.a and 51.a to our consolidated financial statements.

The cost and availability of debt financing are influenced by our credit ratings. A reduction in these ratings could increase the cost of and reduce our market access to debt financing. Our credit ratings are as follows:

	Long-Term	Short-Term	Outlook
Moody’s	Baa2	P-2	Negative
Standard & Poor’s	BBB	A-2	Negative
Fitch	BBB+	F2	Negative
DBRS	A	R-1 (low)	Negative

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Our total customer deposits, excluding assets sold under repurchase agreements, totaled €578.9 billion at December 31, 2012. Loans and advances to customers (gross) totaled €746.0 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, 2012, 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.

During 2012, 2011 and 2010, we spent €1,098 million, €1,420 million and €1,338 million, respectively, in research and development activities in connection with information technology projects.

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 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 Group 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;

• uncertainties relating to economic growth expectations and interest rates cycles, especially in the United States, Spain, the United Kingdom, other European countries, Brazil and other Latin American countries, and the impact they may have over the yield curve and exchange rates;

• the continued effect of the global economic slowdown on Europe and the U.S. 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, as a result of the fragility of the Spanish, Portuguese, Irish and Greek economies, further downgrades in our credit rating or otherwise, could adversely affect our net interest margin as a consequence of timing differences in the repricing of our assets and liabilities;

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• 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; and

• 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.

E. Off-balance sheet arrangements

As of December 31, 2012, 2011 and 2010, we had outstanding the following contingent liabilities and commitments:

	2012		2011		2010
	(in millions of euros)
Contingent liabilities:
Financial guarantees and other sureties		14,437		15,417		18,395
Irrevocable documentary credits		2,866		2,978		3,816
Other guarantees		27,285		29,093		36,733
Other contingent liabilities		445		554		851
		45,033		48,042		59,795
Commitments:
Balances drawable by third parties		187,664		181,559		179,964
Other commitments		28,378		13,823		23,745
		216,042		195,382		203,709
Total:		261,075		243,424		263,504

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, 2012, 2011 and 2010:

	2012		2011		2010
	(in millions of euros)
Off-balance sheet funds:
Mutual funds		89,176		102,611		113,510
Pension funds		10,076		9,645		10,965
Other managed funds		18,889		19,200		20,314
		118,141		131,456		144,789

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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, in our securitization activity we use special purpose vehicles (fondos de titulización) that are consolidated in the Group’s financial statements. According to IFRS, only those vehicles that meet certain requirements can be consolidated. 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 €383.3 million as of December 31, 2012) to some of these special purpose vehicles, which are provided for in accordance with the risks involved. In 2012, the Group sold securitized bonds and structured medium and long-term operations with customers whose collateral is securitized bonds or mortgage bonds amounting to close to €12 billion.

In the ordinary course of business, Santander UK enters into securitization transactions using special purpose securitization companies which are consolidated and included in Santander UK’s financial statements. Santander UK is under no obligation to support any losses that may be incurred by the securitization companies or the holders of the securities and has no right or obligation to repurchase any securitized loan. Santander UK has made some interest-bearing subordinated loans to these securitization companies.

We do not have any further transactions with unconsolidated entities other than those mentioned above.

We have no other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

F. Tabular disclosure of contractual obligations

The following table summarizes our contractual obligations by remaining maturity at December 31, 2012:

Contractual obligations

(in millions of euros)	Less than 1 year		More than 1 year but less than 3 years		More than 3 years  but less than 5 years		More than 5 years		Total
Deposits from credit institutions		61,071		55,983		11,076		3,540		131,670
Customer deposits		508,314		60,827		13,992		5,971		589,104
Marketable debt securities		72,713		54,158		27,291		46,902		201,064
Subordinated debt		1,939		1,377		5,169		9,753		18,238
Liabilities under insurance contracts (1)		—		—		—		1,425		1,425
Operating lease obligations		331		619		564		2,176		3,690
Capital lease obligations		51		9		10		67		137
Purchase obligations		4		7		3		3		17
Other long-term liabilities (2)		—		—		—		7,077		7,077
Contractual interest payments (3)		7,031		7,877		7,541		25,096		47,545
Total		651,454		180,857		65,646		102,010		999,967

(1) Includes life insurance contracts in which the investment risk is borne by the policy holder and insurance savings contracts.

(2) Other long-term liabilities relate to pensions and similar obligations.

(3) Calculated for all Deposits from credit institutions, Customer deposits, Marketable debt securities and Subordinated debt assuming a constant interest rate based on data as of December 31, 2012 over time for all maturities, and those obligations with maturities of more than five years have an average life of ten years.

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The table above excludes the “fixed payments” of our derivatives since derivative contracts executed by the Group apply close-out netting across all outstanding transactions, that is, these agreements provide for settlements to be made on a maturity or settlement date for the differences that arise, and as such, the obligation to be settled in the future is not fixed at the present date and is not determined by the fixed payments.

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 60% of the Group’s total loan portfolio is secured (in most cases, by real estate).

Mortgages to individuals represent approximately 41% of the Group’s total lending. These mortgages are focused on our core markets, Spain and the U.K., 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, 2012, the loan portfolio and thus its risk profile mainly comprises primary residence loans, with an average loan to value ratio (LTV) of 56.6% and an affordability rate of 29% under management criteria described below. Residential mortgages account for 26.8% of the total credit risk portfolio in Spain, of which 89% has a LTV at inception of under 80%.

All customers applying for a prime residential mortgage are subject to a rigorous assessment of credit risk and affordability.

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 transaction + 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 U.K.’s mortgage portfolio is focused on primary residence mortgages with high quality risk in terms of LTV (52.2% as of December 31, 2012). Certain portfolios with high risk profiles (interest only, flexible loans, loans with LTV>100%, buy to let) are subject to strict lending policies to mitigate risks. Furthermore, their performance is continuously monitored to ensure an adequate control.

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Net real estate exposure in Spain was halved to €12.5 billion from €24.9 billion, accounting for 1,7% of the Group’s total credit portfolio. The bank sold 33,500 properties in 2012, from its own books and those of real estate developers.

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 auditing 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.

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.

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, 2012, 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, 2012.

Other

During 2012, 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.

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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”.

Item 6. Directors, senior management and employees

A. Directors and senior management

We are managed by our board of directors, which currently consists of 16 members. In accordance with our Bylaws (Estatutos), the board shall consist of at least 14 and not more than 22 members. Each member of the board is elected to a three-year term by our shareholders at a general meeting. One-third of the members are elected each year and members may be re-elected.

Our board of directors holds its meetings in accordance with an annual calendar. The Rules and Regulations of the Board³ provide that the board shall hold not less than nine annual ordinary meetings; in 2012, it met 11 times. Our board of directors elects our chairman, vice chairmen and chief executive officer from among its members. Between board meetings, lending and other board powers reside with the executive committee (comisión ejecutiva) and with the risk committee (comisión delegada de riesgos) of our board of directors. The chairman is the Bank’s most senior officer and, as a result, all powers as may be delegated under Spanish law, our Bylaws 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.

³  The Rules and Regulations of the Board of Directors 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—Rules and Regulations of the Board of Directors”.

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The current members of our board of directors are:

Name	Position with Banco Santander	Director since
Emilio Botín (1)	Chairman	1960
Fernando de Asúa	First vice chairman	1999
Alfredo Sáenz	Second vice chairman and chief executive officer	1994
Matías R. Inciarte (2)	Third vice chairman	1988
Manuel Soto	Fourth vice chairman	1999
Ana P. Botín (1)	Director	1989
Javier Botín (1)	Director	2004
Lord Burns	Director	2004
Vittorio Corbo	Director	2011
Guillermo de la Dehesa	Director	2002
Rodrigo Echenique	Director	1988
Esther Giménez-Salinas	Director	2012
Ángel Jado	Director	2010
Abel Matutes	Director	2002
Juan R. Inciarte (2)	Director	2008
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.

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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	Director and chief executive officer, Santander UK
Juan R. Inciarte	Director and executive vice president, strategy and Asia
José A. Alvarez	Executive vice president, financial management and investor relations
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, Retail Banking Spain (Santander Branch Network)
José G. Cantera	Executive vice president, global wholesale banking
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, United States
José Mª Nus	Executive vice president, Santander UK
César Ortega	Executive vice president, general secretariat
Javier Peralta	Executive vice president, risk
Marcial Portela	Executive vice president, Brazil
Magda Salarich	Executive vice president, consumer finance
Javier San Félix	Chief executive officer, Banesto
José Tejón	Executive vice president, financial accounting and control
José Antonio Villasante	Executive vice president, Santander Universities
Juan A. Yanes	Executive vice president, United States
Jesús Mª Zabalza	Executive vice president, America

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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 1999 and first vice chairman in 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 2002, second vice chairman and chief executive officer of Santander. He was appointed director in 1994.

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 and third vice chairman in 1999. He is 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 1999. He is 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).

Ana P. Botín

Born in 1960. She was appointed director in 1989. 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 an executive director of Alliance & Leicester plc and 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 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 2004. He is also a non-executive chairman of Santander UK plc. In addition, he is non-executive chairman of Channel Four Television Corporation and a non-executive member of the Office for Budget Responsibility. He was Permanent Secretary to the U.K. Treasury and chaired the U.K. 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.

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Vittorio Corbo

Born in 1943. He was appointed director in 2011. He is an associated senior researcher for the Centre of Public Studies in Santiago. He is also a non-executive chairman of Compañía de Seguros SURA-Chile S.A., a non-executive director of Banco Santander—Chile, Banco Santander (México), S.A., CCU, S.A. and Endesa Chile, and an economic advisor to various international institutions and chilean companies. He was previously chairman of the Central Bank of Chile (2003-2007), a professor of Economics at the Pontificia Catholic University of Chile (1981-1984 and 1991-2003) and at Concordia University in Montreal, Canada (1972-1981) and professorial lecturer at Georgetown University, Washington, DC (1985-1991), and held management positions at the World Bank in Washington, D.C. (1984-1991).

Guillermo de la Dehesa

Born in 1941. He was appointed director in 2002. 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 is an international advisor to Goldman Sachs International, non-executive vice chairman of Amadeus IT Holding, S.A, and a non-executive director of Campofrío Food Group, S.A. and Grupo Empresarial San José, S.A. He is also chairman of the Centre for Economic Policy Research (CEPR) in London, member of the Group of Thirty of Washington, chairman of the board of trustees of the IE Business School and non-executive chairman of Aviva Grupo Corporativo, S.L. and of Aviva Vida y Pensiones, S.A. de Seguros y Reaseguros.

Rodrigo Echenique

Born in 1946. He was appointed director in 1988. Former chief executive officer of Banco Santander, S.A. from 1988 to 1994. He is currently also non-executive chairman of NH Hoteles, S.A. and non-executive director of Vocento, S.A.

Esther Giménez-Salinas

Born in 1949. She joined the board in 2012. She is a professor of Criminal Law for the ESADE-URL’s Law School. She has been rector of the Ramon Llull University, member of the Supreme Judicial Council, member of the standing committee of the Conference of Rectors of Spanish Universities (CRUE) and an executive vice-president of the Center for Legal Studies of the Department of Justice of the Generalitat de Catalunya.

Ángel Jado

Born in 1945. He was appointed director in 2010. Former director of Banco Santander from 1972 to 1999 and director of Banco Banif, S.A. from 2001.

Abel Matutes

Born in 1941. He was appointed director in 2002. 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.

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 2008. He is executive vice president of the Bank. In addition, he is a non-executive vice chairman of Santander UK plc and a director of Santander Consumer Finance, S.A. and Banco Banif, S.A.

Isabel Tocino

Born in 1949. She was appointed director in 2007. 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, and a member of the Royal Academy of Doctors, and a non-executive director of ENCE Energía y Celulosa, SA.

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José A. Alvarez

Born in 1960. He joined the Bank in 2002. In 2004, he was appointed executive vice president, Financial Management and Investor Relations.

Ignacio Benjumea

Born in 1952. He joined Banco Santander in 1987 as general secretary of Banco Santander de Negocios. In 1994 he was appointed executive vice president and general secretary and secretary of the board of Banco Santander. He is also a director of Bolsas y Mercados Españoles, Sociedad Holding de Mercados y Sistemas Financieros, S.A., Sociedad Rectora de la Bolsa de Madrid, S.A. and La Unión Resinera Española, S.A.

Juan Manuel Cendoya

Born in 1967. Former manager of the Legal and Tax Department of Bankinter, S.A. from 1999 to 2001. He joined the Bank in July 2001 as executive vice president, communications, corporate marketing and research.

José María Espí

Born in 1944. He joined the Bank in 1985 and, in 1988, was appointed executive vice president, human resources. In 1999 he was appointed executive vice president, risk. He is also chairman of Unión de Crédito Inmobiliario, S.A., E.F.C. and director of UCI, S.A.

José María Fuster

Born in 1958. He joined the Group in 1988. In 2004, he was appointed chief information officer of Grupo Santander. In the same year, he was also named member of the board of Abbey National plc (now, Santander UK 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 Openbank, S.A.

José Luis G. Alciturri

Born in 1949. He joined the Bank in 1966. Since 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, Retail Banking Spain (Santander Branch Network) in 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. He is also a non-executive director of Banesto.

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. In 2009, he was appointed head of internal auditing. He is also a non-executive director of Banesto.

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Adolfo Lagos

Born in 1948. Former chief executive officer of Grupo Financiero Serfin since 1996. He was appointed executive vice president, America, in 2002 and executive vice president, global wholesale banking in 2003. From June 2012 he is an adviser for Santander on new business opportunities in the U.S. and Latin America.

Jorge Maortua

Born in 1961. Former executive vice president of Banesto between 2001 and 2003. 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 2009, he was appointed head of the asset management and global private banking division. In 2010 he was appointed head of the global private banking, asset management and insurance division.

Jorge Morán

Born in 1964. He joined the Bank in 2002. He was appointed executive vice president, asset management and insurance, in 2004. In 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 2010 he was appointed chief executive officer of Sovereign and country head of all our businesses in the United States.

José Mª 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 Crédito 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.

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 had 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.

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Javier San Félix

Born in 1967. He joined the Group in 2004 as head of strategic planning. In 2005 he was appointed director and executive vice president of Santander Consumer Finance in Spain and in 2006 he was appointed chief operating officer of the Santander Consumer Finance division. Since May 2012 he has been is the chief executive officer of Banesto.

José Tejón

Born in 1951. He joined the Bank in 1989. In 2002, he was appointed executive vice president, financial accounting and control.

José Antonio Villasante

Born in 1946. His entire professional career has been with Banco Santander, which he joined in 1964. He was appointed senior vice president in 1994 and deputy executive vice president in 2006. He is currently executive vice president, head of Santander Universities global division.

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. In 2011, he was named head of compliance and internal control for the Group’s U.S. operations. He serves as a board member of various U.S. business units.

Jesús Mª 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. He is also member of the Board of Directors of Grupo Finaciero Santander Mexico, S.A.B. de C.V. and Banco Santander Chile.

* * * * * *

For a description of arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any person referred to above was appointed, see Item 7 of Part I, “Shareholders and Related Party Transactions—A. Major Shareholders—Shareholders’ agreements” herein.

B. Compensation

Directors’ compensation

Bylaws stipulated fees

Article 58 of the Bank’s Bylaws approved by the shareholders at their annual general meeting held on June 21, 2008 provided that the annual share in the Bank’s profit for that the directors will be entitled to receive for discharging their duties as members of the board of directors -annual retainer 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.

The amount set by the board of directors for 2012, calculated pursuant to the aforementioned Article 58 of the Bylaws, was 0.321% of the Bank’s profit for 2012 (2011: 0.275% in like-for-like terms).

Article 58 of the Bank’s Bylaws has been amended by our shareholders at their annual general meeting held on March 22, 2013. As a consequence, directors will continue to receive remuneration for undertaking supervision and decision-making responsibilities, consisting of a fixed amount, determined at the general shareholders’ meeting and comprising two components: attendance fees and a yearly assigned amount.

For more information on the amendment of section 2 of article 58 of our Bylaws, see below, “Certain Powers of the Board of Directors”.

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Our amended Bylaws have not yet been filed with the Mercantile Register, which is required prior to their effectiveness. We expect that the amendments will become effective within the first semester of 2013.

At the proposal of the appointments and remuneration committee, the directors at the board meeting held on December 17, 2012 resolved to reduce the annual retainer for 2012 by 15% with respect to the amounts paid out of the profits for 2011.

The amounts received individually by each board member in 2012 and 2011 for each position held on the board and for each position held on a board committee are as follows:

	Euros
	2012		2011
Members of the board of directors		84,954		99,946
Members of the executive committee		170,383		200,451
Members of the audit and compliance committee		39,551		46,530
Members of the appointments and remuneration committee		23,730		27,918
First and fourth deputy chairmen		28,477		33,502

Furthermore, the directors received fees for attending board and committee meetings, excluding executive committee meetings, because 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 2012 as in 2011. These attendance fees were approved by the directors at the board meeting held on December 17, 2007 in the following amounts:

• Board of directors: €2,540 for directors resident in Spain 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 for executive directors

Executive directors received the following salaries for 2012 and 2011 approved by the board at the proposal of the appointments and remuneration committee:

	Thousands of euros
	2012		2011
Emilio Botín		1,344		1,344
Alfredo Sáenz		3,703		3,703
Matías R. Inciarte		1,710		1,710
Ana P. Botín (*)		2,100		1,962
Francisco Luzón (**)		108		1,656
Juan R. Inciarte		987		987
Total		9,952		11,362

(*) On December 20, 2010, the board approved the fixed remuneration for Ana P. Botín to reflect the assumption of her new responsibilities as chief executive officer of Santander UK. Her fixed remuneration was established at €2 million which, at the exchange rate published by the Bank of Spain on the preceding business day, amounts to GBP 1,702 thousand. There was no change to that remuneration in 2012. The amounts shown in the table above are the equivalent values calculated by applying the average exchange rates in those years to the fixed remuneration in pounds sterling.

(**) Retired from the board on January 23, 2012.

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The maximum variable remuneration of the executive directors for 2012 and 2011 approved by the board at the proposal of the appointments and remuneration committee was as follows:

	Thousands of euros
	2012		2011
Emilio Botín		1,412		2,825
Alfredo Sáenz		3,510		7,019
Matías R. Inciarte		2,669		3,568
Ana P. Botín (*)		2,247		2,667
Francisco Luzón		—		3,717
Juan R. Inciarte		1,557		2,082
Total		11,395		21,878

(*) Equivalent euro value of the original amount in pounds sterling.

The amounts shown in the foregoing table reflect the maximum total variable remuneration allocated to the executive directors for each year. These amounts include both the cash-based and share-based variable remuneration (according to the plans adopted for each year) and both the remuneration payable immediately and that which, as the case may be, is payable following a deferral period.

In recent years the Group has aligned its remuneration policy to the new requirements and best practices, increasing the variable remuneration to be deferred and paid in shares, rather than in cash. The following table shows a breakdown of the variable remuneration:

	Thousands of euros
	2012				2011
	Immediate payment		Deferred payment		Immediate payment		Deferred payment
Emilio Botín		564		848		1,130		1,695
Alfredo Sáenz		1,404		2,106		2,808		4,212
Matías R. Inciarte		1,068		1,602		1,427		2,141
Ana P. Botín (*)		898		1,348		1,067		1,600
Francisco Luzón		—		—		1,487		2,230
Juan R. Inciarte		622		934		833		1,249
Total		4,556		6,838		8,752		13,127

(*) Equivalent euro value of the original amount in pounds sterling.

The first cycle of the deferred conditional variable remuneration plan was approved in 2011, whereby payment of a portion of the variable remuneration for 2011 amounting to €13,127 thousand in the aggregate for all executive directors is deferred over three years for it to be paid, where appropriate, in three equal portions, 50% in cash and 50% in Santander shares, provided that the conditions for entitlement to the remuneration are met. Similarly, the portion of the variable remuneration that is not deferred (immediate payment) was paid 50% in cash and 50% in shares. The second cycle of the deferred conditional variable remuneration plan was approved in 2012 under the same payment terms as the previous plan.

The amounts relating to the variable share-based remuneration reflect the equivalent value, at the agreement date, of the maximum number of shares (886,510 shares) that may be received by the directors for their participation in the various plans. The number of shares that each director will actually receive on expiry of each plan will depend on the director’s compliance with the conditions for entitlement thereto (see Note 5.e) to our consolidated financial statements.

A detailed explanation for the 2012 remuneration for each director is provided below. The salaries of the executive directors disclosed in the table below relate to the maximum amounts approved by the board of directors as period remuneration, regardless of the actual year of payment and of any amounts paid to the directors under the agreed deferred remuneration scheme. Note 5.e) to our consolidated financial statements includes disclosures on the shares delivered pursuant to the terms of the deferred remuneration schemes in place in previous years the conditions for delivery of which were met in the applicable years.

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Directors	Thousands of euros
	2012																												2011
	Bylaw-stipulated retainers												Salaries of executive directors												Other remuneration (b)		Total		Total (c)
	Annual retainer								Attendance fees
	Board		Executive Committee		Audit and compliance committee		Appointments and remuneration committee		Board		Other fees
													Fixed remuneration		Variable - immediate payment				Variable - deferred payment (a)				Total
															In cash		In shares		In cash		In shares
Emilio Botín		85		170		—		—		25		4		1,344		282		282		424		424		2,756		20		3,061		4,505
Fernando de Asúa		113		170		40		24		25		195		—		—		—		—		—		—		—		567		625
Alfredo Sáenz		85		170		—		—		25		4		3,703		702		702		1,053		1,053		7,213		740		8,237		11,604
Matías R. Inciarte		85		170		—		—		25		160		1,710		534		534		801		801		4,380		334		5,154		6,015
Manuel Soto (9)		113		—		40		24		25		150		—		—		—		—		—		—		—		352		274
Assicurazioni Generali, SpA. (1)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		108
Antonio Basagoiti (2)		21		42		—		—		8		44		—		—		—		—		—		—		—		115		498
Ana P. Botín		85		170		—		—		23		4		2,100		449		449		674		674		4,346		512		5,140		5,010
Javier Botín (3)		85		—		—		—		23		—		—		—		—		—		—		—		—		108		130
Lord Burns (Terence)		85		—		—		—		21		—		—		—		—		—		—		—		—		106		119
Vittorio Corbo (4)		85		—		—		—		21		—		—		—		—		—		—		—		—		106		53
Guillermo de la Dehesa		85		170		—		24		25		15		—		—		—		—		—		—		—		320		377
Rodrigo Echenique		85		170		40		24		25		32		—		—		—		—		—		—		40		415		480
Antonio Escámez (2)		21		42		—		—		8		45		—		—		—		—		—		—		2		118		528
Esther Giménez-Salinas (5)		64		—		—		—		18		—		—		—		—		—		—		—		—		82		—
Ángel Jado		85		—		—		—		25		—		—		—		—		—		—		—		—		110		133
Francisco Luzón (6)		5		11		—		—		3		—		108		—		—		—		—		108		3		130		6,792
Abel Matutes		85		—		40		—		25		19		—		—		—		—		—		—		—		169		198
Juan R. Inciarte		85		—		—		—		25		99		987		311		311		467		467		2,543		183		2,937		3,413
Luis Ángel Rojo (7)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		85
Luis Alberto Salazar-Simpson (2)		21		—		10		—		8		6		—		—		—		—		—		—		—		44		198
Isabel Tocino (8) (9)		85		—		—		24		25		123		—		—		—		—		—		—		—		257		148
Total 2012		1,464		1,287		168		119		409		900		9,952		2,278		2,278		3,419		3,419		21,347		1,833		27,528		—
Total 2011		2,046		2,005		251		135		575		909		11,362		4,376		4,376		6,564		6,564		33,242		2,133		—		41,293

(1) Retired from the board on October 24, 2011.

(2) Retired from the board on March 30, 2012.

(3) Amounts contributed to Marcelino Botín Foundation.

(4) Board member since July 22, 2011.

(5) Board member since March 30, 2012.

(6) Retired from the board on January 23, 2012.

(7) Deceased on May 24, 2011.

(8) Member of the appointments and remuneration committee since July 21, 2011.

(9) Member of the risk committee since March 30, 2012.

(a) Maximum deferred variable remuneration for the period approved by the board of directors, at the related meetings, for each of the directors.

(b) Includes, inter alia, the life and medical insurance costs borne by the Group relating to Bank directors.

(c) Includes the corresponding deferred variable remuneration.

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Compensation for service on other boards as representatives of the Bank

By resolution of the executive committee, all the remuneration received by the Bank’s directors who represent the Bank on the boards of directors of listed companies in which the Bank has a stake (at the expense of those companies) and which relates to appointments made after March 18, 2002, will accrue to the Group. In 2012 and 2011 the Bank’s directors did not receive any remuneration in respect of these representative duties.

Emilio Botín ceased to discharge his duties as director of Shinsei Bank, Ltd. on 23 June 2009. In 2008, 2007, 2006 and 2005 he 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, 2012, the market price of the Shinsei share was JPY 171 and, therefore, the options granted would not have given rise to any gains had they been exercised.

Furthermore, other directors of the Bank received a total of € 1,317 thousand in 2012 as members of the boards of directors of Group companies (2011: € 1,413 thousand), the detail being as follows: Lord Burns received € 708 thousand as non-executive chairman of the board of directors of Santander UK Plc.; Antonio Basagoiti received € 120 thousand as non-executive chairman of the board of directors of Banesto and in bylaw stipulated directors’ fees, from the beginning of 2012 until March 30, 2012, when he retired as director of Banco Santander; Matías R. Inciarte received € 42 thousand as non-executive director of U.C.I., S.A., and Vittorio Corbo received € 119 thousand as non-executive director of Banco Santander Chile, € 321 thousand for advisory services provided to that entity and € 7 thousand as non-executive director of Grupo Financiero Santander México, S.A.B. de C.V.

Pension commitments, other insurance and other items of directors

At December 31, 2011, in the event of early retirement or retirement the executive directors had the right to receive a supplementary pension which could be externalized by the Bank.

The following table provides information on the pension obligations assumed and covered by the Group in respect of the Bank’s current executive directors at December 31, 2011:

	Thousands of euros (*)
	2011
Emilio Botín		25,400
Alfredo Sáenz		87,758
Matías R. Inciarte		45,224
Ana P. Botín		31,856
Juan R. Inciarte		12,309
		202,547

(*) In addition, as of December 31, 2011, the Group had assumed pension obligations to Francisco Luzón amounting to €63,608 thousand. He took voluntary pre-retirement and resigned from his positions as director and executive vice president of the Bank in January 2012, and opted to receive his accrued pre-retirement pension (€2.8 million) as a lump sum, in accordance with the following schedule: €2.5 million in 2012 and €0.1 million each year in 2013, 2014 and 2015. In 2013, having reached retirement age, Francisco Luzón requested to receive his pension as a lump sum. Under the settlement agreement, the portion of the pension not relating to variable remuneration is paid in cash; the portion relating to accrued variable remuneration is paid in cash and must be invested in Santander shares subject to retention; and the portion of the pension relating to unaccrued variable remuneration is invested by the Bank in Santander shares and will or will not be delivered to Francisco Luzón (subject to retention) depending on whether the variable remuneration finally accrues to him (see Note 5.h) to our consolidated financial statements.

The contracts of the executive directors and the other members of the Bank’s senior management prior to the amendment mentioned below granted senior executives the right, on the date of retirement, or prior to that date, from the age of 60, to opt to receive the accrued pensions -or amounts similar thereto- in the form of an annuity or a lump sum, i.e. in one single payment. The exercise of this option meant, in all cases, that no further pension benefit would accrue and, from the date of economic effect of exercising the option, the lump sum to be received, which would be updated at the agreed-upon interest rate, would be fixed. Since the aforementioned option has been exercised, the amounts included in the foregoing table in respect of the directors Emilio Botín, Alfredo Sáenz and Matías R. Inciarte are those relating to the aforementioned lump sums.

171

In 2012, under the framework of the measures implemented by the Group in order to mitigate the risks arising from the defined-benefit pension obligations payable to certain employees, which led to an agreement with the workers’ representatives to convert the defined-benefit obligations existing under the collective agreement into defined-contribution plans (see Note 25 to our consolidated financial statements), the contracts of the executive directors and the other members of the Bank’s senior management -the senior executives- which provided for defined-benefit pension obligations were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander Seguros y Reaseguros, Compañía Aseguradora, S.A. Under the new system, the executive directors are granted the right to receive a pension benefit upon retirement which is based on the contributions made to the aforementioned system and supersedes the right to receive a pension supplement which had hitherto been payable to them upon retirement. The new system expressly excludes any obligation of the Bank to the executive directors other than the conversion of the current system into the new employee welfare system and, as the case may be, the annual contributions to be made as described below. In the event of pre-retirement, the executive directors who have not exercised the option described in the preceding paragraph are entitled to an annual retainer until the date of retirement.

A detail of each of the executive directors’ beginning balance under the new employee welfare system is provided below. This balance reflects the market value, at the date of conversion of the pension obligations under the new employee welfare system, of the assets in which the provisions for the respective accrued obligations had been invested.

	Thousands of euros
Emilio Botín		25,566
Alfredo Sáenz		88,174	(*)
Matías R. Inciarte		45,524
Ana P. Botín		34,941	(*)
Juan R. Inciarte		12,824
		207,029

(*) Includes the amounts relating to the period of the provision of services at Banesto, externalized with another insurance company.

From 2013 onwards, the Bank will make annual contributions to the employee welfare system for the benefit of the executive directors and senior executives, in proportion to their individual pensionable bases, until they leave the Group, or until their retirement from the Group, death or disability (including, as the case may be, during the pre-retirement period). No contributions will be made for the executive directors and senior executives who have exercised the aforementioned option prior to the conversion of the defined-benefit pension obligations into the defined-contribution employee welfare system.

The terms of the employee welfare system regulate the impact of the deferral of the computable variable remuneration on the benefit payments covered by the system upon retirement and, as the case may be, the retention of shares arising from such remuneration.

The Group also continues to have pension obligations to other directors amounting to €18 million (December 31, 2011: €39 million). The payments made in 2012 to the members of the board entitled to post-employment benefits amounted to €1.6 million (2011: €2.6 million).

Pension provisions recognized in 2012 amounted to €2,166 thousand (2011: €7,826 thousand recognized and €886 thousand reversed).

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The Group has taken out life insurance policies for the Bank’s directors, who will be entitled to receive benefits if they are declared disabled; in the event of death, the benefits will be payable to their heirs. The premiums paid by the Group are included in the Other remuneration column of the table shown in Note 5.a.iii to our consolidated financial statements. Also, the following table provides information on the sums insured for the Bank’s executive directors:

	Thousands of euros
	2012		2011
Emilio Botín		—		—
Alfredo Sáenz		11,108		11,108
Matías R. Inciarte		5,131		5,131
Ana P. Botín		6,000		988
Francisco Luzón		—		9,934
Juan R. Inciarte		2,961		2,961
		25,200		30,122

Additionally, other directors have life insurance policies the cost of which is borne by the Group, the related insured sum being €1.4 million at December 31, 2012 (2011: €3 million).

Share-based payments to executive directors

Following is a description of the various share delivery plans instrumenting the directors’ share-based deferred variable remuneration. For more information on these plans see Note 47 to our consolidated financial statements:

i) Performance share plan

This plan involves successive three-year cycles of share deliveries to the beneficiaries, as part of their variable remuneration for the year in which each cycle begins, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end. Following the changes implemented in 2011 to the remuneration policy for the executive directors, the latter ceased to be beneficiaries of the cycle approved in 2011 and of any successive cycles which are approved.

The table below shows the maximum number of options granted to each executive director in each cycle and the number of shares received in 2012 and 2011 under the I12 and I11 incentive plans (Plans I12 and I11), respectively. As established in these plans, the number of shares received was determined by the degree of achievement of the targets to which each plan was tied, and all plans fell short of the maximum number.

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	Options at January 1,2011		Shares delivered in 2011 (number)			Options cancelled in 2011 (number)			Options at December 31, 2011		Shares delivered in 2012 (number)			Options cancelled in 2012 (number)			Options at December 31, 2012		Grant date	Share delivery deadline
Plan I11:
Emilio Botín		68,848		59,209			(9,639	)		—		—			—			—	06/21/08	07/31/11
Alfredo Sáenz		189,628		163,080			(26,548	)		—		—			—			—	06/21/08	07/31/11
Matías R. Inciarte		87,590		75,327			(12,263	)		—		—			—			—	06/21/08	07/31/11
Ana P. Botín (1)		46,855		40,295	(2)		(6,560	)		—		—			—			—	06/21/08	07/31/11
Francisco Luzón (3)		77,083		66,291			(10,792	)		—		—			—			—	06/21/08	07/31/11
Juan R. Inciarte		50,555		43,477			(7,078	)		—		—			—			—	06/21/08	07/31/11
		520,559		447,679			(72,880	)		—		—			—			—
Plan I12:
Emilio Botín		82,941		—			—			82,941		24,882			(58,059	)		—	06/19/09	07/31/12
Alfredo Sáenz		228,445		—			—			228,445		68,534			(159,911	)		—	06/19/09	07/31/12
Matías R. Inciarte		105,520		—			—			105,520		31,656			(73,864	)		—	06/19/09	07/31/12
Ana P. Botín (1)		56,447		—			—			56,447		16,934	(4)		(39,513	)		—	06/19/09	07/31/12
Francisco Luzón (3)		92,862		—			—			92,862		—			(92,862	)		—	06/19/09	07/31/12
Juan R. Inciarte		60,904		—			—			60,904		18,271			(42,633	)		—	06/19/09	07/31/12
		627,119		—			—			627,119		160,277			(466,842	)		—
Plan I13
Emilio Botín		82,941		—			—			82,941		—			—			82,941	06/11/10	07/31/13
Alfredo Sáenz		228,445		—			—			228,445		—			—			228,445	06/11/10	07/31/13
Matías R. Inciarte		105,520		—			—			105,520		—			—			105,520	06/11/10	07/31/13
Ana P. Botín (1)		56,447		—			—			56,447		—			—			56,447	06/11/10	07/31/13
Francisco Luzón (3)		92,862		—			—			92,862		—			(92,862	)		—	06/11/10	07/31/13
Juan R. Inciarte		60,904		—			—			60,904		—			—			60,904	06/11/10	07/31/13
		627,119		—			—			627,119		—			(92,862	)		534,257

(1) Without prejudice to the Banesto shares corresponding to Ana P. Botín by virtue of the various Banesto Share-Based Incentive Plans approved by the shareholders at the general meeting of Banesto (a maximum of 32,358 Banesto shares relating to her participation in the Banesto Share-Based Incentive Plan expiring in 2013).

(2) In 2011 Ana P. Botín received a further 10,786 Banesto shares relating to her participation in the Banesto Share-Based Incentive Plan approved by the shareholders at the annual general meeting of Banesto held on February 24, 2010.

(3) Following his resignation on January 23, 2012, Francisco Luzón lost his entitlement arising from his participation in these plans since he did not meet all the conditions stipulated for the shares to be received.

(4) In 2012 Ana P. Botín received a further 14,022 Banesto shares relating to her participation in the Banesto Share-Based Incentive Plan approved by the shareholders at the annual general meeting of Banesto held on February 24, 2010.

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ii) Obligatory investment share plan

Pursuant to the obligatory investment share plan (see Note 47 to our consolidated financial statements), and also as part of the deferred share-based variable remuneration for each period, the current executive directors acquired, 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 aggregate investment of €1.5 million in 2008, €0.8 million in 2009 and €1.5 million in 2010. Executive directors who hold the shares acquired through the obligatory investment and remain in the Group’s employ for three years from the date on which the obligatory investment is made 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 exist: (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, where applicable to the executive in question; or (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards.

	Maximum number of shares to be delivered
	3rd cycle 2010-2012		2nd cycle 2009-2011		1st cycle 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 (1)		18,446		16,956		13,610
Francisco Luzón (2)		—		—		22,214
Juan R. Inciarte		15,142		14,738		14,617
		128,952		124,513		124,266

(1) 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 corresponding to Ana P. Botín for the 2008-2010 cycle is that shown in the foregoing table. Also, the maximum number of shares corresponding to Ana Patricia Botín 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.

(2) Following his resignation on January 23, 2012, Francisco Luzón lost his entitlement to receive the shares relating to the second and third cycles of this plan since he did not meet all the conditions stipulated for the shares to be received.

Since the condition to retain the shares acquired and the additional requirement to stay in the Group for three years had been complied with, in March 2011 and February 2012, as approved by the board, at the proposal of the appointments and remuneration committee, the gross number of shares detailed in the foregoing table relating to the first and second cycles accrued to the executive directors, which is equivalent to the number of shares initially acquired by them. Also, the shares relating to the third cycle have been delivered in March 2013, once compliance with the conditions for delivery thereof has been verified.

iii) 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 remuneration for 2010 of the executive directors and executives and employees of Santander Group whose variable remuneration or annual bonus for 2010 generally exceeded €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.

In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the share-based deferred remuneration is conditional upon none of the following circumstances existing, in the opinion of the board of directors, during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) 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.

175

The share-based bonus will be deferred over three years and will be paid, where appropriate, in three installments starting in the first year.

The number of shares allocated to each executive director for deferral purposes, the shares delivered in 2012 (first third) and in February 2013 (second third), once the conditions for receiving them have been met, are as follows:

	Number of shares deferred on bonus for 2010		Number of shares delivered in 2012 (1st third)		Number of shares delivered in 2013 (2nd third)
Emilio Botín		94,345		31,448		31,448
Alfredo Sáenz		312,450		104,150		104,150
Matías R. Inciarte		135,188		45,063		45,063
Ana P. Botín (*)		91,187		30,395		30,395
Francisco Luzón (**)		154,981		51,660		51,660
Juan R. Inciarte		61,386		20,462		20,462

(*) Shares of Banesto, as authorized by the shareholders of that entity at the annual general meeting of February 23, 2011.

(**) On January 23, 2012, Francisco Luzón took pre-retirement and resigned from his positions as director and head of the Americas division. In accordance with the plan regulations, Francisco Luzón retains the right to receive, if appropriate, 51,660 shares in 2014, subject to compliance with the conditions established in the plan for them to be received.

iv) Deferred conditional variable remuneration plan

Variable remuneration for 2011

The shareholders at the annual general meeting of June 17, 2011 approved the first cycle of the deferred conditional variable remuneration plan in relation to the variable remuneration or bonus for 2011 of the executive directors and certain executives (including senior management) and employees who assume risks, perform control functions or receive an overall remuneration which puts them on 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 Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors on December 10, 2010).

The purpose of this first cycle is to defer a portion of the variable remuneration or bonus of the beneficiaries thereof over a period of three years for it to be paid, where appropriate, in cash and in Santander shares; the other portion of the variable remuneration is also to be paid in cash and Santander shares, upon commencement of the cycle, in accordance with the rules set forth below.

The variable remuneration will be paid in accordance with the following percentages, based on the timing of the payment and the group to which the beneficiary belongs (the “immediate payment percentage” identifies the portion of the bonus for which payment is not deferred, and the “deferred percentage” identifies the portion of the bonus for which payment is 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%

The payment of the deferred percentage of the bonus applicable in each case will be deferred over a period of three years and will be paid in thirds, within fifteen days following the anniversaries of the initial date in 2013, 2014 and 2015, 50% being paid in cash and 50% in shares, provided that the conditions listed below are met.

In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan terms, the accrual of the deferred remuneration is conditional upon none of the following circumstances existing—as determined by the board of directors and following a proposal of the appointments and remuneration committee-, during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) 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 the Group’s economic capital or risk profile.

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On each delivery, the beneficiaries will be paid an amount in cash equal to the dividends paid for the amount deferred in shares and the interest on the amount deferred in cash.

The maximum number of shares to be delivered is calculated taking into account the amount resulting from applying the applicable taxes and the volume-weighted average prices for the 15 trading sessions prior to the date on which the board of directors approves the bonus for the Bank’s executive directors for 2011.

The number of Santander shares allocated as variable remuneration to each executive director, distinguishing between those which were delivered in 2012 (immediate payment) and those subject to a three-year deferral, is shown in the table below.

In January 2013, at the proposal of the appointments and remuneration committee and, considering that the conditions for delivery had been met, the board approved the accrual of the first third of the plan and, accordingly, in February 2013 the cash has been paid and the shares corresponding to the first third have been delivered. These amounts are shown in the following table:

	Immediate payment (shares delivered in 2012)		Deferred payment (maximum number of shares to be delivered)		Cash paid in 2013 (1st third) (Thousands of euros)			Number of shares delivered in 2013 (1st third)
Emilio Botín		99,552		149,327		282			49,776
Alfredo Sáenz		247,366		371,049		702			123,683
Matías R. Inciarte		125,756		188,634		357			62,878
Ana P. Botín		94,002		141,002		286	(2)		47,001
Francisco Luzón (1)		130,996		196,494		371			65,498
Juan R. Inciarte		73,380		110,070		208			36,690
		771,052		1,156,576		2,206			385,526

(1) On January 23, 2012, Francisco Luzón took pre-retirement and resigned from his positions as director and head of the Americas division. In relation to his 2011 variable remuneration to be received in cash and in Santander shares, the board resolved, at the committee’s proposal, to deliver him €743 thousand and 130,996 shares as an immediate payment. The deferred amount in cash and in shares relating to the first third will be paid in February 2013 and the rest will be paid, if appropriate, on the dates and under the conditions approved by the board (€248 thousand and 65,498 shares of the Bank in 2014 and 2015). Upon each delivery of shares and, therefore, subject to the same requirements, he will be paid an amount in cash equal to the dividends paid on those shares and, if the Santander Dividendo Elección programme is applied, the price offered by the Bank for the bonus share rights relating to the aforementioned shares.

(2) Euro equivalent value of the original amount in pounds sterling.

Variable remuneration for 2012

The shareholders at the annual general meeting of March 30, 2012 approved the second cycle of the deferred conditional variable remuneration plan in relation to the variable remuneration or bonus for 2012 of the executive directors and certain executives (including senior management) and employees who assume risks, perform control functions or receive an overall remuneration which puts them on 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 Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors on December 10, 2010), under the same conditions as the first cycle.

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The number of Santander shares allocated to each executive director as variable remuneration, distinguishing between those which are delivered immediately and those subject to a three-year deferral, is as follows:

	Maximum number of shares to be delivered
	Immediate payment		Deferred payment (*)		Total
Emilio Botín		43,952		65,927		109,879
Alfredo Sáenz		109,211		163,867		273,028
Matías R. Inciarte		83,059		124,589		207,648
Ana P. Botín		69,916		104,874		174,790
Juan R. Inciarte		48,466		72,699		121,165
		354,604		531,906		886,510

(*) In three years: 2014, 2015 and 2016, subject to continued service, with the exceptions provided for in the plan terms, and compliance with the conditions relating to the first cycle.

Compensation for the senior management who are not also executive directors on our board

Following is a detail of the maximum remuneration approved for the Bank’s executive vice presidents (*) in 2012 and 2011:

	Number of managers (1)		Thousands of euros
			Salaries													Other remuneration(4)		Total
			Fixed		Variable - Immediate payment					Variable - Deferred payment				Total
					In cash			In shares		In cash		In shares
2011		22		23,095		12,584	(2)		12,584		12,584		12,584		73,431		7,887		81,318
2012		24		24,580		10,689	(3)		10,689		10,769		10,769		67,495		6,615		74,110

(*) 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 remuneration for the full year regardless of the number of months in which the position of executive vice president was occupied.

(2) The shareholders at the annual general meeting of June 17, 2011 approved the first cycle of the deferred conditional variable remuneration plan, whereby payment of a portion of the variable remuneration for 2011 amounting to €25,168 thousand would be deferred over three years for it to be paid, where appropriate, in three equal portions, 50% in cash and 50% in Santander shares, provided that the conditions for entitlement to the remuneration are met. Similarly, the portion of the variable remuneration that is not deferred will be paid 50% in cash and 50% in shares.

(3) At the annual general meeting on March 30, 2012, the shareholders approved the second cycle of the deferred conditional variable remuneration plan, whereby a portion of the variable remuneration for 2012 amounting to €21,298 thousand will be deferred over three years under the same deferral and payment conditions as the first cycle.

(4) Includes other remuneration items, such as life insurance premiums amounting to €1,355 thousand (2011: €1,104 thousand) and payments of termination or retirement benefits.

Following is a detail of the maximum number of Santander shares that the Bank’s executive vice presidents (excluding executive directors) were entitled to receive at December 31, 2012 and 2011 relating to the deferred portion of their compensation under the various plans then in force (see Note 47 to our consolidated financial statements):

Maximum number of shares to be delivered	December 31, 2012		December 31, 2011
Plan I12 (1)		—		1,468,762
Plan I13 (2)		1,463,987		1,468,762
Second cycle of obligatory investment		—		452,994
Third cycle of obligatory investment		286,327		293,140
Deferred conditional delivery plan (3) Deferred conditional variable remuneration plan (2011) (4)		980,780 2,076,477		1,496,628 2,119,944
Deferred conditional variable remuneration plan (2012) (5)		1,622,485		—

(1) In addition, they were entitled to a maximum of 29,951 Banesto shares at December 31, 2011.

(2) In addition, they were entitled to a maximum of 114,160 Banesto shares at December 31, 2012 (December 31, 2011: 44,926 Banesto shares).

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(3) In addition, they were entitled to a maximum of 14,705 Banesto shares at December 31, 2012 (December 31, 2011: 3,364 Banesto shares).

(4) In addition, they were entitled to a maximum of 123,973 Banesto shares and 79,696 Santander Brasil shares at December 31, 2012 (December 31, 2011: 97,515 Santander Brasil shares).

(5) In addition, they were entitled to a maximum of 61,328 Santander Brasil shares at December 31, 2012 and a maximum of 500,000 options on Santander Brasil shares at December 31, 2012 and 2011 under the share option plan approved in 2011, exercise of which, subject to the plan‘s terms and conditions, may commence in July 2014.

In 2012 and 2011, since the conditions established in the related deferred share-based remuneration schemes corresponding to prior years had been met, the following number of Santander shares was delivered to the executive vice presidents:

Number of shares delivered	2012			2011
Plan I11		—			1,042,130	(1)
Plan I12		439,195	(2)		—
First cycle of obligatory investment		—			232,852
Second cycle of obligatory investment		442,319			—
Deferred conditional delivery plan (2010)		490,338	(3)		—

(1) In addition, 14,975 Banesto shares were delivered.

(2) In addition, 49,469 Banesto shares were delivered.

(3) In addition, 14,705 Banesto shares were delivered.

The actuarial liability recognized in respect of post-employment benefits earned by the Bank’s executive vice presidents totaled €267 million at December 31, 2011.

Settlements of €10.7 million took place in 2012. The net charge to the consolidated income statement amounted to €17.5 million in 2012 (2011: €29 million).

As indicated in Note 5.c) to our consolidated financial statements, in 2012 the contracts of senior executives of the Bank, which provided for defined-benefit pension obligations, were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander Seguros y Reaseguros, Compañía Aseguradora, S.A. Under the new system, the executive directors are granted the right to receive a pension benefit upon retirement which is based on the contributions made to the aforementioned system and supersedes the right to receive a pension supplement which had hitherto been payable to them upon retirement. The new system expressly excludes any obligation of the Bank to the executives other than the conversion of the current system into the new employee welfare system and, as the case may be, the annual contributions to be made. In the event of pre-retirement, the senior executives who have not exercised the option described in Note 5.c to our consolidated financial statements are entitled to an annual retainer until the date of retirement.

The executive directors’ beginning balance under the new employee welfare system amounted to €287 million. This balance reflects the market value, at the date of conversion of the pension obligations under the new employee welfare system, of the assets in which the provisions for the respective accrued obligations had been invested.

Additionally, the total sum insured under life and accident insurance policies relating to this group amounted to €73 million at December  31, 2012 (December 31, 2011: €66 million).

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.

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The date of expiration of the current term of office is shown in the table below:

Name	Date of expiration (1)
Emilio Botín	1st half 2015
Fernando de Asúa	1st half 2016
Alfredo Sáenz	1st half 2014
Matías R. Inciarte	1st half 2015
Manuel Soto	1st half 2015
Ana P. Botín	1st half 2014
Javier Botín	1st half 2016
Lord Burns	1st half 2014
Vittorio Corbo	1st half 2014
Guillermo de la Dehesa	1st half 2015
Rodrigo Echenique	1st half 2014
Esther Giménez-Salinas	1st half 2014
Ángel Jado.	1st half 2016
Abel Matutes	1st half 2015
Juan R. Inciarte	1st half 2015
Isabel Tocino	1st half 2016

(1) Pursuant to the provisions of our Bylaws, one-third of the board will be renewed every year, based on length of service and according to the date and order of their respective appointments.

At the annual general meeting held on March 22, 2013, the shareholders passed the resolutions of re-electing for a term of three years the following directors: Guillermo de la Dehesa, Abel Matutes, Ángel Jado, Javier Botín, Isabel Tocino and Fernando de Asúa.

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.

Likewise, the contracts of the executive directors provide for certain prohibitions against competition and the taking of clients, employees and suppliers that may be enforced after the termination thereof.

(ii) Code of conduct

Executive directors are required to strictly observe the provisions contained in the 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.

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(iii) Remuneration

Set forth below is the remuneration system applied in 2012 to determine the remuneration of directors for the performance of duties of supervision and collective decision-making as well as for the performance by the executive directors of other duties⁶.

i) Composition and limits

The directors share in the profits from the financial year for the performance of duties of supervision and collective decision-making through By-law-mandated payments, which are made up of an annual allotment and attendance fees.

The By-laws set the aforementioned share as an amount equal to one per cent of the net profits obtained by the Bank for the financial year, although the board may resolve to reduce such percentage annually. Moreover, payment thereof requires that the priority payments established by applicable law (such as, for instance, allocations to reserves required under the equity rules for financial institutions) be paid first.

The specific amount payable to each of the directors for the aforementioned items is determined by the board of directors. To such end, all positions held by each director on the board itself as well as membership in and attendance at board meetings and meetings of the various committees are taken into account.

ii) Annual allotment

In 2012, the board, resolved to reduce the annual allotment payable to its members for the financial year for performing the duties of supervision and collective decision-making by 15% compared to the prior year, which in turn was 6% less than the amount paid for the 2010 results.

The amounts received individually by the directors for the most recent financial years based on the positions held on the board and for belonging to the various committees thereof were as follows:

Amount in euros Amounts per director:	2012		Change (%)			2011		Change (%)			2010, 2009 and 2008
Members of the board of directors		84,954		-15.00	%		99,946		-6.00	%		106,326
Members of the executive committee		170,383		-15.00	%		200,451		-6.00	%		213,246
Members of the audit and compliance committee		39,551		-15.00	%		46,530		-6.00	%		49,500
Members of the appointments and remuneration committee		23,720		-15.00	%		27,918		-6.00	%		29,700
First and fourth vice-chairmen		28,477		-15.00	%		33,502		-6.00	%		35,640

iii) Attendance fees

By resolution of the board, upon a proposal of the appointments and remuneration committee, the amount of attendance fees applicable to meetings of the board and the committees thereof—excluding the executive committee, for which no fees are established—was the same in financial years 2008, 2009, 2010, 2011 and 2012 and will likewise remain unchanged from January 1, 2013 onwards.

⁶  Remuneration for duties other than executive duties and beyond those of a mere director (for example, for the provision of professional advisory services by non-executive directors) is analyzed by the appointments and remuneration committee in order to submit the corresponding proposal to the board.

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The respective amounts paid during the financial years mentioned in the preceding paragraph are as follows:

Amount in euros Attendance fees per meeting	2013 - 2008
Board of Directors		2,540
Resident directors		2,057
Non-resident directors
Risk committee and audit and compliance committee		1,650
Resident directors		1,335
Non-resident directors
Other committees		1,270
Resident directors		1,028
Non-resident directors

The principles applied in 2012 to remuneration of the directors for the performance of executive duties were the following:

• Fixed remuneration represented a significant proportion of total remuneration.

• The variable remuneration of executive directors was determined on the basis of the achievement of targets set in terms of budgeted net profits, rorac, and additional qualitative factors:

a) Quantitative targets. There is an evaluation of the achievement of annual targets for net profits and rorac (both adjusted for extraordinary results and special write-downs). These targets are the best indicators of the ability to generate recurring results and to assume allowances in the event of adverse circumstances. A distinction is made between executive directors with general management duties within the Group and those entrusted with the management of a specific business division. The paramount factor in the case of the former is the Group’s net profits and rorac, and in the case of the latter, the net profits of the division managed by the director in question.

b) Additional qualitative factors or targets. In addition to the foregoing, and in order to take into account a qualitative assessment of results and alignment with the interests of the shareholders, the following factors are taken into account:

i. Comparison of the results obtained by each division and the Group with those of peer institutions (benchmarking).

ii. Appropriate risk management (including the risk of losses, liquidity, capital, concentration and reputational), the quality and recurrence of results, as well as the general environment of compliance and control.

iii. Other significant factors in the management of the Group, such as the evolution of core capital, economic capital, and the balance sheet.

Form of payment of the variable remuneration of executive directors:

• 40% of the variable remuneration is paid, net of taxes (or withholdings), half in cash and half in shares, which shares must be held for one year.

• Deferral of 60% of variable remuneration for three years, payment of which is subject to the satisfaction of certain conditions (continuity within the Group and bad actor provisions).

After deduction of applicable taxes (or withholdings), the net amount of the deferred remuneration, if any, shall be paid in thirds, on the first, second and third anniversary, 50% in cash and the other 50% in Santander shares, which shares may not be sold until the passage of one year in each case.

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Hedging the value of the Santander shares received during the deferral and retention period is expressly forbidden.

For more information see “Item 6. Directors, senior management and employees—B. Compensation” herein.

(iv) 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. In any other termination event, the executive directors indicated below will be eligible for the following rights:

• In the case of Ana P. Botín: to take pre-retirement, earning an annual payment. At December 31, 2012, this annual retainer would amount to €2,645 thousand (December 31, 2011: €2,557 thousand).

• In the case of Juan R. Inciarte: to take pre-retirement, earning an annual payment. At December 31, 2012, this annual payment would amount to €987 thousand (December 31, 2011: €948 thousand).

If Ana P. Botín or Juan R. Inciarte take pre-retirement, they have the right to opt to receive the annual retainers in the form of an annuity or a lump sum -i.e. in a single payment- in full but not in part.

If the other executive directors’ contracts are terminated for any reason, they may take retirement and, therefore, claim from the insurer the benefits accrued to them under the externalized employee welfare system described in Note 5.c, with no obligation whatsoever being incumbent upon the Bank in such circumstances.

(v) Insurance

The Group has taken out life insurance policies for the Bank’s directors, who will be entitled to receive benefits if they are declared disabled; in the event of death, the benefits will be payable to their heirs. The premiums paid by the Group are included in the Other remuneration column of the table shown in Note 5.a.iii to our consolidated financial statements. Also, the following table provides information on the sums insured for the Bank’s executive directors:

	Thousands of euros
	2012		2011
Emilio Botín		—		—
Alfredo Sáenz		11,108		11,108
Matías R. Inciarte		5,131		5,131
Ana P. Botín		6,000		988
Francisco Luzón		—		9,934
Juan R. Inciarte		2,961		2,961
		25,200		30,122

For more information see “Item 6. Directors, senior management and employees—A. Directors and senior management”.

(vi) Confidentiality and return of documents

A strict duty of confidentiality is established during the relationship and following termination thereof, pursuant to which executive directors must return to the Bank the documents and items related to their activities that are in their possession.

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(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.

Advance notice period	Date of current contract (month/day/year)		By decision of the Bank (months)			By decision of the director (months)
Emilio Botín		12/26/2012		(	*)		(	*)
Alfredo Sáenz		12/26/2012		(	*)		(	*)
Matías R. Inciarte		12/26/2012		4			4
Ana P. Botín		12/26/2012		4			4
Juan R. Inciarte		12/26/2012		4			4

(*) 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 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). The appointments and remuneration committee consists of five 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 Bylaws 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 fourth vice chairman of the board of directors.

The members of the audit and compliance committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitude and experience in the areas of accounting, auditing or risk management.

Functions of the audit and compliance committee:

a) Have its chairman and/or secretary report to the general shareholders’ meeting with respect to matters raised therein by shareholders regarding its powers.

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;

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(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.

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 12⁷.

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.

⁷  Now Legislative Royal Decree 1/2011, of July 1, approving the Consolidated Audit Act.

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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 Group’s Code of Conduct 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.

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 2012 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

Ignacio Benjumea acts as secretary to the audit and compliance committee, but is classified as a non-member.

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The appointments and remuneration committee:

The Rules and Regulations of the Board state that the members of this committee must all be non-executive directors with independent directors (as defined in the Rules and Regulations of the Board) having a majority representation including an independent director as chairman (as defined in the Rules and Regulations of the Board).

Currently, the chairman of the appointments and remuneration committee is Fernando de Asúa, the first vice chairman of the board of directors.

The members of the appointments and remuneration committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitudes and experience and the goals of the committee.

Functions of the appointments and remuneration committee:

a) Establish and review the standards to be followed in order to determine the composition of the board and select those persons who will be proposed for election to serve as directors. In particular, the appointments and remuneration committee:

(i) Shall evaluate the competencies, knowledge and experience required of the director;

(ii) Shall specify the duties and the aptitudes needed of the candidates to fill each vacancy, evaluating the time and dedication needed for them to properly carry out their commitments; and

(iii) Shall receive for consideration the proposals of potential candidates to fill vacancies that might be made by the directors.

b) Prepare the proposals for appointment, re-election and ratification of directors provided for the Rules and Regulations of the Board, as well as the proposals for appointment of the members of each of the committees of the board of directors. Likewise, it shall prepare, the proposals for the appointment of positions on the board of directors and its committees.

c) Annually verify the classification of each director (as executive, proprietary, independent or other) for the purpose of their confirmation or review at the ordinary general meeting and in the annual corporate governance report.

d) Report on proposals for appointment or withdrawal of the secretary of the board, prior to submission thereof to the board.

e) Report on appointments and withdrawals of the members of senior management.

f) Propose to the board:

(i) The policy for compensation of directors and the corresponding report.

(ii) The policy for compensation of the members of senior management.

(iii) The individual compensation of the directors.

(iv) The individual compensation of the executive directors and, if applicable, external directors, for the performance of duties other than those of a mere director, and other terms of their contracts.

(v) The basic terms of the contracts and compensation of the members of senior management.

(vi) The remuneration of those other officers who, though not members of senior management, receive significant compensation, particularly variable compensation and whose activities may have a significant impact on the assumption of risk by the Group.

g) Ensure compliance with the policy established by the Company for compensation of the directors and the members of senior management.

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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 Group’s Code of Conduct 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 2012 appointments and remuneration committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Committees report”.

The following are the members of the appointments and remuneration committee:

Name	Position
Fernando de Asúa	Chairman
Manuel Soto	Member
Guillermo de la Dehesa	Member
Rodrigo Echenique	Member
Isabel Tocino	Member

Ignacio Benjumea acts as secretary to the appointments and remuneration committee but is classified as a non-member.

D. Employees

As of December 31, 2012, we had 186,763 employees (as compared to 193,349 in 2011 and 178,869 in 2010) of which 34,862 were employed in Spain (as compared to 35,737 in 2011 and 36,429 in 2010) and 151,901 were employed outside Spain (as compared to 157,612 in 2011 and 142,440 in 2010). The terms and conditions of employment in the non-government-owned banks in Spain are negotiated on an industry-wide basis with the trade unions. This process has historically produced collective agreements binding on all the private banks and their employees. The 2011-2014 agreement was signed on March 14, 2012. The terms and conditions of employment in many of our subsidiaries outside Spain (including in Argentina, Portugal, Italy, Uruguay, Puerto Rico, Chile, Mexico, Germany, the U.K., Brazil and Poland) are negotiated either directly or indirectly (on an industry-wide basis) with the trade unions.

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The table below shows our employees by geographic area:

	Number of employees
	2012		2011		2010
SPAIN		34,862		35,737		36,429
LATIN AMERICA		89,622		90,821		88,490
Argentina		6,818		6,773		6,453
Brazil		53,543		54,197		53,829
Chile		12,336		12,204		11,702
Colombia		—		1,458		1,321
Mexico		14,068		13,168		12,531
Peru		66		60		56
Puerto Rico		1,578		1,753		1,807
Uruguay		1,209		1,166		735
Venezuela		4		42		56
EUROPE		52,209		53,859		41,116
Austria		360		399		389
Czech Republic		—		90		116
Germany		5,628		5,406		3,020
Belgium		22		23		23
Finland		146		151		143
France		48		52		41
Greece		—		24		26
Hungary		37		38		42
Ireland		21		16		8
Italy		840		894		922
Luxembourg		—		3		3
Norway		493		454		421
Poland		12,625		12,754		3,622
Portugal		6,105		6,300		6,522
Russia		—		—		—
Switzerland		159		170		175
The Netherlands		360		365		423
United Kingdom		25,365		26,720		25,220
USA		9,882		12,722		12,644
ASIA		144		141		114
Hong Kong		89		91		78
China		38		33		23
Japan		6		7		6
Others		11		10		7
OTHERS		44		69		76
Bahamas		24		46		55
Others		20		23		21
Total		186,763		193,349		178,869

In those cases where an employee is working from one country but is technically employed by a Group company located in a different country, we designate that employee as working from his/her country of residence.

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The table below shows our employees by type of business:

	Number of employees
	2012		2011		2010
Retail Banking		176,715		187,022		171,964
Asset Management and Insurance		1,756		1,272		1,338
Global Wholesale Banking		5,890		2,722		3,037
Corporate Activities		2,402		2,333		2,530
Total		186,763		193,349		178,869

As of December 31, 2012, we had 6,875 temporary employees (as compared to 5,109 as of December 31, 2011 and 2,216 as of December 31, 2010). In 2012, the average number of temporary employees working for the Group was 5,992 employees.

E. Share ownership

As of April 17, 2013, the direct, indirect and represented holdings of our current directors were as follows:

Directors	Direct Stake		Indirect stake and represented		Total shares		% of Capital stock
Emilio Botín (1)		6,464,149		174,667,735		181,131,884		1.719	%
Fernando de Asúa		76,836		60,543		137,379		0.001	%
Alfredo Sáenz		429,358		2,404,950		2,834,308		0.027	%
Esther Giménez-Salinas		2,151		—		2,151		0.000	%
Matías R. Inciarte (3)		1,261,678		183,374		1,445,052		0.014	%
Manuel Soto		73,532		513,096		586,628		0.006	%
Ana P. Botín (1)		5,064,820		11,995,761		17,060,581		0.000	%
Javier Botín (1) (2)		4,793,481		11,486,545		16,280,026		0.000	%
Lord Burns (Terence)		30,119		27,001		57,120		0.001	%
Vittorio Corbo		1		—		1		0.000	%
Guillermo de la Dehesa		119		—		119		0.000	%
Rodrigo Echenique		658,758		11,232		669,990		0.006	%
Ángel Jado		2,000,000		4,950,000		6,950,000		0.066	%
Abel Matutes Juan		182,135		2,500,050		2,682,185		0.025	%
Juan R. Inciarte		1,528,082		—		1,528,082		0.014	%
Isabel Tocino		78,855		—		78,855		0.001	%
Total		22,644,074		208,800,287		231,444,361		1.880	%

(1) Emilio Botín has attributed the right of vote in a general shareholders’ meeting of 93,026,412 shares owned by Fundación Botín (0.883% of share capital), 8,890,093 of which are owned by Jaime Botín (0.085% of capital); 9,404,392 of which are owned by Puente San Miguel, S.A., Nueva Azil, S.L. y Latimer Inversiones, S.L. (0.089% of capital); 8,622,878 of which are owned by Carmen Botín (0.082% of capital); 7,815,849 of which are owned by Paloma Botín (0.074% of capital); and 13,567,504 of which are owned by Emilio Botín O. (0.129% of capital). In addition, Emilio Botín is attributed the voting rights over 17,060,581 shares owned by Ana P. Botín (0.162% of capital) and 16,280,026 shares owned, directly and indirectly, by Javier Botín (0.154% of capital). Therefore, although the table above shows the direct and indirect ownership interests of each of the two last-mentioned directors of the Bank, in the column relating to the percentage of total voting rights, these holdings are calculated together with those belonging to or represented by Emilio Botín.

(2) Javier Botín has the status of an external proprietary director as he represents on the board of directors the ownership interests of Fundación Botín, Bafimar, S.L., Cronje, S.L., Puente San Miguel, S.A., Inversiones Zulú, S.L. Latimer Inversiones, S.L., Jardín Histórico Puente San Miguel, S.A., Nueva Azil, S.L., Leugim Bridge, S.L., Apecaño, S.L., Bright Sky 2012, S.L., Emilio Botín, Ana P. Botín, Emilio Botín O., Carmen Botín, Paloma Botín, Jaime Botín, Jorge Botín, Francisco J. Botín, Marta Botín, as well as his own equity interest.

(3) Matías R. Inciarte holds the voting rights over 83,452 shares owned by his two sons.

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Santander’s capital is comprised of only one class of shares, all of which are ordinary and have the same rights.

As of April 17, 2013 our current executive officers (not directors) referred to above under Section A of this Item 6 as a group beneficially owned, directly or indirectly, 7,525,493 ordinary shares, or 0.07% of our issued and outstanding share capital as of that date. 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, 2012, to our knowledge no person beneficially owned, directly or indirectly, 5% or more of our shares.

At December 31, 2012 a total of 1,182,915,220 shares, or 11.46% of our share capital, were held by 1,203 registered holders with registered addresses in the United States and Puerto Rico, including JP Morgan Chase, as depositary of our American Depositary Share Program. These ADSs were held by 19,893 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, 2012.

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.

At the date of execution of the agreement, the syndicate comprised a total of 44,396,513 shares of the Bank (0.430% of share capital at December 31, 2012). In addition, as established in clause one of the shareholders’ agreement, the syndication extended, solely with respect to the exercise of the voting rights, to other Bank shares held either directly or indirectly by the signatories, or whose voting rights are assigned to them. Accordingly, at December 31, 2012, a further 34,885,821 shares (0.338% of share capital) were included in the syndicate.

At any given time, the chairman of the syndicate is the person then presiding over the Marcelino Botín Foundation, currently Emilio Botín.

The members of the syndicate undertake to syndicate and pool the voting and other political rights attaching to the syndicated shares, so that these rights may be exercised and, in general, the syndicate members heading the Bank may act in a concerted manner, in accordance with the instructions and indications and with the voting criteria and orientation, necessarily unitary, issued by the syndicate, and, for this purpose, the representation of these shares is attributed to the chairman of the syndicate as the common representative of its members.

Except for transactions carried out in favor of other members of the syndicate or in favor of the Marcelino Botín Foundation, prior authorization must be granted from the syndicate assembly, which may freely approve or refuse permission for the planned transfer.

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Banco Santander informed the CNMV on August 3 and November 19, 2012, by means of the applicable significant event filings, that it had been officially notified of amendments to this shareholder agreement in respect of the persons subscribing to it.

The agreement encompasses a total of 79,282,334 Bank shares (0.768% of its share capital as of December 31, 2012), broken down as follows:

Parties to the shareholders’ agreement	No of shares syndicated
Emilio Botín		6,365,296
Ana P. Botín (1)		13,207,720
Emilio Botín O. (2)		13,567,504
Javier Botín (3)		16,279,089
Paloma Botín (4)		7,811,706
Carmen Botín		8,622,491
Puente San Miguel, S.A.		3,275,605
Latimer Inversiones, S.L. (5)		553,508
Cronje, S.L., Unipersonal		4,024,136
Nueva Azil, S.L.		5,575,279
Total		79,282,334

(1) 7,971,625 shares held indirectly through Bafimar, S.L.

(2) 3,024,727 shares held indirectly through Leugim Bridge, S.L. and 1,500,000 shares indirectly through Jardín Histórico Puente San Miguel, S.A., the latter being 100%-owned by the former.

(3) 4,652,747 shares held indirectly through Inversiones Zulú, S.L. and 6,794,391 shares indirectly through Apecaño, S.L

(4) 6,628,291 shares held indirectly through Bright Sky 2012, S.L.

(5) Bare ownership (ownership without usufruct) of 553,508 shares corresponds to Fundación Marcelino Botín, but the voting rights are assigned to Latimer Inversiones, S.L. as their beneficial owner.

In all other issues, the agreement is unchanged as compared to that signed in February 2006.

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
	2012						2011
	Loans and credits		Guarantees		Total		Loans and credits		Guarantees		Total
Alfredo Sáenz		17		—		17		8		—		8
Matías R. Inciarte		13		—		13		1		—		1
Manuel Soto		—		—		—		1		—		1
Antonio Basagoiti (1)		—		—		—		12		1		13
Ana P. Botín		7		—		7		6		—		6
Javier Botín		13		—		13		3		—		3
Rodrigo Echenique		1,178		—		1,178		1,500		—		1,500
Antonio Escámez (1)		—		—		—		1,851		—		1,851
Ángel Jado		7		—		7		3,004		—		3,004
Francisco Luzón (2)		—		—		—		11,670		—		11,670
Juan R. Inciarte		5,313		—		5,313		321		—		321
Luis Alberto Salazar-Simpson (1)		—		—		—		3		—		3
Isabel Tocino		42		—		42		322		—		322
		6,591		—		6,591		18,702		1		18,703

(1) Retired from the board on March 30, 2012.

(2) Retired from the board on January 23, 2012

Additionally, the total amount of loans and credits made by us to our executive officers who are not directors, as of December 31, 2012 amounted to €33 million (see Note 53 to our consolidated financial statements).

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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 collectability 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; and

• 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 collectability or other unfavorable features.

As of December 31, 2012 our loans and credits to associated and jointly controlled entities, amounted to €544 million. Those loans and credits represented 0.08% of our total net loans and credits and 0.73% of our total stockholders’ equity as of December 31, 2012.

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, 2012, 2011 and 2010		F-2
Consolidated Income Statements for the Years Ended December 31, 2012, 2011 and 2010		F-3
Consolidated Statements of Recognized Income and Expense for the Years Ended December  31, 2012, 2011 and 2010		F-4
Consolidated Statements of Changes in Total Equity for the Years Ended December  31, 2012, 2011 and 2010		F-5
Consolidated Statement of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010		F-8
Notes to the Consolidated Financial Statements		F-9

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Legal Proceedings

Our general policy is to record provisions for tax and legal proceedings in which we assess the chances of loss to be probable and we do not record provisions when the chances of loss are possible or remote. We determine amounts to be provided as our best estimate of the expenditure required to settle the corresponding claim based, among others, on a case-by-case basis based on the analysis and legal opinion of internal and external counsel or by considering the historical average amount of loss of such category of lawsuits.

i. Tax-related proceedings

As of the date of this report, 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.

• “Mandados de Segurança” filed by Banco Santander Brasil, S.A. (currently Banco Santander (Brasil) 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 Brasil, 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 Brasil, 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. (currently Banco Santander (Brasil) 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 Santander (Brasil) S.A. filed an appeal at the Federal Supreme Court.

• Banco Santander (Brasil) S.A. and other Group companies in Brazil have appealed against the assessments issued by the Brazilian tax authorities questioning the deduction of loan losses in their income tax returns (IRPJ and CSLL) on the ground that the relevant requirements under the applicable legislation were not met.

• 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 taxation for social security purposes of certain items which are not considered to be employee remuneration.

• 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 amortization of the goodwill arising on the acquisition of Banespa (currently Banco Santander (Brasil) S.A.). Banco Santander (Brasil) S.A. filed an appeal against the infringement notice at Conselho Administrativo de Recursos Fiscais (CARF), which on October 21, 2011 unanimously decided to render the infringement notice null and void. The tax authorities have appealed against this decision at a higher administrative level. 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. Based on the advice of its external legal counsel and in view of the previous decision by CARF, the Group considers that the stance taken by the Brazilian tax authorities is incorrect and that there are sound defence arguments to appeal against the infringement notice. Accordingly, the risk of incurring a 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 May 2003 the Brazilian tax authorities issued separate infringement notices against Santander Distribuidora de Títulos e Valores Mobiliarios Ltda. (DTVM) and Banco Santander Brasil, S.A. (currently Banco Santander (Brasil), S.A.) in relation to the Provisional Tax on Financial Movements (CPMF) with respect to certain transactions carried out by DTVM in the management of its customers’ funds and for the clearing services provided by Banco Santander Brasil, S.A. to DTVM in 2000, 2001 and the first two months of 2002. Both entities appealed against the infringement notices at CARF, with DTVM obtaining a favorable decision and Banco Santander Brasil,

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S.A. an unfavorable decision. Both decisions were appealed by the losing parties at the Higher Chamber of CARF, and the appeal relating to Banco Santander Brasil, S.A. is pending a decision. With respect to DTVM, having been notified of the decision overturning the previous favorable judgment on August 24, 2012, it lodged an appeal at the Higher Chamber of CARF on August 29, 2012. In the opinion of its legal advisors, the Group considers that the tax treatment applied in these transactions was correct.

• In December 2010 the Brazilian tax authorities issued an infringement notice against Santander Seguros S.A. (Brasil), as the successor by merger to ABN AMRO Brasil Dois Participações, S.A., in relation to income tax (IRPJ and CSLL) for 2005. The tax authorities questioned the tax treatment applied to a sale of shares of Real Seguros, S.A. made in that year. The aforementioned entity filed an appeal against the infringement notice. As the former parent of Santander Seguros, S.A. (Brasil), Banco Santander (Brasil), S.A. is liable in the event of any adverse outcome of this proceeding. As of December 31, 2012, there is no provision in connection with this proceeding as it is considered a contingent liability. Also, the Brazilian tax authorities issued infringement notices against Banco Santander (Brasil) S.A. in connection with income tax (IRPJ and CSLL), questioning the tax treatment applied to the economic compensation received under the contractual guarantees provided by the sellers of the former Banco Meridional. The aforementioned entity filed an appeal against the infringement notice. On November 23, 2011, CARF unanimously decided to render null and void an infringement notice relating to 2002 with regard to the same matter. In February 2012 this decision was declared final in respect of 2002. The proceedings relating to the 2003 to 2006 fiscal years are still in progress. As of December 31, 2012, there is no provision in connection with this proceeding as it is considered a contingent liability.

• 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 appealed against this decision at a higher court and in December 2011 the tax authorities confirmed their intention to file the related pleadings. The hearing took place in April 2012 and the court found for the tax authorities, upholding their appeal. No appeal may be filed against this judgment. In view of the existing provisions relating to this litigation there is no adverse impact on the consolidated financial statements.

• Legal action brought by Sovereign Bancorp, Inc. (currently Santander Holdings USA, Inc.) claiming its right 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. Santander Holdings USA, Inc. continues to believe that it is entitled to claim these foreign tax credits taken with respect to the transactions and also continues to believe that Santander Holdings USA, Inc. is entitled to tax deductions for the related issuance costs and interest deductions based on tax laws. In addition, if the outcome of this legal action is favorable to the interests of Santander Holdings USA, Inc., the amounts paid over by the entity in relation to this matter with respect to 2006 and 2007 would have to be refunded. During the first quarter of 2013, the U.S. Tax Court issued an adverse opinion in a case between a US taxpayer and the IRS involving a transaction with a structure similar to Santander Holdings USA, Inc.’s financing transactions. The US taxpayer has indicated it intends to appeal the decision. Santander Holdings USA, Inc. has confidence in its position because, among other reasons, Santander Holdings USA, Inc. will raise arguments and issues in its case that were not considered by the Tax Court. The trial of this litigation is expected to take place in the last quarter of 2013.

At the date of approval of this annual report on Form 20-F certain other less significant tax-related proceedings were also in progress.

ii. Non-tax-related proceedings

As of the date of this report, the main non-tax-related proceedings concerning the Group were as follows:

• Customer remediation: claims associated with the sale by Santander UK of certain financial products (principally payment protection insurance or PPI) to its customers.

Payment protection insurance is a UK insurance product offering payment protection on unsecured personal loans (and credit cards). The product was sold by all UK banks. The mis-selling issues are predominantly related to business written before 2009. The nature and profitability of the product has changed materially since 2008, in part due to customer and regulatory pressure.

On July 1, 2008, the UK Financial Ombudsman Service (‘FOS’) referred concerns regarding the handling of PPI complaints to the UK Financial Services Authority (‘FSA’). On September 29, 2009 and March 9, 2010, the FSA issued consultation papers on PPI complaints handling as an issue of wider implication. The FSA published its

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Policy Statement on August 10, 2010, setting out the evidence and guidance on the fair assessment of a complaint and the calculation of redress, as well as a requirement for firms to reassess historically rejected complaints which had to be implemented by December 1, 2010.

On October 8, 2010, the British Bankers’ Association (‘BBA’), the principal trade association for the UK banking and financial services sector, filed on behalf of certain financial institutions (which did not include Santander UK plc) an application for permission to seek judicial review against the FSA and the FOS. The BBA sought an order quashing the FSA Policy Statement and an order quashing the decision of the FOS to determine PPI sales in accordance with the guidance published on its website in November 2008. The judicial review was heard in the courts in January 2011 and on April 20, 2011 judgment was handed down by the High Court dismissing the BBA’s application.

Santander UK did not participate in the legal action undertaken by other UK banks and has been consistently making a provision and settling claims with regards to PPI complaints liabilities since they began to increase in recent years. The provisions recognized by Santander UK in this respect were calculated on the basis of the estimate of customer remediation comprising the estimated cost of making redress payments with respect to the past sales of the products.

A detailed review of the provision was performed by Santander UK in the first half of 2011 in light of the new situation, including the High Court judgment of April 2011, the BBA’s subsequent decision not to appeal and the consequent increase in actual claims levels. As a result, the provision has been revised to reflect the new information.

In this context, in 2011 the Group recognized a provision, with a net effect on results of €620 million (GBP 538 million), which was calculated on the basis of the estimate of the number of claims that would be received, of the number of claims that would be upheld and of the estimated average amount of compensation in each case.

A number of uncertainties persist regarding the eventual costs of that compensation given the inherent difficulties of assessing the impact of detailed implementation of the Policy Statement for all PPI complaints, uncertainties concerning the recent rise in complaints, the availability of evidence to support the claims and the activities of claims management companies, all of which may significantly affect complaints volumes, the acceptance rates and redress costs.

The provision represents management’s best estimate of the anticipated costs of related customer contact and/or redress, including administration expenses. The provision is calculated based on a number of key assumptions which involve significant management judgment. These are as follows:

• Claim volumes—the estimated number of customer complaints received,

• Uphold rate—the estimated percentage of complaints that are, or will be, upheld in favor of the customer, and

• Average cost of redress—the estimated payment to customers, including compensation for any direct loss plus interest.

The assumptions have been based on the following:

• Analysis completed of the causes of complaints, and uphold rates, and how these are likely to vary in the future,

• Actual claims activity registered to date,

• The level of redress paid to customers, together with a forecast of how this is likely to change over time,

• The impact on complaints levels of proactive customer contact, and

• The effect of media coverage on the issue.

The assumptions are kept under review, and regularly reassessed and validated against actual customer data, e.g. claims received, uphold rates, the impact of any changes in approach to uphold rates etc, and any re-evaluation of the estimated population. The most critical factor in determining the level of provision is the volume of claims. The uphold rate is a reasonably consistent function of the sales process and the average cost of redress can be predicted reasonably accurately given that management is dealing with a high volume and reasonably homogeneous population. In setting the provision, management estimated the total claims that were likely to be received. Previous experience has indicated that claims could be received over a number of years. While initial claim levels at the beginning of the process were quite low, this has increased in line with our initial expectations as a result of press coverage and the activities of the claims management companies (“CMC’s”). The CMC’s facilitate customer claims in return for a share of the redress payment and advertise heavily thereby resulting in an increase in the volume of claims experienced.

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The table below sets out the actual claims received to date.

Movements in the number of PPI claims outstanding during the years ended December 31, 2012, 2011 and 2010 were as follows:

(thousands of claims)
	2012			2011			2010
Outstanding at January 1		1			—			2
Claims received		437			111			37
Claims paid (1)		(258	)		(90	)		(38	)
Claims rejected as invalid (1)		(149	)		(20	)		(1	)
Outstanding at December 31		31			1			—

(1) The customer has the right to appeal to the FOS if their claim is rejected. FOS may uphold or reject the appeal and if upheld Santander UK is required to provide redress to the customer. Claims paid or rejected above reflect the results of any appeals.

As anticipated, PPI complaints rose significantly in 2012, due to higher press coverage and increased focus by CMCs. The increase was partly driven by invalid complaints (which also drove an increase in the level of claims rejected) and claims originated by CMCs. In addition, Santander UK proactively contacted more than 300,000 customers during the year, which led to an increase in claims received. The number of claims settled in 2012 increased, reflecting both the increase in claims received and continued prompt settlement of claims.

Press coverage on PPI reached significant levels in 2011, following the High Court‘s dismissal of the BBA’s application for a judicial review, as highlighted above. The focus of the CMCs also started to be directed at PPI in 2011. This led to a marked increase in complaints in 2011. Complaint volumes were also driven by pro-active customer contact made by Santander UK. The number of claims settled in 2011 increased as well, reflecting both the increase in claims received and prompt settlement of claims.

Management reassess the level of provision required at each reporting period, taking account of the latest available information as well as past experience. The provision necessarily incorporates predictions of complaint levels for a number of periods into the future. Although complaint levels rose substantially in 2012, this increase was consistent with management’s estimates which reflected previous conduct remediation experience. Consequently, no change to the provision was required in 2012. This will continue to be kept under review.

The assumptions and consequent level of provision remain subjective. This relates particularly to the uncertainty associated with the level of future claims. It is therefore possible that the level of payments to be made may differ from current estimates, resulting in an increase or decrease to the required provision.

• 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, S.A. 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 issued an order to enforce the decision handed down by the Madrid Provincial Appellate Court, whereby the Bank had to subscribe to 75.1 million shares at their par value of €0.4 per share, totaling €30.05 million. Zed Worldwide, S.A. filed an appeal for reconsideration of the order enforcing the decision, which the Bank opposed. On May 23, 2011, the Bank was served notice of the decision of May 6, 2011, dismissing the appeal for reconsideration and upholding the order of January 25 2011. On July 14, 2011, Zed Worldwide, S.A. filed an appeal at a superior court against the decision dismissing the aforementioned appeal for reconsideration, which was upheld in an order of December 17, 2012 by the Madrid Provincial Appellate Court whereby the Bank had to subscribe 2,111,600 shares for its contribution of €30.05 million.

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Following this order, an agreement was reached for the out-of-court enforcement of the decision whereby the Bank would subscribe and pay 6,208,802 shares for its contribution of €30.05 million. As a result, on December 27, 2012, the parties requested the judge that the enforcement proceeding be discontinued and struck out, which was declared in an order dated January 23, 2013.

• Proceeding under Criminal 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 Bank to third-party buyers. The judgment of the Supreme Court ordered the reversal of the court foreclosure proceeding to 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 to 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 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 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 with the Supreme Court against this decision, which was given leave to proceed in an order dated October 11, 2011, and the Bank submitted a notice of opposition.

• After the Madrid Provincial Appellate Court had rendered null and void the award handed down in the previous arbitration proceeding, on September 8, 2011 Banco Santander S.A. filed a new request for arbitration with the Secretary of the Spanish Arbitration Court against the business entity Delforca 2008, Sociedad de Valores, S.A. (formerly 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. The defendant Delforca 2008, S.A. voluntarily petitioned for an insolvency order, which was granted on August 3, 2012 by Barcelona Commercial Court no. 10. On October 26, 2012, as part of the insolvency proceeding, this Court ordered the stay of the arbitration proceeding and of the effects of the arbitration agreement entered into by Banco Santander, S.A. and Delforca 2008, S.A., and also requested the Spanish Court of Arbitration that the arbitration proceedings underway be stayed immediately and notice be served that the effects of the arbitration agreement had been stayed. The Bank filed an appeal for reconsideration against this decision by the Commercial Court and that Court rejected the appeal. A formal protest has been filed and a remedy of appeal shall be filed by Banco Santander, S.A. on appropriate time to be decided by the Barcelona Court of Appeal.

The Arbitration Court, in strict obedience with the decision of the Commercial Court, agreed in a decision dated January 20, 2013 to stay the arbitration proceedings at the stage reached until a decision may be reached in this respect in the insolvency proceeding.

In addition, as part of the insolvency proceeding of Delforca 2008, S.A., Banco Santander, S.A. notified its claim against the insolvent party due to the potential creditor’s rights to which it might be entitled as a result of the arbitration proceeding relating to Delforca 2008 S.A, with a view to having the claim recognized as a contingent ordinary claim without specified amount. The insolvency proceeding is in the common phase and on November 5, 2012, the insolvency manager submitted the report referred to in Articles 74 and 75 of the Insolvency Law, accompanied by the inventory and provisional list of creditors. The insolvency manager opted to exclude Banco Santander, S.A.’s claim from the provisional list of creditors and, accordingly, on January 2, 2013, Banco Santander, S.A. filed an ancillary claim contesting the document and seeking the aforementioned claim’s recognition on the terms notified. A decision is yet to be handed down in this regard. Delforca 2008 S.A. has filed an answer to the claim but Banco Santander, S.A. has not been notified of an answer to the claim being filed by the insolvency manager.

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Additionally, in April 2009 Mobilaria Monesa, S.A. (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 resolved before the Arbitration Court, a circumstance which was brought to the Court’s attention in the notice of opposition thereto filed by the Bank.

This proceeding was stayed by the Santander Provincial Appellate Court in an order dated December 20, 2010 due to the Court admitting the preliminary civil ruling grounds claimed by the Bank.

The above stay currently subsists due to an order dated October 11, 2011 by Santander Court of First Instance no. 5, based on the new arbitration proceeding brought by Banco Santander S.A. An appeal was filed against this order by Delforca 2008, S.A. at the Santander Provincial Appellate Court but a judgment thereon is yet to be issued.

On April 11, 2012, Banco Santander, S.A. was notified of the claim filed by Delforca 2008, S.A., heard by Madrid Court of First Instance no. 21, in which it substantially requested indemnification for the damage and losses suffered by DELFORCA 2008, S.A. arising from the counterclaim filed in the arbitration proceeding that was concluded with the annulled award; although in its claim, invoking Article 219.3 of the Civil Procedure Law, it leaves for a subsequent proceeding the amount to be settled (as the case may be) by Banco Santander, S.A. (which it put at a figure of up to €218,000,000 in the preceding arbitration proceeding). Banco Santander, S.A. filed a motion for declinatory exception arguing that the ordinary courts lacked jurisdiction because the dispute had been submitted to arbitration, which was upheld in an order dated July 2, 2012, in which the court resolved to abstain from hearing the case and ordered a stay of the proceedings. Delforca 2008, S.A. filed an appeal against the order and a decision is yet to be handed down thereon by the Provincial Appellate Court.

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 Labour 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 Labour Court. A decision was handed down on June 25, 2008 which ordered the bank to pay the half-yearly bonus from 1996 onwards for a maximum amount equivalent to the share in the profits. Appeals against this decision were filed at the High Labour Court and the Supreme Federal Court. The High Labour Court ordered the aforementioned half-yearly bonus to be paid. The Supreme Federal Court subsequently dismissed the extraordinary appeal filed by the Bank by means of a monocratic decision (adopted by only one of the judges of the court), thereby upholding the aforementioned judgment. As a result, the Bank filed a special appeal called an “Agravo Regimental” and the 1st Chamber of the Supreme Federal Court upheld the Extraordinary Appeal filed by the Bank and denied the Association’s Appeal. Thus, the Extraordinary Appeal filed by the Bank now follows for the plenary session of the Supreme Court for decision about general repercussion and the main matters.

• “Planos económicos”: Like the rest of the banking system, Santander Brasil has been the subject of claims from customers, mostly depositors, and of class actions brought for a common reason 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 limitation period for these class actions at five years, as claimed by the banks, rather than twenty years, as sought by the claimants, 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 with 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 at civil law. Shortly thereafter, the Supreme Federal Court issued an injunctive relief order whereby all the proceedings in progress in this connection were stayed until this court issues

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a final decision on the matter. Consequently, enforcement of the aforementioned decision handed down by the High Court of Justice was also stayed. We expect that a judgement will be handed down this year; however, this is still pending and there are no hearings scheduled at the moment.

• 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 US$ 150,000,000 in principal plus US$ 4,656,164 in interest, upon 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 costs. Both the plaintiff and the defendant filed appeals to a superior court: the plaintiff in connection with the decision not to award costs and the Bank in connection with the other decisions. Both parties also filed notices of opposition against the appeal filed by the other party.

Also, on March 29, 2011, the Bank filed a notice of opposition against the specific provisional enforcement measures of the court. The Bank’s opposition to the aforementioned measures was upheld in a decision dated September 5, 2011.

A judgment handed down by the Madrid Provincial Appellate Court on October 9, 2012 upheld the appeal lodged by the Bank and dismissed the appeal lodged by Banco Occidental de Descuento, Banco Universal, C.A., dismissing the claim. The dismissal of the claim was confirmed in an ancillary order to the judgment dated December 28, 2012. A cassation appeal was filed by Banco Occidental de Descuento, Banco Universal, C.A. against the Madrid Provincial Appellate Court judgment and the parties have appeared before the Supreme Court.

• On January 26, 2011, notice was served on the Bank of an ancillary insolvency claim to annul acts detrimental to the assets available to creditors as part of the voluntary insolvency proceedings of Mediterráneo Hispa Group S.A. at Murcia Commercial Court no. 2. The aim of the principal action is to request annulment of the application of the proceeds obtained by the company undergoing insolvency from an asset sale and purchase transaction involving €31,704,000 in principal and €2,711,567.02 in interest. On November 24, 2011, the hearing was held with the examination of the proposed evidence. Upon completion of the hearing, it was resolved to conduct a final proceeding which was held on February 29, 2012, and a decision is yet to be issued thereon.

• 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.

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 mis-selling) for holders of one of the products sold—Seguro Banif Estructurado—issued by the insurance company Axa Aurora Vida, which had as its underlying 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 of €46 million was recognized in the consolidated income statement (€33 million after tax).

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 in the consolidated income statement for 2008.

As of the date of this report, 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 for it in relation to the insolvency of Lehman. Accordingly, the risk of loss is considered to be remote.

• The intervention, 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

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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 its intervention, Madoff Securities was an authorized broker dealer, registered and overseen by the SEC and was also authorized as an investment advisor by the US Financial Industry Regulatory Authority (FINRA). As the SEC itself stated, Madoff Securities had been inspected regularly by the supervisor in recent years and at no time was its reputation or solvency questioned either by the market or by the US supervisory authorities.

On March 18, 2009, the Group issued the preference shares earmarked for the replacement of assets offered to the private banking customers affected by the intervention of Madoff Securities. 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. (“OIS”), 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 US$ 1,540,141,277.60 and US$ 9,807,768.40, respectively, and the funds were entitled to Securities Investor Protection Corporation advances of US$ 500,000 each. The funds paid 85% of the clawback claims asserted by the trustee. The payments totaled US$ 129,057,094.60 for Strategic U.S. Equity and US$ 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 was reached following an analysis by the trustee of how Optimal had managed its investments with Madoff Securities, including a review of Optimal’s documents relating to the due diligence review, from which the trustee concluded that there were no grounds in Optimal’s conduct for bringing claims against the Optimal companies or against any other entity in the Santander Group (other than the claims for rebates mentioned previously, which were not related to any improper management by the funds).

The agreement contains the waiver 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 waiver 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.

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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 greatest pyramid fraud in history and was sentenced to 150 years’ imprisonment.

In April 2011, by means of a corporate operation, the funds Optimal Strategic US Equity Series de Optimal Multiadvisors Ltd de Bahamas, Optimal Strategic US Equity Ireland Euro Fund de Optimal Multiadvisors Ireland Plc and Optimal Strategic US Equity Ireland US Dollar Fund de Optimal Multiadvisors Ireland Plc offered unitholders the possibility of voluntarily liquidating their units in the funds in exchange for shares in a special purpose entity in the Bahamas (SPV Optimal SUS Ltd.) to which Optimal Strategic US Equity Ltd., the company through which the aforementioned funds’ assets are held, transferred the full amount of the claim recognized by the trustee for the liquidation of Madoff Securities mentioned above, the nominal amount of which was US$ 1,540,141,277.60, which was included in the SPV’s net assets.

This arrangement enabled the investors who so wished to take direct control of their proportional part of the claim against the insolvency estate of Madoff Securities and also afforded them the chance of being able to sell it directly or by means of a sales procedure through a private auction organized by OIS.

The corporate operation meant that 1,021 million shares of the 1,539 million issued by the SPV are now directly owned by the unitholders of the three aforementioned Optimal Strategic US Equity funds that accepted the exchange of their units in the fund for shares of the SPV. Furthermore, 991 million shares of those 1,021 million were sold in the subsequent private auction organized by OIS, while 30 million opted not to participate in the auction. The remaining fund unitholders decided to maintain their units in the funds and not participate in the corporate operation.

The price reached in the auction of the SPV shares was equal to 72.14% of the amount of the claim against BLMIS, which meant that those unitholders were able to recover approximately 35% of the value of their investment in the Optimal Strategic US Equity funds at October 30, 2008.

Santander Group, as unitholder of the Optimal Strategic US Equity funds, opted to accept the exchange and subsequent partial sale of a portion of its units in the funds, and it recognized in profit or loss for 2011, as a result of the cash proceeds from that sale, a recovery of approximately €249 million of the initial loss.

Subsequently, in March 2012 the Optimal Strategic US Equity Series de Optimal Multiadvisors Ltd de Bahamas, Optimal Strategic US Equity Ireland Euro Fund de Optimal Multiadvisors Ireland Plc and Optimal Strategic US Equity Ireland Dollar Fund de Optimal Multiadvisors Ireland Plc funds once again offered a similar corporate operation to that performed in April 2011.

In the second half of 2012 the Group made additional sales of its interest in the SPV and, accordingly, at December 31, 2012, it held an interest of approximately 5.54% in the SPV through the Optimal Strategic US Equity Series fund.

As of the date of this report, certain claims had been filed in relation to this matter. The Group is currently assessing the appropriate legal action to be taken. As indicated 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 two specific cases in which the decisions handed down partially upheld the claim based on the particular circumstances of these cases (which have been appealed against by the Bank), the risk of loss is considered to be remote.

• On December 17, 2010, the Bank of New York Mellon Trust Company, National Association (“the Trustee”) filed a claim against Santander Holdings USA, Inc. (formerly Sovereign Bancorp, Inc.) (“Sovereign”) at the US District Court for the Southern District of New York (the “Court”) as the trustee of the Trust PIERS (Preferred Income Equity Redeemable Securities) under an indenture dated September 1, 1999 (the version in force at that date).

The claim alleged that the acquisition of Sovereign by Banco Santander on January 31, 2009 constituted a “change of control” of the Trust PIERS.

If the acquisition constituted a “change of control” in accordance with the definitions applicable to the Trust PIERS, Sovereign would be obliged to pay a considerably higher interest rate on the Sovereign subordinated debentures deposited in trust on behalf of the Trust PIERS holders, and the principal amount of the debentures would increase to US$ 50 per debenture at the date on which the “change of control” took place.

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The increased rate in the event of a “change of control” is defined in the indenture as the greater of (i) 7.41% per annum; and (ii) the rate determined by a reference agent in accordance with a process established in the indenture.

There is no “change of control” under the Trust PIERS indenture, among other reasons, if the consideration for the acquisition consisted of shares of common stock listed on a national securities market. Banco Santander issued American Depositary Shares (ADSs) in relation to the acquisition that were traded and continue to be traded on the New York Stock Exchange.

Under the claim, the Court was asked to declare that the acquisition of Sovereign constituted a “change of control” under the indenture and to order payment of damages equal to the interest which, according to the claim, should have been paid by Sovereign to the Trust PIERS holders.

On December 13, 2011, the Court handed down a decision, granting the Trustee’s motion for summary judgment and denying the cross-motion filed by Sovereign. The Court ruled that the term “common stock” used in the “change of control” provision of the indenture did not include the ADSs and, accordingly, a “change of control” had occurred. The Court referred the matter of the payment of damages to a district court judge for investigation.

On September 12, 2012, the judge in charge of the investigation issued a report recommending that the interest rate of the Trust PIERS be set at 13.61% from January 31, 2009 and that the holders of Trust PIERS should be compensated with US$ 305,626,022 for unpaid interest, US$ 3,160,012.31 for lawyers’ fees and US$ 130,150.23 for the interest on such expenses.

On November 23, 2012, Sovereign signed a “ Settlement Agreement” with the Trustee resolving all the disputes between the Trustee and Sovereign with respect to the claim filed.

The Settlement Agreement (i) acknowledges that a “change of control” occurred in accordance with the Trust indenture as a result of the acquisition, (ii) provides that the annual interest rate on the distributions made to the Trust PIERS holders from November 15, 2012 shall be 12.835%, (iii) requires Sovereign to carry out a takeover bid for all the Trust PIERS at a purchase price of US$ 78.95 in cash per US$ 50.00 and (iv) establishes that Sovereign may redeem the issue in full at any time from January 30, 2014. The Settlement Agreement also requires Sovereign to make additional offers to purchase the Trust PIERS within ten business days following each quarterly distribution from the settlement date until no Trust PIERS remain outstanding, at the same purchase price mentioned above.

On November 26, 2012, Sovereign announced to the Trust PIERS holders an offer in accordance with the requirements of the Settlement Agreement indicated in point (iii) of the preceding paragraph, which was completed on December 26, 2012, and approximately 40.4% of the outstanding aggregate liquidation amount of the Trust PIERS was accepted for purchase. In addition, under the Settlement Agreement, on December 26, 2012, the parties applied to discontinue proceedings at the US District Court for the Southern District of New York and, accordingly, this litigation is therefore concluded.

At December 31, 2011, the Group had recognized the estimated amount of the contingency with third parties (US$ 139 million) due to this litigation, which includes the cumulative interest at 7.410% from January 31, 2009 to December 31, 2011 and the amount due to increasing the debentures to par (US$ 50). In 2012 the Group recognized US$ 163 million in the consolidated income statement in relation to the Settlement Agreement that resolved the contingency with non-Group third parties.

As of the date of this report certain other less significant non-tax-related proceedings were also in progress.

The Bank and the other Group companies are subject to claims and, therefore, are party to certain legal proceedings incidental to the normal course of their business (including those in connection with lending activities, relationships with employees and other commercial or tax matters).

In this context, it must be considered that the outcome of court proceedings is uncertain, particularly in the case of claims for large or indeterminate amounts, those based on legal issues for which there are no precedents, those that affect a large number of parties or those at a very preliminary stage.

With the information available to it, the Group considers that at December 31, 2012, 2011 and 2010, it had reliably estimated the obligations associated with each proceeding and had recognized, where necessary, sufficient provisions to cover reasonably any liabilities that may arise as a result of these tax and legal situations. It also believes that any liability arising from such claims and proceedings will not have, overall, a material adverse effect on the Group’s business, financial position or results of operations.

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The total amount of payments made by the Group arising from litigation in 2012, 2011 and 2010 is not material with respect to the consolidated financial statements for those years.

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 Group cannot state with confidence what the eventual outcome of any of these pending matters will be, what the timing of the ultimate resolution of such matters will be or what the eventual loss, fines or penalties related to each such pending matter may be. Consequently, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by the Group; and the outcome of a particular matter may be material to the Group’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 Group’s income for that period.

Shareholders remuneration

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										Dollars per ADS
	First		Second		Third		Fourth		Total		First		Second		Third		Fourth		Total
2006		0.11		0.11		0.11		0.20		0.52		0.12		0.12		0.11		0.22		0.57
2007		0.12		0.12		0.12		0.28		0.65		0.14		0.15		0.15		0.36		0.79
2008		0.14		0.14		0.12		0.26		0.65		0.17		0.14		0.13		0.27		0.70
2009		0.14		0.12		0.12		0.22		0.60		0.16		0.14		0.14		0.24		0.67
2010		0.14		0.12		0.12		0.23		0.60		0.14		0.13		0.13		0.25		0.65
2011		0.14		0.13		0.12		0.22		0.60		0.15		0.14		0.12		0.23		0.64
2012(*)		0.15		0.15		0.15		0.15		0.60		0.14		0.19		0.21		n.a.		n.a.

(*) As of the date of this annual report on Form 20-F, the fourth dividend has not yet been determined.

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 dividends in cash or new shares. The remuneration per share approved in subsequent annual shareholders’ meetings for 2009, 2010, 2011 and 2012 disclosed above, €0.60, is calculated assuming that the four payments for these years (either cash dividends or scrip dividends) were made in cash.

Banco Santander paid on account of 2012:

• A scrip dividend of €0.15 per share equivalent to the first interim dividend (August 2012).

• A scrip dividend of €0.15 per share equivalent to the second interim dividend (November 2012).

• A scrip dividend of €0.15 per share equivalent to the third interim dividend (February 2013); and

• A scrip dividend of €0.15 per share equivalent to the fourth dividend approved at the annual general shareholders’ meeting held on March 22, 2013 (to be paid in May 2013).

Following the increase of capital of the third interim dividend, the Bank’s share capital at the date of this annual report on Form 20-F was €5,269,341,572.50 represented by 10,538,683,145 shares, par value €0.50 each.

Banco Santander assigned €6,086 million to shareholder remuneration in 2012, 15.7% more than in 2011.

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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” herein.

For a discussion of Spanish taxation of dividends, see “Item 10. Additional Information—E. Taxation—Spanish tax considerations—Taxation of dividends” herein.

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” herein. 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
2008		2009		2010		2011		2012
(in millions of euros)
	4,826		4,151		3,332		2,151		1,355

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

No significant change has occurred since the date of the Consolidated Financial Statements other than those mentioned in our Consolidated Financial Statements.

Item  9. The Offer and Listing

A. Offer and listing details

Market Price and Volume Information

Santander’s Shares

In 2012, Santander was the most actively traded stock on the Spanish stock exchange. As at December 31, 2012, the stock had a 18.64% weighting in the IBEX 35 Index and was ranked first among all Spanish issuers represented in this index. Santander’s stock weighting in the Euro Stoxx 50 was, at year end, 4.00%, placing it in fifth position. Our market capitalization of €62,959 million at 2012 year-end was the second largest of any Spanish company.

At December 31, 2012, we had 3,296,270 registered holders of our shares and, as of such date, a total of 1,182,915,220 shares, or 11.46% of our share capital, were held by 1,203 registered holders with registered addresses in the United States and Puerto Rico, including JP Morgan Chase, as depositary of our American Depositary Share Program.

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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, 2012, 54.95% of our shares were held of record by non-residents of Spain.

The table below sets forth the high, low and last daily sales prices in euros for our shares on the Spanish continuous market for the periods indicated.

	Euros per Share
	High		Low		Last
2008 Annual		14.59		5.11		6.75
2009 Annual		11.96		4.00		11.55
2010 Annual		11.98		7.30		7.93
2011 Annual		9.32		5.13		5.87
First Quarter		9.32		7.40		8.19
Second Quarter		8.66		7.51		7.96
Third Quarter		8.17		5.26		6.22
Fourth Quarter		6.44		5.13		5.87
2012 Annual		6.68		4.17		6.10
First Quarter		6.59		5.45		5.77
Second Quarter		5.78		4.25		5.22
Third Quarter		6.29		4.04		5.80
Fourth Quarter		6.13		5.43		5.88
2013 First Quarter		6.62		5.23		5.24
Last six months
2012
October		6.13		5.64		5.79
November		5.91		5.43		5.91
December		6.11		5.75		6.10
2013
January		6.62		6.10		6.18
February		6.03		5.62		5.81
March		5.99		5.23		5.24
April (through April 16, 2013)		5.54		5.18		5.24

On April 16, 2013, the reported last sale price of our shares on the continuous Spanish market was €5.24.

American Depositary Shares

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, 2012, a total of 276,642,085 of our ADSs were held by 19,893 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.

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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
2008 Annual		22.24		6.06		9.49
2009 Annual		17.83		4.90		16.44
2010 Annual		17.50		8.77		10.65
2011
Annual		12.69		6.80		7.52
First Quarter		12.69		9.74		11.71
Second Quarter		12.48		10.66		11.51
Third Quarter		11.87		7.38		8.04
Fourth Quarter		9.20		6.80		7.52
2012
Annual		8.76		4.89		8.17
First Quarter		8.76		6.91		7.67
Second Quarter		7.74		5.25		6.56
Third Quarter		8.29		4.89		7.04
Fourth Quarter		8.17		6.92		8.17
2013 First Quarter		8.81		6.77		6.81
Last six months
2012
October		7.97		7.24		7.46
November		7.66		6.92		7.66
December		8.17		7.44		8.17
2013
January		8.81		8.18		8.18
February		8.27		7.32		7.58
March		7.78		6.77		6.81
April (through April 16, 2013)		7.08		6.77		6.94

On April 16, 2013, the reported last sale price of our ADSs on the New York Stock Exchange was $6.94.

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, 2012, the Automated Quotation System accounted for the majority of the total trading volume of equity securities on the Spanish Stock Exchanges.

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Automated Quotation System

The Automated Quotation System was introduced in 1989 and links the four local exchanges, providing those securities listed on it with a uniform continuous market that eliminates most of the differences among the local exchanges. The principal feature of the system is the computerized matching of buy and sell orders at the time of entry of the order. Each order is executed as soon as a matching order is entered, but can be modified or canceled until executed. The activity of the market can be continuously monitored by investors and brokers. The Automated Quotation System is operated and regulated by the Sociedad de Bolsas, a corporation owned by the companies that manage the local exchanges. All trades on the Automated Quotation System must be placed through a bank, brokerage firm, an official stock broker or a dealer firm member of a Spanish stock exchange directly.

There is a pre-opening session held from 8:30 a.m. to 9:00 a.m. each trading day on which orders are placed at that time. The computerized trading hours are from 9:00 a.m. to 5:30 p.m. Each session will end with a 5 minute auction, between 5:30 and 5:35 p.m., with a random closedown of 30 seconds. The price resulting from each auction will be the closing price of the session.

From May 14, 2001, new rules came into effect regarding the maximum price fluctuations in the price of stocks. Under the new rules, each stock in the continuous market is assigned a static and a dynamic range within which the price of stocks can fluctuate. The price of a stock may rise or fall by its static range (which is published once a month and is calculated according to the stock’s average historic price volatility) above or below its opening price (which shall be the closing price of the previous session). When the stock trades outside of this range, the trading of the stock is suspended for 5 minutes, during which an auction takes place. After this auction, the price of the stock can once again rise or fall by its static range above or below its last auction price (which will be considered as the new static price before triggering another auction). Furthermore, the price of a stock cannot rise or fall by more than its dynamic price range (which is fixed and published once a month and is calculated according to the stock’s average intra-day volatility), from the last price at which it has traded. If the price variation exceeds the stock’s dynamic range a five minute auction is triggered.

Moreover, there is a block market (el mercado de bloques) allowing for block trades between buyers and sellers from 9:00 a.m. to 5:30 p.m. during the trading session. Under certain conditions, this market allows cross-transactions of trades at prices different from prevailing market prices. Trading in the block market is subject to certain limits with regard to price deviations and volumes.

Between 5:30 p.m. and 8:00 p.m., trades may occur outside the computerized matching system without prior authorization of the Sociedad de Bolsas, at a price within the range of 5% above the higher of the average price and closing price for the day and 5% below the lower of the average price and closing price for the day, if there are no outstanding bids or offers, as the case may be, on the system matching or bettering the terms of the proposed off-system transaction, and if the trade involves more than €300,000 and more than 20% of the average daily trading volume of the stock during the preceding quarter. At any time before 8:00 p.m., trades may take place (with the prior authorization of the Sociedad de Bolsas) at any price if:

• the trade involves more than €1.5 million and more than 40% of average daily trading volume of the stock during the preceding quarter;

• relates to a merger or spin-off of a listed company;

• relates to the reorganization of a business group;

• the transaction is executed for the purposes of settling litigation;

• involves certain types of contracts or complex transactions; or

• the Sociedad de Bolsas finds other justifiable cause.

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.

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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 (the latter of which was managed by the Bank of Spain).

Book-Entry System

Ownership of shares listed on any Spanish stock exchange is required to be represented by entries in a register maintained by Iberclear, which is the Spanish Central Securities Depositary, 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 material facts, 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;

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• the establishment of Iberclear; and

• the authorization of the Minister of Economy and Competitiveness to regulate financial services electronic contracts.

On July 17, 2003, the Securities Market law was amended by Law 26/2003 in order to reinforce the transparency of listed companies. It introduced:

• information and transparency obligations including detailed requirements of the contents of the corporate website of listed companies and the obligation to file with the CNMV an annual corporate governance report; and

• the obligation to implement a series of corporate governance rules including, among others, regulations regarding the boards of directors and the general shareholders’ meetings.

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”.

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Law 6/2007 (i) introduces several changes to the periodical financial information, annual, biannual and quarterly, to be published by issuers of listed securities; and (ii) introduces new developments to the system which establishes the duty to notify significant stakes in an enterprise, such as:

• Anyone with a right to acquire, transfer or exercise voting rights granted by the shares, regardless of the actual ownership of the shares; and anyone owing, acquiring or transferring other securities or financial instruments which grant a right to acquire shares with voting rights, will also have to notify the holding of a significant stake in accordance with the developing regulations;

• Directors of listed companies, in addition to notifying any transaction concerning the shares or other securities or financial instruments of the issuer which are linked to these shares, will have to inform the CNMV of their stake upon appointment or resignation; and

• 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.

Law 32/2011 of October 4, 2011, amending Law 24/1988 of July 28, 1988, on the securities market, introduced a central counterparty for equity transactions imposing the obligation to carry out all equity transactions traded through a central counterparty. Other relevant amendments of Law 32/2011 of October 4, 2011, include the introduction of a right of withdrawal in the event of insolvency of the entities in charge of keeping the registry and of participating entities and the pro rata rule. Modifications were also made to the regulatory regime of Iberclear, which is in charge of both the register of securities held in book-entry form and their clearing and settlement. Specifically, the new rules facilitate the relationship between Iberclear and the other agents of the trading and post-trading system and regulate the agreements that Iberclear may carry out to provide a better integration with to the TARGET2-Securities project, which aims to establish a eurozone-wide settlement system.

Royal Decree-Law 20/2012 of July 13, 2012 on measures to ensure budgetary stability and the promotion of competitiveness which, among other reforms, amended Law 24/1988 of July 28, 1988 on the Securities Market (and Law 44/2002 of November 22, 2002 on financial system reform measures) to include a new financial instrument in the Spanish legal system, the so-called “internationalization covered bonds” (“cédulas de internacionalización”). These bonds are similar to “territorial covered bonds” (“cédulas territoriales”), introduced by Law 44/2002 and are fixed-income securities that may be issued by credit institutions, whose capital and interest are especially secured by loans and credits granted for the internationalization of companies. The total amount of internationalization covered bonds issued by a credit institution may not exceed 70% of the amount of the unrepaid “eligible” loans and credits.

The Royal Decree-Law 20/2012 also introduces new tax measures on a range of taxes which, in some cases, amends or expands the reforms previously introduced by the Royal Decree-Law 9/2011, 20/2011 and 12/2012. The following are the most important tax measures in the Corporate Income Tax: (i) In 2012 and 2013 the offsetting of negative tax bases generated in previous years will be restricted to 50% for those entities whose turnover during the previous year was between €20 million and €60 million (the figure was previously 75%) and to 25% if the turnover exceeds €60 million (previously 50%). Over this same period, the deduction for goodwill arising from acquisitions of businesses will be subject to the maximum annual limit of 1% of the related amount (5% previously) (ii) Likewise, for fiscal years 2012 and 2013, the ceiling on the tax deduction for intangible fixed assets with an indefinite useful life is reduced from 10% to 2%. Regarding indirect taxation, as from September 1, 2012, the Royal Decree-Law also sets up that the standard rate of VAT increases from 18% to 21%, the reduced rate from 8% to 10%, and the super-reduced rate is held at 4%, which is applicable to staple goods and services. Certain goods and services hitherto taxed at the reduced rate (8%) will now be taxed at the standard rate (21%). Finally, the tax rate applicable to the delivery of housing units is maintained at 4% until December 31, 2012.

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The Law 11/2012 of December 19, 2012 on urgent measures relating to the environment, which included transposition into Spanish legislation of the provisions of the Commission Regulation 1031/2010 of November 12, 2010 on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances, amended by the Commission Regulation 1210/2011 of November 23, 2011, also amended Law 24/1988 of July 28, 1988 on the Securities Market to define the financial institutions that can participate in these auctions and grant the CNMV supervisory, inspection and sanctioning powers in relation to the aforementioned misconduct. It established that investment firms and credit institutions authorized to provide investment services may submit bids to greenhouse gas emission allowance auctions on their customers’ behalf, as well as conduct the activities envisaged in Law 24/1988.

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 Spanish Corporate Enterprises Act, 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 Spanish Corporate Enterprises Act 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 overall trading volume in Santander ordinary shares transacted by Group subsidiaries continues to vary from day to day and from month to month, and is expected to continue to do so in the future. In 2012, 7.39% of the total volume traded in Santander ordinary shares executed on the Primary Spanish Stock Exchange (Bolsas y Mercados Españoles) was transacted by Santander Investment Bolsa S.V.,S.A. and 1.54% 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 (treasury shares) was approximately 4.9% in the same period. The monthly average percentage of outstanding shares held by our subsidiaries ranged from 0.184% to 1.999% in 2012. At December 31, 2012, the Parent bank and our subsidiaries held 48,893,603 of our shares (0.474% of our total capital stock as of that date).

D. Selling shareholders

Not Applicable.

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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 Bylaws is not meant to be complete and is qualified in its entirety by reference to our Bylaws. Because this is a summary, it does not contain all the information that may be important to you. You should read our Bylaws carefully before you decide to invest. Copies of our Bylaws are incorporated by reference.

The Bylaws of Banco Santander, S.A. were approved by our shareholders acting at the annual general shareholders’ meeting held on June 21, 2008 and incorporated with the office of the Mercantile Registry on August 11, 2008.

Subsequently, sub-subsections 1 and 2 of Article 5 of the Bank’s Bylaws have been updated several times to show the current share capital and the number of shares outstanding. The most recent of such amendments corresponds to the one required by the share capital increase carried out on January 30, 2013 and filed with the office of the Mercantile Registry on the following day.

At the 2011 annual general meeting, our shareholders resolved to amend our Bylaws primarily to bring them into line with 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 Corporate Enterprises Act (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, labor 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; and

(iv) The inclusion of certain provisions contained in the Spanish Corporate Enterprises Act and which were already included in the former Business Corporations Law as a consequence of the entry into force of, among other, Law 3/2009, of April 3, on structural modifications of commercial companies and Law 16/2007, of July 4, on the reform and adjustment of commercial legislation in accounting matters for international harmonization thereof based on European Union law.

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 were passed by our shareholders at the 2011 annual general meeting to amend our Bylaws.

At the 2012 annual general meeting, held on March 30, 2012, our shareholders resolved to amend our Bylaws primarily to bring them into line with recent statutory amendments affecting Spanish Corporate Enterprises Act, including, specifically, those arising from Act 25/2011, of August 1, partially amending the Spanish Corporate Enterprises Act, and from the adoption of Directive 2007/36/EC, of the European Parliament and of the Council, of July 11 2007, on the exercise of certain rights of shareholders in listed companies.

At the 2013 annual general meeting, held on March 22, 2013, our shareholders resolved to amend our Bylaws to achieve two separate goals: (i) on the one hand, modify the rules on directors’ remuneration to conform them to the Bank’s practices; and (ii) on the other, adjust the Bylaws to recent statutory amendments regarding capital companies (Ley de sociedades de capital) by Law 1/2012, of 22 June, on the simplification of the obligations to provide information and documentation regarding mergers and split-offs of capital companies (“Law 1/2012”).

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The first goal was achieved by amending section 2 of article 58 of our Bylaws regarding the rules for the remuneration of directors for their duties of supervision and collective decision-making, which has changed from a system of profits participation to one of fixed amount remuneration. For more information on the amendment of section 2 of article 58 of our Bylaws, see below, “Certain Powers of the Board of Directors”.

The second goal was achieved by amending the title and sections 1 and 2 in article 61 of our Bylaws to conform the provision to the latest amendment of article 11 bis of the Spanish Corporate Enterprises Act pursuant to Law 1/2012. First, the amendment of the title of the article was intended to specify the corporate nature of the website, in line with the nomenclature used by the law. Second, section 1 includes now a new rule that gives the shareholders at the General Shareholders’ Meeting the power to create the corporate website, for which purpose the corresponding item should expressly appear in the agenda of the meeting. Legal provisions have also been included regarding the manner in which such resolution will be announced. The power to amend, relocate or remove the website still belongs to the board of directors, in line with the legal rule applicable by default. Third, in section 2, apart from including certain improvements to the text, the reference to “registration with the Commercial Registry” of the approval of the amendment, removal or relocation of the website is replaced with a reference to its “record on the Bank’s page maintained with the Commercial Registry”, thus conforming the text of the Bylaws to the tenor of the new text of article 11 bis of the Spanish Corporate Enterprises Act.

Our amended Bylaws have not yet been filed with the Mercantile Register, which is required prior to their effectiveness. We expect that the amendments will become effective within the first semester of 2013.

Our current Bylaws are included as Exhibit 1.1. The Bylaws 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— Bylaws”.

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 current 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, 2012, the Bank’s share capital was €5,160,589,875, represented by a single class of 10,321,179,750 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.

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Corporate Object and Purpose

Article 2 of our Bylaws 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 Bylaws do not contain any provisions relating to sinking funds.

Our Bylaws 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 Bylaws 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. At our annual general shareholders’ meeting held on March 30, 2012, our shareholders approved an amendment to our Bylaws to require that notices of all meetings be published at least one month prior to the date set for the meeting, except in those instances in which a different period is established by law, in the Official Gazette of the Mercantile Register or in one of the local newspapers having the largest circulation in the province where the registered office of Santander is located, on the website of the National Securities Market Commission (CNMV) and on the Company’s website (www.santander.com). 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 March 22, 2013 and our last extraordinary general meeting of shareholders was held on January 26, 2009.

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 Bylaws 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. 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.

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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 general shareholders’ meetings held on June 18, 2005, June 17, 2006, June 23, 2007, June 21, 2008, June 19, 2009, June 11, 2010, June 17, 2011, March 30, 2012 and March 22, 2013, 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.

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 Bylaws.

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.

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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 general shareholders’ meeting held on March 22, 2013, the shareholders passed resolutions which, among other things, withdrew, to the extent of the unused amount, the authorization granted by the shareholders at the annual meeting held on March 30, 2012, and gave the board the authority to increase, within a period of three years from the date of the meeting, the Bank’s capital by up to €2,634,670,786. Under these resolutions, the board is authorized to totally or partially exclude pre-emptive rights upon the terms of the Spanish law, provided, however, that this power is limited to capital increases carried out under this resolution up to the amount of €1,053,868,314.50.

At the Bank’s annual general shareholders’ meeting held on March 22, 2013, the shareholders passed resolutions which, among other things, withdrew, to the extent of the unused part, the authorization granted by the shareholders at the annual general shareholders meeting held on March 30, 2012, and permitted the Bank to issue, within five years from the date of the meeting, on one or more occasions, debentures, bonds, participating preference shares and other fixed-income securities or debt instruments of a similar nature (including warrants) that are convertible into and/or exchangeable for shares of the Bank in an amount up to €10 billion aggregate principal amount or the equivalent thereof in another currency.

At the Bank’s annual general shareholders’ meeting held on March 22, 2013, our shareholders also passed a resolution by which they authorized the board of directors to issue, on one or more occasions, up to €50 billion euros, or the equivalent thereof in another currency, in fixed-income securities in any of the forms admitted by Law, including bonds, certificates, promissory notes, debentures and preferred interests or debt instruments of a similar nature (including warrants payable by physical delivery or set-off). This power may be exercised by the board of directors within a maximum period of five years from the date of adoption of this resolution by the shareholders, at the end of which period it shall be cancelled to the extent of the unused amount.

Dividends

We normally pay dividends in quarterly installments in August and November of the relevant year and February and May of the following year. Such dividends may be either cash dividends or scrip dividends according to the Santander Dividendo Elección program, pursuant to which each shareholder receives a free allotment right for every Santander share held. These rights are listed on and may be traded on the Spanish Stock Exchanges during a 15 calendar day period. Following the end of this period, the rights will be automatically converted into new Santander shares. Each shareholder may opt for one of the following alternatives: (i) receive new Santander shares; (ii) receive a cash payment equivalent to the dividend. To this end, Banco Santander assumes an irrevocable undertaking to acquire the free allotment rights for a fixed price; or (iii) receive a cash payment through selling rights on market. We and our domestic banking subsidiaries are subject to certain restrictions on dividend payments, as prescribed by the Ministry of Economy and Competitiveness and the Bank of Spain. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Restrictions on Dividends” herein.

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 Bylaws 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 years after the dividend payment date.

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The shareholders at the annual 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. However, preemptive rights of shareholders 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 Bylaws do not contain any provisions relating to redemption of shares except as set forth in connection with capital reductions. Nevertheless, pursuant to Spanish law, redemption rights may be created at a duly held general shareholders’ meeting. Such meeting will establish the specific terms of any redemption rights created.

Registration and Transfers

The Santander shares are in book-entry form in the Iberclear system. We maintain a registry of shareholders. We do not recognize, at any given time, more than one person as the person entitled to vote each share in the shareholders meeting.

Under Spanish law and regulations, transfers of shares quoted on a stock exchange are normally made through a Sociedad o Agencia de Valores, credit entities and investment services companies, that are members of the Spanish stock exchange.

Transfers executed through stock exchange systems are implemented pursuant to the stock exchange clearing and settlement procedures of Iberclear. Transfers executed “over the counter” are implemented pursuant to the general legal regime for book-entry transfer, including registration by Iberclear.

New shares may not be transferred until the capital increase is registered with the Commercial Registry.

Liquidation Rights

Upon a liquidation of Santander, our shareholders would be entitled to receive pro-rata any assets remaining after the payment of our debts, taxes and expenses of the liquidation. Holders of non-voting shares, if any, are entitled to receive reimbursement of the amount paid before any amount is distributed to the holders of voting shares.

218

Change of Control

Our Bylaws 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 financial institution.

Any individual or corporation that wishes to acquire, directly or indirectly, a significant holding (participación significativa) in a Spanish financial institution 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 holding” is defined as 10% 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, among others, 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.

Any individual or corporation which acquires, directly or indirectly, a participation in a Spanish financial institution and as a consequence the percentage of its share capital or voting rights reaches or exceeds 5%, must notify the Bank of Spain and the relevant financial institution, indicating the amount of the participation reached.

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 Competitiveness: (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.

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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 rules replaced 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).

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” herein.

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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 three years but can be re-elected. One third of the members of the board are elected each year.

A director could serve for a term shorter than the one for which he or she has been initially elected if the shareholders acting at a duly called general meeting decide that that director be replaced before completing his or her term.

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 Bylaws also provides that the shareholders at the general shareholders’ meeting shall endeavor to ensure that external or non-executive directors represent a large majority of the board of directors, and that a reasonable number of the board of directors are independent directors. In addition, the shareholders at the general shareholders’ meeting shall likewise endeavor to ensure that independent directors represent at least one-third of the total number of directors.

These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. See Item 16G of Part II, “Corporate Governance—Independence of the directors on the board of directors” herein.

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 Bylaws. For instance, Article 57 of our Bylaws 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 Bylaws 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 Bylaws. 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 with the Bank, 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 Bylaws, 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.

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Our current Bylaws 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. The compensation has two components: an annual retainer and attendance fees.

At the Bank’s annual general shareholders’ meeting held on March 22, 2013, our shareholders passed a resolution to amend section 2 of article 58 of our Bylaws regarding the rules for the remuneration of directors for their duties of supervision and collective-decision making, which changed from the system of profits participation to one of fixed annual remuneration determined by the shareholders at the general shareholders’ meeting. Such amount shall remain in effect to the extent that the shareholders at the general shareholders’ meeting do not resolve to change it, although the board may reduce the amount thereof in those years in which it so believes justified. Such compensation shall have two components: (i) an annual amount, and (ii) attendance fees.

The specific amount payable for the above-mentioned items to each of the directors and the form of payment shall be determined by the board of directors. For such purpose, it shall take into consideration the positions held by each director on the board and their membership in and attendance at the meetings of the various committees.

Our amended Bylaws have not yet been filed with the Mercantile Register, which is required prior to their effectiveness. We expect that the amendments will become effective within the first semester of 2013.

Regardless of the limit set above, the directors are entitled to receive compensation 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.

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 Bylaws and applicable Spanish legislation).

According to our Bylaws, the board of directors must, on an annual basis, approve a report on directors remuneration policy, which shall include complete, clear and understandable information regarding: (i) the overall summary of the application of such policy during the last fiscal year, including a breakdown of the individual compensation accrued by each director during such fiscal year, (ii) the policy approved by the board for the current year and (iii) the policy, if any, planned for future years. This report must be made available to the shareholders when the annual general shareholders’ meeting is called and must be submitted to a non-binding vote thereof as a separate item on the agenda.

Board of Directors Qualification

There are no mandatory retirement provisions due to age for board members in our Bylaws or in the regulations of our board of directors. These regulations contain provisions relating to the cessation of directorship for other reasons.

In addition, there are no share ownership requirements in our Bylaws or in the Rules and Regulations of the Board of Directors.

Pursuant to Spanish law, directors appointed by the board but whose appointment remains subject to ratification by the shareholders must be a shareholder of the Bank and, pursuant to the Rules and Regulations of the Board, proprietary directors must submit their resignation proportionately when the shareholder that they represent parts with its shareholdings or reduces them in a significant manner. Our Bylaws and Rules and Regulations of the Board do not otherwise require ownership of Santander shares for a director’s qualification.

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.

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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 Council of Ministers may agree to suspend, all or part of, Royal Decree 664/1999 following a proposal of the Minister of Economy and Competitiveness, 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 U.S. 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 you are a U.S. 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”).

On January 14, 2013, the United States of America and the Kingdom of Spain signed a protocol amending the Treaty, which needs to be ratified by both countries, and will become effective three months following the date on which notice is provided by the later of the countries to provide notice that its internal procedures for effectiveness have been fulfilled. When this protocol becomes effective, taxation described under the Treaty in this section may be altered.

You should consult your own tax adviser as to the particular tax consequences to you of owning the shares or ADSs including your eligibility for the benefits of any treaty between Spain and the country of your residence for the avoidance of double taxation, the applicability or effect of any special rules to which you may be subject, and the applicability and effect of state, local, foreign and other tax laws and possible changes in tax law.

Spanish tax considerations

The following is a summary of material Spanish tax matters and is not exhaustive of all the possible tax consequences to you of the acquisition, ownership and disposition of ADSs or shares. This discussion is based upon the tax laws of Spain and regulations thereunder, which are subject to change, possibly with retroactive effect.

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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 21% rate. Royal Decree-Law 20/2011 has temporarily increased from 19% to 21% the rate applicable until December 31, 2013.

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 withhold tax on the gross amount of dividends at a 21% 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 U.S. 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 timely to provide our depositary with the required documentation, you may obtain a refund of the 6% in excess withholding that would result from the Spanish tax authorities in accordance with the procedures below.

A scrip dividend (such as a dividend described in Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Recent events”) will be treated as follows:

• If the holder of ordinary shares or ADSs elects to receive newly issued ordinary shares or ADSs it will be considered a delivery of fully paid-up shares free of charge and, hence, will not be considered income for purposes of the Spanish Non-Resident Income Tax. The acquisition value, both of the new ordinary shares or ADSs received in the scrip dividend and of the ordinary shares or ADSs from which they arise, will be the result of dividing the total original cost of the shareholder’s portfolio by the number of shares, both old and new. The acquisition date of the new shares will be that of the shares from which they arise.

• If the holder of ordinary shares or ADSs elects to sell the rights on the market, the amount obtained from the sale of rights will be deducted from the acquisition value of the shares from which the rights arose. If the amount obtained from such sale is higher than the acquisition value of the shares from which the rights arose, the excess amount will be treated as a capital gain for the holder in the fiscal year in which the transfer takes place (please refer to “—Taxation of capital gains” below).

• If the holder of ordinary shares or ADSs elects to receive the proceeds from the sale of rights back to us at a fixed price, the tax regime applicable to the amounts received will be that applicable to cash dividends described above.

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 U.S. 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.

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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, the 210 Form may be filed on or after February 1^st 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 U.S. tax implications of receipt of a refund.

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 U.S. resident, income from the sale of ADSs or shares will be treated as capital gains for Spanish tax purposes. Since January 1, 2012, Spanish Non-Resident Income Tax is levied at a 21% 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. Royal Decree-Law 20/2011 has temporarily increased the applicable rate from 19% to 21% until December 31, 2013.

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, if you are a U.S. resident, 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 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 might take the view that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. If such a view were to prevail, non-residents of Spain who held shares or ADSs on the last day of any year would be subject to the Spanish wealth tax for such year on the average market value of such shares or ADSs during the last quarter of such year.

Law 4/2008 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. However, Royal Decree-Law 13/2011 of September 16, extended by Law 16/2012, has temporarily restored the wealth tax abolishing the 100% tax rebate until January 1, 2014 and introduced a €700,000 tax free amount.

As a result of Royal Decree-Law 13/2011 and Law 16/2012, non-residents of Spain who held shares, ADSs, or other assets or rights located in Spain according to Spanish wealth tax law, on the last day of 2012 and 2013 whose combined value exceeds €700,000 might be subject to the Spanish wealth tax on that excess amount at marginal rates varying between 0.2% and 2.5%, and would be obliged to file the corresponding wealth tax return.

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 might 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 21% tax rate on the fair market value of the shares as a capital gain. Royal Decree-Law 20/2011 has temporarily increased from 19% to 21% the rate applicable until December 31, 2013. 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.

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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.

U.S. Federal Income Tax Considerations

The following summary describes the material U.S. 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 U.S. Holders (as defined below) that hold ADSs or shares as capital assets for U.S. federal income tax purposes. In addition, it does not describe all of the tax consequences that may be relevant in light of the U.S. Holder’s particular circumstances, including the potential application of the provisions of the Internal Revenue Code of 1986, as amended (the “Code”) known as the Medicare contribution tax, state, local or non-United States tax laws, and tax consequences applicable to U.S. Holders subject to special rules, such as:

• financial institutions;

• insurance companies;

• dealers and traders in securities that use a mark-to-market method of tax accounting;

• persons holding ADSs or shares as part of a “straddle”, conversion transaction or integrated transaction;

• persons whose “functional currency” is not the U.S. dollar;

• persons liable for the alternative minimum tax;

• tax exempt entities, including “individual retirement accounts” and “Roth IRAs”;

• partnerships or other entities classified as partnerships for U.S. federal income tax purposes;

• persons that own or are deemed to own 10% or more of our voting shares;

• persons that acquired our ADSs or shares pursuant to the exercise of an employee stock option or otherwise as compensation; or

• persons 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 U.S. federal income tax purposes holds shares or ADSs, the U.S. 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 U.S. federal income tax consequences of owning and disposing of the shares or ADSs.

This summary is based on the Code, administrative pronouncements, judicial decisions, final, temporary and proposed Treasury Regulations, and the Treaty, 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 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. U.S. Holders are urged to consult their own tax advisers as to the U.S., Spanish and other tax consequences of the ownership and disposition of ADSs or shares in their particular circumstances.

As used herein, a “U.S. Holder” is, for U.S. federal income tax purposes, a beneficial owner of ADSs or shares who is eligible for the benefits of the Treaty and is:

• a citizen or individual resident of the United States;

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• 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

• an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

In general, for U.S. federal income tax purposes, U.S. 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 U.S. Holder exchanges ADSs for the underlying shares represented by those ADSs.

The U.S. 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 U.S. 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 U.S. 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 U.S. 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 U.S. 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 U.S. Holder as foreign-source ordinary dividend income. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. These dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s (or in the case of ADSs, the depositary’s) receipt of the dividends, 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 U.S. dollar value of the euros received, calculated by reference to the exchange rate in effect on the date that distribution is received (which, for U.S. Holders of ADSs, will be the date that distribution is received by the depositary), whether or not the depositary or U.S. Holder in fact converts any euros received into U.S. dollars at that time. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder generally will not be required to recognize foreign currency gain or loss in respect thereof. A U.S. Holder may have foreign currency gain or loss if the euros are converted into U.S. dollars after the date of receipt. Any gain or loss resulting from the conversion of euros into U.S. dollars will be treated as ordinary income or loss, as the case may be, and will be U.S.-source.

A scrip dividend (such as a dividend described in Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Recent events”) will be treated as a distribution of cash, even if a U.S. Holder elects to receive the equivalent amount in shares. In that event, the U.S. Holder will be treated as having received the U.S. dollar fair market value of the shares on the date of receipt, and that amount will be the U.S. Holder’s tax basis in those shares. The holding period for the shares will begin on the following day.

Subject to generally applicable limitations that may vary depending upon a U.S. Holder’s individual circumstances, the discussion above regarding concerns expressed by the U.S. Treasury, and the discussion of the passive foreign investment company rules below, under current law, dividends paid to certain non-corporate U.S. holders may be taxable at rates applicable to long-term capital gains. A U.S. 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 regarding the availability of the reduced rate on dividends in their particular circumstances.

Subject to certain generally applicable limitations that may vary depending upon a U.S. Holder’s circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, a U.S. Holder will be entitled to a credit against its U.S. federal income tax liability for Spanish income taxes withheld at a rate not exceeding 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 U.S. Holder may, at its election, deduct such otherwise creditable Spanish taxes in computing taxable income, subject to generally applicable limitations. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States.

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A U.S. 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 U.S. 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

A U.S. Holder will realize gain or loss on the sale or exchange of ADSs or shares in an amount equal to the difference between the U.S. Holder’s tax basis in the ADSs or shares and the amount realized on the sale or exchange, in each case as determined in U.S. dollars. Subject to the discussion of the passive foreign investment company rules below, the gain or loss will be capital gain or loss and will be long-term capital gain or loss if the U.S. Holder held the ADSs or shares for more than one year. This gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes.

Passive Foreign Investment Company Rules

We believe that we were not a “passive foreign investment company” (“PFIC”) for U.S. federal income tax purposes for the 2012 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 were not or will not be a PFIC for any taxable year.

If we were a PFIC for any taxable year, any gain recognized by a U.S. Holder on a sale or other disposition of ADSs or shares would be allocated ratably over the U.S. 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 U.S. Holder during the preceding three years or the U.S. 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 paid a dividend or the prior taxable year, the reduced rate on dividends discussed above with respect to non-corporate holders would not apply.

Information Reporting and Backup Withholding

Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (i) the U.S. Holder is an exempt recipient or (ii) in the case of backup withholding, the U.S. 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 U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.

Certain U.S. Holders who are individuals may be required to report information relating to their ownership of an interest in certain foreign financial assets, including stock of a non-U.S. entity, subject to certain exceptions (including an exception for publicly traded stock and interests held in custodial accounts maintained by a U.S. financial institution). Certain U.S. Holders that are entities may be subject to similar rules in the future. U.S. Holders are urged to consult their tax advisers regarding the effect, if any, of this requirement on the ownership and disposition of ADSs or shares.

F. Dividends and paying agents

Not Applicable.

G. Statement by experts

Not Applicable.

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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 on the internet at http://www.sec.gov. The information contained on this website does not form part of this annual report on Form 20-F.

I. Subsidiary information

Not Applicable.

Item 11. Quantitative and Qualitative Disclosures About 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 nine parts:

• Corporate principles of risk management, control and risk appetite;

• Corporate governance of the risk function;

• Integrated risk control and internal risk validation;

• Credit risk;

• Liquidity risk and funding;

• Operational risk;

• Compliance and reputational risk;

• Capital; and

• Market risk.

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

Corporate principles

High quality management of risk is one of our hallmarks and thus a priority in our activity. Throughout its 150 years, the Bank 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.

Our risk policy focuses on maintaining a medium-low and predictable profile for all our risks. Our risk management model is a key factor for achieving our strategic objectives.

The economic downturn in 2012 severely affected some of the main markets in which we operate.

This situation particularly tested all our risk admission, monitoring and recovery models. In this context, management of different risks was positive when compared to the performance of the banking sector in these markets, which, combined with the high international diversification of the Group’s businesses, enabled it to produce globally satisfactory results.

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Our banking business model from the risk standpoint

Our risk management and control systems are adapted to the risk appetite framework approved by the Bank’s top governance bodies and to its banking business model:

• Santander focuses on retail banking, ensuring an internationally diversified presence characterized by high market shares (more than 10%) in the main markets where it operates. Wholesale banking is carried out particularly in core markets.

• Santander operates through subsidiaries which are autonomous in terms of capital and liquidity, but are ultimately controlled by the Bank. The corporate structure is simple, minimizing the use of instrumental companies.

• The business model enables a high degree of recurrence in results and its development is backed by a strong capital and liquidity base.

• Santander develops its operational and technological integration model via corporate platforms and tools. This allows information to be steadily aggregated.

• All our activity is conducted within its social and reputational commitment, in accordance with its strategic objectives.

The economic capital distribution among the Group’s businesses reflects the diversified nature of Santander’s activity. The risk of corporate activities mainly emanates from the capital assigned to goodwill and, to a lesser extent, market risk (structural exchange rate and non-trading portfolio of equities). The operating areas account for most of the credit risk, as befits the nature of the Group’s retail banking.

For further details of capital see Part 8 of this Item.

Our risk management model, underpinning the business model, is based on the following principles:

• Independence of the risk function from the business areas. Our third vice-chairman and chairman of the board’s risk committee heads the risk division and reports directly to the executive committee and to the board. The establishment of separate functions between the business areas and the risk areas, responsible for admission, measurement, analysis, control and information, provides sufficient independence and autonomy to control risks appropriately.

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• Direct involvement of senior management in all decisions taken.

• Committee decision-making, ensuring a variety of opinions without results becoming dependent on decisions solely taken by individuals, including at the branch level. Joint responsibility for decisions on credit operations between risk and business areas, with the former having the last word in the event of disagreement.

• Delegated authorities. Each risk acceptance and management unit has clearly defined the types of activities, segments and risks it can face and decisions it might make in the sphere of risks, in accordance with delegated powers. Contracting and management procedures, and where operations are recorded, are also defined.

• Centralized control. Risk control and management are conducted on an integrated basis through a corporate structure, with global scope responsibilities (all risk, all businesses, all countries).

Risk management and control is done the following way:

• Set risk appetite. The purpose is to delimit, synthetically and explicitly, the levels and types of risk that the bank is ready to assume in the course of business.

• Establish risk policies and procedures. They constitute the basic framework for regulating risk activities and processes. At the local level, the risk units, through “mirror” structures they have established, incorporate the corporate risk rules to their internal policies.

• Building, independent validation and approval of the risk models developed in accordance with the corporate methodological guidelines. These models systemize the risk origination processes as well as their monitoring and recovery processes, calculate the expected loss, the capital needed and evaluate the products in the trading portfolio.

• Execute a system to monitor and control risks, which verifies, on a daily basis and with the corresponding reports, the extent to which Santander’s risks profile is in line with the risk policies approved and the limits established.

Risk culture

The importance and attention attached by senior management to risk management is deeply rooted in Santander’s DNA. This risk culture is based on the principles of Santander’s risk management model and is transmitted to all business and management units and is supported, among other things, by the following drivers:

• Our risk function is independent of the business units. This enables their criteria and opinions to be taken into account in the various instances where businesses are developed.

• Our structure for delegating powers requires a large number of operations to be submitted to the risk committees of the bank’s central services, be it the global committee of the risk division, the board’s risk committee or the Group’s executive committee. The high frequency with which these approval and risk monitoring bodies meet (twice a week in the case of the board’s risk committee; once a week for the executive committee) guarantees great agility in resolving proposals while ensuring senior management’s intense participation in the daily management of risks.

• Santander has detailed risk management manuals and policies. Risk and business teams hold regular meetings about the business, which produce actions in accordance with the Group’s risk culture. In addition, the risk and business executives participate in the different bodies for resolving operations of the Group’s central services, and this facilitates transmission of criteria and focuses that emanate from senior management, both to the teams of executives as well as the rest of the risk committees. The lack of powers in any one individual means that all the decisions are resolved by collegiate bodies. This confers greater rigor and transparency on decisions.

• Risk limits plan. Santander has established a full system of risk limits which is updated at least annually and covers both credit risk as well as the different market risk exposures, including trading, liquidity and structural (for each business unit and risk factor). Credit risk management is supported by credit management programmes (individuals and small businesses), rating systems (exposures to medium and large companies) and pre-classification (large corporate clients and financial counterparties).

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• Santander’s information systems and aggregation of exposures’ systems enable daily monitoring of exposures, verifying systematic compliance with the limits approved, as well as adopting, where necessary, the pertinent corrective measures.

• Main risks are not only analyzed at the time of their origination or when irregular situations arise in the process of ordinary recovery. They are overseen permanently for all clients. In addition, the Group’s main portfolios are monitored systematically during the month of August.

• Other procedures supporting the dissemination of Santander’s risk culture are the training sessions carried out by the risks corporate school, the remuneration and incentives policy, which includes performance variables that take into account the quality of risk and the bank’s results over the long term, strict compliance by staff with the general codes of conduct and systematic and independent action by the internal auditing services.

Risk training activities

The aim of Santander’s corporate school of risk management is to help consolidate the risk management culture and ensure that all employees in the risks area are trained under the same criteria. The school, which gave a total of 29,960 hours of training to 4,078 employees in 100 activities in 2012, is considered a key element to enhance Santander’s leadership in this sphere and strengthen the skills of our staff.

Furthermore, the risks corporate school trains professionals from other business areas, particularly retail banking, to align the demanding risk management criteria to business goals.

Our risk appetite

Santander defines risk appetite as the amount and type of risks considered reasonable to assume for implementing its business strategy, so that the Group can maintain its ordinary activity in the event of unexpected circumstances that could have a negative impact on its levels of capital, profitability and/or share price.

The board is responsible for annually setting and updating the risk appetite, monitoring the Bank’s risk profile and ensuring the consistency between both of them. Risk appetite is set for the whole of the Group as well as for each of the main business units in accordance with a corporate methodology adapted to the circumstances of each unit/market. At the local level, the boards of the subsidiaries are responsible for approving the respective risk appetite proposals once they have been validated by the Group’s executive committee.

Senior management is responsible for achieving the desired risk profile—which is reflected in the annual budget and in the medium-term strategic plan—as well as for daily risk management, so that the usual limit structures set for each risk are adequately connected to the metrics established for the risk appetite.

These structures of limits for each risk are in addition to the risk appetite and are essential for articulating effective risk management in the daily course of business. In the event that risk appetite levels set are met and once the board is informed, the necessary management measures have to be adopted for effectively adjusting the risk profile.

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The board’s risk committee and the Group’s executive committee verify compliance with the risk appetite at Group and business units on a quarterly basis.

Effective implementation of the risk appetite framework was deepened in 2012 through the corresponding quarterly reviews as well as their development in some of the Group’s main units.

Risk appetite framework

Santander’s risk appetite framework contains quantitative and qualitative elements integrated into series of primary and other metrics.

Quantitative elements of the risk appetite

The primary quantitative metrics of the risk appetite are as follows:

• The maximum losses the Group is willing to assume,

• The minimum capital position the Group wishes to maintain, and

• The minimum liquidity position the Group wishes to have.

These metrics are calculated using severe stress scenarios, which are unlikely to occur, but possible.

In addition, the Group has a series of transversal metrics to limit the excessive concentration of the risk profile, both by risk factors as well as in terms of clients, businesses, countries and products.

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Losses

One of the three primary metrics used to formulate Santander’s risk appetite is the maximum unexpected impact on results the institution is prepared to assume in unfavorable scenarios, with a low, but possible, probability of occurring.

These scenarios mainly affect both (i) losses resulting from the exposure to retail and wholesale credit risk (both the direct credit loss as well as the reduced revenue) and (ii) the potential unfavorable impact resulting from the exposure to market risk. After applying these credit and market impacts to budgeted results, in the context of monitoring risk appetite, senior management ensures that the resulting spread is sufficient to absorb the unexpected impacts from technological and operational risk, and from compliance and reputational risk.

The time frame in which the negative impacts for all risks considered materialize is normally 12 months, except in the case of credit risk where an additional impact analysis is conducted using a three-year time frame. An annual time frame to formulate risk appetite is used.

As regards the metric of losses, according to Santander’s risk appetite the combined impact in all risks resulting from these scenarios must be less than net operating income after ordinary provisions (i.e. ordinary profit before tax).

Capital position

Santander operates with a comfortable capital base which enables it not only to fulfill regulatory requirements but also have a reasonable surplus of capital. The bank has set a core capital ratio target of more than 9% (Basel II) and has also set minimum goals for the Group’s return on risk adjusted capital (RORAC).

In addition and in the face of the aforementioned unfavorable scenarios, Santander’s risk appetite establishes that its risk profile must be such that the unexpected impact of these scenarios does not involve a deterioration of more than 100 basis points in the core capital ratio.

This capital focus included in the risk appetite is consistent with the Group’s capital objective approved within the capital planning process (Pillar II) implemented in the Group and covering a three-year period.

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Liquidity position

The Group’s liquidity management model is based on the following principles:

• Decentralized liquidity model.

• Needs derived from medium and long term activity must be funded by medium and long term instruments.

• High contribution of customer deposits in an essentially retail banking balance sheet.

• Diversification of wholesale funding sources by: instruments/investors; markets/currencies and maturities.

• Limited recourse to short-term funding.

• Availability of a sufficient liquidity reserve, including discounting capacity in central banks to be used in adverse situations.

Bearing in mind the Group’s decision to structure on the basis of autonomous subsidiaries, liquidity management is executed at the level of each subsidiary, while supervised by a corporate control. All the subsidiaries must be self-sufficient as regards availability of liquidity.

Santander’s risk appetite establishes, as regards the liquidity metric, a structural funding ratio of more than 100% (customer deposits, equity and medium and long term issues have to be higher than the structural funding needs defined as lending and stakes in Group companies), as well as demanding objectives of liquidity position and time frames in the face of short term, systemic and idiosyncratic stress scenarios.

Additional quantitative metrics of risk appetite concentration

Santander wants to maintain a widely diversified risk profile from the standpoint of its exposure to large risks, certain markets and specific products. In the first instance, this is achieved by virtue of Santander’s retail banking focus with a high degree of international diversification.

Concentration risk: this is measured by the following metrics upon which set risk appetite thresholds as a proportion of equity or of lending (in general terms):

• Client (as a proportion of equity): (i) net individual maximum exposure to corporate clients (additionally, clients with internal ratings below investment grade and exceeding a certain exposure are also monitored); (ii) net maximum aggregate exposure to the Bank’s 20 largest corporate clients (Top 20); (iii) net maximum aggregate exposure of the exposures considered as large risks (corporate and financial clients); and (iv) maximum impact on profit before tax of a simultaneous failure of the five largest corporate exposures (jump to default Top 5).

• Sector: maximum percentages of exposure of the portfolio of companies in an economic sector, in relation to lending (at both the total level as well as for the segment of companies).

• Portfolios with high risk profile (defined as those retail portfolios with a percentage of risk premium that exceed an established threshold): maximum percentages of exposure to this type of portfolio in proportion to lending (at both the total and retail levels) and for different business units.

Qualitative elements of the risk appetite

The qualitative elements of the risk appetite framework define, in general and for the main risk factors, the positioning that Santander’s senior management wishes to adopt or maintain in the course of its business model. Generally speaking, the framework is based on maintaining the following qualitative objectives:

• A medium-low and predictable risk profile based on a diversified business model, focused on retail banking and with an internationally diversified presence and significant market shares, and a wholesale banking model centered on relations with clients in the Group’s main markets.

• A rating objective in the range of between AA- and A-, both at Group level and in local units (in local scale), on the basis of both the environment as well as the sovereign risk performance.

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• A stable and recurring policy to generate earnings and remunerate shareholders, on a strong capital and liquidity base and a strategy of diversification by funding sources and maturities.

• An organizational structure based on subsidiaries which are autonomous and self-sufficient in capital and liquidity, minimizing the use of instrumental companies, and ensuring that no subsidiary has a risk profile that jeopardizes the Group’s solvency.

• An independent risk function with very active involvement of senior management which guarantees a strong risk culture focused on protecting and ensuring an adequate return on capital.

• A management model that ensures a global and interrelated view of all risks, through an environment of control and robust monitoring of risks, with global responsibilities: all risk, all businesses, all countries.

• Focus in the business model on those products that the Group knows sufficiently well and has the management capacity in (systems, processes and equity).

• The confidence of clients, shareholders, employees and professional counterparties, ensuring that activity is carried out in line with Santander’s social and reputational commitment, in accordance with the Group’s strategic objectives.

• Adequate and sufficient availability of staff, systems and tools that guarantee maintaining a risk profile compatible with the established risk appetite, both at the global and local levels.

• A remuneration policy that has the necessary incentives to ensure that the individual interests of employees and executives are aligned with the corporate framework of risk appetite and that these are consistent with the Bank’s long-term results.

The Group’s risk appetite framework also covers other specific qualitative objectives for the various types of risk.

Risk appetite and living wills

The Group has an organizational structure based on subsidiaries which are autonomous and self-sufficient in terms of capital and liquidity, ensuring that no subsidiary reaches a risk profile that could jeopardize the Group’s solvency.

Grupo Santander was the first of the international financial institutions considered globally systemic by the Financial Stability Board to present (in 2010) to its consolidated supervisor (the Bank of Spain) its corporate living wills including, as required, a viability plan and all the information needed to plan a possible liquidation (resolution plan). Furthermore, and even though not required, more summarized individual plans were drawn up for the main geographic units, including Brazil, Mexico, Chile, Portugal and the U.K..

A third version of the corporate plan in this respect was drawn up in 2012. As with the first two versions in 2010 and 2011, the Group presented the third version of its recovery plan to its crisis management group (CMG) in July 2012. This plan consists of the corporate plan (for Banco Santander) and individual plans for many of its most important local units (U.K., Brazil, Mexico and Sovereign). It is important to point out, in the U.K. case, that the plan was also prepared, in parallel to its in-house development, with respect to local regulatory initiatives.

The significant contribution of the living wills exercise to the conceptual delimitation of the risk appetite, and the Group’s risk profile, should also be noted.

Part 2. Corporate governance of the risks function

The board’s risk committee is responsible for proposing to the board the Group’s risk policy. Its approval corresponds to the board under its powers of administration and supervision. The committee also ensures that the Group’s activities are consistent with its risk tolerance level and establishes the global limits for the main risk exposures, reviewing them systematically and resolving those operations that exceed the powers delegated in bodies lower down the hierarchy.

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The committee is of an executive nature and takes decisions in the sphere of the powers delegated in it by the board. It is chaired by the third vice-chairman of Grupo Santander and four other board members are also members of the committee.

The committee met 98 times during 2012, underscoring the importance that Grupo Santander attaches to appropriate management of its risks.

The main responsibilities of the board’s risk committee are to:

• Propose to the board the Group’s risk policy, which must specifically identify:

• The different types of risk (operational, technological, financial, legal and reputational, among others) facing the Group.

• The information and internal control systems used to control and manage these risks.

• Set the level of risk considered acceptable.

• Identify the measures envisaged to mitigate the impact of identified risks, in the event that they materialize.

• Systematically review exposures to the main customers, economic sectors, geographic areas and types of risk.

• Authorize management tools and risk models and be familiar with the results of the internal validation.

• Ensure that the Group’s actions are consistent with the previously decided risk appetite level.

• Know, assess and monitor the observations and recommendations periodically formulated by the supervisory authorities in the exercise of their function.

• Resolve operations beyond the powers delegated to bodies lower down the hierarchy, as well as the global limits of pre-classification of economic groups or in relation to exposures by classes of risk.

The board’s risk committee delegates some of its powers in risk committees which are structured by geographic area, business and types of risk, all of them defined in the corporate governance risk model.

Both the executive committee and the Bank’s board also pay particular attention to management of the Group’s risks.

The Group’s third vice-chairman is the maximum executive in risk management. He is a member of the board and chairman of the risk committee. Two directorates-general of risks, which are independent of the business areas, both from the hierarchical and functional standpoint, report to the third vice-chairman. The organizational and functional framework is as follows:

• The general directorate of risk (GDR) is responsible for the executive functions of credit and financial risk management and is adapted to the business structure, both by customer type as well as by activity and country (global/local vision).

The GDR is configured in two blocks:

• A corporate structure with global scope responsibilities (“every risk, every country”), entrusted with establishing the policies, methodologies and control. In this block, also denominated intelligence and global control, are the areas/functions of solvency risks, market risk and methodology.

• A business structure, focused on executing and integrating management of the risk functions in the Group’s local and global commercial businesses. In this block, also denominated execution and integration in management, the following areas/functions are grouped: management of standardized risks, management of segmented company risks, global recoveries, management of wholesale banking risk, management of Santander Consumer Finance risks and management of global business risks.

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Between these two blocks is the corporate area of integration in management whose purpose is to intensify and systemize the use of corporate risk management models (credit, market and structural risk), speed up its establishment and ensure integration in the management of all the Group’s units.

Complementing this structure is a global governance and systems area, which supports and advises the GDR, which is responsible for implementation of the organizational model, and for ensuring effective execution of internal control (including the quality processes), and a development and corporate management area which leads the initiatives and projects of the GDR involving various areas and/or local units, such as a common information model and a global corporate platform.

These functions have a global action sphere, i.e. they intervene in all the units where the risk division acts and the same structure is reflected in the local units. The main elements through which the global functions are replicated in each of the units are corporate frameworks. These are central elements to communicate and transfer global practices, reflect the criteria and policies for each of the areas and set the Group’s compliance standards to be applied in all local units.

Generally speaking it is possible to distinguish the main functions developed respectively by the GDR’s global areas and by the units:

• The GDR establishes risk policies and criteria, the global limits and the decision-making and control processes; it generates management frameworks, systems and tools; and manages the best practices within and outside the Group.

• The local units apply the policies and systems to the local market: they adapt the organization and the management frameworks to the corporate frameworks; they contribute critical and best practices and lead the local sphere projects.

• General directorate of integral control and internal validation of risks. This is of corporate nature, supporting the Group’s governance bodies, with the following global reach responsibilities:

• Internal validation of credit, market and economic capital risk models in order to assess their suitability for management and regulatory purposes. Validation involves reviewing the model’s theoretical foundations, the quality of the data used to build and calibrate it, the use to which it is put and the process of governance associated.

• Integral control of risks, the mission of which is to supervise the quality of the Group’s risk management, guaranteeing that the management and control systems of the various risks inherent in its activity comply with the most demanding criteria and best practices observed in the banking industry and/or required by regulators, and verifying that the profile of effective risk assumed is adjusted to what senior management has established.

Part 3. Integrated risk control and internal risk validation

The functions of integral control and internal validation of risks are located at the corporate level in the general directorate of integral control and internal validation of risks, which reports directly to the Group’s third vice-chairman and chairman of the risk committee, and is configured as a support for the Group’s governance bodies in the sphere of control and risk management.

Function of integral control of risks

Grupo Santander launched the function of integral control of risks in 2008 in order to provide a fully rounded view for top management of all risks that affect development of the Group’s ordinary activity. These risks are: (i) credit risk (including those of concentration and counterparty); (ii) market risk (including liquidity as well as the structural risks of interest rates and exchange rates); and (iii) operational and technological risks; and (iv) compliance and reputational risks.

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Integral control of risks is based on three complementary activities:

1. Guaranteeing that the management and control systems of the various risks inherent in Grupo Santander’s activity meet the most demanding criteria and the best practices observed in the industry and/or required by regulators;

2. Ensuring 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 risk appetite; and

3. Supervising 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 Santander is subject.

The function has global and corporate scope and covers all risks, all businesses and all countries and is configured as a third layer, of control after that carried out in the first instance by the executive responsible for control and management of each risk in the sphere of each business or functional unit (first layer) as well as by each executive responsible at the corporate level for the control of each risk (second layer). This ensures the vision and thus the integral supervision of all the risks that Santander incurs during the year.

Methodology and tools

This function is backed by an internally developed methodology and a series of tools that support it, in order to systemize the exercise of it and adjust it to Santander’s specific needs. This enables application of the methodology to be formalized and traceable. The methodology and the tools of the three activities are articulated through the following modules:

Module 1

A set 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 in the process is assessed and enables the parameters of control of the various risks to be homogenized, is done every 12 months. New tests are incorporated on the basis of the best practices most recently observed in the industry and/or required by regulators. The support tool is a repository of the results of each test and of its work papers. A review of the situation of each risk is also conducted every six months, with monitoring of the recommendations that emanate from the annual report of integral control.

Module 2

Senior management is able to monitor the integral vision of the various risks assumed and their adjustment to the previously formulated risk appetites.

Module 3

There is a tool to monitor proactively the recommendations made by internal auditing and by the supervisors regarding risk control and management. This also enables the recommendations arising from integral control to be registered.

The Bank of Spain can access these tools if it so wishes and thus also the work papers used to develop the function of integral control of risks.

Activity during 2012

(a) The fourth cycle of reviewing the various risks was completed in close contact with the corporate areas of control, contrasting and assessing the control and management systems of these risks. Improvements were identified and turned into recommendations—with their corresponding schedule for implementation agreed with the risk areas—along with half-yearly monitoring of the progress achieved in the recommendations made in 2011.

(b) The board and executive committee were regularly informed with an integral vision of all risks. The risk committee and the audit and compliance committee were also kept in the picture.

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(c) Work continued on extending the integral control of risks model to the Group’s main units, also coordinating the initiatives in this sphere in the various countries.

(d) There was also participation, in coordination with the public policy area and other areas, in representing the Group in forums such as the Financial Stability Board (FSB), IIF, Eurofi and the Enhanced Disclosure Task Force (EDTF, sponsored by the FSB) in matters such as transparency in information on risks

Internal independent validation of risk models

As well as being a regulatory requirement, the function of internal validation of risk models constitutes a fundamental support for the risk committee, and for local and corporate risk committees, in their responsibilities of authorization of the use (management and regulatory) of models and their regular review.

Internal validation of models consists of a specialized unit with sufficient independence, obtaining a technical opinion on the adequacy of the internal models for the purposes used, whether they be internal management and/or of a regulatory nature (calculation of the regulatory capital, levels of provisions, etc.), and concluding on their robustness, use and effectiveness.

Santander’s internal validation of models covers credit risk models, market risk models and those for setting the price 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 technological systems and the quality of the data that enable and support their effective functioning and, in general, all relevant aspects (controls, reporting, uses, involvement of senior management, etc.).

The function is global and corporate. In order to ensure homogeneous application, it is conducted via four regional centers in Madrid, London, Sao Paulo and New York. These centers have full functional and hierarchical dependence on the corporate center, which ensures uniformity in the development of its activities. This facilitates implementation of a corporate methodology that is supported by a series of tools developed internally in Santander, which provide a robust corporate framework for all the Group’s units, computerizing certain verifications in order to ensure that the reviews are carried out efficiently.

This corporate framework of internal validation is fully aligned with the criteria on internal validation of the advanced models issued by the Bank of Spain and by the rest of supervisors to whom the Group is subjected. In this respect, the criterion of separating functions between the units of internal validation and internal auditing is maintained, which is the last layer of control in the Group charged with reviewing the methodology, tools and work conducted by internal validation and expressing its opinion on its degree of effective independence.

Following is an analysis of the Group’s main types of risk: credit, liquidity and funding, operational, compliance and reputational and market risks.

Part 4. Credit Risk

4.1 Introduction to the treatment of credit risk

Credit risk is the possibility of losses stemming from the failure of clients or counterparties to meet their financial obligations with the Group.

The Group’s risks function is organized on the basis of two types of customers:

• Those under individualized management are assigned a risk analyst. This category includes the global wholesale banking customers (corporations, financial institutions and sovereigns), companies within the retail banking scope with a risk level which is above the exposure threshold set by each unit. Risk management is conducted through expert analysis backed up by tools that support decision making;

• The segment of standardized risks covers those clients who have not been assigned a risk analyst. This category includes individuals, the self-employed and retail banking companies that are not under individualized management. Management of these risks is based on internal models of assessment and automatic decisions, complemented when necessary by expert teams of analysts.

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The following chart shows the distribution of credit risk on the basis of the management model.

The Group’s risk profile is mainly retail, accounting for over 80% of total risk.

4.2 Main magnitudes and performance

4.2.1 Global credit risk map 2012

Credit exposure in 2012 was €1,231,398 million, most of it with customers and credit entities (87% of the total).

Risk is diversified among the main regions where the Group operates: Europe (72%), Latin America (22%) and the U.S.(6%).

Credit risk exposure increased 1.3% in 2012, largely due to the growth in outstanding loans with credit entities, mainly because of the growth in deposits in central banks.

Excluding the exchange-rate impact of the main currencies against the euro, the increase was 2%.

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The following table sets out the global credit risk exposure in nominal amounts (except for derivatives and repos exposure, which is expressed in equivalent credit) as of December 31, 2012.

GRUPO SANTANDER - GROSS EXPOSURE TO CREDIT RISK CLASSIFIED IN ACCORDANCE WITH LEGAL COMPANY CRITERIA

Million euros. Data at 31 December 2012
	Customers						Entities2						Fixed income3						Derivatives and repos			Total
	Outstanding1			Commitments			Outstanding			Commitments			Sovereign			Private			(ECR)4
Spain		228,332			45,281			61,669			3,851			31,634			9,082			31,661			411,510
Parent bank		140,875			34,352			52,220			3,582			22,095			6,221			26,627			285,972
Banesto		68,119			6,519			8,018			157			4,899			1,285			4,924			93,921
Others		19,338			4,410			1,431			111			4,641			1,576			110			31,617
Rest of Europe		334,697			64,587			42,279			192			12,019			5,288			14,276			473,337
Germany		30,640			8,349			1,628			—			—			41			2			40,659
Portugal		23,910			5,851			1,718			131			3,545			1,675			2,414			39,243
UK		242,736			45,262			36,394			—			5,819			3,114			11,088			344,413
Others		37,412			5,125			2,539			61			2,655			458			772			49,023
Latin America		152,933			55,879			24,610			—			16,945			6,568			9,369			266,304
Brazil		86,684			39,476			16,613			—			11,282			4,796			5,064			163,915
Chile		32,288			7,910			1,654			—			1,618			1,273			1,979			46,722
Mexico		21,378			7,604			3,610			—			2,738			348			2,157			37,836
Others		12,582			889			2,734			—			1,308			150			169			17,832
United States		44,429			17,581			2,755			—			1,594			12,564			785			79,707
Rest of world		382			35			120			—			—			2			—			539
Total Group		760,772			183,362			131,433			4,043			62,192			33,504			56,091			1,231,398
% Total		61.8	%		14.9	%		10.7	%		0.3	%		5.1	%		2.7	%		4.6	%		100	%
% Change/Dec 11		(3.2	%)		3.0	%		31.2	%		16.7	%		3.4	%		14.9	%		(4.7	%)		1.3	%

EVOLUTION OF GROSS EXPOSURE TO CREDIT RISK
Million euros. Data at 31 December 2012
	2012		2011		2010		Change/2011			Change/2010
Spain		411,510		421,142		427,092		(2.3	%)		(3.6	%)
Parent bank		285,972		278,663		276,105		2.6	%		3.6	%
Banesto		93,921		101,264		108,556		(7.3	%)		(13.5	%)
Others		31,617		41,215		42,430		(23.3	%)		(25.5	%)
Rest of Europe		473,337		447,754		428,525		5.7	%		10.5	%
Germany		40,659		33,541		22,984		21.2	%		76.9	%
Portugal		39,243		41,241		43,272		(4.8	%)		(9.3	%)
UK		344,413		327,321		325,624		5.2	%		5.8	%
Others		49,023		45,651		36,645		7.4	%		33.8	%
Latin America		266,304		272,297		271,106		(2.2	%)		(1.8	%)
Brazil		163,915		176,317		174,263		(7.0	%)		(5.9	%)
Chile		46,722		43,406		43,296		7.6	%		7.9	%
Mexico		37,836		32,777		35,361		15.4	%		7.0	%
Others		17,832		19,797		18,186		(9.9	%)		(2.0	%)
United States		79,707		73,717		78,590		8.1	%		1.4	%
Rest of world		539		964		1,009		(44.1	%)		(46.6	%)
Total Group		1,231,398		1,215,874		1,206,322		1.3	%		2.1	%

(1) Balances with customers include contingent risks (see the auditor’s report and annual consolidates statements, note 35) and exclude repos (€4,707 million) and other customer financial assets (€23,686 million).

(2) Balances with credit entities and central banks include contingent risks and exclude repos, the trading portfolio and other financial assets. Of the total, €104,454 million are deposits in central banks.

(3) Total fixed income excludes the trading and investment portfolio of third party takers of insurers.

(4) ECR (equivalent credit risk: net value of replacement plus the maximum potential value. Includes mitigants).

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4.2.2 Performance of magnitudes in 2012

The table below sets out the main items related to credit risk derived from our activity with customers:

GRUPO SANTANDER - RISK, NPLS, COVERAGE, PROVISIONS AND COST OF CREDIT*
	Credit Risk with customers1 (million euros)						Non-performing loans (million euros)						NPL ratio %
	2012		2011		2010		2012		2011		2010		2012		2011		2010
Continental Europe		334,028		354,666		370,673		20,869		18,378		16,075		6.25		5.18		4.34
Santander Branch Network		111,756		118,060		126,705		10,787		10,002		6,994		9.65		8.47		5.52
Banesto		71,976		78,860		86,213		4,520		3,950		3,548		6.28		5.01		4.11
Santander Consumer Finance		59,387		59,442		67,820		2,315		2,361		3,359		3.90		3.97		4.95
Portugal		28,188		30,607		32,265		1,849		1,244		937		6.56		4.06		2.90
Poland		10,601		9,120		—		500		446		—		4.72		4.89		—
UK		255,519		259,386		244,707		5,241		4,763		4,308		2.05		1.84		1.76
Latin America		160,413		159,445		149,333		8,695		6,881		6,141		5.42		4.32		4.11
Brazil		89,142		91,035		84,440		6,113		4,902		4,149		6.86		5.38		4.91
Mexico		22,038		19,446		16,432		428		354		303		1.94		1.82		1.84
Chile		32,697		28,462		28,858		1,691		1,096		1,079		5.17		3.85		3.74
Puerto Rico		4,567		4,559		4,360		326		394		462		7.14		8.64		10.59
Argentina		5,378		4,957		4,097		92		57		69		1.71		1.15		1.69
Sovereign		44,678		43,052		40,604		1,025		1,229		1,872		2.29		2.85		4.61
Total Group		794,901		822,657		804,036		36,100		32,036		28,522		4.54		3.89		3.55
Memo item:
Spain		249,477		271,180		283,424		16,809		14,900		12,007		6.74		5.49		4.24

	Coverage (%)						Spec. provs. net of recovered write-offs2 (million euros)						Credit cost (% of risk)3
	2012		2011		2010		2012		2011		2010		2012		2011(4)		2010(5)
Continental Europe		72.5		55.8		71.4		4,106		3,828		6.190		1.19		1.10		1.62
Santander Branch Network		67.5		39.9		51.8		1,545		1,735		2.454		1.33		1.42		1.89
Banesto		71.3		53.1		54.4		948		778		1.272		1.28		0.96		1.52
Santander Consumer Finance		109.5		109.3		128.4		797		762		1.884		1.34		1.43		2.85
Portugal		53.1		54.9		60.0		344		283		105		1.17		0.90		0.30
Poland		68.3		65.2		—		117		59		—		1.17		—		—
UK		45.4		40.2		45.8		982		811		826		0.36		0.32		0.34
Latin America		87.5		97.0		103.6		7,215		5,379		4.758		4.48		3.57		3.53
Brazil		90.2		95.2		100.5		5,939		4,554		3.703		6.47		5.28		4.93
Mexico		157.3		175.7		214.9		459		293		469		2.11		1.63		3.12
Chile		57.7		73.4		88.7		601		395		390		1.86		1.40		1.57
Puerto Rico		62.0		51.4		57.5		86		95		143		1.90		2.25		3.22
Argentina		143.3		206.9		149.1		106		29		26		1.99		0.67		0.72
Sovereign		105.9		96.2		75.4		284		416		479		0.62		1.04		1.16
Total Group		72.6		61.4		72.7		12,574		10,426		12.342		2.21		1.41		1.56
Memo item:
Spain		70.6		45.5		57.9		2.993		2.821		4.352		1.23		1.04		1.53

* So that like-for-like comparisons can be made between 2012 and 2011, the data for 2011 has been restated.

1. Includes gross loans to customers, guarantees, documentary credits and clients’ mark to market (MtM) derivatives (€5,735 million).

2. Bad debts recovered (€1,321 million).

3. (Specific provisions-bad debts recovered)/Total average credit risk.

4. Excludes the incorporation of Bank Zachodni WBK.

5. Excludes AIG from Santander Consumer Finance in Poland.

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At the end of 2012, non-performing loans amounted to €36.1 billion and the Group’s NPL ratio stood at 4.54% (+65 basis points), mainly due to the situation in Spain. It is important to point out that this ratio is below the sector’s average in almost all the countries in which the Group operates.

These NPLs are covered by €12,574 million of specific loan-loss provisions net of insolvencies. Total loan-loss provisions were €26,194 million.

The Group’s coverage ratio was 72.6%, up from 61.4% in 2011. It is important to note that this ratio is affected by the weight of mortgages (particularly in the U.K. and Spain), which require fewer provisions as they have collateral.

The structure of the main magnitudes by geographic area:

• Continental Europe

• Spain’s NPL ratio was 6.74% (+125 basis points) while the ratio for the whole banking system was 10.58%. The provisions for the real estate sector brought the coverage level to 70.6%.

• Portugal’s NPL ratio was 6.56% and coverage was 53.1%. Santander Totta was positively viewed in the programme of special inspections by the Bank of Portugal and the troika. It was the only bank that did not require additional provisions.

• Poland’s NPL ratio was 4.72% (-17 basis points) and coverage was 68.3%.

• The U.K. recorded a NPL ratio of 2.05% (+21 basis points) and a coverage ratio of 45.4%.

• Brazil’s NPL ratio was 6.86% (+148 basis points) and coverage was 90.2%.

• Latin America excluding Brazil

The overall NPL ratio was 3.62% and coverage 81.2%.

• Lending in Chile accounted for 4.1% of the Group’s total, with a mix of diversified portfolio and balanced between individual borrowers and companies. The NPL ratio was 5.17% and coverage 57.7%.

• Mexico’s lending grew 13.3% in 2012, driven by the macroeconomic scenario. This growth went hand in hand with good credit quality indicators. The NPL ratio was 1.94%, one of the lowest in the region, and coverage was 157.3%, also well above the banking system’s average.

• Sovereign’s NPL ratio was 2.29% (-56 basis points). Coverage rose by 9.7 percentage points to 105.9%.

Restructured/refinanced portfolio

The general term restructured/refinanced portfolio, in accordance with the Bank of Spain circular 6/2012, refers to those operations in which the client has presented, or might present, financial difficulties in meeting their payment obligations in the prevailing contractual terms and, for this reason, it could be advisable to modify, cancel or even formalize a new transaction.

The restructuring/refinancing of debts is part of the usual risk management with clients, although it assumes greater importance at times of economic weakening.

Grupo Santander follows very rigorous definitions and policies in this management process, which is conducted in accordance with the best practices and within the strictest compliance with regulatory requirements.

Grupo Santander has a detailed corporate policy for restructuring/refinancing, which meets the Bank of Spain’s rules via circulars 4/2004 and 6/2012 and which is applied to all countries and clients. This policy establishes rigorous criteria that underscore Santander’s prudence in assessing these risks, noteworthy are those regarding its restricted use and the classification of this type of operation:

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• There must be restrictive use of restructurings, which must be accompanied by guarantees or additional efforts by the client, avoiding actions that only postpone recognition of the non-performing loan.

• The aim is to recover all the amounts owed, which entails recognizing as soon as possible the amounts that it is estimated cannot be recovered. Delaying immediate recognition of losses would be contrary to good management practices.

• The restructuring must always maintain the existing guarantees and, wherever possible, improving them and/or increasing the coverage. Effective guarantees not only serve to mitigate the severity, but also can reduce the probability of default.

• This practice should not mean granting additional financing to the client, nor serve to refinance the debt of other banks, nor be used as an instrument of cross-selling.

• It is necessary to assess all the refinancing alternatives and their effects, ensuring that the results would be better than those likely to be achieved in the event of not doing it.

• The new operation cannot mean an improvement in the classification as long as a satisfactory experience with the client does not exist.

All Grupo Santander’s institutions apply these principles, adapting them to meet local needs and rules, and are always subordinated to complying with any stricter local rule that has to be implemented.

From management’s standpoint, taking into account the client’s different situation of irregularity at the time of the restructuring/refinancing, there are two types of operation:

• Those that arise from a non-doubtful loan situation. These operations refer to clients who, due to a change in their economic circumstances, could experience an eventual reduction in their payment capacity, although at the time, they are up to date with payments or have not failed to make payments for more than three months. This contingency can be resolved by adapting the debt conditions to the client’s new payment capacity, which facilitates compliance with their obligations. Of the total restructured/refinanced portfolio, 77% corresponds to this type of operation.

• Operations that arise from a doubtful situation whether for subjective or objective reasons, when at least three months have passed since the first non-payment. These operations do not signify a release of provisions, as the doubtful risk classification remains, unless the criteria set out in the regulatory rules based on Bank of Spain circulars are fulfilled (payment of ordinary interest pending and, in all cases, contribution of new effective guarantees or a reasonable certainty of payment capacity), as well as the cautions which, under a criterion of prudence, are set out in the Group’s corporate policy (sustained payment during a period on the basis of the features of the operation and the type of guarantees existing).

These operations are classified in accordance with their features in the following way:

• Doubtful: those restructurings in a process of normalization or which, being classified as normal or substandard, during the life of the operation, present new payment difficulties. In the event of this deterioration intensifying, in accordance with the criterion of corporate prudence, the loan will be considered as a write-off.

• Substandard: those restructurings emanating from doubtful loans which have met sustained payment for a certain period on the basis of the features of the operation and the type of guarantees existing.

In the particular case of those operations with a grace period on capital payments, the restructuring will be classified as substandard risk, if it is not already classified as doubtful risk, and must be maintained as such until the grace period ends

• Normal: those restructurings emanating from doubtful or substandard loans which have exceeded a period of observation which shows the re-establishment of the payment capacity in accordance with the periods established in the corporate policy.

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According to this policy, the operations in a normal situation must be kept under this special watch for a minimum, precautionary period of two years and have amortized 20% of the principal of the loan, except for those articulated via some type of hair cut which will be maintained until its extinction.

The total portfolio stood at €55,714 million at the end of 2012 and was distributed as follows:

RESTRUCTURED/REFINANCED PORTFOLIO
Million euros
	Normal		Substandard					Doubtful					Total
	Portfolio		Portfolio		Specific coverage			Portfolio		Specific coverage			% of total portfolio			Specific coverage
Operations arising from non-doubtful situation		18,638		13,179		10	%		11,117		41	%		77	%		14	%
Operations arising from doubtful situation		3,601		2,079		23	%		7,100		48	%		23	%		30	%
Total		22,239		15,258		12	%		18,217		43	%		100	%		17	%

A more detailed breakdown of this portfolio can be found in Note 54 to our consolidated financial statements.

From the credit classification standpoint, 67% of the total is classified in a non-doubtful status, while the other 33% which was in a doubtful situation, had a specific coverage of 43%.

In this portfolio, 77% comes from a non-doubtful origin, while doubtful situations only account for 1.5% of the Group’s total credit risk with clients.

From the standpoint of its guarantees, more than 70% of the total portfolio has real guarantees (more than 92% in the case of the portfolio of companies with real estate purpose).

Of the Group’s total restructured/refinanced portfolio, Spain’s accounts for 59% (€32,867 million) with the following features:

• The amount corresponding to companies with a real estate purpose was €11,256 million, 72% of which is classified as doubtful or substandard with specific coverage of 46%. Total coverage of this portfolio, including the provisions set aside for the normal portfolio which correspond to it, is 44%.

• Of the total portfolio in Spain, 34% was in a doubtful situation with coverage of 42%.

• From a management standpoint, it is important to highlight the preventative management of risk together with the high level of existing guarantees:

• 89% (€29,380 million) emanates from operations that come from a non-doubtful situation and 82% have real guarantees.

• Only the remaining 11% (€3,487 million) emanates from doubtful situation operations and 84% have real guarantees.

In the rest of the countries where the Group operates, the restructured/refinanced portfolio does not account in any of them for more than 1% of the Group’s total credit risk with clients.

Management metrics⁸

Credit risk management uses other metrics to those already mentioned, particularly management of non-performing loans variation plus net write-offs (known in Spanish as VMG), and expected loss. Both enable risk managers to form a complete idea of the evolution and future prospects of the portfolio.

⁸  For more detail on these metrics see 4.5.5. measurement and control in this section

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Unlike non-performing loans, the VMG refers to the total portfolio deteriorated over a period of time, regardless of the situation in which it finds itself (doubtful loans and write-offs). This makes the metric a main driver when it comes to establishing measures to manage the portfolio.

The VMG is frequently considered in relation to the average loan that generated it, giving rise to what is known as the risk premium, whose evolution can be seen below.

Despite the unfavorable economic environment, the Group’s risk premium was virtually unchanged over 2011, due to the geographic distribution.

The expected loss is the estimate of the economic loss during the following year of the portfolio existing at any given moment. Its forward-looking component complements the view provided by the VMG when analyzing the portfolio and its evolution.

The expected loss reflects the portfolio’s features as regards the exposure at default (EaD), the probability of default (PD) and the severity or recovery once the default occurs (loss given default, LGD).

The table below sets out the distribution by segments in terms of EaD, PD and LGD. For example, it can be seen how the consideration of the LGD in the metrics makes the portfolios with a mortgage guarantee generally produce a lower expected loss, the result of the recovery that occurs in the event of a default via the mortgaged property.

The expected loss of the exposure with clients is 1.27% (1.30% in 2011) and 0.99% for the whole of the Group’s credit exposure (1.05% in 2011), which underscores the medium-low risk profile assumed.

SEGMENTATION OF THE CREDIT RISK EXPOSURE
Segment	EaD1,2		%			Average PD			Average LGD			Expected loss
Sovereign debt		179,588		17.2	%		0.10	%		9.62	%		0.01	%
Banks and other fin. inst.		62,363		6.0	%		0.35	%		54.41	%		0.19	%
Public sector		14,853		1.4	%		2.87	%		7.91	%		0.23	%
Corporate		135,640		13.0	%		0.64	%		33.88	%		0.22	%
SMEs		162,733		15.6	%		5.20	%		36.70	%		1.91	%
Individual mortages		318,947		30.6	%		2.97	%		8.65	%		0.26	%
Consumer credit (individuals)		115,577		11.1	%		6.94	%		55.25	%		3.83	%
Credit cards (individuals)		37,209		3.6	%		5.05	%		68.18	%		3.44	%
Other assets		14,643		1.4	%		4.07	%		29.44	%		1.20	%
Memorandum item3		784,959		75.4	%		3.71	%		34.20	%		1.27	%
Total		1,041,553		100.0	%		2.89	%		34.10	%		0.99	%

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Data at December 2012.

1. Excludes doubtful loans.

2. Million euros.

3. Excludes sovereign debt, banks and other financial institutions and other assets.

4.3 Geographic areas with the largest concentration of risk

The portfolios with the largest concentration of risk are set out below, based on the figures in “4.2.2. Performance of magnitudes in 2012.”

4.3.1 United Kingdom

4.3.1.1 General view of the portfolio

Santander UK’s loans amounted to €255,519 million at the end of 2012 (32.1% of the Group’s total), with the following distribution by segments:

4.3.1.2 Mortgage portfolio

Santander UK’s mortgage portfolio at the end of 2012 was €191,827 million and its evolution over the last three years is set out in the chart below:

This portfolio consists of first mortgages for buying or reforming homes, granted to new as well as existing clients. There are no operations that entail second or successive charges on mortgaged properties.

The mortgaged property must always be located within U.K. territory, regardless of the destiny of the financing. Mortgages can be granted for properties outside the U.K., but the collateral for such mortgages must consist of a property in the U.K.

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Most of the mortgages are in Greater London, where housing prices are more stable even during a period of economic slowdown.

All the properties are assessed independently before each new operation is approved, in accordance with the principles established by the Group for risk management.

Mortgages that have already been granted are subject to a quarterly update of the value of the property in guarantee, by an independent agency, using an automatic valuation system in accordance with the market’s usual practices and in compliance with prevailing legislation.

In 2012, the NPL ratio of this portfolio rose to 1.74% from 1.46% at the end of 2011, although always below the ratio for the whole of the banking sector, according to the data published by the Council of Mortgage Lenders.

This growth is due to the following reasons: fall in lending as a result of stricter credit and pricing policies implemented in previous years, lower balances of nonperforming loans during 2012 and local changes to the definition of what constitutes a NPL.

As regards the reduction in NPL exits during the year, this was mainly due to implementing new collection procedures, within the framework of the regulatory initiative known as treating customers fairly, which generated an increase in administrative tasks that must be carried out when managing non-payments, which implies that clients remain in a NPL situation for a longer time.

As for the portfolio’s profile, applying strict credit policies enabled NPL entries to remain at levels very similar to those in 2011. The maximum loan-to-value (LTV) requirement was reduced to 75% for those loans that amortized capital and interest and to 50% for those that amortized interest regularly and the capital on maturity. The average simple value of this metric for the whole of the portfolio was 52.2%, while the average weighted loan-to-value was 49%. The proportion of the portfolio with a loan-to-value of more than 90% remained at 12%, well below the U.K. market’s average of more than 17% (CACI mortgage market data).

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The following charts show the LTV structure for the stock of residential mortgages and the distribution in terms of the income multiple of new loans in 2012:

The credit risk policies explicitly forbid loans regarded as high risk (subprime mortgages) and establish demanding requirements for credit quality, both for operations and for clients. For example, in 2009, mortgages with a loan-to-value of more than 100% were banned. As of then and until 2012, less than 0.1% of new loans had a loan-to-value of more than 90%. A maximum limit of 75% was set in that year.

There are various types of products with different risk profiles, all of them subject to the limits inherent in the policies of a prime lender such as Santander UK. The features of some of them (in brackets, the percentage of the portfolio of U.K. mortgages they represent):

• Interest only loans (35.0%)⁹: The customer amortizes the interest every month and capital at maturity. Appropriate repayment vehicles such as pension plans, mutual funds, etc. are needed. This is a regular product in the U.K. market for which Santander UK applies restrictive policies in order to mitigate the risks inherent in it. For example, maximum LTV of 50%, higher cut-off in the admission score or the evolution of the payment capacity simulating the amortization of capital and interest payments instead of just interest. New loans of this type were reduced by 60% in 2012.

• Flexible Loans (11.4%): This type of loan contractually enables the customer to modify the monthly payments or make additional provisions of funds up to a pre-established limit, as well as having disbursements from previously paid amounts above that limit.

• Buy to Let (1.31%): Buy to let mortgages (purchase of a property to then rent it out) account for a small percentage of the total portfolio. Admissions were halted between 2009 and 2012. In 2012, after the improvement in market conditions, only €18 million a month was approved (around 2% of the total monthly admission) and under strict risk policies.

The following table shows the distribution by type of loan:

SANTANDER UK: DISTRIBUTION BY TYPE OF LOAN
Million euros
	December 2012					December 2011					December 2010
	Portfolio		% of total			Portfolio		% of total			Portfolio		% of total
Residential mortgages1		191,827		75.1	%		198,789		82.1	%		192,590		78.6	%
First-time buyer2		32,838		12.9	%		33,010		13.6	%		34,666		14.2	%
Mover3		75,920		29.7	%		71,295		29.4	%		75,110		30.7	%
Remortgage4		83,069		32.5	%		94,484		39.0	%		82,814		33.8	%

1. Percentage of residential mortgages calculated on the total portfolio, while the percentage by type of borrower is on the basis of the total number of mortgages.

2. First-time buyer: customers who buy a home for the first time.

3. Mover: customers who change home with or without changing the bank that granted the mortgage.

4. Remortgage: customers who transfer their mortgage from another bank.

⁹  Percentage calculated for interest only loans. If we include loans with some component of interest only the percentage of the portfolio increases to 46%.

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An additional indicator of the portfolio’s good performance is the small volume of foreclosed homes (€157 million at the end of 2012, only 0.1% of the total mortgage exposure). 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, contributed to the good results.

4.3.1.3. SMEs and companies

As shown in the chart on the segmentation of the portfolio at the beginning of this section, lending to SMEs and companies (€42,176 million) represented 18% of the total at Santander UK.

SMEs: This segment includes those small firms which, from a risk management standpoint, are in the standardized model. Specifically, those belonging to the business lines of small business banking and regional business centers. Total lending at the end of 2012 amounted to €4,248 million, with a NPL ratio of 7.1% (7.4% at the start of the year).

Companies: This segment includes those under individualized risk management (i.e. have a risk analyst assigned). Also included are portfolios considered as not strategic (legacy and noncore). Lending at the end of 2012 amounted to €23,389 million, with a NPL ratio of 5.8% (6.2% at the beginning of the year).

SGBM: This segment includes companies under the risk management model of Global Wholesale Banking. Lending was €4,865 million at the end of 2012 and there were virtually no NPLs.

Social housing: This segment includes lending to companies that build, sell and rent social housing. This segment is supported by local governments and the central government and has no NPLs. Lending stood at €9,674 million at the end of 2012.

In line with the objective of becoming the reference bank for SMEs and companies, the most representative portfolios of this segment grew by around 18% in 2012 (excluding legacy and non-core portfolios).

4.3.2 Spain

4.3.2.1 General view of the portfolio

The total credit risk (including guarantees and documentary credits) of Santander’s businesses in Spain amounted to €249,477 million at the end of 2012 (31% of the Group’s total), with an adequate level of diversification, by both product and customer segment.

Lending declined as a result of the fall in demand for credit, the economic situation and, regarding real estate balances, the active policy of reducing these exposures.

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CREDIT RISK DISTRIBUTION, SPAIN
Million euros
	2012		2011		2010		cha. 12/11			cha. 11/10
Total credit risk*		249,477		271,180		283,424		(8	%)		(4	%)
Home mortgages		55,423		58,535		61,387		(5	%)		(5	%)
Rest of loans to individuals		24,645		24,963		28,377		(1	%)		(12	%)
Companies without real estate purpose**		139,851		151,157		152,900		(7	%)		(1	%)
Real estate purpose		15,867		23,442		27,334		(32	%)		(14	%)
Public administrations		13,692		13,083		13,426		5	%		(3	%)

* Including guarantees and documentary credits.

** Including financing for public sector suppliers (4bn).

The NPL ratio for the total portfolio increased during the year, as a result of the deterioration of the real estate portfolio, to 6.74%, 384 basis points below the ratio for the whole of the banking system. The differential with the banking system widened in 2012, reflecting Santander’s hallmark criterion of prudence in risk management.

Excluding the portfolio with real estate purpose, the NPL ratio was 4.0% (+65 basis points), mainly due to the reduction in lending.

At the end of 2012, provisions covered 70.6% of doubtful loan balances, up from 45.5% at the end of 2011 mainly due to increased provisioning of the real estate portfolio, as shown below.

Below are the main portfolios.

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4.3.2.2 Home mortgages

Lending to households to buy a home by the main businesses in Spain amounted to €55,997 million at the end of 2012 (22.4% of total credit), of which 98.9% had a mortgage guarantee.

LENDING TO HOUSEHOLDS TO ACQUIRE HOMES
Million euros
	2012		2011		2010
Gross amount		55,997		59,453		61,936
Without mortgage guarantee		574		918		549
With mortgage guarantee		55,423		58,535		61,387
of which doubtful		1,425		1,607		1,388
Without mortgage guarantee		8		28		30
With mortgage guarantee		1,417		1,579		1,358

The NPL ratio of the portfolio with a mortgage guarantee was slightly lower than in 2011 and ended 2012 at 2.6%, well below that for the other businesses in Spain.

The portfolio of mortgages for homes in Spain kept its medium-low profile and with limited expectations of a further deterioration:

• All mortgages pay principle right from the start.

• Early amortization is usual and the average life of the operation is well below that in the contract.

• The borrower responds with all his assets, not just the home.

• The high quality of collateral was concentrated almost exclusively in financing the first home.

• 89% of the portfolio has a loan-to-value of less than 80% (total risk/latest available value of the home).

• The average affordability rate was close to 29%.

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RANGES OF TOTAL LTV
Million euros
	2012		2011
Gross amount with mortgage guarantee		55,423		58,535
LTV< 40%		12,774		13,020
LTV between 40% y 60%		16,443		16,503
LTV between 60% y 80%		19,915		21,940
LTV between 80% y 100%		5,702		6,474
LTV > 100%		589		597
of which doubtful		1,417		1,579
LTV < 40%		155		177
LTV between 40% y 60%		198		271
LTV between 60% y 80%		359		598
LTV between 80% y 100%		547		425
LTV > 100%		158		107

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	12/31/12
	Loan-to-value ratio
Million euros	Less than or equal to 40%		More than 40% and less than 60%		More than 60% and less than 80%		More than 80% and  less than or equal to 100%		More than 100%		Total
Gross amount at origination		12,774		16,444		19,915		5,702		588		55,423
Gross amount updated (*)		12,986		11,898		14,137		10,732		5,670		55,423
Of which: Doubtful		155		198		359		547		158		1,417

(*) The gross amount is updated using published housing prices indices

For internal management purposes, the Group updates the LTV ratios at least once a year, taking into consideration published house price indices. Also, if a debtor becomes doubtful, the Group updates the appraisals undertaken by valuers, which are taken into account in the estimate of impairment losses.

Despite the economic situation and the gradual deterioration over the last few years, the loan admission measures produced a good evolution of vintages. For example, for the years 2008-2012 in the Santander branch network in Spain, the maturity of mortgage vintages was as follows:

As of August 1, 2011, Grupo Santander in Spain offered a three-year suspension on payments of principal to alleviate the situation of clients, including the self-employed, for those presenting objective causes of economic problems, such as being unemployed or having suffered a fall in income of more than 25%, and thus facing temporary difficulties in paying the mortgage on their usual home. Customers who take advantage of this measure have the possibility of extending the maturity of their loan in order to compensate for the grace period, but without changing the loan’s financial conditions either during the grace period or at the end of it.

This measure served to mitigate the social impact of the economic crisis, while preserving the good culture of payment, one of the elements that distinguishes the Spanish mortgage market. At the end of 2012, more than 21,000 clients had taken advantage of this measure.

4.3.2.3 Portfolio of companies without real estate purpose

Lending to companies without a real estate purpose by Santander’s businesses in Spain amounted to €139,851 million at the end of 2012.

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More than 90% of the lending in this segment was to clients under individualized management who, for reasons of the risk assumed, have a risk analyst assigned who continuously monitors the client during all phases of the risk cycle.

The portfolio is well diversified, with more than 250,000 active clients and no significant concentrations by sector.

The NPL ratio of this portfolio remained at levels lower than the total of businesses in Spain and, at the end of 2012, was 4.4%.

4.3.2.4 Portfolio with real estate purpose

The exposure, net of provisions, dropped by €12,383 million in 2012 to €12,509 million and represented 1.7% of the Group’s total credit portfolio. This decline was due to the effort made to reduce the portfolio with real estate purpose and to the increase in coverage provisions.

As for the reduction of the portfolio, at the end of 2012 the gross exposure with real estate purpose in Spain was €23,705 million, of which €15,867 million were loans and €7,838 million foreclosures. This was a decline of €8,289 million (€714 million foreclosures and €7,575 million loans) over 2011 (-25.9%) and 44.2% since the onset of the crisis in 2008.

The Group assigned dedicated teams to reduce the real estate risk, which resulted in 33,500 operations, double the number in 2011. Of this number, 31,000 were homes and 2,500 other properties. A total of 17,500 foreclosed homes were sold and 16,000 were sales of financed real estate developers.

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As a result of this, 2012 was the first year when there was a fall in foreclosures, as seen in the chart below:

Regarding coverage, the Group set aside €6,140 million of provisions for real estate loans in Spain. Coverage of the real estate exposure in Spain was 47%, up from 22% at the end of 2011.

Coverage by the type of real estate that guarantees the loans (regardless of their classification by credit quality as doubtful, sub-standard or normal) or by foreclosed properties is as follows:

EXPOSURE AND COVERAGE
Million euros
	Real estate loans					Foreclosed properties					Total
	Exposure		Coverage			Exposure		Coverage			Exposure		Coverage
Total		15,867		44	%		7,838		53	%		23,705		47	%
Finished buildings		7,025		21	%		2,440		39	%		9,465		25	%
Developers		1,494		42	%		668		50	%		2,162		45	%
Land		5,126		60	%		4,730		61	%		9,856		60	%
Rest of guarantees		2,222		86	%							2,222		86	%

4.3.3 Brazil

Brazil’s lending rose 9.58% in 2012 (excluding the exchange rate impact) to €89,142 million (11% of the Group’s total lending). This growth was aligned with the expansion of the Brazilian economy].

The portfolio is diversified by customers and has a big volume of retail operations: 56.1% to individuals, consumer finance and SMEs.

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Lending to individuals grew 11%. The segment that grew the most was mortgages, though its share of the portfolio remains low (5% of the total).

Lending by Santander Financiamentos, specialized in consumer finance, mainly auto finance, fell 3%, which is in line with the trend in these portfolios in the banking system. Loans to SMEs and large companies rose 13%.

LENDING: SEGMENTATION
Million euros. Constant exchange rate. December 2012
	2012		2011		2010		12/11			11/10
Individuals		26,187		23,514		18,890		11	%		24	%
Mortgages		4,651		3,755		2,504		24	%		50	%
Consumer		14,395		13,344		11,142		8	%		20	%
Cards		5,983		5,232		3,980		14	%		31	%
Others		1,159		1,184		1,264		(2	%)		(6	%)
Santander Financiamentos		11,208		11,518		10,036		(3	%)		15	%
SMEs and large companies		49,599		44,023		38,814		13	%		13	%
SMEs		13,829		11,489		9,064		20	%		27	%
Companies		12,647		12,115		9,893		4	%		22	%
Corporate		23,123		20,419		19,857		13	%		3	%

The NPL ratio was 6.86% at the end of 2012, up from 5.38% a year earlier, against a backdrop of a slowdown in the Brazilian economy which produced a rise in NPLs throughout the banking system.

Coverage was 90.2% (95% in 2011).

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4.4. Other credit risk optics

4.4.1 Credit risk by activity in the financial markets

This section covers credit risk generated in treasury activities with clients, mainly with credit institutions. This is developed through financing products in the money market with different financial institutions, as well as derivatives to provide service to the Group’s clients.

Risk is controlled through an integrated system and in real time, enabling us to know at any moment the exposure limit available with any counterparty, in any product and maturity and in all of the Group’s 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).

Exposure in derivatives

The total exposure to credit risk from activities in the financial markets amounted to €52,184 million and is concentrated in high quality counterparties (76.6% of the risk with counterparties has a rating equal to or more than A-).

OTC DERIVATIVES DISTRIBUTION BY EQUIVALENT CREDIT RISK AND MARKET VALUE INCLUDING THE MITIGATION IMPACT*
Million euros
	End 2012					End 2011					End 2010
	Gross Exposure			Gross MtM		Gross Exposure			Gross MtM		Gross Exposure			Gross MtM
CDS Protection Acquired		699			610		2,269			2,316		1,324			1,144
CDS protection sold		478			467		231			228		131			622
Total credit derivatives		1,177			1,077		2,500			2,544		1,455			1,766
Equity forwards		616			339		437			147		369			(146	)
Equity options		2,582			1,203		2,635			1,516		3,028			1,834
Equity spot		0			0		0			4		1			21
Equity swaps		1,347			176		914			385		677			237
Total equity derivatives		4,544			1,719		3,986			2,053		4,076			1,947
Fixed-income forwards		143			5		59			0		121			30
Fixed-income spot		0			0		0			0		1			0
Total fixed income derivatives		143			5		136			0		135			31
Forward and spot rates		4,409			1,235		6,340			1,648		5,271			1,812
Exchange-rate options		1,744			662		2,058			604		1,319			466
Other exchange rate derivatives		6			1		5			0		13			2
Exchange-rate swaps		27,230			9,422		28,837			10,599		24,957			10,545
Total exchange rate derivatives		33,389			11,321		37,241			12,851		31,560			12,825
Asset Swaps		928			870		904			850		342			692
Call Money Swaps		1,141			673		1,544			573		951			324
Interest rate structures		2,487			2,137		2,364			1,866		2,029			1,709
Forward Interest rates - FRAs		104			40		174			69		17			16
IRS		117,127			89,278		106,414			72,048		52,810			46,731
Other interest-rate derivatives		5,827			4,415		5,471			3,608		3,174			3,069
Total Interest-rate derivatives		127,614			97,412		116,871			79,014		59,324			52,540
Commodities		459			286		877			402		580			313
Total commodity derivatives		459			286		877			402		580			313
Total gross derivatives		167,326			111,821		161,611			96,864		97,131			69,422
Total net derivatives (without collateral)**		62,738			6,922		64,866			7,381		53,766			3,002
Collateral		(10,555	)		—		(11,508	)		—		(6,873	)		—
Total net		52,184			6,922		53,358			7,381		46,893			3,002

* Opening of the exposure by products in gross risk as it is methodologically not possible to separate out net risk by product.

** Market value used to include the effects of mitigant agreements to calculate the exposure by counterparty risk.

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NOTIONAL OTC DERIVATIVE PRODUCTS BY MATURITY*
In million of euros
	Until 1 year			1-5 years		5-10 years		Over 10 years		Total
CDS protection acquired		27			324		92		278		699
CDS protection sold		77			354		25		1		478
Total credit derivatives		104			678		117		279		1,177
Equity forwards		408			208		0		0		616
Equity options		978			1,361		176		67		2,582
Equity spot		0			0		0		0		0
Equity swaps		1,156			190		0		0		1,347
Total equity derivatives		2,542			1,759		176		67		4,545
Fixed-income forwards		133			10		0		0		143
Fixed-income spot		0			0		0		0		0
Total fixed income derivatives		133			10		0		0		143
Forward and spot rates		3,590			793		26		0		4,409
Exchange-rate options		1,344			400		0		0		1,744
Other exchange rate derivatives		6			1		0		0		6
Exchange-rate swaps		7,521			12,139		5,082		2,487		27,230
Total exchange rate derivatives		12,461			13,333		5,108		2,487		33,389
Asset Swaps		18			119		204		588		928
Call Money Swaps		545			504		44		49		1,141
Interest rate structures		19			63		53		2,352		2,487
Forward interest rates - FRAs		103			1		0		0		104
IRS		4,384			27,151		34,586		51,006		117,127
Other Interest-rate derivatives		270			1,103		3,002		1,452		5,827
Total Interest-rate derivatives		5,339			28,940		37,888		55,447		127,614
Commodities		85			373		0		0		459
Total commodity derivatives		85			373		0		0		459
Total gross derivatives		20,664			45,093		43,290		58,280		167,326	**
Collateral		(10,555	)		—		—		—		—

* Opening of the exposure by products in gross risk as it is methodologically not possible to separate out net risk by product.

** After mitigants are applied (netting and collateral), total net risk is EUR 52,154 million.

Approximately 50% of the exposure with derivatives is with banks with whom we operate almost entirely under netting and collateral agreements. The rest of operations with customers who are not financial institutions are, in general, hedging operations. Occasionally, operations are conducted for purposes other than hedging, always with specialized clients.

DISTRIBUTION OF RISK IN OTC DERIVATIVES BY RATING OF COUNTERPARTY
RATING	%
AAA		7.71	%
AA		3.95	%
A		64.91	%
BBB		20.14	%
BB		2.95	%
B		0.30	%
Other		0.05	%

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The distribution of risk in derivatives by type of counterparty was 48.4% with banks, 26.4% with large companies and 9.2% with SMEs.

As regards the geographic distribution of risk, 16.5% is with Spanish counterparties, 20% with U.K. counterparties (mainly Santander UK’s operations), 31% the rest of Europe, 10% the U.S.and 7% Latin America.

OTC derivatives, organized markets and clearing houses. The Group’s policies seek to anticipate, wherever possible, the implementation of measures resulting from new regulations regarding operations of OTC derivatives, both if settled by clearing house or if remaining bilateral. Since 2011, there has been a gradual standardization of OTC operations in order to conduct clearing and settlement via houses of all new trading operations required by the new rules, as well as foster internal use of the electronic execution systems.

Regarding the operations of organized markets, credit risk is not considered as incurred because this risk is eliminated by the organized markets acting as counterparty in the operations, given that they have mechanisms that enable them to protect their financial position via systems of deposits, improved guarantees and processes that ensure the liquidity and transparency of transactions. The following tables show the relative share in total derivatives of new operations settled by clearing house at the end of 2012 and the significant evolution of operations settled by clearing house since 2011.

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RISK DISTRIBUTION WITH OTC DERIVATIVES ON THE BASIS OF MARKET TRADING AND TYPE OF DERIVATIVE
Nominal in million euros
	Bilateral					CCP*
	Nominal		%			Nominal		%			Total
Credit derivatives		95,030		100	%		—		0	%		95,030
Equity derivatives		72,141		100	%		138		0	%		72,279
Fixed-Income derivatives		6,530		99	%		33		1	%		6,563
Exchange rate derivatives		586,232		100	%		988		0	%		587,220
Interest rate derivatives		2,164,197		76	%		669,750		24	%		2,833,947
Commodities derivatives		1,871		100	%		—		0	%		1,871
Total		2,926,002		81	%		670,908		19	%		3,596,910

* Central Counterparties.

RISK DISTRIBUTION ON THE BASIS OF SETTLEMENT IN CCPS AND BY TYPE OF DERIVATIVE AND EVOLUTION
Gross exposure. Million euros
	2012		2011		2010
Equity derivatives		4		2		61
Exchange rate derivatives		11		13		12
Interest rate derivatives		17,711		12,770		23
Total		17,726		12,785		96

The Group actively manages operations not settled by clearing house and seeks to optimize their volume, given the requirements of spreads and capital that the new regulations impose on them.

In general, the operations with financial institutions are done under netting and collateral agreements, and a continued effort is being made to ensure that the rest of operations are covered under this type of agreement.

RISK DISTRIBUTION ON THE BASIS OF THE COLLATERAL TYPE BY OTCS NOT SETTLED IN CCPS
Million euros
	Gross exposure		MtM
With collateral		103,016		(1,810	)
Without collateral		46,584		13,344

In general, the collateral contracts that the Group signs are bilateral. There are some exceptions mainly with multilateral entities and securitization funds.

Activity in credit derivatives

Grupo Santander uses credit derivatives to cover loans, customer business in financial markets and within trading operations. The volume of this activity is small compared to that of our peers and, moreover, is subject to a solid environment of internal controls and minimizing operational risk.

The risk of these activities is controlled via a broad series of limits such as VaR, nominal by rating, sensitivity to the spread by rating and name, sensitivity to the rate of recovery and to correlation. Jump-to-default limits are also set by individual name. geographic area, sector and liquidity.

In notional terms, the CDS position incorporates €47,105 million of acquired protection and €42,529 million of sold protection.

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At 31 December 2012, for the Group’s trading activity, the sensitivity of lending to increases in spreads of one basis point was minus €0.3 million, similar to 2011, and the average VaR during the year was €2.9 million, significantly lower than in 2011 (average VaR of €10.6 million).

4.4.2. Concentration risk

Control of concentration risk is a vital part of management. The Group continuously tracks the degree of concentration of its credit risk portfolios using various criteria, including 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 portfolios¹⁰.

The Group is subject to the Bank of Spain regulation on large risks. In accordance with Circular 3/2008 (regarding determining and control of minimum equity) and subsequent changes, the value of all the risks that a credit institution contracts with the same person, entity or economic group, including that in the part which is nonconsolidatable, cannot exceed 25% of its equity. The risks maintained with the same person, whether an individual, company or economic group, are considered large risks when their values exceeds 10% of the equity of the credit institution. The exception is exposure to OECD governments and central banks.

On December 31, 2012, there were several financial groups initially exceeding 10% of shareholders’ funds: three EU financial institutions, two U.S. financial entities, an oil company and a EU central counterparty entity. After applying risk mitigation techniques and the rules for large risks, all of them were below 5.5% of eligible equity.

On December 31, 2012, the 20 largest economic and financial groups, excluding AAA governments and sovereign securities denominated in local currency, represented 5.0% of the outstanding credit risk of the Group’s clients (lending plus guarantees), the same level as in 2011. The distribution of the portfolio of companies by sectors is adequately diversified.

The Group has no exposure with any international financial institution which is more than 5% of equity. An EU bank has the largest exposure. The Top 10 of IFIs account for €15,713 million.

The Group’s risks division works closely with the financial division to actively manage credit portfolios. Its activities include reducing the concentration of exposures through various techniques, including using credit derivatives and securitization to optimize the risk-return relation of the whole portfolio.

4.4.3 Country risk

Country risk is a credit risk component in all cross-border credit operations 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 2012 was €342 million. At the end of 2011, the total country risk in need of provisions was €380 million. Total provisions in 2012 stood at €45 million compared with €55 million in 2011. Of note in 2012 was that three countries improved their classification according to the Bank of Spain criteria: Uruguay and Colombia (from Group 4 to Group 3, with provisions passing from 22.8% to 10.1%) and Peru (from Group 3 to Group 2, with provisions no longer needed).

¹⁰  For more detail, see “Supplementary quantitative metrics of risk appetite of concentration” in Part1, “Corporate management principles, control and risk appetite”.

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The exposure is moderate and has been on a downward trend in recent years. The only exception was in 2008 when there was a significant increase due to the incorporation of transactions with Brazilian clients resulting from the purchase of ABN/Banco Real. This increase was reduced in 2009, with the reclassification of Brazil to Group 2.

The principles of country risk management continued to follow criteria of maximum prudence; country risk is assumed very selectively in operations that are clearly profitable for the bank and which enhance the global relation with customers.

4.4.4 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 public debt) and that arising from operations with public institutions with the following features: their funds only come from the state’s budgeted income and the activities are of a non-commercial nature.

This criterion, historically used by Grupo Santander, is different from the one used by the European Banking Authority (EBA) for its regular stress exercises. The main differences are that the EBA’s criterion does not include risk with central banks, the exposures with insurance companies, indirect exposures via guarantees and other instruments. However, it includes public administrations in general, not only the central government.

In general, the exposure to sovereign risk emanates mainly from the obligations to which our subsidiary banks are subject to, regarding the establishment of certain deposits in central banks as well as fixed-income portfolios maintained as part of the risk management strategy for structural interest. Most of these exposures are in local currencies and are financed with locally captured deposits, also in local currencies. The exposures in the local sovereign but in currencies different to the official one of the country of issuance is not very significant (€4,872 million, 2.8% of the total sovereign risk), and less so the exposure in non-local sovereign issuers, which means cross-border risk¹¹ (€2,907 million, 1.7% of the total sovereign risk). For more information on the Group’s exposure to Spanish sovereign risk see “Item 4—B. Business overview—Exposure to sovereign counterparties by credit rating.”

The investment strategy for sovereign risk also takes into account the credit quality of each country when setting the maximum exposure limits. The following table shows the percentage of exposure by rating levels¹².

¹¹  Countries classified as low risk by the Bank of Spain (Group 1, according to the terminology) are not considered.

¹²  Internal ratings used.

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EXPOSURE BY LEVEL OF RATING
%
	2012			2011			2010
AAA		34	%		29	%		61	%
AA		3	%		26	%		0	%
A		29	%		6	%		3	%
BBB		31	%		38	%		34	%
Under BBB		4	%		1	%		2	%

As expected, the distribution of sovereign risk by rating level was affected by many rating revisions of sovereign issuers in the last few years, mainly Spain, Portugal, the U.S.and Chile.

4.4.5 Environmental risk

Analysis of the environmental risk of credit operations 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 operations. The assumption of these principles represents a commitment to assess the operation, taking into account the social and environmental risks, and to only finance those projects that can accredit adequate management of the social and environmental impacts. The methodology used is set out below:

• For operations with an amount equal to or more than $10 million, an initial questionnaire is filled out, of a generic nature, designed to establish the project’s risk in the socio-environmental sphere (according to categories A, B and C, from greater to lower risk, respectively) and the operation’s degree of compliance with the Equator Principles.

• For those projects classified within the categories of greater risk (categories A and B and non-high income OECD), a more detailed questionnaire has to be filled out, adapted according to the sector of activity.

• According to the category and location of the projects, a social and environmental audit is carried out (by independent external auditors). Specific questionnaires have been developed for those sectors where the bank is most active. The bank also gives training courses in social and environmental matters to risk teams as well as to those responsible for business.

In 2012, 22 projects were analyzed under the Equator principles for a total amount of €9,280 million.

• VIDA tool: used since 2004, its main purpose is to assess the environmental risk of corporate clients, both current and potential, through a system that classifies in seven categories each of the companies on the basis of the environmental risk contracted. In 2012, 37,020 clients were assessed by this tool in Spain (total risk of €55,559 million).

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Low or very low environmental risk accounts for 89% of total risk. In 2012, there was a sharp fall in average environmental risk (50% less than in 2011).

4.5. Credit risk cycle

The process of credit risk management consists of identifying, analyzing, controlling and deciding on the risks incurred by the Group’s operations. The business areas, senior management and the risk areas are all involved.

The board and the executive committee participate in the process, as well as the risk committee, which sets the risk policies and procedures, the limits and delegation of powers, and approves and supervises the framework of the risk function.

The risk cycle has three phases: pre-sale, sale and aftersale. The process is constantly revised, incorporating the results and conclusions of the after-sale phase to the study of risk and pre-sale planning.

4.5.1 Study of risk and credit rating process

Risk study consists of analyzing a customer’s capacity to meet his contractual commitments with the bank. This entails analyzing the customer’s credit quality, risk operations, solvency and profitability to be obtained on the basis of the risk assumed.

With this objective, since 1993 the Group has used models for assigning solvency ratings. These mechanisms are used in all individualized management segments, both wholesale (sovereign, financial institutions and corporate banking), as well as the rest of companies and institutions in this category.

The rating is the result of a quantitative model based on balance sheet ratios or macroeconomic variables, which is supplemented by the expert advice of the analyst.

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The ratings given to customers are regularly reviewed, incorporating the latest available financial information and experience in the development of banking relations. The regularity of the reviews increases with customers who reach certain levels in the automatic warning systems and those classified as special watch. The rating tools are also revised in order to adjust the accuracy of the granted rating.

While ratings are used for companies under individualized management, scoring techniques are used for the standardized segment, which automatically assign a score to operations, as set out in the section “decisions on operations.”

4.5.2 Planning and setting limits

The purpose of this phase is to efficiently and comprehensively limit the risk levels assumed by the Group.

The credit risk planning process serves to set the budgets and limits at portfolio or customer level on the basis of the segment.

In the sphere of standardized risk, the planning and setting of limits is done through credit management programmes (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.

The most basic level in the individualized management sphere 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. The result of pre-classification is the maximum risk level that a client or group can assume in terms of amount of maturity. A more streamlined version is used for those companies who meet certain requirements (high knowledge, rating, etc.).

Analysis of scenarios

An important part of planning is to consider the volatility of macroeconomic variables that help to support the budgetary process. The Group conducts simulations of its portfolio using various adverse scenarios and stress tests to assess the Group’s solvency in the face of certain situations in the future.

These simulations cover all the Group’s 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 the Group’s units).

• Identifies rupture scenarios (levels as of which the sensitivity of risk factors to macroeconomic variables is more accentuated) and the distance of these scenarios from the current situation and the reference scenarios.

• Estimates the expected loss of each scenario and the evolution of the risk profile of each portfolio in the face of movements in certain macroeconomic variables.

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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.

The scenarios take into account the vision of each unit as well as the global vision. The macroeconomic variables in these scenarios 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.

Definition of suppositions and scenarios (baseline/acid)

The projections of the risk and loss parameters, usually with a time frame of three years are executed under different economic scenarios.

The scenarios defined are supported in different levels of stress, from the central (baseline) one, the most likely, to the most acid scenarios which are unlikely but possible.

These scenarios are set by the Group’s research department in coordination with the research service of each unit and use as their reference the figures published by the main international institutions.

A global acid (stress) scenario is always defined. It describes a world crisis situation and the way in which it would affect each of the countries where Grupo Santander operates. A local stress scenario is also defined where it would only affect some of the Group’s main units and with a greater degree of stress than the global stress one.

In the capital coordination committee, senior management studies the situation, proposes the changes and formally approves the set of definitive scenarios to be used in the Group’s stress test.

Stress test uses and integration in the management of scenario analysis

Analysis of scenarios is a useful tool throughout the credit risk cycle. Grupo Santander has different uses for the stress test and analysis of scenarios:

• Internal uses, for example, dealing with risk appetite and the drawing up of risk, business plans and budgets. It integrates the corporate stress test methodology into the management of the Group’s different areas and informs senior management of the results from the following angles:

• Impact on the income statement and capital.

• Evolution of the cost of credit for the next three years with the strategy of business planned.

• Sufficiency of funds and provisions.

• Measures the level of sensitivity of each portfolio to the economic environment.

• Diversification of the portfolio in acid scenarios.

• Contrast with other locally made estimates.

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• External uses, including the European Banking Authority’s stress tests, annual ICCAP and bottom up and top down stress tests of the Spanish system. With these uses, an external or regulatory agent would request the results of the stress test after execution of the Group’s corporate methodology. In other cases, details of the performance of the portfolio can be requested so that the risk parameters can be exercised under defined scenarios.

Results obtained and impact on capital

The various stress test exercises, from both an internal and external standpoint, underlined the strength and validity of Grupo Santander’s business model, as can be seen in the results published by the Bank of Spain of the bottom up test conducted in September 2012 and led by Oliver Wyman.

The analyses conducted, in both baseline and acid scenarios, for the whole Group and for each of its units, with a time frame of three years, shows the strength of the balance sheet to different market and macroeconomic situations.

As well as these results, after the latest updating of risk appetite¹³ presented to the board, it was concluded that Grupo Santander would maintain positive results and solvency even in the most adverse scenarios, with conservative assumptions.

4.5.3 Decisions on operations

The sales phase comprises decision-taking, giving support to the business units that need analysis and approval of risks in order to be able to conduct an operation.

The decision-taking process involves analyzing and resolving operations. Approval by the risks areas is a requirement before contracting any risk operation. This process must take into account the policies defined for approving operations and take into consideration both the risk appetite as well as those elements of the operation that are relevant in the search for the right balance between risk and profitability.

In the sphere of clients under standardized management, the administration of large volumes of credit operations with the use of automatic decision models is facilitated, which classifies the client/operation as binomial. Investment is classified into homogeneous risk groups, on the basis of the information on features of the operation and of its owner. These models are used in banking with individuals, businesses and standardized SMEs.

As already indicated, the prior phase of setting limits can follow two different paths, giving rise to different types of decisions in the sphere of clients under individualized management:

• Automatically verifying if there is capacity for the proposed operation (in amount, product, maturity and other conditions) within the limits authorized under the framework of pre-classification. This process is generally applied to corporate pre-classifications.

• The authorization of the analyst is always required, even if the operation meets the amount, maturity and other conditions set forth in the pre-classified limit. This process applies to the pre-classification of companies under individualized management of retail banking.

¹³  More details on risk appetite in Part 1 of this Item.

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Credit risk mitigation techniques

Although they are relevant in all phases of the credit risk cycle, mitigation techniques play a particularly important role in making decisions on operations.

Grupo Santander applies various forms of credit risk reduction on the basis of the type of client and product, among other factors. As we will later see, some are inherent in specific operations (for example, real estate guarantees) while others apply to a series of operations (for example, netting and collateral).

The various mitigation techniques can be grouped into the following categories:

Settlement of positions

The concept of netting is the possibility of settling operations of the same type, under the umbrella of a framework agreement such as ISDA.

It consists of settling the positive and negative market values of derivative transactions that we have with a certain counterparty, so that in the event of its default it owes us (or we owe it, if the net is negative) a single net figure and not a series of positive or negative values corresponding to each operation we have closed with the counterparty.

An important aspect of the framework contracts is that they represent a single legal obligation that covers all operations. This is fundamental when it comes to settling the risks of all operations covered by said contract with a same counterparty.

Real guarantees

These are those goods that are subject to compliance with the guaranteed obligation and which can be provided not only by the client but also by a third party. The real goods or rights that are the object of the guarantee can be:

• Financial: cash, deposit of securities, gold, etc.

• Non-financial: real estate (both properties as well as commercial premises, etc.) or other property goods.

From the standpoint of risk admission, the highest level of real guarantees is required. From the position of the regulatory capital calculation, not all can be considered as reduction factors, only those which meet the minimum qualitative requirements set out in the Basel agreements.

An important case of a real financial guarantee are collateral agreements. These are a series of instruments with economic value that are deposited by a counterparty in favor of another in order to guarantee/reduce the credit risk of the counterparty that could result from portfolios of transactions with risk existing between them.

The nature of these agreements is diverse, but whatever the specific form of collateralization, the final purpose, regarding the netting technique, is to reduce the counterparty risk through recovering part or all of the profits/benefits (credit granted to the counterparty) generated over a period of time by the operation (valued at market prices).

The operation subject to the collateral agreement is regularly valued (normally day to day) and, on this valuation, the parameters defined in the contract are applied so that a collateral amount is obtained (normally cash) which is to be paid to or received from the counterparty.

Regarding real estate guarantees, there are regular re-appraisal processes, based on the real market values which for the different types of property are provided by valuation agencies, which meet all the requirements set by the regulator.

Implementing the mitigation techniques follows the minimum requirements established in the manual of credit risk management policies, and consists of ensuring:

• Legal certainty. The possibility of legally requiring the settlement of guarantees must be examined and ensured at all times.

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• The non-existence of substantial positive correlation between the counterparty and the value of the collateral.

• The correct documentation of all guarantees.

• The availability of documentation of the methodologies used for each mitigation technique.

• Adequate monitoring and regular control.

Personal guarantees and credit derivatives

This type of guarantee corresponds to those that place a third party in a position of having to respond to obligations acquired by another to the Group. Including sureties, guarantees, stand-by letters of credit, etc. The only ones that can be recognized, for the purposes of calculating capital, are those provided by third parties that meet the minimum requirements set by the supervisor.

Credit derivatives are financial instruments whose main objective is to cover credit risk by acquiring protection from a third party, through which the bank transfers the issuer risk of the underlying asset. Credit derivatives are over the counter (OTC) instruments that are traded on non-organized markets. The coverage with credit derivatives, mainly through credit default swaps, is contracted with front line banks.

The information on mitigation techniques is in Part 6.6.Mitigation measures. There is also more information on credit derivatives in the section “Activity in credit derivatives” in Part “4.4.1. Credit risk by activities in financial markets” of this Item.

4.5.4 Monitoring

Monitoring is a continuous process, of constant observation, which allows changes that could affect the credit quality of clients to be detected early on, in order to take measures to correct the deviations that have a negative impact.

Monitoring is based on the segmentation of customers, and is carried out by local and global risk dedicated teams, backed by internal auditing.

The function consists, among other things, of identifying and tracking clients under special watch, reviewing ratings and continuous monitoring of indicators of standardized clients.

The system called companies in special watch (FEVE) 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 quarterly 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.

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Regarding the risks of standardized clients, the main indicators are monitored to detect shifts in the performance of the loan portfolio with respect to the forecasts made in the credit management programmers.

4.5.5 Measurement and control

Grupo Santander monitors clients’ credit quality and establishes the control procedures needed to analyze the current credit risk profile and its evolution, through different credit risk phases.

The function is developed by assessing the risks from various perspectives that complement one another, establishing as the main elements control by countries, business areas, management models, products, etc., facilitating early detection of points of specific attention, as well as drawing up action plans to correct any deteriorations.

Each element of control admits two types of analysis:

1. Quantitative and qualitative analysis of the portfolio.

Analysis of the portfolio controls, permanently and systematically, the evolution of risk with respect to budgets, limits and standards of reference, assessing the impacts of future situations, exogenous as well as resulting from strategic decisions, in order to establish measures that put the profile and volume of the risks portfolio within the parameters set by the Group.

The credit risk control phase uses, among others and in addition to traditional metrics, the following metrics:

• Management of non-performing loans variation plus net write-offs (VMG)

The VMG measures how NPLs change during a period, discounting write-offs and taking loan loss recoveries into account.

It is an aggregate measure at portfolio level which allows a response to deteriorations observed in the evolution of NPLs.

It is the result of the final balance less the initial balance of non-performing loans of the period under consideration, plus the write-offs of this period less loan loss recoveries for the same period.

The VMG and its components play a key role as monitoring variables.

• Expected loss (EL) and regulatory capital

The expected loss is the estimate of the economic loss that would occur during the next year of the portfolio existing at that time.

It is one more cost of activity, which must have a repercussion on the price of operations. Its calculation is mainly based on three parameters:

• Probability of default (PD): the maximum amount that could be lost as a result of a default.

• Exposure at default (EaD): the probability of a client’s default during the next year.

• Loss Given Default (LGD): this reflects the percentage of exposure that could not be recovered in the event of a default. It is calculated by discounting, at the time of the default, the amounts recovered during the whole recovery process and this figure is compared in percentage terms with the amount owed by the client at that moment.

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Other relevant aspects regarding the risk of operations are covered, such as quantification of off-balance sheet exposures or the expected percentage of recoveries, related to the guarantees associated with the operation as well as other issues such as the type of product, maturity, etc.

The risk parameters also enable economic and regulatory capital to be calculated. The integration in management of the metrics of capital is vital for rationalizing its use. More detail is available in section 10 on capital.

2. Evaluation of the control processes

Evaluation of the control processes includes systematic and regular revision of the procedures and methodology, developed throughout the credit risk cycle, in order to guarantees their effectiveness and validity.

In 2006, within the corporate framework established in the Group for compliance with the Sarbanes Oxley law, a corporate tool was established in the Group’s intranet to document and certify all the sub processes, operational risks and controls that mitigate them. The risks division assesses the efficiency of internal control of its activities every year.

The directorate general of integral control and internal validation of risks, within its mission of supervising the quality of the Group’s risk management, guarantees that the management and control systems of the different risks inherent in its activity fulfill the most demanding requirements and the best practices observed in the industry and/or required by regulators. In addition, internal auditing is responsible for ensuring that the policies, methods and procedures are adequate, effectively implemented and regularly reviewed.

4.5.6 Recovery management

Recovery management is a strategic element in the Bank’s risk management.

In order to conduct recovery management adequately, it is done in four main phases: (i) irregularity or early non-payment, (ii) recovery of non-performing loans, (iii) recovery of write-offs, and (iv) management of foreclosed assets. Indeed, the recovery function begins before the first non-payment when the client shows signs of deterioration and ends when the debt has been paid or regularized. The function aims to anticipate noncompliance and is focused on preventative management.

The current macroeconomic environment directly impacts the non-payment index and customers’ bad loans. The quality of portfolios is thus fundamental for the development and growth of our businesses in different countries where great importance is attached to debt recovery in order to ensure that this quality always remains within expected levels.

The Group has a corporate management model that sets the guidelines and general pattern of actions applied to the various countries, always taking into account the local features that recovery activity requires, including the economic environment, the business model or a mixture of both. This model is constantly reviewed and the processes and management methodology that sustains it improved. Recovery management for Santander, which directly involves all the management areas (commercial staff, technology, operations, human resources and risks), has helped to incorporate solutions that improve the model’s effectiveness and efficiency.

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The diverse features of our customers make segmentation necessary in order to manage recoveries adequately. Massive management for large collectives of clients with similar profiles and products is done through processes with a high technological component, while personalized management focuses on customers that, because of their profile, require more individualized analysis.

Recovery activity has been aligned with the socio-economic reality of various countries and different risk management mechanisms have been used on the basis of their age, guarantees and conditions, always ensuring, as a minimum, the required classification and provision. Particular emphasis in the recovery function is placed on management of the aforementioned mechanisms for early management, in line with corporate policies, taking account of the various local realities and closely tracking vintages, stock and performance. These policies are reviewed and regularly adopted in order to reflect both the better management practices as well as the regulatory changes that are applied.

Recovery management focuses on adapting operations to the client’s payment capacity, and is also noteworthy in seeking solutions, other than judicial ones, for the advance payment of debts.

One of the ways to recover debt from clients who have suffered a severe deterioration in their repayment capacity is repossession (judicial or in lieu of payment) of the real estate assets that guarantee the loans. In countries with a high exposure to real estate risk, such as Spain, there are strong mechanisms for the evacuation of properties which, with their sale, enable the capital to be returned to the bank and reduce the worrying stock in the balance sheet at a much faster speed than those of its competitors.

Part 5. Liquidity risk and funding

5.1 Introduction to the treatment of liquidity risk and funding

Santander developed a funding model based on autonomous subsidiaries responsible for covering their own liquidity needs.

This structure makes it possible for Santander to take advantage of its solid business model in order to maintain comfortable liquidity positions at Group level.

In the last few years, it has been necessary to adapt the funding strategies to the new commercial business trends and the markets’ conditions.

In 2012, a very demanding environment, the Group strengthened its liquidity situation and that of its subsidiaries, enabling it to tackle 2013 from a good starting point.

Liquidity management and funding have always been basic elements in Banco Santander’s business strategy and, together with capital, a fundamental pillar in supporting its balance sheet strength.

Relegated during the expansion period to a second level importance, liquidity has recovered its importance in the last few years because of the rising tensions in financial markets against the backdrop of a global economic crisis. This scenario has enhanced the importance for banks of having appropriate funding structures and strategies to ensure its intermediation activity.

During this period of stress, Santander has enjoyed an appropriate liquidity position, higher than that of its peers, which has given it a competitive advantage to develop and expand its activity in an increasingly demanding environment.

This better position for the whole Group has been supported by a decentralized funding model consisting of autonomous subsidiaries, self-sufficient in liquidity. Each subsidiary is responsible for covering the liquidity needs of its current and future activity, either through deposits captured from its customers in its area of influence or through recourse to the wholesale markets in which it operates, within a framework of management and supervision coordinated at the Group level.

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The funding structure is one that shows its greatest effectiveness in situations of high levels of market stress as it prevents the difficulties of one area from affecting the funding capacity of the Group and of other areas, as could happen in the case of a centralized funding model.

This funding structure also benefits from the opportunities of a solid retail banking model: with a significant presence (market shares of around 10% or more) in 10 high potential markets, focused on retail clients and high efficiency. All of this gives our subsidiaries a big capacity to attract stable deposits, as well as a strong issuance capacity in the wholesale markets of these countries, generally in their own currency, and backed by the strength of their franchise and belonging to a leading group.

At the end of 2012, the Group’s large management units, from the standpoint of funding, were self-financing except for Santander Consumer Finance because of the nature of its business. The main balance sheet items were as follows:

MAIN UNITS AND BALANCE SHEET ITEMS
December 2012. EUR billion
	Total assets		Net loans		Customer deposits*		M/LT funding**
Spain		356.1		194.2		201.9		84.9
SCF		74.0		56.7		31.9		7.4
Portugal		42.2		26.0		24.0		3.2
Poland- BZ WBK		14.9		9.7		11.2		0.1
UK		359.7		250.5		194.5		76.0
Brazil		148.7		74.5		69.8		21.2
Mexico		46.9		20.4		24.7		2.1
Chile		40.7		29.7		22.4		6.8
Argentina		8.3		5.2		6.3		0.0
US		62.9		41.3		38.1		11.7
Total Group		1,269.6		720.5		638.2		213.6

* Includes retail commercial paper in Spain.

** M/LT term issues in the market securitizations and other secured financing in markets, and funds borrowed from FHLB lines. All of them for their nominal value.

Santander’s management of funding and liquidity risk, both theoretical and practical, is set out in the following sections:

• Liquidity management framework – monitoring and control of liquidity risk.

• Funding strategy and evolution of liquidity in 2012.

• Outlook for 2013.

5.2 Liquidity management framework monitoring and control of liquidity risk

Management of structural liquidity aims to fund the Group’s recurring activity in optimum conditions of term and cost, avoiding the assumption of undesired liquidity risks.

Santander’s liquidity management is based on the following principles:

• Decentralized liquidity model.

• Needs derived from medium and long term activity must be financed by medium and long term instruments.

• High contribution from customer deposits, derived from the retail nature of the balance sheet.

• Diversification of wholesale funding sources by instruments/investors, markets/currencies and terms.

• Limited recourse to short-term funding.

• Availability of a sufficient liquidity reserve, which includes the discount capacity in central banks to be used in adverse situations.

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The effective application of these principles by all the entities that comprise the Group required development of a unique management framework built around three essential pillars:

• A solid organizational and governance model that ensures the involvement of the senior management of subsidiaries in decision-taking and its integration into the Group’s global strategy.

• Deep balance sheet analysis and measurement of liquidity risk, which supports decision-making and its control.

• Management adapted in practice to the liquidity needs of each business.

5.2.1 Organizational model and governance

Decision-making process regarding structural risks, including liquidity risk, is carried out by local asset and liability committees (ALCOs) in coordination with the markets committee.

The markets committee is the main body at Group levels, which coordinates and supervises all the global decisions that influence measurement, management and control of liquidity risk. It is headed by the chairman of the bank and comprises the 2nd vice-chairman and chief executive officer, the third vice-chairman (who is, in turn, the chairman of the delegated risk committee), the chief financial officer and the senior vice chairman for risk and those responsible for the business and analysis units.

In line with these principles, the local ALCO sets the strategies that ensure and/or anticipate the funding needs of their business. They are supported by the financial management and market risk areas, which present analysis and proposals for a correct management and control compliance with the limits set.

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In line with best governance practices, the Group establishes a clear division between executing the financial management strategy (the responsibility of the financial management area) and monitoring and control (the responsibility of market risks).

5.2.2 Balance sheet analysis and measurement of liquidity risk

Making decisions on funding and liquidity is based on a deep understanding of the Group’s current situation (environment, strategy, balance sheet and liquidity position), of future liquidity needs generated from businesses (projection of liquidity), as well as from expected access to and current situation of funding sources in the wholesale markets.

The objective is to ensure the Group maintains optimum levels of liquidity to cover its short and long-term needs with stable sources of funding, optimizing the impact of its cost on the income statement.

This requires monitoring of the structure of balance sheets, forecasting short and medium-term liquidity and establishing the basic metrics.

At the same time, 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.

The inputs for drawing up the various contingency plans for the Group are obtained from the results of the analysis of balance sheets, forecasts and scenarios which, in turn, enable a whole spectrum of potentially adverse circumstances to be anticipated.

All these actions are in line with the practices being fostered by 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 under observation.

Greater detail on the measures, metrics and analysis used by the Group and its subsidiaries to manage and control liquidity risk is set out below:

Methodology for monitoring and controlling liquidity risk

The objectives of the Group’s liquidity risk measures are:

• To achieve greater efficiency in measuring and controlling liquidity risk.

• To support financial management, for which the measures are adapted to the form of managing the Group’s liquidity.

• Alignment with BIS III to avoid “conflicts” between different limits and facilitate their management.

• Be an early warning system, anticipating potential risk situations by monitoring certain indicators.

• Attain the involvement of countries. The metrics are developed on the basis of common and homogeneous concepts that affect liquidity, but the analysis and adaptation of each unit is needed.

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There are two types of basic metrics used to control liquidity risk: dynamic and static ones. The first category basically includes the liquidity gap and the second one the balance sheet’s net structural position. As an additional element, the Group develops various stress scenarios. These three metrics are as follows:

a) Liquidity gap

The liquidity gap provides information on the contractual and estimated (by hypothesis) cash inflows and outflows for a certain period of time, for each of the main currencies in which the Group operates.

The gap provides information on the sources and uses of funds expected in specific time periods, in relation to the total on- and off-balance sheet items. This analysis tool is obtained from the net of the structure of maturities and flows for each period established. The liquidity available is contrasted with the needs arising from maturities.

In practice, and given the different performances of a same item in the Group’s subsidiaries, there are common standards and methodologies to homogenize the building of liquidity risk profiles for each unit as well as be presented in a comparable way to the bank’s senior management.

In the Group’s case, a consolidated look at the liquidity gaps is of limited use for managing and understanding liquidity risk. This use is reduced if the gaps result from the use of contractual maturities.

Of note in the various analysis made using the liquidity gap is that for wholesale funding. On the basis of this analysis, a metric has been defined whose objective is to guarantee that sufficient liquid assets are maintained in order to attain a minimum liquidity horizon, in a scenario in which wholesale funding is not renewed at its maturity.

The minimum liquidity horizons are determined in a corporate and homogeneous way for all units/countries, which must calculate their wholesale liquidity metric in the main currencies in which they operate.

Considering the market tensions in 2012, this wholesale liquidity gap is closely monitored in the parent bank and in the eurozone units.

At the end of 2012, all units were within the horizons established for this scenario.

b) Net structural position

The objective of this metric is to determine the reasonability of the financing structure of the balance sheet. The Group’s criterion is to ensure that the structural needs (customer loans, fixed assets, etc.) are covered by an adequate combination of wholesale funding sources and a stable base of retail deposits.

Each unit draws up its liquidity balance sheet in accordance with the features of their businesses and compare them with the various funding sources they have. The main factors taken into account when determining this metric are the recurrence of the businesses to be financed, the stability of funding sources and the capacity of assets to become liquid.

In practice, each subsidiary draws up its liquidity balance sheet (different from the accounting one) by classifying the various asset, liability and off-balance sheet items on the basis of their nature for the purposes of liquidity. This determines the financing structure that must comply at all times with a key premise: basic businesses must be financed with stable funds and medium and long term funding. This guarantees a sound financial structure and the sustainability of business plans.

As of December 31, 2012, the Group’s structural liquidity surplus stood at €157 billion on a consolidated basis. This surplus is based mainly on fixed income securities (€114 billion), equities (€5 billion) and net deposits at central banks (€56 billion).

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c) Analysis of scenarios

As an additional element to the metrics, the Group develops various stress scenarios. The main objective is to identify the critical aspects in each potential crisis and define the most appropriate management measures to tackle each of these situations.

Generally speaking the units take into account three scenarios in their liquidity analysis: systemic, idiosyncratic and hybrid. These represent the minimum standard analysis established for all the Group’s units and which are provided to senior management. Each of the units also develops ad hoc scenarios that replicate significant historic crises or specific liquidity risks of their environment.

The main features of the three basic scenarios are:

• An idiosyncratic crisis only affects a bank but not its environment. This is basically reflected in wholesale funds and in retail deposits, with various percentages of outflows depending on the severity defined.

Within this category a specific crisis scenario that a local unit could suffer as a result of a crisis in the parent bank (Banco Santander) is studied. This scenario was particularly relevant in 2012 because of tensions suffered by countries on the periphery of the eurozone.

• A systemic crisis is an attack by the international financial markets on the country where the local unit is located. Each unit would be affected to varying degrees, depending on its relative position in the local market and the image of soundness it has. Among other factors which would be affected in this scenario are, for example, the wholesale funding lines from the closure of markets or the liquid assets linked to the country whose market value would be significantly reduced.

• In a hybrid crisis scenario, some of the factors mentioned in the scenarios above are stressed. Particular attention is paid to the most sensitive aspects from the standpoint of the unit’s liquidity risk.

These metrics and scenarios are directly linked to the process of drawing up and executing the liquidity contingency plan by the financial management area.

At the end of 2012, and in a scenario of a potential systemic crisis affecting the wholesale funding of units in Spain, Grupo Santander had an appropriate liquidity position. The wholesale liquidity metric horizon in Spain (included within the liquidity gap measures) showed levels of more than 90 days during which the liquidity reserve would cover all the maturities of wholesale financing.

As well as these three metrics, a series of internal and market variables were defined as early warning indicators of possible crises, which can also state their nature and severity. Their integration in daily liquidity management enables situations that could affect the Group’s liquidity risk to be anticipated. Although these alerts vary from country to country and from bank to bank on the basis of specific determinants, some of the parameters used are common in the Group such as Banco Santander’s level of CDS, the evolution of deposits from customers and the interest rate trend of central banks.

5.2.3 Management adapted to business needs

In practice, and in line with the financing principles set out, Grupo Santander’s liquidity management consists of:

• Drawing up a yearly liquidity plan based on the funding needs derived from the budgets of each business and the methodology already described. On the basis of these liquidity needs and taking into account prudent limits of recourse to short-term markets, an issuance and securitization plan for the year for each subsidiary/global business is established by the financial management area.

• Monitoring, during the year, the evolution of the balance sheet and of the financing needs of the subsidiaries/businesses, which gives rise to updating the plan.

• Maintain an active presence in a large number of wholesale funding markets that enables an appropriate structure of issues to be sustained, diversified by products and with an average conservative maturity.

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The effectiveness of this management is based on implementation in all subsidiaries. Each subsidiary budgets the liquidity needs based on its activity of intermediation and assesses its capacity of recourse to wholesale markets in order to establish an issuance and securitization plan, in coordination with the Group.

The Group’s main subsidiaries are self-sufficient regarding their structural financing. The exception is Santander Consumer Finance which needs the support of other Group units, particularly that of the parent bank, given its nature as a consumer finance specialist operating mainly via dealers. This financing is always done at market prices on the basis of the maturity term and the internal rating of the borrower.

In any case, the parent bank’s support for Santander Consumer Finance has been reduced to less than a third in the last three years (from €15 billion in 2009 to around €4.5 billion). The developments underway to attain self-financing levels similar to those of the rest of the subsidiaries, through recourse to retail clients as well as wholesale funding, are successfully covering their phases and will be completed in the short term.

5.3 Financing strategy and evolution of liquidity in 2012

5.3.1 Funding strategy

Santander’s financing activity over the last few years has achieved its objective of adequately funding the Group’s recurring activity in a very demanding environment characterized by a greater perception of risk, scarce liquidity in certain maturity terms and their higher cost.

This good performance was supported by extending the management model to all the Group’s subsidiaries, including new ones, and, on top of that, adapting the subsidiaries’ strategy to the increasing requirements of markets. These requirements have not been the same for all markets and have attained much higher levels of difficulty and pressure in some areas such as on the periphery of Europe.

It is possible, however, to extract a series of general trends implemented by Santander’s subsidiaries in their funding and liquidity management strategies in the last three years. They are the following:

• Lower growth in lending because of the environment, particularly in countries such as Spain and Portugal undergoing adjustments. On the other hand, growth in emerging markets (Latin America) and in units and businesses under development (U.S., Germany, Poland and U.K. SMEs).

Group loans, excluding repos, increased by around €40 billion since the end of 2009 (+6%), including those by new units incorporated to the Group (Poland and Germany).

• Priority focus on capturing customer funds. Group deposits excluding repos but including retail paper rose by €122 billion (+26%), a growth three times greater than that of lending.

All countries increased deposits, particularly those units that grew the most in lending and those under higher stress from the markets. Among the first group are Brazil, Mexico and Chile with a combined rise in deposits of 31% in local currency, and among the second, Spain and Portugal whose deposits grew by 33% in the last three years.

• Maintain adequate and stable levels of medium and long term wholesale funding at the Group level (22% of balance sheet for liquidity management purpose at the end of 2012 vs. 23% in 2009). The decentralized model for subsidiaries helped maintain a high level of activity in wholesale markets in a more demanding period.

Of note was the greater activity in the U.K. resulting from the change in regulatory conditions, and of the main Latin American countries (Brazil, Mexico and Chile) because of their strong growth in lending.

In Europe, the securitization activity of Santander Consumer Finance was extended to new markets such as Finland, Sweden and Norway, converting their units into pioneers in securitization of auto finance. Also noteworthy was the incorporation in 2012 of SHUSA, Santander Group’s holding in the US, to the pool of the Group’s significant issuers.

Lastly, in Spain, where business required reduced liquidity needs in the last three years, the Group maintained a conservative issuance policy (€54 billion of medium and long term debt in 2010-2012, close to 80% of maturities and amortizations), taking advantage of the strength of the Santander brand and credit quality.

• Ensure a sufficient volume of assets eligible for discount in central banks and other public institutions as part of the liquidity reserve to meet stress situations in wholesale markets.

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The Group increased its total discounting capacity in 2012 to around €130 billion (it was close to €100 billion in 2010 and 2011). This required a continuous strategy from the subsidiaries to generate assets eligible for discount in order to compensate for the reduction in the value of guarantees as a result of the downgrading of ratings in the period, particularly of sovereign debt and related assets.

A large part of this total discounting capacity was generated by the units in the eurozone. These benefited from the quality of their assets and from the extraordinary monetary policy measures implemented by the European Central Bank (ECB) at the end of 2011 and the beginning of 2012 (basically, widening of collateral and three-year liquidity auctions) in order to boost its liquidity buffer notably.

At the end of 2012, Santander had a total volume eligible for discounting that comfortably exceeded the commercial gap (i.e. the difference between net loans and deposits) at Group level. It represents more than 160% of the gap after the dynamics of the aforementioned volumes, which were developed more intensely in 2012.

During 2012, faced with the situation in the euro markets, Santander followed a prudent policy of depositing in the same central banks included in the Eurosystem most of the funds raised from them, as an immediate liquidity reserve, making its global net position virtually zero.

In January 2013, the improvement in the Group’s liquidity position and that of the units in Spain, combined with an easing in the wholesale funding markets, led Santander to return all of the funds taken by Banco Santander and Banesto in the first auction of Long Term Refinancing Operations (LTROs) conducted by the ECB in December 2011. Santander returned €24 billion deposited in the Eurosystem central banks, the maximum allowed in the first repayment window offered by the ECB.

All of these developments, made on the foundations of a solid liquidity management model, made it possible for Santander to enjoy a very robust financing structure that sets it apart from most of its international peers. The basic features of this structure are:

• High relative share of customer deposits in an essentially retail banking balance sheet.

Customer deposits are the main source of the Group’s financing. Including retail commercial paper (given its role as replacing time deposits in Spain), they accounted for around two-thirds of the Group’s funding and 89% of net loans at the end of 2012.

They are also very stable funds given their retail origin (more than 85% of the deposits come from retail banking).

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• Diversified wholesale funding focused on the medium and long term and with a very small relative share of short term.

Medium and long term funding accounts for less than one quarter of the Group’s funding and comfortably covers the rest of net loans not financed by customer deposits (commercial gap).

This funding is well balanced by instruments (approximately 1/3 senior debt, 1/3 covered bonds, 1/3 securitizations and the rest) and also by markets so that those with the highest shares in issues are those where investor activity is the strongest.

The charts showing the geographic distribution of gross loans and of medium and long term funding are shown below so that their similarity can be appreciated.

The bulk of medium and long term wholesale funding consists of debt issues. Their outstanding balance at the end of 2012 was €153 billion nominal, with an average maturity of 3.8 years and an appropriate distribution profile.

The distribution by instruments, the evolution over the last three years and their maturity profile were as follows:

MEDIUM AND LONG TERM DEBT ISSUES, GRUPO SANTANDER
Million euros
	Evolution of outstanding balances in nominal value
	December 2012		December 2011		December 2010
Preferred shares		4,765		5,657		7,525
Subordinated debt		11,004		14,184		20,633
Senior debt		69,916		73,693		63,519
Covered bonds		67,468		68,240		62,974
Total*		153,152		161,774		154,651

Distribution by maturity, December 2012*
	0-1 month		1-3 months		3-6 months		6-9 months		9-12 months		12-24 months		2-5 years		Over 5 years		Total
Preferred shares		0		0		0		0		0		0		0		4,765		4,765
Subordinated debt		0		194		0		0		0		227		4,824		5,759		11,004
Senior debt		4,533		6,436		6,840		4,297		4,389		15,438		23,368		4,615		69,916
Covered bonds		0		2,808		3,551		4,696		300		11,267		29,811		15,035		67,468
Total*		4,533		9,437		10,391		8,993		4,689		26,932		58,003		30,174		153,152

* In the case of issues with put option in favour of the holder, the maturity of the put option will be considered instead of the contractual maturity.

Note: the entire senior debt issued by the Group’s subsidiaries does not have additional guarantees.

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As well as debt issues, the medium and long term wholesale funding is completed by lines from the Federal Home Loan Banks in the U.S.(€10 billion at the end of 2012) and by funds obtained from securitization activities. The latter includes securitization bonds placed in the market, other collateralized financing and other special ones for a total amount of €50 billion and an average maturity of around 2.5 years, which compares well with market standards.

The wholesale funding of short term issuance programmes is a marginal part of the structure as it accounts for less than 2% of financing (excluding the aforementioned retail commercial paper) and is well covered by liquid financial assets.

The outstanding balance at the end of 2012 was €17 billion, mainly due to the U.K. unit and the parent bank through existing issuance programmes: various programmes of CDs and commercial paper of the U.K. (60%), European commercial paper and U.S. commercial paper of the parent bank (25%), and from other units (15%).

In short, Santander enjoys a very solid and robust financing structure based on an essentially retail banking balance sheet that enables the Group to cover comfortably its structural liquidity needs (loans and fixed assets) with permanent structural funds (deposits, medium and long term funding and equity), which generates a large surplus of structural liquidity.

This robustness at the Group level is also distinctive of the balance sheets of the countries in which we operate and of the main subsidiaries, except for Santander Consumer Finance. The commercial gap of these subsidiaries is amply covered by issues and medium and long term financing, the recourse to short-term funds is very small and, as a result, there is a structural liquidity surplus.

5.3.2 Evolution of liquidity in 2012

Further improvement in liquidity ratios (Group LTD: 113%), backed by deleveraging in key markets and by issuance of the main subsidiaries (€43 billion of medium and long term issues and securitizations).

Strengthened position with a high liquidity reserve (€217 billion).

Facing 2013 from a comfortable position enabled the repayment of the €24 billion borrowed from the ECB (100% of funds borrowed by Banco Santander and Banesto in the first LTROs auction).

From a funding standpoint, 2012 was the most demanding of the last few years. The intensified Greek crisis and doubts regarding the euro’s survival sharply pushed up the risk premiums of the sovereign debt of many European countries to their highest levels since the creation of the single currency. This tension led to the narrowing of wholesale markets for most of the year, particularly in countries on the periphery, with reduced issuing “windows” at the start and the end of the year only for the best credit quality companies. This issuance difficulty increased the appetite for retail deposits even further; they had already been the object of strong competition in most European markets.

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In this context Santander managed to improve its liquidity position as reflected in two basic aspects:

1. Improvement in basic liquidity ratios

The table shows the evolution in the last few years of the basic metrics for monitoring liquidity at the Group level:

GRUPO SANTANDER MONITORING METRICS
	2012			2011			2010			2009			2008
Net loans/net assets*		74	%		77	%		75	%		79	%		79	%
Net loan-to-deposit ratio		113	%		117	%		117	%		135	%		150	%
Customer deposits and medium and long term funding/net loans		118	%		113	%		115	%		106	%		104	%
Short term wholesale funding/net liabilities		2	%		2	%		3	%		5	%		7	%
Structural liquidity surplus (%/net liabilities*)		16	%		13	%		14	%		8	%		4	%

* Balance sheet for liquidity management purposes.

Note: In 2011 and 2012, customer deposits include retail commercial paper in Spain (excluding short term wholesale funding).

At the end of 2012, and compared to 2011, Grupo Santander registered:

• A fall in the ratio of loans/net assets (total assets less trading derivatives and interbank balances) to 74% due to the decline in lending in the environment of deleveraging. The ratio reflects the retail nature of Santander’s balance sheet.

• An improvement in the net loan-to-deposit ratio to 113% (including retail commercial paper) from 117% in 2011. This continued the downward trend started in 2008 (150%), the result of the effort made to capture retail deposits throughout the Group.

• The ratio of customer deposits and medium and long term financing/lending also improved, combining the improvement in liquidity from business management with the Group’s issuance capacity. The ratio was 118% (113% in 2011), well above 104% in 2008.

• Recourse to short-term wholesale funding was also reduced (below 2%), in line with that in 2011.

• Lastly, the Group’s structural surplus (i.e., the excess of structural financing funds -deposits, medium and long term funding and capital- over structural liquidity needs -net loans and fixed assets-) rose significantly in 2012 to €157 billion, basically due to the reduction in the commercial gap.

This improvement in the Group’s liquidity position is the result of the evolution of several subsidiaries. Of note were Spain and Portugal with a combined loan-to-deposit ratio (including retail commercial paper) of 97% at the end of 2012 (118% in 2011), which improved the Group’s average ratio.

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The table below sets out the most frequently used liquidity ratios for Santander’s main units at the end of 2012.

LIQUIDITY RATIOS FOR THE MAIN UNITS
December 2012. (%)
	Net loan-to-deposit ratio		Deposits+M & LT funding/net loans
Spain		96		148
Portugal		108		105
Santander Consumer Finance		178		69
Poland-BZ WBK		87		116
UK		129		108
Brazil		107		122
Mexico		82		132
Chile		132		98
Argentina		83		120
US		108		121
Total Group		113		118

Note: In Spain, including retail commercial paper in deposits.

The drivers behind the improvements in the liquidity ratios in 2012, at Group level and in the subsidiaries, were:

• A generalized reduction in the commercial gap, taking advantage of the capacity to capture customer funds and the deleveraging trends in some countries, and;

• A high issuance capacity in wholesale markets.

As regards the first factor, many units in 2012 focused on increasing their customer deposits as the basis for financing growth in lending.

The greater growth was concentrated in Spain (+€22 billion) where Santander took advantage of customers searching for quality to gain market share (via deposits and retail commercial paper) in a market undergoing restructuring. The combination of this trend with the decline in lending because of deleveraging explains the significant improvement in liquidity ratios. Portugal shows similar, but not as strong, trends.

Overall, these trends enabled the units in Spain and Portugal to reduce their commercial gap by more than €42 billion, a volume almost double that of the maturities in their issues of medium and long term debt during the year.

In the U.K., the U.S.and Latin America, where there is increasing access to more normalized medium and long term wholesale markets, the evolution of deposits in the various units was limited to accompanying growth in lending. In the case of Santander Consumer Finance and Poland’s BZ WBK (the latter with a surplus of deposits over loans) management was more focused on optimizing the cost of funds.

Regarding issuance, the Group was supported by market and currency diversity, and by the “windows” offered by euro markets, to maintain high levels of fund raising even in unfavorable scenarios.

The Group captured €43 billion in medium and long term issues of fixed income and securitizations in 2012. The chart below sets out their distribution by instruments and geographic areas.

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Issues were made in 10 currencies, involving 13 issuers in 10 countries, with an average maturity of around 4.3 years.

Medium and long term issues (senior debt and covered bonds) raised €31 billion. Two points are worth mentioning:

• The parent bank’s issuance capacity (almost €16 billion with Banesto) in a scenario as adverse as that in 2012, which underscored Santander’s financial strength for international investors.

• The jump made by Latin American units both in quantitative (more than €8 billion issued) and qualitative terms: the four main countries (Brazil, Mexico, Chile and Argentina) made issues. Furthermore, Mexico and Chile made benchmark issues in the region (10-year senior debt in dollars with a high quality international demand).

In securitizations, the Group’s subsidiaries placed in the market close to €12 billion of securitization bonds and medium and long term structured funding collateralized by securitization bonds or covered bonds.

Along with the U.K. market which took 84% of the Group’s placements, also noteworthy was the securitization activity of Santander Consumer Finance backed by investors’ appetite for its assets. This demand enabled two new units of Santander Consumer Finance to access new wholesale markets (Finland and Sweden). In both cases, the Group made the first securitization of auto finance loans.

Regulatory ratios

Finally, regarding regulatory ratios, in 2013 the Basel Committee approved the definitive implementation of the liquidity coverage ratio (LCR), both as regards to defining the eligible assets to include in the liquidity buffer, as well as the period for their gradual introduction. Implementation will begin on 1 January 2015, with 60% coverage, gradually raised by 10 points a year to 100% in 2019.

At the end of 2012, Grupo Santander comfortably met the full requirements of the new LCR ratio regarding its complete application.

2. Increase in the liquidity reserve

This is the second main aspect which reflects the improvement in the Group’s liquidity position during 2012.

The liquidity reserve is the total of the highly liquid assets of the Group and its subsidiaries. It serves as a last resort recourse at times of maximum stress in the markets, when it is impossible to obtain funding with adequate maturity terms and prices.

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As a result, this reserve includes deposits in central banks and cash, unencumbered sovereign debt, undrawn credit lines granted by central banks, as well as other assets eligible as collateral and other undrawn credit lines in official institutions (FHLB, etc.), all of which reinforce the solid liquidity position of the Group and its subsidiaries.

At the end of 2012, Grupo Santander’s liquidity reserve amounted to more than €217 billion (over 20% of the total Group’s external financing). The structure of this volume by type of asset, according to the effective value (net of haircuts), was as follows:

LIQUIDITY RESERVE AT 31/12/2012
Effective value (net of haircuts) in million euros
Cash and holdings at central banks	83,909
Uncumbered sovereign debt	41,930
Undrawn credit lines granted by central banks	79,116
Assets eligible as collateral and undrawn credit lines	12,120
Liquidity reserve	217,075

Note: the reserve excludes other assets of high liquidity such as listed fixed income and equity portfolios.

As of December 31, 2012, the liquidity reserve was located as follows: €107 billion in the U.K., €90 billion in the rest of the units in the convertible currencies area, and the remaining €20 billion mainly in Latin America and Poland.

In 2012, the Group was particularly active in generating eligible assets generally linked to the development of business with customers. This enabled both the maturities of existing assets as well as cuts in credit ratings and in the value of guarantees to be offset when obtaining liquidity from central banks.

At the same time, the extraordinary liquidity measures put into effect by central banks have increased the discounting capacity of the banking sector as a whole. In the case of Grupo Santander, and backed by the quality of its assets, this capacity rose from around €100 billion in 2010 and 2011 to around €130 billion at the end of 2012.

Encumbered assets-funding

Finally, it is worth mentioning the moderate weight of secured funding in the Group’s liquidity position, either in raising medium and long term wholesale funds, or in the central bank funding via discounts of eligible assets, as well as by capturing customer deposits via fixed income repos.

• Regarding wholesale funding, of note are issues of covered bonds (mortgage and public sector), as well as the placement of securitizations and other secured funding (structured, FHLB lines). At the end of 2012, the Group had placed in the market more than €67 billion of covered bonds in nominal value (€3.5 billion public sector and the rest mortgage-backed), as well as €57 billion of securitizations and other collateralized funding.

• With respect to the generation of eligible assets, the various subsidiaries issue central bank eligible covered bonds and securitizations that they retain in portfolio to be used as collateral in the financing facilities of central banks with whom they operate. The Group also has loans eligible for direct discounting in central banks, part of which are pledged in various facilities. At the end of 2012, the Group had obtained €49 billion of financing through central bank discounting. Most of these funds are deposited back in central banks, increasing the liquidity reserve, and so they barely contributed to net financing.

• Lastly, around €48 billion of the total customer deposits relate to repos, secured by fixed income portfolios. The rest of repos related to market activities did not contribute to financing the Group’s commercial activity so that they are netting off the fixed-income portfolios in the balance sheet for liquidity management purposes.

At the end of 2012, the Group had in net terms €174 billion of financing of its activity (18% of its net liabilities, i.e. of the liquidity balance sheet) collateralized via the aforementioned items.

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5.4 Funding outlook for 2013

Grupo Santander began 2013 with a comfortable liquidity position and lower issuance needs in the medium and long term due to the deleveraging process, which allowed the Group to return €24 billion, borrowed in 2011, to the ECB at the end of January 2013.

It does not have any relevant concentration of maturities in the coming years and, furthermore, the various dynamics of the business areas and markets make it unnecessary to cover all the maturities. This will lead the Group to develop differentiated strategies in each of them.

In Spain and Portugal, as in 2012, the units are expected to generate sufficient liquidity in commercial businesses to cover medium and long term maturities, whose total volume will not be very different to the maturities in 2012. Of note among the rest of the European units is the ongoing Santander Consumer Finance strategy of securitizations to achieve its self-financing in the short term.

In the U.K., part of the liquidity surplus accumulated in 2012 was used to finance the growth of the unit and part of the maturities of issues while reinforcing and optimizing its deposits base. Deposits in the U.S. will continue to accompany lending growth.

In Latin America, where activity is more dynamic, the emphasis will be maintained on growth in deposits in order to finance commercial activities, while strengthening issuance in wholesale markets opened to the Group’s large units.

In any case, while current uncertainty persists, Santander will continue its conservative issuance policy in order to strengthen its solid position.

The issues made by the parent bank in Spain in January 2013 are a good example of this strategy. Taking advantage of the reduced market tensions and the lower risk premium of Spanish sovereign debt, Banco Santander made two issues of senior debt and covered bonds and captured €3 billion at a maturity term well above the previous year (7 and 5 years, respectively, compared to an average of 4.3 years in 2012) and significantly lower costs (in the case of the senior debt, 20% less than the average cost in 2012 despite more than doubling the average maturity of the previous year).

Part 6. Operational risk

6.1 Definition and objectives

Grupo Santander defines 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/evaluate, control/mitigate and monitor this risk. The Group’s 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.

Grupo Santander opted, from the beginning, to use the standard method for calculating regulatory capital by operational risk, envisaged in the BIS II rules. The Group is 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 Grupo Santander’s operational risk management model).

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6.2 Corporate governance and organizational model

The organizational model for controlling and managing risks is in line with the Basel guidelines and establishes three levels of control:

• First level: control functions conducted by the Group’s units. It seeks to ensure that business and the institution as a whole does not incur this type of risks.

• Second level: functions carried out by the corporate areas. It establishes rules and controls compliance by the first layer of control.

• Third level: integral control functions by the risks division integral control area and internal validation of risk (CIVIR).

This model is constantly reviewed by the internal auditing division.

In the technology and operations division, the corporate area of technological and operational risk (CATOR) defines the policies and methodology, as well as managing and controlling the technological and operational risks.

The Group believes it is convenient for the first and second layer of control functions to be developed within this division, where operational risk is managed more directly and which has the most appropriate resources and staff to identify, measure, assess and mitigate this risk. All of this is conducted within a recurring supervision of the Group’s bodies of control, in accordance with its strong risk management culture.

All local areas are responsible for the implementation, integration and local adjustment of the policies and guidelines established by the corporate area, carried out by the operational risk executives in each of the units.

This operation risk management structure is based on the knowledge and experience of the executives of the Group’s various areas. Particular importance is given to the role of local executives.

The two committees for managing and controlling technological and operational risk (TOR) are:

• Corporate Committee of TOR, which comprises executives from the various divisions related to management and control of this risk: its objectives are to supply a broad view of operational risk in the Group and establish effective measures and corporate criteria in the spheres of management, measurement, monitoring and mitigation of this risk.

• Corporate Committee of CATOR: it meets twice a month. This committee monitors CATOR’s projects and the Group’s risk exposure. Local executives and those from integral control of risks also form part of the committee.

The Group monitors and controls technological and operational risk through its governance bodies. The board, the executive committee and the Group’s management committee regularly include treatment of relevant aspects in management and mitigation of operational risk.

The Group, through approval in the risk committee, also establishes every year operational risk limits. A risk appetite is set which must be situated in low and medium-low profiles, which are defined on the basis of the level of the various ratios. Limits are set by country and for the Group on the basis of the gross loss/gross income ratio.

Finally, the corporate governance structure was increased in 2012, by incorporating:

• Monthly committees between CATOR and CIVIR. The contents of this committee are diverse, although focused on aspects such as organization and governance, review of the tools and management methodologies of TOR and of the evolution of exposure to this risk.

• Committee of Local Information Security Officers (LISOs), which guarantees implementation of the corporate model of security in each country/unit and identifies and drives the measures for continuous improvement in the Group’s security.

• Monthly committee of review and continuous monitoring of issues related to management of TOR in the sphere of production and management of infrastructure, fostering global actions to mitigate risk. It is held with executives of the Group’s technology areas.

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6.3 Risk management model

The Group’s operational risk management incorporates the following elements:

The various phases of the technological and operational risk management model are:

• Identify the operational risk inherent in all activities, products, processes and banking systems.

• Measure and assess 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 monitor the exposure of operational risk, implement control procedures, improve internal knowledge and mitigate losses.

• Establish mitigation measures that eliminate or minimize operational risk.

• Produce 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.

• Define and implement systems that enable operational risk exposures to be watched over and controlled and integrated into the Group’s daily management, taking advantage of existing technology and seeking the maximum computerization of applications.

• Define and document operational risk management policies, and introduce methodologies for managing this risk in accordance with regulations and best practices.

Grupo Santander’s 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.

• Facilitates the establishment of operational risk appetite limits.

Implementing the model: global initiatives and results

The main functions, activities and global initiatives adopted seek to ensure effective management of operational and technological risk are:

• 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: communication of best practices within the Group.

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• Foster mitigation plans: ensure control of implementation of corrective measures as well as ongoing projects.

• Define policies and structures to minimize the impact on the Group of big disasters.

• Maintain adequate control on activities carried out by third parties in order to meet potential critical situations.

• Supply adequate information on this type of risk.

The corporate function enhances management of technological risk (TR), strengthening 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 the Group’s units are incorporated into the model and with a high degree of uniformity. However, due to the different pace of implementation, phases, schedules and the historical depth of the respective databases, the degree of progress varies from country to country.

In general, all the Group’s units continue to improve all aspects related to operational risk management. This can be seen in the annual review by the internal auditing unit.

6.4. Measurement model and risk assessment

A series of quantitative and qualitative corporate techniques/tools have been defined to measure and assess technological and operational risk, which are combined to make a diagnosis (on the basis of the risks identified) and obtain an assessment (through measurement/evaluation) of the area/unit.

The quantitative analysis of this risk is carried out with tools that register and quantify the level of losses associated with TOR events. These include:

• An internal database of events, whose objective is to capture all the Group’s losses from operational risk. The capturing of events related to operational risk is not restricted by setting thresholds (i.e. there are no exclusions for reasons of amount) and there are both events with accounting impact (including positive effects) as well as non-accounting ones.

• Accounting conciliation processes have been established that guarantee the quality of the information gathered in the databases.

• The main events of the Group and of each operational risk unit are particularly documented and reviewed.

• An external database of events, as the Group participates in international consortiums, such as the Operational Risk Exchange (ORX).

• Capital calculation by the standard method (see the corresponding section in the report on Prudential Relevance Report/Pillar II).

The tools defined for quantitative analysis seek to assess aspects (coverage/exposure) linked to risk profile. These tools are mainly:

• A map of processes and risks and self-assessment questions. An adequate evaluation of the risks, on the basis of the expert criterion of the managers, enables a qualitative view of the Group’s main focuses of risk to be obtained, regardless of having materialized before.

• Corporate system of operational risk indicators, in continuous evolution and coordination with the internal control area. They are various types of statistics or parameters that provide information on an institution’s exposure to risk. These indicators are regularly reviewed in order to alert them to changes that could reveal problems with risk.

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The Group’s units in 2012 continued to make progress in exercises of risk self-evaluation. This evolution focused on the bases of risks to be evaluated, with a substantial enriching, as well as on incorporating to the methodology the estimated inherent and residual loss and the qualitative VaR according to the map of processes and risks. The experts from the various business and support areas assessed the risks associated with their processes and activities, estimating the average frequency of occurrence of the materialization of risks as well as the average severity.

The exercise also incorporated evaluating the greatest risk, the environment of control and linkage to compliance and reputational risk.

6.5. Evolution of the main metrics

As regards the databases of events, and consolidating the total information received, the evolution of net losses by Basel risk category in the last three years is set out below:

The evolution of losses by category shows a reduction in relative terms of external fraud and execution, delivery and management of processes thanks to the measures taken for their mitigation.

The category of practices with clients, products and business – which includes customer complaints on erroneous marketing, incomplete information and inexact products – increased. Of note was the contribution of payment protection insurance for clients in the U.K.. It should be pointed out that the complaints raised with the Group relate to a general problem in the U.K. banking sector, and the volume of complaints against the bank is considered proportionate to its market share. Although these events were sufficiently provisioned in 2011 by the Group, the settlements for these clients increased in 2012, in accordance with the planning by the unit.

The chart below sets out the evolution of the number of operational risk events by Basel category over the last three years.

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6.6 Mitigation measures

The Group has a stock of mitigation measures (more than 900 active ones, of which more than 400 started in 2012), established in response to the main risk sources. They have been identified by analyzing the tools used to manage operational risk, as well as the organizational and development model and by implementing preventative policies and procedures for managing and controlling risk.

The percentage of measures on the basis of the source and management tool, which identified the risk necessary to mitigate, was as follows:

The measures referred to are turned into action plans which are distributed in the following spheres:

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The main mitigation measures centered on improving the security of customers in their usual operations, as well as continued improvements in processes and technology. Regarding the reduction of fraud, the main specific measures were:

• Electronic fraud. Measures were established at the corporate and local levels, such as:

• Improvements in the tracking of customer operations conducted by electronic banking, mobile phones and telephone banking (teams with specialized staff and intelligence software). These expert systems of scoring enable anomalies to be detected in the movements of customers and to warn them of suspicious operations.

• Increased security in confirming customers’ operations using strong procedures for the signature of operations.

These measures are locally implemented in the Group’s various countries such as the OTP-SMS passwords or physical devices that generate access codes (physical token).

• Strengthening mechanisms to identify operations. Validation processes for activating telematics.

• Technical measures for detecting and warning of the theft of customers’ credentials (phishing).

• Fraud in the use of cards:

• Migration to card technologies with chip (EMV).

• Improvements in ATM security, including mechanisms to detect the falsification of cards (anti-skimming). These mechanisms are specifically orientated to prevent the cloning of cards or the capturing of PINs.

The Group finished installing a new corporate system (SANSIRO) that supports all operational risk management tools and facilitates functions and information needs and reporting at both the local and corporate levels. The main features are:

• It has the following modules: registry of events, map of risks and evaluation, indicators and reporting systems.

• An application tool for all the Group’s institutions.

• All operational risk management processes are automated.

• In 2013, we will continue to invest in the platform and add elements that contribute to continuous improvement, incorporating the continuous evolution of methodologies related to management and control of this risk.

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The different areas that cover this platform are:

In addition, a corporate methodology of operational risk scenarios is being developed in 2013, following various pilot experiences in 2012 such as that developed in the U.K. unit and the participation in the exercise led by the ORX consortium.

6.7. Other aspects of control and monitoring of operational risk

Analysis and monitoring of controls in market operations

Due to the specific nature and complexity of financial markets, the Group considers it necessary to strengthen continuously operational control of this activity, thereby enhancing the very demanding and conservative risk and operating principles that Grupo Santander already regularly applied.

Regardless of the monitoring of all aspects related to operational control, attention in all the Group’s units to the following aspects is reinforced:

• Review of the valuation models and in general the valuation of portfolios.

• Processes to capture and independently validate prices.

• Adequate confirmation of operations with counterparties.

• Review of cancellations/modifications of operations.

• Review and monitoring of the effectiveness of guarantees, collateral and risk mitigants.

Corporate information

The corporate area of technology and operational risk control has an integral management information system for operational risk, which consolidates every quarter the information available in each country/unit in the sphere of operational risk, so that it has a global view with the following features:

• Two levels of information: corporate with consolidated information and the other individualized for each country/ unit.

• Dissemination of the best practices between Grupo Santander’s countries/units, obtained through a combined study of the results of qualitative and quantitative analysis of operational risk.

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Additionally, we elaborate information on the following points:

• Operational risk management model in Grupo Santander.

• Human resources and perimeter of activity.

• Analysis of the database of errors and incidents.

• Operational risk cost and accounting conciliation.

• Self-assessment questionnaire.

• Indicators.

• Mitigating/active management measures.

• Business continuity and contingency plans.

• Regulatory framework: BIS II.

• Insurance.

This information is the basis for complying with the reporting needs to the risk committee, senior management, regulators, rating agencies, etc.

Insurance in the management of operational risk

Grupo Santander regards insurance as a key element in management of operational risk. The area responsible for operational risk has been closely cooperating with the Group’s insurance area since 2004 in all those activities that entail improvements in both areas. For example:

• Cooperation in the exposure of the Group’s operational risk control and management model 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 strengthen the quality of the databases 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 the unit for global sourcing of insurance, the Group’s maximum technical body for defining coverage strategies and contracting insurance.

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Part 7. Compliance and reputational risk

7.1 Definitions and objective

The compliance risk is the risk of receiving economic or other sanctions, or other types of disciplinary measures by supervisory bodies for not complying with laws, regulations, rules, standards of self-regulation or codes of conduct applicable to the activity developed.

The reputational risk is that linked to the perception of the Group 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.

The Group’s objective in the sphere of compliance risk is: (i) to minimize the probability that irregularities occur; and (ii) that the irregularities that could eventually occur are identified, reported and quickly resolved. As for reputational risk, bearing in mind the diversity of sources from which it can arise, the objective of management is to identify them and ensure that they are duly tended to so that their probability is reduced and the eventual impact is mitigated.

7.2. Corporate governance and the organizational model

In the exercise of its general function of supervision, the Bank’s board is responsible for approving the general policy of risks. In the sphere of compliance and reputational risk, the board is the owner of the Group’s General Code of Conduct, the global policy for the prevention of money-laundering and the financing of terrorism and the marketing policy for products and services.

The delegated risks committee proposes to the board the Group’s risk policy. Furthermore, as the body responsible for global risk management, it assesses the reputational risk of its sphere of action and decisions.

The audit and compliance committee is entrusted with, among others, the functions of supervising compliance with legal requirements, watching over the effectiveness of internal control systems and risk management, supervising compliance with the Group’s code of conduct in the securities markets, with the manuals and procedures for the prevention of money-laundering and, in general, with the bank’s rules of governance and compliance, and make the necessary proposals for their improvement, as well as review compliance with the actions and measures resulting from reports or actions of the administrative authorities responsible for supervision and control.

The compliance function reports constantly to the board and mainly via the audit and compliance committee. The head of the Group’s compliance informed this committee at the 11 meetings it held in 2012 and also once at a meeting of the delegated risks committee, without detriment to attending other sessions of this committee when submitting to it operations which might have an impact from the standpoint of reputational risk.

The last stage of governance consists of corporate committees of rule compliance, of analysis and resolving and marketing (the latter two specialized in their respective matters: prevention of money-laundering and marketing of products and services), with a global scope (every country, every business) and which are replicated at the local level.

From the risks division, the area of integral control and internal validation of risks (CIVIR) in the exercise of its functions of supporting the risks committee supervises the control framework applied for risk and reputational compliance, facilitating, in turn, information to the Group’s bodies of control.

The organizational model revolves around the corporate area of compliance and reputational risk, integrated into the division of the general secretariat, which is entrusted with managing the Group’s compliance and reputational risks. Within the area, led by the head of the Group’s compliance, is the corporate office of reputational risk and the central department of prevention of money-laundering and financing of terrorism. This structure is replicated at the local level and also in global businesses, having established the opportune functional reports for the corporate area.

7.3. Risk management model

The main responsibility of compliance and reputational risk management is shared between the compliance area and the different business and support units, which conduct the activities that give rise to risk. The responsibility for

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developing policies and implementing the corresponding controls lies with the compliance area, which is also responsible for advising senior management on these matters and fostering a culture of compliance, all of this in a framework of an annual programme whose effectiveness is regularly evaluated.

The area directly manages some of these basic risks (money-laundering, codes of conduct, marketing of products, etc.) and ensures that the rest is duly tended to by the corresponding unit of the Group (responsible financing, data protection, customers’ complaints, etc.), having established the opportune control and verification systems.

One of the functions of internal auditing is to carry out the tests and reviews required to ensure that the rules and procedures established in the Group are fulfilled.

The area of integral control and internal validation of risk supervises the correct execution of the risk management model. Internal auditing, within its functions, conducts the necessary tests and reviews in order to check compliance with the rules and procedures established in the Group.

Policies

The general code of conduct is the central plank of the Group’s compliance program. This code, which enshrines the ethical principles and rules of conduct that must govern the actions of all Grupo Santander’s employees, is complemented in certain matters by the rules that are in the codes and manuals of the various sectors.

The following form part of the codes and manuals of sectors: the Manual for the Prevention of Money-laundering and Financing of Terrorism, the Code of Conduct in the Securities Markets, the Manual of Procedures for the Sale of Financial Products, the Code of Conduct for Analysis Activity, the Research Policy Manual, the Manual of Conduct in the Management of Foreclosed Properties, the Manual of Conduct in the Management of Purchases, etc. as well as the notes and circulars that develop specific points of these codes and manuals.

The code also establishes: (i) the functions and responsibilities in matters of compliance of the governance bodies and of the Group’s management areas affected; (ii) the rules that regulate the consequences of non-compliance; and (iii) a channel for formulating and handling communications for presumably illicit activity.

Governance and organization

The corporate office of compliance is responsible, under the supervision of the audit and compliance committee and the committee for compliance with rules, for supervising the effective implementation and monitoring of the general code of conduct.

The rule compliance committee, chaired by the Group’s secretary general, has powers in all matters inherent in the compliance function, without detriment to those assigned to the two existing specialized bodies in the area (the corporate marketing committee for the marketing of products and services and the analysis and resolution committee for prevention of money-laundering and financing of terrorism).

It is made up of representatives of internal auditing, the general secretariat, financial management, human resources and the most directly affected business units.

This committee held five meetings in 2012.

The Group’s compliance management has the following functions as regards management of compliance and reputational risks:

1. Implement the Group’s general code of conduct and other codes and manuals for sectors.

2. Supervise the training activity of the compliance program conducted by the human resources area.

3. Direct the investigations into the possible committing of acts of non-compliance. Help can be sought from internal auditing and the sanctions that might arise be proposed to the committee.

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4. Cooperate with internal auditing in the regular reviews carried out on compliance with the general code and with the codes and manuals of sectors, without detriment to the regular reviews which, on matters of rule compliance, are conducted by compliance management directly.

5. Receive and handle the accusations made by employees or third parties via the relevant channel.

6. Advise on resolving doubts that arise from implementing codes and manuals.

7. Draw up an annual report on implementing the compliance program for the audit and compliance committee.

8. Regularly inform the general secretary, the audit and compliance committee and the board on implementation of the compliance policy and the compliance program.

9. On a yearly basis, assess the changes that need to be introduced into the compliance program, particularly in the event of detecting unregulated business areas and procedures susceptible to improvement, and propose the changes to the audit and compliance committee.

The Group’s compliance management also manages the prevention of the penal risks model, which came into effect with the entry into force of Organic Law 5/2010, which introduced penal responsibility for institutions that commit crimes on their own behalf and for their benefit by administrators or representatives and by employees as a result of the lack of control. This model was fully installed into Grupo Santander in Spain during 2012, including the design and implementation of a risks map with its corresponding controls, the drawing up of a prevention manual and a protocol to be applied in the event of a penal procedure beginning, as well as various training aspects and staff awareness of the penal risk.

Regarding the codes and manuals of the sectors, the focus of the compliance program is on the following operational spheres, among others:

• Prevention of money-laundering and the financing of terrorism.

• Marketing of products and services.

• Conduct in the securities markets.

• Relations with regulators and supervisors.

• Drawing up and disseminating the Group’s institutional information.

Prevention of money-laundering and financing of terrorism

Policies

As a socially responsible organization, it is a strategic objective for Grupo Santander to have an advanced and effective system for the prevention of money-laundering and the financing of terrorism, constantly adapted to the latest international regulations and with the capacity to tackle the appearance of new techniques by criminal organizations.

The function of the prevention of money-laundering and of the financing of terrorism revolves around policies that set minimum standards that Grupo Santander’s units must observe, and is formulated in accordance with the principles contained in the 40 recommendations of the Group of International Financial Action and the obligations and assumptions of directive 2005/60/EC of the European Parliament and of the Council, of October 26, 2005, on the prevention of using the financial system to launder money and finance terrorism.

The corporate policy and rules that develop it have to be complied with in all the Group’s units in the world. By units we mean all the banks, subsidiaries, departments or branches of Banco Santander, both in Spain and abroad which, in accordance with their legal statute, must submit to the regulations regarding the prevention of money-laundering and the financing of terrorism.

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Governance and organization

The organizational function of the prevention of money-laundering and of the financing of terrorism rests on three areas: the analysis and resolution committee (ARC), the central department for the prevention of money-laundering (CDPML) and prevention executives at various levels.

The analysis and resolution committee is a collegiate body of corporate scope chaired by the Group’s general secretary and comprising representatives of internal auditing, the general secretariat, human resources and the business units most directly affected. The ARC held four meetings in 2012.

The CDPML establishes, coordinates and supervises the systems and procedures for the prevention of money-laundering and the financing of terrorism in all the Group’s units.

There are also prevention executives at four different levels: area, unit, branch and account. In each case their mission is to support the CDPML from a position of proximity to clients and operations.

As of December 31, 2012, at the consolidated level, a total of 714 people (three quarters of them full time) work in prevention activities and tend to 182 units in 38 countries.

Grupo Santander has established in all its units and business areas corporate systems based on decentralized IT applications. These enable operations and customers, who because of their risk need to be analyzed, to be directly presented to the branches of the account or customer relation managers. The tools are complemented by others of centralized use which are operated by teams of analysis from prevention units who, on the basis of certain risk profiles and changes in certain patterns of customer behavior, enable operations susceptible of being linked to money-laundering and/or the financing of terrorism to be analyzed, identified early on and monitored.

Banco Santander is a founder member of the Wolfsberg Group, and forms part of it along with 10 other large international banks. The Wolfsberg Group’s objective is to establish international standards that increase the effectiveness of programmes to combat money-laundering and the financing of terrorism in the financial community.

Various initiatives have been developed which have treated issues such as the prevention of money-laundering in private banking, correspondent banking and the financing of terrorism, among others. Regulatory authorities and experts in this area believe that the principles and guidelines set forth by the Wolfsberg Group represent an important step in the fight against money-laundering, corruption, terrorism and other serious crimes.

Main actions

The Group analyzed a total of 21.1 million operations in 2012 (24.8 million in 2011) both by the commercial networks as well as money-laundering prevention teams, of which more than one million were by the units in Spain.

The CDPML and the local departments of prevention conduct annual reviews of all the Group’s units throughout the world. In 2012, 162 units were reviewed (172 in 2011), 26 of them in Spain and the rest abroad, and reports were issued, where for every case identified the corresponding recommendations and measures to be taken to improve and strengthen systems were registered.

In 2012, 242 measures to be adopted were established (268 in 2011), which are being monitored until their full and effective implementation.

In 2012, training courses were given for the prevention of money-laundering to a total of 105,664 employees (119,976 in 2011) and for 146,911 hours.

MAIN INDICATORS OF ACTIVITY
2012	Subsidiaries reviewed*		Cases investigated		Communications to authorities		Employees trained
Total		162		65,727		19,219		105,664

* By the CDPML and local money-laundering prevention units.

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Marketing of products and services

Policies

At Grupo Santander, management of the reputational risk that could arise from an inadequate sale of products or from an incorrect provision of services by the Group is conducted in accordance with the corporate policies of reputational risk management derived from the marketing of products and services.

These corporate policies aim to set a single corporate framework for all countries, businesses and institutions: (i) strengthening organizational structures; (ii) ensuring that the decision-making committees oversee not only the approval of products or services, but also the monitoring of them during their whole life; and (iii) set the guidelines for defining uniform criteria and procedures for the whole Group for the marketing of products and services, covering all phases (admission, pre-sale, sale and post-sale).

The developments and specific adjustment of these policies to the local reality and to local regulatory requirements is carried out through local internal rules in the Group’s various units, following authorization by the corporate area of compliance and reputational risk.

Governance and organization

The corporate and local marketing committees, the global consultative committee, the corporate committee of monitoring and the corporate and local branches comprise the organizational structure for handling the risk that could arise from an inappropriate marketing of products and services.

The corporate committee of marketing (CCM) is the Group’s maximum decision-making body for approving products and services and is chaired by the Group’s secretary general. It is made up of representatives of the divisions of risks, financial management, technology and operations, the general secretariat, general audit and control, internal auditing, retail banking, global wholesale banking, private banking, asset management and insurance.

The CCM analyses, in particular, the adequacy of the product or service to the framework where it is going to be marketed. Special attention is paid to ensuring that:

• Each product or service is sold by suitable staff.

• Customers are provided with the necessary and adequate information.

• The product or service is adjusted to the customer’s risk profile.

• Each product of service is assigned to the right market, not only for legal or tax reasons, but also to meet the market’s financial culture.

• The products and services fulfill the requirements of the corporate marketing policies and, in general, the applicable internal and external rules.

At the local level, local marketing committees (LCM) are established, which channel toward the CCM proposals to approve new products—after a favorable opinion has been issued as initially they do not have powers delegated in them—and approve products that are not new and marketing campaigns of them.

The marketing committees, in the respective approval processes, take a risk-focused stance from the double perspective of bank/client. The global consultative committee (GCC) is the advisory body of the corporate marketing committee and consists of representatives of the areas that provide a view of regulatory and market risk. The GCC, which meets around every three months, can recommend a review of products that are affected by changes in markets, deterioration of solvency (country, sectors or companies) or by changes in the Group’s view of the markets in the medium- and long-term.

The corporate monitoring committee (CMC) is the Group’s decision-making body for the monitoring of products and services. It is chaired by the secretary general and has representatives from internal auditing, legal advice, compliance, customer attention and the business areas affected (permanent representation of the retail network). It meets every week to raise and resolve specific issues related to the marketing of products and services at the local level as well as by the Group’s units abroad.

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The corporate office of reputational risk management (CORRM) provides the governance bodies with the information needed for: (i) adequate analysis of risk in approvals, from the standpoint of the bank and the impact on the client; and (ii) monitoring of products throughout their life cycle.

At the local level there are reputational risk management offices, which are responsible for promoting the risk culture and ensuring that approval and monitoring of products is developed in their respective local sphere in line with the corporate guidelines.

Main actions

During 2012, the committee met 14 times (19 times during 2011, and 21 times during 2010) and analyzed 140 new products/services. The corporate office of reputational risk was presented with 61 products/services considered not new for approval and resolved 171 consultations from areas and countries. The products approved by the corporate office of reputational risk management were successive issues of products that had been previously approved by the CCM or the LCM, after being given this power. The GCC held three meetings in 2012 (3 in 2011, and 3 in 2010).

Monitoring of products and services approved is done locally (local committee of monitoring of products or equivalent local body, such as the LCM). The conclusions are set out in reports every four months for the CORRM, which prepares integrated reports on all the Group’s monitoring for the CMC.

The CMC held 44 meetings in 2012 (42 in 2011 and 46 in 2010) at which incidents were resolved and information analyzed on the monitoring of products and services, at both the local level as well as the Group’s units abroad.

Both the audit and compliance committee and the rule compliance committee were informed during 2012 of the control and monitoring framework of the markets in financial instruments directive (MiFID), as well as various aspects related with the directive.

Code of conduct in the securities markets

Policy

This is set by the code of conduct in the securities markets (CCSM), complemented, among others, by the code of conduct for analysis activity, the research policy manual and the procedure for detecting, analyzing and communicating operations suspected of market abuse.

Governance and organization

The organization revolves around the corporate office of compliance together with local compliance management and that of subsidiaries.

The functions of compliance management with regard to the code of conduct in the securities markets are as follows:

1. Register and control sensitive information known and/or generated by the Group.

2. Maintain the lists of securities affected and related personnel, and watch the transactions conducted with these securities.

3. Monitor transactions with restricted securities according to the type of activity, portfolios or collectives to whom the restriction is applicable.

4. Receive and deal with communications and requests to carry out own account transactions.

5. Control own account transactions of the relevant personnel.

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6. Manage failures to comply.

7. Resolve doubts on the CCSM.

8. Register and resolve, in the sphere of its responsibilities, conflicts of interest and situations that could give rise to them.

9. Assess and manage conflicts arising from the analysis activity.

10. Keep the necessary records to control compliance with the obligations envisaged in the CCSM.

11. Develop ordinary contact with the regulators.

12. Organize the training and, in general, conduct the actions needed to apply the code.

13. Analyze activities suspicious of constituting abuse of the market and, where appropriate, report them to the supervisory authorities.

Main actions

The compliance management of the parent bank together with the compliance executives of the subsidiaries ensure that the obligations contained in the CCSM are observed by around 8,500 Group employees throughout the world.

The market abuse investigation unit continued to review many transactions that gave rise to the opportune communications to the National Securities Market Commission. Training actions were also taken, in accordance with the training plan approved by the rule compliance committee.

Relations with the supervisory authorities and dissemination of information to the markets

Compliance management is responsible for tending to the information requirements of the regulatory and supervisory bodies, both those in Spain as well as in other countries where the Group operates, monitoring implementation of the measures resulting from the reports or inspections of these bodies and supervising the way in which the Group disseminates institutional information in the markets, transparently and in accordance with the requirements of the regulators. The audit and compliance committee is informed of the main issues at each of its meetings.

Banco Santander made public in Spain 107 relevant facts in 2012, which are available on the Group’s web site and that of the National Securities Market Commission.

Other actions

Compliance management continued to carry out other activities in 2012 inherent to its sphere (reviewing the bank’s internal rules before their publication, ensuring treasury stock operations are in line with internal and external rules, maintaining the section on regulatory information on the corporate website, reviewing the vote recommendation reports for shareholders’ meetings drawn up by the leading consultancies in this area, sending periodic regulatory information to the supervisory bodies, etc.). It also cooperated in new corporate projects such as the Group’s adjustment to the U.S. laws FATCA and Dodd-Frank.

The losses incurred by the Group derived from compliance and reputational risk are included in the database of events managed by the Group’s corporate area of technological and operational risk.

Part 8. Capital

8.1 Adjusting to the new regulatory framework

Grupo Santander participated during 2012 in the impact studies promoted by the Basel Committee and the European Banking Authority (EBA), and coordinated at the local level by the Bank of Spain, to gauge the new rules known as Basel III, the implementation of which means the establishment of new capital and liquidity standards with stricter criteria and homogeneous at the international level.

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The new regulatory framework raised by Basel III will significantly increase the capital requirements, both from a quantitative standpoint (gradual rise in the basic minimum capital and Tier 1 capital requirements as well as qualitative (greater quality of the capital required). Santander currently has solid capital ratios, as befits its business model and risk profile which, together with the Group’s considerable capacity to generate capital organically and the gradual schedule of implementation for the new requirements (until 2019), put it in a good position to comply with Basel III. The analysis of the impact of the future new regulations does not show significant effects on the Group’s solvency ratios. The date of entry in force of the new Basel III rules in Europe is subject to completing the European legislative process and the corresponding transfer to national law, but is expected to come into force in 2014.

As regards credit risk, Grupo Santander has proposed to adopt, over the next few years, Basel’s advanced internal rating-based (AIRB) approach for almost all the Group’s banks (up to 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 between supervisors of the validation processes of internal models.

The Group operates in countries where the legal framework among supervisors is the same as in Europe via the capital directive. However, in other jurisdictions, 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, This means, in practice, adapting to different criteria and calendars in order to attain authorization for the use of advanced models on a consolidated basis.

With this objective, Santander continued during 2012 to gradually install the necessary technology platforms and methodological developments which will make it possible to progressively apply advanced internal models for calculating regulatory capital in the rest of the Group’s units. At the moment, Grupo Santander has the supervisory authorization to use advanced focuses for calculating the regulatory capital requirements by credit risk for the parent bank and the main subsidiaries in Spain, the U.K. and Portugal, and certain portfolios in Mexico, Brazil, Chile and Santander Consumer Finance Spain. The strategy of implementing Basel in the Group is focused on achieving use of advanced models in the main institutions in the Americas and Europe.

As regards the rest of risks explicitly envisaged in Pillar 1 of Basel, in market risk we have authorization to use its internal model for the trading activity of treasuries in Spain, Chile, Portugal and Mexico, continuing the plan of gradual implementation for the rest of units presented to the Bank of Spain.

In operational risk, the Group believes that development of the internal model should be largely based on the accumulated experience of management of the entity via the corporate guidelines and criteria established after assuming control and which are very much hallmarks of Santander.

The Group currently uses the standard focus for calculating regulatory capital and is considering the possibility of adopting the advanced management approach (AMA) once it has gathered sufficient information on the basis of its own management model.

As regards Pillar II, Grupo Santander uses an economic capital approach to quantify its global risk profile and its solvency position within the process of self-evaluation conducted at the consolidated level (ICAAP). This process, which is supplemented 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 a corporate governance framework that culminates with its approval by the board. Furthermore, the board establishes every year the strategic elements regarding risk appetite and solvency objectives. The economic capital model considers risks not included in Pillar 1 (concentration, interest rate risk, business risk, pensions risk, goodwill risk and business risks, risk of other intangible assets and risk of deferred tax assets). The Group’s diversification compensates the additional capital required for these risks.

Grupo Santander, in accordance with the capital requirements set out in the European Directive and the regulations of the Bank of Spain, publishes every year the Report with Prudential Relevance. This report clearly shows the transparency requirements requested regarding Pillar III. Grupo Santander regards the requirements of 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. It is incorporating to its Pillar III report the recommendations of the Committee of European Banking Supervisors (CEBS).

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As well as the process of implementing the advanced models in various of the Group’s units, Santander is carrying out an ambitious training process on Basel at all level. This is reaching a large number of employees in all areas and divisions, with a particular impact on those most affected by the changes resulting from adopting the new international standards in matters of capital.

8.2 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 Basel capital framework clearly brings both concepts together. While Pillar 1 determines the minimum regulatory capital requirements, Pillar II quantifies, via economic capital, the Group’s global solvency position.

The Group’s model of economic capital enables the consolidated risk profile taking into account all the significant risks of activity (not just those contemplated in Pillar 1) to be quantified, as well as the consubstantial diversification effect on a multinational and multi-business group such as Santander. In addition, our model includes a definition of capital different to the regulatory one and which, in our view, allows for a better separation between the capital available for stress situations and the risks that must be assessed. This model serves as the Group’s base for preparing its self-assessment of capital report in accordance with Bank of Spain regulations under the Basel II Pillar 2 framework.

The internal definition of available capital, unlike the base of regulatory capital, does not deduct certain assets from the balance sheet (such as goodwill and others) to which the regulator does not accord value from a prudential standpoint, as in our model a risk and a capital requirement are also calculated for these assets.

In the case of goodwill, for example, even though a hypothetical stress situation could leave at zero the value of the goodwill corresponding to an investment in some of the Group’s subsidiaries, it is highly unlikely that this situation would occur at the same time in all the countries in which the Group operates. The Group would retain, even in a stress situation, part of the value of these assets, which justifies that the capital needed is less than the book value of this goodwill and which, for management purposes, is not deducted from the capital base. This situation is possible due to the features of the Santander model, based on subsidiaries autonomous in capital and very diversified geographically.

The concept of diversification is fundamental for measuring and understanding adequately the risk profile of a global activity group such as Santander. The fact that the Group’s business is developed in various countries via a structure of differentiated legal entities, with a variety of customer segments and products, and also incurring different types of risk, makes the Group’s results less vulnerable to adverse situations in some of the markets, portfolios, clients or particular risks. Economic cycles, despite the high current degree of globalization of economies, are not the same and nor do they have the same intensity in different countries. Consequently, those groups with a global presence have a greater degree of stability in their results and a greater capacity of resistance to eventual crisis in markets or in specific portfolios, which means a lower risk profile. In other words, the risk and economic capital associated with the Group as a whole is less than the risk and capital of the sum of the parts considered separately.

Lastly, 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.

Economic capital is a key tool for the internal management and development of the Group’s strategy, from the standpoint of assessing solvency as well as risk management of portfolios and businesses.

From the solvency standpoint, the Group uses, in the context of Basel Pillar II, its economic model for the capital self-evaluation process, including all the risks of activity, beyond those contemplated in the regulatory focus, and taking into account essential elements, not captured by the regulatory capital, such as concentration of portfolios or diversification between risks and countries. For this, the business evolution and the capital needs are planned under a central scenario and alternative stress scenarios. The Group is assured in this planning of maintaining its solvency objectives even in the most adverse scenarios.

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The metrics of economic capital also enable return risk objectives to be assessed, even for compensation purposes, setting prices of operations on the basis of the risk, evaluating the economic viability of projects, units or business lines, with the overriding objective of maximizing the generation of shareholder value.

Global risk profile analysis

The Group’s risk profile at 31 December 2012, measured in terms of economic capital, is distributed by types of risk and the main business units, is reflected below:

DISTRIBUTION BY TYPES OF RISK
Million euros
Economic capital model	Amount		%
Credit		27,541		43	%
Market		4,219		7	%
Non-trading equity		2,113		3	%
Structural FX		1,715		3	%
Trading		390		1	%
Operational		3,631		6	%
Material assets		858		1	%
Sub-total Pillar I risks		36,248		56	%
Goodwill		13,937		22	%
Interest (ALM)		4,968		8	%
Business		3,261		5	%
Others		5,970		9	%
Sub-total Pillar II risks		28,136		44	%
Total economic capital		64,384		100	%

BY GEOGRAPHIC AREAS
Main segments	Contribution
Continental Europe		27	%
UK		9	%
Brazil		15	%
Rest of Latin America		8	%
US		7	%
Sub-total operating areas		66	%
Corporate centre		34	%
Total		100	%

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The distribution of economic capital among the main business units reflects the diversification of the Group’s activity and risk. The weight of the corporate center is mainly due to the risk of goodwill.

Continental Europe accounts for 27% of the Group’s capital, Latin America including Brazil 23%, the U.K. 9%, and the U.S. 7%, while the corporate center, which as well as the risk from goodwill also assumes that from the exposure to structural exchange rate risk (derived from stakes in subsidiaries abroad denominated in non-euro currencies) and most of the equity stakes, accounts for 34%.

As of 31 December 2012, the Group’s total economic capital requirements amounted to €64,384 million, while available capital was more than €80,940 million (corresponding to the amount of capital and reserves plus adjustments, without deducting the value of goodwill).

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 25% at the end of 2012.

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Return on risk-adjusted capital (RORAC) and creation of value

Grupo Santander has been using RORAC methodology in its credit risk management since 1993 in order to:

• Calculate the consumption of economic capital and the return on it of the Group’s 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 the Group’s business units, including them in their remuneration plans.

• Analyze and set prices in the decision-taking process for operations (admission) and clients (monitoring). RORAC methodology enables one to compare, on a like-for like basis, the return on operations, customers, portfolios and businesses, identifying those that obtain a risk-adjusted return higher than the cost of the Group’s capital, aligning risk and business management with the intention of maximizing the creation of value, the ultimate aim of the Group’s senior management.

The Group regularly assesses the level and evolution of value creation (VC) and the risk-adjusted return (RORAC) of its main business units. The VC is the profit generated above the cost of the economic capital (EC) employed, and is calculated as follows:

Value creation = profit – (average EC x cost of capital)

The profit used is obtained by making the necessary adjustments to the accounting profit so as to extract just the recurrent profit that each unit generates in the year of its activity.

The minimum return on capital that an operation must attain is determined by the cost of capital, which is the minimum required by shareholders. It is calculated objectively by adding to the 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 the Banco Santander share in relation to the market’s performance. The cost of capital in 2012 applied to the Group’s various units was 11.237%.

A positive return from an operation or portfolio means it is contributing to the Group’s profits, but it is only creating shareholder value when that return exceeds the cost of capital.

The performance of the business units in 2012 in value creation varied, declining in Europe and increasing in the Americas. The Group’s results, and thus the RORAC figures and value creation, are conditioned by the weakness of the economic cycle in various Group units in Europe and, particularly, in Spain.

The creation of value and the RORAC for the Group’s main business areas are shown below:

RORAC AND BUSINESSES VALUE CREATION
Million euros
Main segments	RORAC			Value creation
Continental Europe		14.2	%		526
UK		16.6	%		321
Latin America		33.4	%		3,414
US		19.6	%		347
Total business units		21.9	%		4,609

These figures do not include the losses of the corporate activities area, in which are recorded the extraordinary provisions set aside in 2012, as well as the results of equity stakes, the liquidity buffers and the coverage, among others. The return on risk-adjusted capital (RORAC) of the corporate center is -15.5%, and the Group’s RORAC is 9.6%, a final result that is €1,078 million below the cost of capital.

These figures are clearly determined by the phase of the cycle that some of the Group’s units are undergoing, resulting in particular, in higher loan-loss provisions and a final result below the cost of capital used. In order to exclude from these results the impact of the current phase of the cycle, the expected average credit loss of the cycle is

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considered, instead of the current level of loan-loss provisions. If so, the Group’s RORAC would improve to 12.8%, above the cost of capital of 11.34%, with a value creation of €1,033  million, which better reflects the recurrent capacity of the Group’s businesses to generate value.

Part 9. Market Risk

A. Activities subject to market risk and types of market risk

The market risk area has a perimeter for measuring, controlling and monitoring that covers those operations where equity risk is assumed as a result of changes in market factors. This risk comes from the change in risk factors—interest rates, inflation rates, exchange rates, share prices, the spread on loans commodities prices and the volatility of each of these elements—as well as the liquidity risk of the various products and markets in which the Group operates.

• Interest rate risk is the possibility that changes in interest rates could adversely affect the value of a financial instrument, a portfolio or the Group as a whole. It affects, among others, loans, deposits, debt securities, most assets and liabilities of trading portfolios as well as derivatives.

• The inflation rate risk is the possibility that changes in inflation rates could adversely affect the value of a financial instrument, a portfolio or the Group as a whole. It affects, among others, loans, debt securities and derivatives, whose yield is linked to inflation or to a real rate of variation.

• The exchange rate risk is the sensitivity of the value of a position in a currency different to the base currency to a potential change in exchange rates. A long position or one bought in a foreign currency would produce a loss in the event that the currency depreciated against the base currency. Among the positions affected by this risk are non-euro investments in subsidiaries, as well as loans, securities and derivatives denominated in foreign currencies.

• The equity risk is the sensitivity of the value of positions opened in equity markets to adverse movements in the market prices or in expectations of future dividends. Among other instruments, this affects positions in shares, stock market indices, convertible bonds and derivatives using shares as the underlying asset (put, call, and equity swaps).

• The credit spread risk is the risk or sensitivity of the value of positions opened in fixed income securities or in credit derivatives to movements in the credit spread curves or in recovery rates associated with issuers and specific types of debt. The spread is a differential between financial instruments that trade with a spread over other reference instruments, mainly the yield on government securities and interbank rates.

• The commodities price risk is the risk derived from the effect of potential change in prices. The Group’s exposure to this risk is not significant and is concentrated in derivative operations on commodities with clients.

• Volatility risk is the risk or sensitivity of the value of a portfolio to changes in the volatility of risk factors: volatility of interest rates, exchange rates, shares, credit spreads and of commodities. This risk is incurred by financial instruments which have volatility as a variable in their valuation model. The most significant case is portfolios of financial options.

All these market risks can be partly or fully mitigated by using options, futures, forwards and swaps.

There are other types of market risk, whose coverage is more complex. They are the following:

• Correlation risk is the sensitivity of the value of a portfolio to changes in the relation between risk factors, be they of the same type (for example, between two exchange rates) or of a different nature (for example, between an interest rate and the price of a commodity).

• Market liquidity risk is that of a Group entity or the Group as a whole finding itself unable to get out of or close a position in time without impacting on the market price or on the cost of the transaction. This risk can be caused by a fall in the number of market makers or institutional investors, the execution of large volumes of operations, market instability and increases with the concentration existing in certain products and currencies.

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• Risk of prepayment or cancellation. When in certain operations the contract allows, explicitly or implicitly, cancellation before the maturity without negotiation there is a risk that the cash flows have to be reinvested at a potentially lower interest rate. This mainly affects loans or mortgage securities.

• Underwriting risk. This occurs as a result of an entity’s participation in underwriting a placement of securities or another type of debt, assuming the risk of partially owning the issue or the loan due to non-placement of all of it among potential buyers.

On the basis of the origin of the risk, activities are segmented in the following way:

(a) Trading. This includes financial services to customers and purchase-sale and positioning mainly in fixed income, equity and currency products.

(b) Structural risks. Constituted by market risks inherent in the balance sheet excluding the trading portfolio. They are:

• Structural interest rate risk. This arises from mismatches in the maturities and repricing of all assets and liabilities.

• Structural exchange rate risk/hedging of results. Exchange rate risk occurs when the currency in which the investment is made is different from the euro in companies that consolidate and those that do not (structural exchange rate). In addition, exchange rate hedging of future results generated in currencies other than the euro (hedging of results).

• Structural equity risk. This involves investments via stakes in financial or non-financial companies that are not consolidated, as well as portfolios available for sale formed by equity positions.

The Global Banking and Markets division is mainly responsible for managing the taking of trading activity positions, in order to develop the activity of clients in financial markets and to a much lesser extent take its own positions.

The financial management area is responsible for implementing the management strategy for structural risks, applying standardized methodologies adapted to each market where the Group operates, either directly in the case of the parent bank or in coordination with the rest of units. The management decisions for these risks are taken by each country’s ALCO (ALM) committee in coordination with the Group’s markets’ committee. The aim is to inject stability and recurrence into the net interest margin of commercial activity and the Group’s economic value, while maintaining adequate levels of liquidity and solvency.

Each of these activities is measured and analyzed with different metrics in order to show their risk profile in the most precise way.

B. Management framework

1. Organizational and governance structure

The market and structural risks area is integrated into one of the Group’s two general risk directorates. The missions of the market risk function are:

• To define and supervise the market risk management model, which includes corporate policies, defining the risks map and segmentation criteria.

• Control and manage the consolidation, reporting and centralized admission process of market risks.

These missions rest on five basic pillars, vital for correct management of market risks:

• Measurement, analysis and control of market and liquidity risks.

• Calculation, analysis, explanation and conciliation of results.

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• Defining, capturing, validating and distributing market data.

• Admission of limits, products and underlying assets.

• Consolidation of information.

In turn, market risks management is guided by the following basic principles:

• Involvement of senior management.

• Independence of the risk function from business.

• Clear definition of powers.

• Risk measurement.

• Limiting risks.

• Analysis and control of risk positions.

• Establishing risk policies and procedures.

• Assessing risk methodologies.

In the same way that the market risks function is structured at the corporate or global level, each local market risk unit has and arranges its functions, with the adjustments that arise in accordance with its specific business, operational and legal requirement features, etc.

For the correct functioning of global policies and local execution, the global area of market risks and local units carry out different functions:

Global market risk:

• Establish, propose and document risk policies and criteria, the global limits and the decision-making and control processes.

• Generate management frameworks, systems and tools.

• Promote and support their implementation and ensure they function effectively in all units.

• Know, assimilate and adapt the best practices inside and outside the Group.

• Promote activity for obtaining results.

• Consolidate, analyze and control the market risk incurred by all units of the perimeter.

Local market risk units:

• Manage risks.

• Transfer, adapt and assume internally the corporate policies and procedures through local approval.

• Define and document policies and lead local sphere projects.

• Apply policies and decision-making systems to each market.

• Adapt the organization and management frameworks and corporate rules.

• Contribute critical and best practices, as well as local knowledge and proximity to customers/markets.

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• Assume greater responsibilities in decisions, control and management of risks.

• Measure, analyze and control market risk within the sphere of responsibility.

COMMITTEES WITH RESPONSIBILITIES IN MARKET RISK

Sphere	Hierarchical level	Name
Centralised sphere	Executive	Executive Committee
		Markets Committee
		Risk Committee
	Risk division	Risk Management Committee
		Global Committee of the General Directorate of Risk
		Permanent Risk Committee
		Corporate Risk Committee, Brazil
	Areas and departaments dependent on the Risk Division	Global Market Risk Committee
		Underwriting and Structured Products Committee
		Models Committee
Decentralised sphere	Units	Risk Committees in the Banks of the Group/Countries
		Risk Committees of Branches Abroad
		Risk Committees in Business Units
		Local ALCOs
		Other committees

The committees, by hierarchical order, which have powers in decision-making, control and monitoring of market risks are set out above.

The collegiate body of the market risks area is the global market risk committee (GMRC). This committee is responsible for the functioning of market risk in Grupo Santander, both at the centralized level (global areas) and local level (local units). It gets its powers directly from the risk committee, the maximum body responsible for the risks function in Grupo Santander.

2. System for controlling limits

Setting market risk and liquidity limits is designed as a dynamic process which responds to the Group’s risk appetite level. This process is part of the annual limits plan, which is drawn up by the Group’s senior management and administered by the general directorate of risks in a way that involves all the Group’s institutions.

Definition of limits

The market risk limits used in Grupo Santander are established on different metrics and try to cover all activity subject to market risk from many perspectives, applying a conservative criterion. The main ones are:

Trading limits:

• VaR limits.

• Limits of equivalent positions and/or nominal.

• Sensitivity limits to interest rates.

• Vega limits.

• Risk limits of delivery by short positions in securities (fixed income and equities).

• Limits aimed at reducing the volume of effective losses or protecting results already generated during the period:

• Loss trigger.

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• Stop loss.

• Credit limits:

• Limit on the total exposure.

• Limit to the jump to default by issuer.

• Others.

• Limits for origination operations.

Structural interest rate risk of the balance sheet:

• Sensitivity limit of net interest margin at 1 year.

• Sensitivity limit of equity value.

Structural exchange rate risk:

• Net position in each currency (for positions of hedging results).

These general limits are complemented by sub-limits. In this way, the market risk area has a structure of limits sufficiently granular to conduct an effective control of the various types of market risk factors on which an exposure is maintained. Positions are tracked daily, both of each unit as well as globally. An exhaustive control is made of the changes in the portfolios, in order to detect possible incidents for their immediate correction. Meanwhile, the daily drawing up of the income statement by the market risks area is an excellent indicator of risks, as it allows the impact that changes in financial variables have had on portfolios to be identified.

Structure of limits

The table below shows the levels of applying limits, the categories and the sphere of control in which they are classified and their levels of approval.

STRUCTURE OF LIMITS
Levels	Category/Control	Approval
	Global/Global control	Risk Committee
Activity / Unity	Global/Local control	Global Market Risk Committee
	Local/Local control	Local market risks

• Global limits of global control: The Risks Committee approves the limits at the activity/unit level in the annual process of setting limits. Changes that are subsequently made can be approved by the Global Market Risk Committee, in accordance with the powers delegated in it.

These limits are requested by the relevant business executive in each country/entity on the basis of the nature of the business and the budget established, seeking consistency between limits and the return/risk ratio.

• Global limits of local control: On the basis of the local features of products, and of the internal organization of business, sub-limits are set for the aforementioned activities in order to exercise greater control of the positions maintained in each business. Sub-limits are set by risk factor, currency positions, equity positions, sensitivity by currencies and maturities, vega by maturities, etc.

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Compliance and control of limits

Business units must comply with the approved limits. The possible excesses trigger a series of actions by the local and global market risk areas, risk management committees or the Risks Committee in order to reduce the risk levels and control them more strictly or executive actions, which can make the risk takers reduce the risks levels assumed.

The local executives for market risk notify the excesses to the business executives. These have to explain the reasons for the excess and, where appropriate, provide the plan of action to correct the situation. The business executive must respond, in writing and on the day, to the requirement made. The alternatives are to reduce the position to the prevailing limits or set out the strategy that justifies an increase in the limits.

If the excess situation continues without a response by the business unit for three days, the market risks area contacts the relevant global business executives and informs them of this, and requests adjustment measures be taken. If this situation persists 10 days after the first excess, the market risks area will contact senior risk management so that a decision can be taken.

C. Statistical Tools for Measuring and Managing Market Risk

1. Trading activity

1.1. Value At Risk (VaR)

VaR model

The standard methodology that Grupo Santander applied to trading activities during 2012 was Value at Risk (VaR). As calculated by us, VaR 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 two or three days per year. VaR provides a single estimate of market risk that is comparable among different portfolios or instruments.

The number of expected “exceptions” is an average number. Over a long period of time we would expect an average of two or three exceptions per year; however, there may be some years or periods where there are fewer exceptions than expected, as was the case in 2009 and 2010 when there were no exceptions, and other periods where there are more exceptions than expected. In 2012 there were three exceptions of VaR at 99%: two in May - the first due to a more than usually high rise in the Brazilian currency inflation-indexed curve after the publication of a higher than expected inflation figure, and the second because of higher than normal increases in Spain’s and Mexico’s interest rate curves -, and one in June, due to the sudden widening of credit spreads, falls in stock markets and the depreciation of most currencies against the U.S. dollar as a result of the deterioration of expectations on the outcome of the summit of EU heads of state (June 29).

The standard methodology used is based on historical simulation (520 days). In order to capture recent market volatility in the model, the reported VaR is the maximum between two different VaR figures, both of which use a historical window of two years (one applies an exponential decline factor which gives a higher weight to the observations closer in time and another gives the same weight to all the observations). This methodology makes our VaR numbers react very quickly to changes in current volatility, significantly reducing the likelihood of backtesting exceptions. In addition, backtesting exceptions in 2010 were further reduced as a consequence of inclusion of the 2008 financial crisis in the historical series used for calculating the VaR.

We use VaR estimates to alert senior management whenever the statistically estimated losses in our portfolios exceed prudent levels.

Assumptions and Limitations

Our 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 VaR at the close of business and trading positions may change substantially during the course of the trading day.

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Scenario Analysis and Calibration Measures

The VaR is not the only measurement. It is used because of its calculation facility and for being a good benchmark of the Group’s risk level, but other measures are also employed which allow for greater control of risks in all the markets where the Group operates.

Among these measures is analysis of scenarios, which consists of defining alternatives for the performance of different financial variables and obtain the impact on results by applying them to activities. These scenarios can replicate events that happened in the past (crisis) or determine possible alternatives that do not correspond to past events.

The potential impact on results of applying different stress scenarios to all the trading portfolios and considering the same suppositions by risk factor is calculated and analyzed at least monthly. Three types of scenario are defined: possible, severe and extreme, obtaining along with the VaR a fuller spectrum of the risk profile.

In addition, levels of warning (triggers) are set for global scenarios, on the basis of the historic results of these scenarios and of the capital associated with the portfolio in question. In the event of surpassing these levels, those responsible for management of the portfolio are informed so they can take the necessary measures. At the same time, the results of the stress exercises at the global level, as well as the possible breaching of the levels set, are regularly reviewed by the global committee of market risks so that, if required, senior management is informed.

In order to calibrate our VaR model, we use back testing processes. Back testing (BT) is a comparative analysis between VaR estimates and the daily clean P&L (i.e. real profit or loss obtained at the end of the day on the portfolio analyzed at the end of the preceding day valued at the following day prices). The purpose of these tests is to verify and measure the precision of the models used to calculate VaR.

Santander performs regular BT processes to calibrate and improve its VaR model. Back-testing is conducted based on several approaches: by unit (Madrid, Brazil, Mexico, etc.), by main portfolio/strategy (proprietary trading, market making rates, market making equity, etc.), and by type of profit & loss source. Three kinds of back-testing are conducted: “clean P&L” (which allows us to monitor market risk), “clean P&L” calculated with front platforms such as Murex (which allows us to monitor risks associated with our treasury positions) and “dirty P&L” (which includes commissions, mark ups and intraday trading results). The aim of the latter is to capture indirectly the importance of intra-day activity.

Whenever an anomaly is detected, we undertake a detailed examination of elements (such as “pricers”, inputs and configuration, among others, in order to correct such anomaly. Detailed results of our BT are regularly reported to Bank of Spain.

The analyses of our BT comply, at a minimum, with the BIS recommendations regarding the verification of the internal systems used to measure and manage market risks.

Besides the ongoing and regular calibration of our VaR methodology, there were no significant changes during the periods presented nor are any such changes contemplated at this time.

1.2. Analysis of positions. sensitivities and results

The market risk area, in line with the principle of independence of the business units, monitors the positions daily, both those of each unit as well as globally, and conducts an exhaustive control of the changes in the portfolios in order to detect possible incidents so that they can be corrected immediately.

The positions are traditionally used to quantify the net volume of the market values of the transactions in portfolio, grouped by main risk factor, and considering the delta value of the futures and options that could exist. All the risk positions can be expressed in the base currency of the unit and in the currency of homogenizing information.

The market risk sensitivity measures are those that gauge the change (sensitivity) of the market value of an instrument or portfolio to changes in each of the risk factors. The sensitivity of the value of an instrument to changes in market factors can be obtained through analytical approximations by partial derivatives or through a full revaluation of the portfolio.

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The daily drawing up of the income statement is also an excellent indicator of risks, as it enables the impact that changes in financial variables have on portfolios to be identified.

1.3. Credit management activity

Control of derivative activities and credit management should also be mentioned. This control, because of its atypical nature, is conducted daily according to specific measures. In the case of derivative activities, sensitivity to the price movements of the underlying asset (delta and gamma), volatility (vega) and time (theta) is controlled. In the case of credit management, measures such as the spread sensitivity, jump-to-default, and concentration of positions by rating levels, etc., are systematically reviewed.

Regarding the credit risk inherent in trading portfolios and in line with the recommendations of the Basel Committee on Banking Supervision and prevailing regulations, an additional measurement began to be calculated (incremental risk charge, IRC), in order to cover the risk of default and rating migration that is not adequately captured in the VaR, via changes in credit spreads. The controlled products 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 IRC is based on direct measurements of the tails of the distribution of losses to the appropriate percentile (99.9%). The Monte Carlo methodology is used, applying a million simulations.

1.4. Other measures: stressed VaR (sVaR) and expected shortfall

As well as the usual VaR, Santander began to calculate stressed VaR every day, as of October 2011, for the main portfolios. The methodology for calculation is the same as that used for the VaR, with the following two exceptions:

• Historic period of observation of factors: the stressed VaR uses a window of 250 figures, instead of one of 520 for the VaR.

• In order to obtain the stressed VaR, unlike when calculating the VaR, the maximum between the percentile uniformly weighted and the one exponentially weighted is not applied. Instead, the percentile uniformly weighted is used directly.

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All the other aspects regarding the methodology and the inputs for calculating the stressed VaR are the same as those for the VaR. As regards determining the period of observation, for each relevant portfolio, the methodology area has analyzed the history of a subseries of market risk factors that were chosen on the basis of expert criteria taking into account the most relevant positions of the books.

Moreover. the expected shortfall (ES) has begun to be calculated in order to estimate the expected value of the potential loss when this is higher than the level set by the VaR 1¹⁴. The ES, unlike the VaR, has the advantage of capturing better the tail risk and of being a sub-additive metric.

2. Structural market risks

2.1. Structural interest rate risk

The Group analyses the sensitivity of net interest margin and of equity value to changes in interest rates. This sensitivity arises from gaps in maturity dates and the review of interest rates in the different asset and liability items.

On the basis of the positioning of balance sheet interest rates, as well as the situation and outlook for the market, the financial measures are agreed to adjust the positioning to that desired by the bank. These measures range from taking positions in markets to defining the interest rate features of commercial products.

The metrics used by the Group to control interest rate risk in these activities are: the interest rate gap, the sensitivity of net interest margin and of equity value to changes in interest rate levels, Value at Risk (VaR), for the purposes of calculating economic capital.

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. It 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 value.

All on- and off-balance sheet items must be disaggregated by their flows and looked at in terms of repricing/maturity. In the case of those items that do not have a contractual maturity, an internal model of analysis is used and estimates made of the duration and sensitivity of them.

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 situation. The sensitivity is the difference between the two margins calculated.

Market value of equity sensitivity (MVE)

The sensitivity of equity value is an additional measure to the sensitivity of the net interest margin.

It measures the interest risk implicit in the equity value on the basis of the impact of a change in interest rates on the current values of financial assets and liabilities.

Treatment of liabilities without defined maturity

In the corporate model, the total volume of the balances of accounts without maturity is divided between stable and unstable balances.

¹⁴  The Basel Committee published in May 2012 a consultative document, “Fundamental review of the trading book”, which, among other things, recommends the use of the expected shortfall as the main metric for measuring the market risk of trading activity.

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The separation between the stable and unstable balances is obtained from a model that is based on the relation between balances and their own moving averages.

From this simplified model the monthly cash flows are obtained and used to calculate the NIM and MVE sensitivities.

The model requires a variety of inputs:

• Parameters inherent in the product.

• Performance parameters of the customer (in this case analysis of historic data is combined with the expert business view).

• Market data.

• Historic data of the portfolio.

Pre-payment treatment for certain assets

The pre-payment issue mainly affects fixed-rate mortgages in units where the relevant interest rate curves for the balance sheet (specifically for the portfolio of investment in fixed rate mortgages) are at low levels. In these units the risk is modelized and some changes can also be made to assets without defined maturity (credit card businesses and similar).

The usual techniques used to value options cannot be applied directly because of the complexity of the factors that determine the pre-payment of borrowers. As a result, the models for assessing options must be combined with empirical statistical models which seek to capture the prepayment performance. Some of the factors are:

• Interest rate: the differential between the fixed rate of the mortgage and the market rate at which it could be refinanced, net of cancellation and opening costs;

• Seasoning: pre-payment trend downward at the start of the instrument’s life cycle (signing of the contract) and upward and stabilizing as time passes;

• Seasonality: the amortizations or early cancellations tend to take place at specific dates.

• Burnout: decreasing trend in the speed of pre-payment as the instrument’s maturity approaches, which includes:

a) Age: defines low rates of pre-payment.

b) Cash pooling: defines as more stable those loans that have already overcome various waves of interest rate falls. In other words, when a portfolio of loans has passed one or more cycles of downward rates and thus high levels of pre-payment, the “surviving” loans have a significantly lower pre-payment probability.

c) Others: geographic mobility, demographic, social, available income factors, etc.

The series of econometric relations that seek to capture the impact of all these factors is the probability of pre-payment of a loan or pool of loans and is denominated the pre-payment model.

Value at Risk (VaR)

The Value at Risk for balance sheet activity and investment portfolios is calculated with the same standard as for trading: maximum expected loss under historic simulation with a confidence level of 99% and a time frame of one day. As for the trading portfolios, a time frame of two years, or 520 daily figures, is used, obtained from the reference date of the VaR calculation back in time.

2.2. Structural exchange rate risk/hedging of results

These activities are monitored via position measurements, VaR and results, on a daily basis.

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2.3. Structural equity risk

These activities are monitored via position measurements, VaR and results, on a monthly basis.

D. Quantitative analysis

1. Trading activity¹⁵

1.1. Value at Risk (VaR) analysis

Grupo Santander stepped up its strategy of concentrating its trading activity in customer business, minimizing where possible, exposures of directional risk opened in net terms.

This was reflected in the VaR¹⁶ evolution, which declined over previous years.

EVOLUTION OF VaR 2010-2012 Million euros. VaR at 99%, with a time frame of one day

VaR during 2012 fluctuated between €9.4 million (the lowest in the last few years) and €22.4 million. It rose a little during the fourth quarter, because of the rise of risk in Brazil’s treasuries (in interest rates and exchange rates) and Madrid (in interest rate and credit spread).

The VaR reported as of November 15, 2011 excludes the risk from changes in the credit spreads of securitizations and portfolios affected by credit correlation. For regulatory reasons (BIS 2.5), these exposures are considered as banking book for capital purposes. This change caused a decline in risk in VaR terms, both at the total level as well as by credit spread.

The average VaR of the Group’s trading portfolio in 2012 (€14.9 million) was lower than in 2011 (€22.4 million) and 2010 (€28.7 million), for the reason already mentioned of the greater concentration of activity in customers and, to a lesser degree, the reduction in volatility in the markets, despite the continued sovereign debt crisis in Europe. In relation to other comparable financial groups, the Group can be said to have a low risk trading profile.

¹⁵  Trading activity in financial markets.

¹⁶  The definition and methodology for calculating VaR is in Section Statistical Tools for Measuring and Managing Market Risk

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The histogram below shows the distribution of average risk in terms of VaR between 2010 and 2012 where the accumulation of days with levels between €12.5 million and €28.5 million can be seen (91.5%). The higher values of €28.5 million (7.2%) were concentrated in periods mainly caused by one-off rises of volatility in the Brazilian currency and by the eurozone’s sovereign debt crisis.

VaR RISK HISTOGRAM

VaR at 99%, with a time frame of one day

• Risk factor

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The minimum, average, maximum and year-end 2012 values in VaR terms are shown below:

VaR STATISTICS BY RISK FACTOR ^17,18

Million euros. VaR at 99%, with a time frame of one day

		2012												2011						2010
		Minimum			Average			Maximum			Year-end			Average			Year-end			Average			Year-end
TOTAL TRADING	Total VaR		9.4			14.9			22.4			18.5			22.4			15.9			28.7			29.6
	Diversification effect		(9.1	)		(15.2	)		(25.8	)		(13.5	)		(21.8	)		(16.7	)		(29.1	)		(27.8	)
	Interest Rate VaR		7.4			11.8			23.3			12.0			14.8			14.6			16.4			19.0
	Equity VaR		4.1			7.0			11.2			7.1			4.8			3.7			8.0			8.8
	FX VaR		1.9			5.0			12.2			3.5			9.0			4.2			11.4			13.9
	Credit Spread VaR		2.2			6.1			13.0			9.1			15.0			9.6			20.9			14.7
	Commodities VaR		0.2			0.4			0.7			0.3			0.6			0.4			1.3			1.0
LATIN AMERICA	Total VaR		5.0			10.1			20.5			8.9			11.7			10.7			18.2			13.9
	Diversification effect		(3.1	)		(6.4	)		(12.5	)		(3.8	)		(6.4	)		(8.7	)		(8.3	)		(12.6	)
	Interest Rate VaR		5.2			8.8			20.0			8.8			11.2			10.5			14.5			14.8
	Equity VaR		0.7			3.1			9.7			1.6			3.5			2.2			5.8			5.3
	FX VaR		0.5			3.1			9.8			1.3			3.7			1.2			7.1			6.5
USA & ASIA	Total VaR		0.5			0.9			2.0			0.8			1.2			0.9			1.3			0.9
	Diversification effect		(0.2	)		(0.5	)		(1.1	)		(0.3	)		(0.5	)		(0.4	)		(0.7	)		(0.3	)
	Interest Rate VaR		0.4			0.7			1.3			0.6			0.9			0.9			1.2			0.9
	Equity VaR		0.0			0.2			0.8			0.1			0.1			0.1			0.2			0.0
	FX VaR		0.1			0.6			1.7			0.4			0.6			0.4			0.6			0.3
EUROPE	Total VaR		7.2			11.0			16.5			16.4			15.5			10.1			14.8			25.1
	Diversification effect		(7.7	)		(12.9	)		(20.6	)		(9.9	)		(15.1	)		(13.0	)		(18.9	)		(14.6	)
	Interest Rate VaR		5.4			7.9			15.4			6.8			11.5			11.9			8.9			12.5
	Equity VaR		4.1			6.2			9.9			6.3			3.9			3.6			6.7			6.5
	FX VaR		1.0			4.1			13.1			4.0			8.5			3.9			9.8			9.6
	Credit Spread VaR		2.1			5.4			10.0			8.9			6.0			3.3			7.0			9.0
	Commodities VaR		0.2			0.4			0.7			0.3			0.6			0.4			1.3			2.1
GLOBAL ACTIVITIES	Total VaR		0.8			2.7			10.2			1.2			10.5			9.7			16.1			10.7
	Diversification effect		(0.2	)		(0.6	)		(5.0	)		(0.3	)		(1.1	)		(0.9	)		(1.1	)		(1.2	)
	Interest Rate VaR		0.2			0.3			0.6			0.2			0.4			0.5			0.6			0.5
	Credit Spread VaR		0.6			2.6			10.4			1.3			10.3			8.4			16.0			10.5
	FX VaR		0.0			0.4			1.9			0.1			0.9			1.8			0.6			0.9

The average VaR declined again in 2012 by €7.5 million over 2011. The reduction occurred in all risk factors except for equities, which increased from €4.8 million to €7 million. Of note was the drop in the average VaR of interest rates and exchange rates in Europe and the credit spread in global activities.

¹⁷  The VaR of global activities includes operations that are not assigned to any particular country.

¹⁸  In Latin America, the U.S. and Asia, the VaR levels of the spread credit and commodity factors are not shown separately because of their scant or zero materiality.

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VaR BY RISK FACTOR. VaR at 99% with a time frame of one day (15-day moving average)

The VaR evolution by risk factor in general also declined, with peaks and troughs sharper in the case of the VaR by credit spread, partly due to the exclusion of the risk spread of securitizations and credit correlation which by BIS 2.5 is considered as banking book for the purposes of regulatory capital as of November 15, 2011. The temporary changes in the VaR of various factors was due more to the temporary rises in the volatility of market prices than to significant changes in positions.

1.2. Distribution of risks and management results¹⁹

• Geographic distribution

In trading activity. The average contribution of Latin America to the Group’s total VaR in 2012 was 44% compared with a contribution of 33.3% in economic results. Europe, with 52.6% of global risk, contributed 60.6% of results, as its treasury activity was more focused on providing service to professional and institutional clients compared with that of Latin America. However, there was a gradual homogenization in the profile of activity in the Group’s different units.

¹⁹  Results in terms that can be assimilated to the gross margin (excluding operating costs, financial ones are the only cost)

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Below is the geographic contribution (by percentage), both in risks, measured in VaR terms, as well as in results (economic terms).

VaR BINOMIAL-MANAGEMENT RESULTS: GEOGRAPHIC DISTRIBUTION

Average VaR (at 99%, with a time frame of one day) and annual accumulated management result (million euros)

• Monthly distribution of risks and results

The next chart shows the risk assumption profile, in terms of VaR, compared to results in 2012. The average VaR remained stable, while results evolved in a more irregular way during the year. January and July were positive months, particularly January, and August to October negative, with results below the annual average.

DISTRIBUTION OF RISK BY TIME AND RESULTS IN 2012: PERCENTAGES OF ANNUAL TOTALS

Average VaR (at 99%, with a time frame of one day) and annual accumulated management result (million euros)

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The following histogram of frequencies shows the distribution of daily economic results on the basis of their size between 2010 and 2012. The daily yield²⁰ was between -€10 and +€15 million approximately 90% of days when the market was open.

HISTOGRAM OF THE FREQUENCY OF DAILY RESULTS (MTM)

Daily results of management “clean” of commissions and intraday operations (million euros). Number of days (%) in each range

1.3. Risk management of structured derivatives

Structured derivatives activity is mainly focused on designing investment products and hedging risks for clients. Management is focused on ensuring that the net risk opened is the lowest possible.

These transactions include options on equities, fixed-income and exchange rates.

The units where this activity mainly takes place are: Madrid, Banesto, Santander UK and, to a lesser extent, Brazil and Mexico.

The chart below shows the VaR Vega²¹ performance of structured derivatives business over the last three years. It fluctuated at around an average of €6.8 million. The periods with higher VaR levels related to episodes of significant rises in volatility in the markets (of equities in the eurozone, interest rates in Brazil, etc.).

²⁰  Yields “clean” of commissions and results of intraday derivative operations.

²¹  Vega, a Greek term, means here the sensitivity of the value of a portfolio to changes in the price of market volatility.

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EVOLUTION OF RISK (VaR) OF THE BUSINESS OF STRUCTURED DERIVATIVES

Million euros. VaR Vega at 99%, with a time frame of one day.

Regarding the VaR Vega by risk factor, the exposure was concentrated, in this order, in equities, interest rates, exchange rates and commodities. This is shown in the table below:

STRUCTURED DERIVATIVES. RISK (VaR) BY RISK FACTOR

Million euros. VaR at 99%, with a time frame of one day

	2012												2011						2010
	Minimum			Average			Maximum			Year-end			Average			Year-end			Average			Year-end
Total VaR Vega		3.9			6.8			9.8			6.5			4.7			4.9			7.9			6.2
Diversification impact		(1.4	)		(3.0	)		(4.4	)		(3.4	)		(2.9	)		(3.7	)		(3.8	)		(3.2	)
Interest rate VaR		1.5			2.3			4.5			2.8			2.0			2.0			2.4			2.1
Equity VaR		2.7			6.5			9.0			5.5			4.1			5.2			7.1			5.6
FX VaR		0.3			0.7			2.3			1.3			1.2			1.0			1.8			1.5
Commodities VaR		0.2			0.3			0.5			0.2			0.3			0.4			0.5			0.2

Regarding the distribution by business unit, the exposure is concentrated, in this order, in the parent-holding, Banesto, Santander UK, Brazil and Mexico.

STRUCTURED DERIVATIVES. RISK (VaR) BY UNIT

Million euros. VaR at 99%, with a time frame of one day

	2012								2011				2010
	Minimum		Average		Maximum		Year-end		Average		Year-end		Average		Year-end
Total VaR Vega		3.9		6.8		9.8		6.5		4.7		4.9		7.9		6.2
Parent-holding		1.4		4.6		7.1		4.0		2.9		2.8		4.3		2.4
Banesto		1.5		3.4		6.5		3.6		2.3		2.4		5.9		5.3
Santander U.K.		1.5		2.8		5.7		2.0		1.4		2.7		1.2		1.0
Brazil		0.4		1.0		4.4		2.8		0.8		0.3		0.9		0.5
Mexico		0.4		0.7		1.3		0.6		1.2		1.1		1.5		1.1

The average risk in 2012 (€6.8 million) was equal to the combined average of the last three years, which underscores the stability of the exposure opened in financial instruments linked to volatility.

Grupo Santander continues to have a very limited exposure to instruments or complex structured vehicles, reflecting a management culture one of whose hallmarks is prudence in risk management. At the end of 2012, the Group had:

• CDOs and CLOs: the position continues to not be very significant (€207 million). An important part of it is the result of integrating the portfolio of Alliance & Leicester in 2008.

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• Hedge funds: the total exposure is not significant (€274 million at the end of 2012) and most of it is via the financing of these funds (€169 million), with the rest direct participation in portfolio. This exposure has low loan-to-value levels of below 20% (collateral of €1,480 million at the end of 2012). The risk with this type of counterparty is analyzed case-by-case, establishing percentages of collateralization on the basis of the features and assets of each fund.

• Conduits: no exposure.

• Monolines: Santander’s exposure to bond insurance companies (monolines) was €151 million²² at the end of 2012, mainly indirect exposure, and €145 million by virtue of the guarantee provided by this type of entity to various financing or traditional securitization operations. The exposure in this case is double default, as the primary underlying assets are of high credit quality. 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 23% lower than in 2011.

In short, the exposure to this type of instruments as a result of the Group’s usual operations, continued to decline in 2012. Its origin was mainly due to the integration of positions of institutions acquired by the Group, such as Alliance & Leicester and Sovereign (in 2008 and 2009, respectively). All of these positions were known at the time of purchase, having been duly provisioned. These positions, since their integration in the Group, have been notably reduced, with the ultimate goal of eliminating them from the balance sheet.

Santander’s policy for approving new transactions related to these products remains very prudent and conservative. It is subject to strict supervision by the Group’s senior management.

Before approving a new transaction, product or underlying asset, the risks division verifies:

• The existence of an appropriate valuation model to monitor the value of each exposure: Mark-to-Market, Mark-to-Model or Mark-to-Liquidity.

• The availability in the market of observable data (inputs) needed to be able to apply this valuation model.

And provided these two points are always met:

• The availability of appropriate systems, duly adapted to calculate and monitor every day the results, positions and risks of new operations, and;

• The degree of liquidity of the product or underlying asset, in order to make possible their coverage when deemed opportune.

1.4. Gauging and contrasting measures

In 2012, the Group continued to regularly conduct analysis and contrasting tests on the effectiveness of the Value at Risk (VaR) calculation model, obtaining the same conclusions that enable us to verify the model’s reliability. The objective of these tests is to determine whether it is possible to accept or reject the model used to estimate the maximum loss of a portfolio for a certain level of confidence and a specific time frame.

The most important test is backtesting, analyzed at the local and global levels by the market risk control units. The methodology of backtesting is implemented in the same way for all the Group’s portfolios and sub-portfolios.

For the first case and the total portfolio, there were three exceptions in 2012 of VaR at 99% (days when the daily loss was higher than the VaR), as was previously commented ²³.

²²  Guarantees provided by monolines for bonds issued by U.S. states (municipal bonds) are not considered as exposure. As a result of the acquisition of Sovereign Bank, the Group incorporated a portfolio of these bonds which amounted to €858 million at the end of 2012.

²³  See “VaR Model” in section c) Statistical Tools for Measuring and Managing Market Risk

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BACKTESTING OF BUSINESS PORTFOLIOS: DAILY RESULTS VERSUS PREVIOUS DAY’S VALUE AT RISK (Million euros)

1.5. Analysis of scenarios

Various stress scenarios were calculated and analyzed regularly in 2012 (at least every month) at the local and global levels for all the trading portfolios and using the same suppositions by risk factor.

Maximum volatility scenario (Worst Case)

This scenario is given particular attention as it combines historic movements of risk factors with an ad hoc analysis in order to reject very unlikely combinations of variations (for example, sharp falls in stock markets together with a decline in volatility).

Regarding the variations, an historic volatility equivalent to six typical deviations is applied. The scenario is defined by taking each risk factor the movements which represents the greatest potential loss in the portfolio, rejecting the most unlikely combinations in economic-financial terms. For year-end, that scenario implied, for the global portfolio, interest rate rises in Latin American markets and falls in core markets (“flight into quality”), declines in stock markets, depreciation of all currencies against the euro, greater volatility and credit spreads. The table below shows the results of this scenario at the end of 2012.

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, if the stress movements defined in the scenario materialized, €147.9 million, a loss that would be concentrated in Latin America (interest rates and equities) and Europe (credit spreads, exchange rate and interest rate).

MAXIMUM VOLATILITY STRESS SCENARIO (WORST CASE)

€ million	Interest Rate			Equity			Exchange Rate			Credit Spread			Commodity			Total
Total Trading		(87.8	)		(15.5	)		(23.1	)		(20.9	)		(0.7	)		(147.9	)
Europe		(7.1	)		(2.3	)		(18.6	)		(20.2	)		(0.7	)		(48.8	)
Latin America		(77.7	)		(13.0	)		(2.7	)		0.0			0.0			(93.4	)
United States		(2.1	)		(0.2	)		(1.6	)		0.0			0.0			(3.9	)
Global Activities		(0.9	)		0.0			(0.2	)		(0.7	)		0.0			(1.8	)

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Other global stress test scenarios Various global scenarios (similar for all the Group’s units) are established:

• Abrupt crisis: ad hoc scenario with very sudden movements in markets. Rise in interest rate curves, sharp falls in stock markets, large appreciation of the dollar against the rest of currencies, rise in volatility and in credit spreads.

• Crisis 11S: historic scenario of the September 11, 2001 attacks with a significant impact on the U.S. and global markets. It is sub-divided into two scenarios: 1) maximum accumulated loss until the worst moment of the crisis, and 2) maximum loss in a day. In both cases, there are drops in stock markets and in interest rates in core markets and rises in emerging markets, and the dollar appreciates against the rest of currencies.

• Subprime crisis. Historic scenario of the U.S. mortgage crisis. The objective of the analysis is to capture the impact on results of the reduction in liquidity in the markets. The scenarios have two time frames (one day and 10 days): in both cases there are drops in stock markets and in interest rates in core markets and rises in emerging markets, and the dollar appreciates against the rest of currencies.

• Sovereign crisis: the severest historic scenario by the Committee of European Banking Supervisors (CEBS) to measure the market’s shock capacity between April 15 and September 1, 2010. Given the Group’s international sphere, four geographic zones are distinguished (US, Europe, Latin America and Asia), interest rate rises, falls in stock markets and volatilities are established, rises in credit spreads and depreciation of the euro and Latin American currencies and appreciation of Asian currencies against the dollar.

Every month a consolidated stress test report is drawn up with explanations of the main changes in results for the various scenarios and units supervised by the global committee of market risks. An early warning mechanism has also been established so than when the loss of a scenario is high in historic terms and/or the capital consumed by the portfolio in question, the business executive is informed.

Here we show the results of the global scenarios for 2011 and 2012.

STRESS TEST RESULTS : COMPARISON OF THE 2011 AND 2012 (ANNUAL AVERAGES)

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2. Non-Trading Activity²⁴

2.1. Structural interest rate

Europe and the United States

Generally, in these mature markets and in a context of low interest rates, the general positioning has been to maintain balance sheets with positive sensitivity to interest rate rises, both for the net interest margin (NIM) as well as for the economic value (market value of equity, MVE).

In any case, the exposure level in all countries is very low in relation to the annual budget and the amount of equity.

At the end of 2012, the sensitivity of the NIM at one year to parallel rises of 100 basis points was concentrated in the euro interest rate curve, the U.S. dollar and sterling, with the parent bank, the U.S. subsidiary and Santander UK the units that contributed the most (€183 million, $60 million and £14 million, respectively). Also important in the euro interest rate curve is the contribution of the risk of Banesto and Santander Consumer Finance. The sensitivity of the margin to the rest of convertible currencies is not significant.

At the same date, the main sensitivity of equity to parallel rises in the yield curve of 100 basis points was in the euro interest rate curve in the parent bank (€527 million). Regarding the dollar and sterling curves, the amounts were $297 million and £215 million, respectively.

Latin America

Due to differences in the macroeconomic context and the degree of maturity of these markets, the positioning with regard to the NIM was not homogeneous. There are countries with balance sheets positioned for interest rate rises and others for interest rate falls.

With regard to MVE, the general positioning of the balance sheets was such that the average duration of the asset was higher than that of the liability (negative sensitivity to interest rate rises).

In any case, the exposure level in all countries is very low in relation to the annual budget and the amount of equity.

EVOLUTION OF THE LATIN AMERICA STRUCTURAL INTEREST RISK PROFILE

Sensitivity of NIM and MVE to 100 basis points million euros

²⁴  Includes the entire balance sheet except for the trading portfolios.

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For Latin America as a whole, the consumption of risk as of December 2012, measured to 100 basis points of the financial margin²⁵, stood at €89 million (€79 million at December 2011). It can be seen from the chart below that over 95% of the risk was concentrated in three countries: Brazil, Chile and Mexico.

NIM SENSITIVITY BY COUNTRIES TO 100 BASIS POINTS

% of the total

At the end of December 2012, risk consumption for the region, measured to 100 basis points of asset value²⁶, was €916 million (€957 million as of December 2011). Over 95% of the asset value risk was concentrated in the same three countries: Brazil, Chile y Mexico.

MVE SENSITIVITY BY COUNTRIES TO 100 BASIS POINTS

% of the total

²⁵  Betas are used to aggregate the sensitivities of different curves.

²⁶  Betas are used to aggregate the sensitivities of different curves.

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The gap tables show the risk maturity structure in Latin America at the end of 2012.

LATIN AMERICA: REPRICING GAP OF INTEREST RATES* (December 31, 2012)

Million euros

	TOTAL		3 months			6 months		1 year		3 years			5 years			> 5 years			Non sensitive
Assets		335,544		110,329			28,284		28,334		55,765			19,476			24,093			69,263
Local currency		295,569		89,498			22,386		25,453		51,589			17,566			21,242			67,836
Dollar		39,975		20,832			5,898		2,881		4,175			1,910			2,850			1,428
Liabilities		335,544		157,545			6,767		20,145		41,762			7,855			7,661			93,808
Local currency		293,407		139,213			3,695		15,495		37,005			2,933			3,751			91,315
Dollar		42,137		18,332			3,073		4,650		4,758			4,922			3,910			2,493
Off-balance sheet		0		5,814			1,025		758		(3,482	)		(3,447	)		(1,524	)		856
Gap		0		(41,402	)		22,542		8,948		10,520			8,174			14,908			(23,689	)

* Aggregate gap of all currencies in the balance sheets of Latin American units, expressed in euros.

Structural interest rate VaR of the balance sheet

As well as sensitivity to interest rate movements, Santander uses other methods to monitor the structural interest rate risk of the balance sheet including analysis of scenarios and calculation of the VaR, using methodology similar to that used for the trading portfolios.

The table below shows the average, minimum, maximum and year-end values of the VaR of structural interest rate risk.

BALANCE SHEET STRUCTURAL INTEREST RATE RISK (VAR)

VaR at 99%, with a time frame of one day. Million euros

	2012
	Minimum			Average			Maximum			Year-end
Structural interest rate risk (VaR)*		361.7			446.4			525.7			517.5
Diversification impact		(78.1	)		(124.4	)		(168.1	)		(144.9	)
Europe and US		334.4			451.4			560.8			552.0
Latin America		105.5			119.5			133.0			110.3

* Includes VaR by credit spread in the ALCO portfolios.

The structural interest rate risk, measured in VaR terms at one day and at 99%, was an average of €446.4 million in 2012. The contribution to it of the balances of Europe and the U.S. was greater than that of Latin America. Of note was the high diversification between both areas.

D.2. Structural exchange-rate risk/hedging of results

Structural exchange rate risk arises from Group operations in currencies, mainly related to permanent financial investments, and the results and hedging 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.

At the end of 2012, the largest exposures of a permanent nature (with potential impact on equity value) were concentrated in Brazilian reales, followed by sterling, U.S. dollars, Mexican pesos, Chilean pesos and Polish zlotys. The Group covers part of these positions of a permanent nature with exchange rate derivatives.

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In addition, financial management at the consolidated level is responsible for exchange rate management of the Group’s expected results and dividends in those units whose currency is not the euro.

D.3. Structural equity risk

Santander maintains equity positions in its banking book in addition to those of the trading portfolio. These positions are maintained as portfolios available for sale (capital instruments) or as equity stakes, depending on their envisaged time in the portfolio.

These positions are exposed to market risk. VaR calculations are made for these positions, using market price series for listed shares and proxies for those that do not. At the end of 2012, the VaR at 99% with a one day time frame was €281.4 million (€305.7 million and €218.5 million at the end of 2011 and 2012, respectively).

D.4. Balance sheet market risk

With a homogeneous metric such as the VaR, the total market risk in the banking book can be monitored, distinguishing between fixed income (both interest rate as well the credit spread for the ALCO portfolios), exchange rate and equities.

Figures in millions of EUR

				December 31, 2012
	December 31, 2011			Low			Average			High			Period End
TOTAL		542.8			458.2			598.0			666.5			666.5
Trading		15.9			9.4			14.9			22.4			18.5
Non-Trading		534.4			454.8			593.1			659.0			659.0
Diversification Effect		(7.5	)		(6.1	)		(10.1	)		(14.9	)		(11.0	)

The diversification effect is calculated as the sum of the individual or “stand alone” VaR of each portfolio minus the total VaR of the consolidated portfolio.

We calculate the VaR for full revaluation (individual pricers for each position) or second-order Taylor approximation for the most complex portfolios. We include several individual factors such as each interest rate curve involved, individual share prices, currencies and volatility matrices. For reporting purposes, we group them based on the primary factor (interest rate, equity, foreign exchange, credit spread and commodities).

Our daily VaR (considering each factor of interest rate risk, foreign exchange rate risk and equity price risk individually) were as set forth below.

Interest Rate Risk

Figures in millions of EUR

				December 31, 2012
	December 31, 2011			Low			Average			High			Period End
Interest Rate Risk
Trading		14.6			7.4			11.8			23.3			12.0
Non-Trading		328.1			361.7			446.4			525.7			517.5
Diversification Effect		(14.3	)		(7.4	)		(11.6	)		(22.8	)		(11.8	)
TOTAL		328.5			361.8			446.6			526.3			517.6

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Foreign Exchange Rate Risk

Figures in millions of EUR

				December 31, 2012
	December 31, 2011			Low			Average			High			Period End
Exchange Rate Risk
Trading		4.2			1.9			5.0			12.2			3.5
Non-Trading		346.8			182.8			237.0			340.1			207.3
Diversification Effect		(4.2	)		(1.9	)		(4.9	)		(12.0	)		(3.5	)
TOTAL		346.8			182.8			237.1			340.3			207.3

Equity Price Risk

Figures in millions of EUR

				December 31, 2012
	December 31, 2011			Low			Average			High			Period End
Equity Price Risk
Trading		3.7			4.1			7.0			11.2			7.1
Non-Trading		305.7			265.7			300.4			355.0			281.4
Diversification Effect		(3.7	)		(4.0	)		(6.9	)		(11.0	)		(7.0	)
TOTAL		305.7			265.8			300.5			355.2			281.5

The Group’s daily VaR estimates by activity were as set forth below.

Figures in millions of EUR

			December 31, 2012
	December 31, 2011		Low		Average		High		Period End
Trading
Interest Rate		14.6		7.4		11.8		23.3		12.0
Exchange Rate		4.2		1.9		5.0		12.2		3.5
Equity		3.7		4.1		7.0		11.2		7.1
Credit Spread		9.6		2.2		6.1		13.0		9.1
Commodities		0.4		0.2		0.4		0.7		0.3
TOTAL		15.9		9.4		14.9		22.4		18.5
Non-Trading Interest Rate
Interest Rate		328.1		361.7		446.4		525.7		517.5
Exchange Rate
Non-Trading Foreign Exchange
Exchange Rate		346.8		182.8		237.0		340.1		207.3
Non-Trading Equity
Equity		305.7		265.7		300.4		355.0		281.4
TOTAL		542.8		458.2		598.0		666.5		666.5
Interest Rate		328.5		361.8		446.6		526.3		517.6
Exchange Rate		346.8		182.8		237.1		340.3		207.3
Equity		305.7		265.8		300.5		355.2		281.5

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E. Internal model

Grupo Santander had, at the end of 2011, approval from the Bank of Spain for its internal market risk model for calculating regulatory capital in the trading portfolios of units in Spain, Chile, Mexico and Portugal. The Group’s objective is to gradually increase approval to the rest of units.

The regulatory capital consolidated by the internal model of market risks for Grupo Santander is obtained by adding the regulatory capital of each of the units for which there is the corresponding Bank of Spain approval. A conservative criterion is used for consolidating the Group’s capital, as it does not take into account the savings in capital derived from the diversification impact among various countries.

As a result of this approval, the regulatory capital of trading activity for the commented perimeter is calculated via advanced methods, using VaR as the fundamental metric, the stressed VaR and the incremental risk charge (IRC), in line with the new capital requirements demanded by the Basel agreements.

We closely co-operate with the Bank of Spain in order to advance in the perimeter susceptible of entering into the internal model (at the geographic and operational levels), as well as in analysis of the impact of new requirements, in line with the documents published by the Basel Committee to strengthen the capital of banks.

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 Santander, par value €0.50 each.

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• 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. 27 Each person surrendering ADRs for the withdrawal of deposited securities.	$5.00 for each 100 ADSs (or portion thereof) delivered or surrendered.
(b) Receiving or distributing dividends	Distribution of dividends.	$0.01 per ADS.
(c) Selling or Exercising Rights	Distribution or sale of securities, the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities.	$5.00 for each 100 ADSs (or portion thereof).
(d) Withdrawing an underlying security	Acceptance of ADRs surrendered for withdrawal of deposited securities.	$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs surrendered.
(d) Expenses of the Depositary	Expenses incurred on behalf of Holders in connection with: i) Stock transfer or other taxes and other governmental charges. ii) Cable, telex and facsimile transmission and delivery. iii) Expenses of the Depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency). iv) Such fees and expenses as are incurred by the Depositary (including without limitation expenses incurred on behalf of Holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in delivery of deposited securities or otherwise in connection with the Depositary’s or its Custodian’s compliance with applicable law, rule or regulation.	Expenses payable at the sole discretion of the depositary.

• Fees received from our depositary in connection with the ADR program are the following:

Contract amount:

Fixed: $3,720,283.56

Variable: $1,156,594.70

Total: $4,876,878.26

Actually paid:

Fixed: $3,720,283.56

Variable: $0

Total: $3,720,283.56

Waived fees:

Ongoing program maintenance per contract year: $150,000

Annual meeting services: $15,000

Investor Relations advisory services: $185,000

Total: $350,000

²⁷  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.

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PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

A. Not Applicable

B. 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, 2012, 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;

• 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.

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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, 2012, 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, 2012, its internal control over financial reporting was effective based on those criteria.

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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, 2012. This report follows below.

(c) Attestation report of the registered public accounting firm

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, 2012, 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, 2012, 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, 2012 of the Group and our report dated April 24, 2013 expressed an unqualified opinion on those financial statements.

/s/ Deloitte, S.L.

DELOITTE, S.L.

Madrid, Spain

April 24, 2013

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(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 four 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 applies to members of the board and to all employees of Banco Santander, S.A. and of the Grupo Santander companies, notwithstanding the fact that certain persons are also subject to the Code of Conduct in Securities Markets or to other Codes of Conduct related specifically to the activity or lines of business in which they undertake their responsibilities. 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.

In 2012, a new General Code of Conduct was published. The current Code has primarily broadened the scope of the previous one by: (i) including guidelines for certain specific situations not included in the previous version and (ii) listing additional responsibilities in relation to the Code for compliance management and for other bodies and divisions of the Group.

The current General Code of Conduct set an open door policy by which any Grupo Santander employee who becomes aware of an allegedly unlawful act or an act in breach of the General Code of Conduct or of our business specific codes and manuals may report such act directly to compliance management.

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—codes of conduct”.

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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

	2012		2011
	(In million of euros)
Audit Fees (1)		38.1		36.2
Audit Related Fees (1)		20.6		13.6
Tax Fees		4.3		3.8
All Other Fees Paid (2)		8.1		5.7
		71.1		59.3

⁽¹⁾  See detail of most significant concepts included in Note 48 to the Consolidated Financial Statements.

⁽²⁾  It includes €2.7 million in 2012, €1.5 million in 2011 for services related to adaptation of the Group to new regulations.

The services commissioned from the Group’s auditors meet the independence requirements stipulated by the Legislative Royal Decree 1/2011, of 1 July, approving the Consolidated Audit Act, as well as those included in the Sarbanes-Oxley Act of 2002, assumed by the SEC, and in the Rules and Regulations of the Board.

The audit and compliance committee is required to pre-approve the audit and non-audit services performed by the Group’s auditors in order to assure that the provision of such services does not impair the audit firm’s independence.

In the first months of each year the audit and compliance committee proposes to the board the appointment of the independent auditor. At that moment, the audit and compliance committee pre-approves the audit and audit related services that the appointed auditors will be required to carry out during the year to comply with the applicable regulation. These services will be included in the correspondent audit contracts of the Bank and of any other company of the Group with its principal auditing firm.

In addition, non-recurrent audit or audit-related services and all non-audit services provided by the Group’s principal auditing firm or other auditing firms are subject to case-by-case pre-approval by the audit and compliance committee.

All services provided by the Group’s principal auditing firm in 2012 detailed in the table above were approved by the audit and compliance committee.

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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 2012:

2012	(a) Total number of shares (or units) purchased		(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part  of publicly announced plans or programs		(d) Maximum number (or approximate dollar value) of shares (or  units) that may yet be purchased under the plans or programs
January		79,477,360		5.01		—		—
February		58,531,050		6.01		—		—
March		99,306,204		6.33		—		—
April		193,061,276		5.16		—		—
May		97,452,003		4.48		—		—
June		68,280,888		4.38		—		—
July		219,251,178		4.59		—		—
August		104,576,666		4.94		—		—
September		61,859,330		5.33		—		—
October		268,020,303		5.53		—		—
November		70,307,676		4.65		—		—
December		39,127,736		4.78		—		—
Total		1,359,251,670

During 2012, 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 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 Bylaws 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 eight independent directors (out of sixteen directors total), as defined in Article 6.2.c) of the Rules and Regulations of the Board. We have not determined whether or not the directors on the Santander board would be considered independent under the NYSE rules except in the case of the members of our audit and compliance committee where we have determined that all of them meet the NYSE independence criteria for foreign private issuers. Article 6.2.c) of the Rules and Regulations of the Board defines the concept of an independent director as follows:

“External or non-executive Directors who have been appointed based on their personal or professional status and who perform duties not conditioned by relationships with the Company, or with the significant shareholders or management thereof shall be considered independent directors.

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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”.

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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 four directors. All members are non-executive independent directors and its chairman is independent in accordance with the standards set forth in the previously mentioned Article 6.2. c) of the Rules and Regulations of the Board. These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. Under Spanish law, a majority of the members and the chairman of the audit committee must be non-executive. The composition of the audit and compliance committee is described under “—Audit and compliance committee and appointments and remuneration committee”.

Independence of the directors on the appointments and remuneration committee

In accordance with the NYSE corporate governance rules, all U.S. 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. 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 2012, 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 11 times, respectively, during 2012.

Code of ethics

Under the NYSE corporate governance rules, all U.S. 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 that applies to members of the board and to all employees of Banco Santander, S.A. and of the Grupo Santander companies, notwithstanding the fact that certain persons are also subject to the Code of Conduct in Securities Markets or to other Codes of Conduct related specifically to the activity or lines of business in which they undertake their responsibilities. 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 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.

In 2012, a new General Code of Conduct was published. The current Code has primarily broadened the scope of the previous one by: (i) including guidelines for certain specific situations not included in the previous version and (ii) listing additional responsibilities in relation to the Code for compliance management and for other bodies and divisions of the Group.

343

The current General Code of Conduct set an open door policy by which any Grupo Santander employee who becomes aware of an allegedly unlawful act or an act in breach of the General Code of Conduct or of our business specific codes and manuals may report such act directly to compliance management.

As of December 31, 2012, no waivers with respect to the General Code of Conduct had been applied for or granted.

In addition, the Group abides by a Code of Conduct in the Securities Markets, which was updated on July 28, 2003. This code establishes standards and obligations in relation to securities trading, conflicts of interest and the treatment of price sensitive information.

Both codes are available to the public on our website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—corporate governance—codes of conduct”.

Item 16H. Mine Safety Disclosure

Not applicable.

344

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, 2012, 2011 and 2010		F-2
Consolidated Income Statements for the Years Ended December 31, 2012, 2011 and 2010		F-3
Consolidated Statements of Recognized Income and Expense for the Years Ended December  31, 2012, 2011 and 2010		F-4
Consolidated Statements of Changes In Total Equity for the Years Ended December  31, 2012, 2011 and 2010		F-5
Consolidated Cash Flow Statement for the Years Ended December 31, 2012, 2011 and 2010		F-8
Notes to the Consolidated Financial Statements		F-9

(b) List of Exhibits.

Exhibit Number	Description
1.1	Bylaws (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, 2011, filed with the Securities and Exchange Commission on April 27, 2012).
1.2	Bylaws (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, 2011, filed with the Securities and Exchange Commission on April 27, 2012).
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.

We will furnish to the SEC, upon request, copies of any unfiled instruments that define the rights of holders of long-term debt of Santander.

345

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

BANCO SANTANDER, S.A.
By:	/s/ José Antonio Álvarez
	Name:	José Antonio Álvarez
	Title:	Chief financial officer
	Date: April 24, 2013

346

INDEX TO FINANCIAL STATEMENTS

(a) Index to Financial Statements

	Page
Report of Deloitte, S.L.		F-1
Consolidated Balance Sheets at December 31, 2012, 2011 and 2010		F-2
Consolidated Income Statements for the Years Ended December 31, 2012, 2011 and 2010		F-3
Consolidated Statements of Recognized Income and Expense for the Years Ended December  31, 2012, 2011 and 2010		F-4
Consolidated Statements of Changes in Total Equity for the Years Ended December 31, 2012, 2011 and 2010		F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010		F-8
Notes to the Consolidated Financial Statements		F-9

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, 2012, 2011, and 2010, 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, 2012, 2011, and 2010, 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, 2012, in conformity with International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IFRS-IASB”).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the Group’s internal control over financial reporting as of December 31, 2012, 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 April 24, 2013 expressed an unqualified opinion on the Group’s internal control over financial reporting.

/s/ Deloitte, S.L.

DELOITTE, S.L.

Madrid-Spain

April 24, 2013

F-1

SANTANDER GROUP

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2012, 2011 AND 2010

(Millions of Euros)

ASSETS	Note		2012		2011		2010
CASH AND BALANCES WITH CENTRAL BANKS				118,488		96,524		77,786
FINANCIAL ASSETS HELD FOR TRADING:				177,917		172,638		156,762
Loans and advances to credit institutions		6		9,843		4,636		16,216
Loans and advances to customers		10		9,162		8,056		755
Debt instruments		7		43,101		52,704		57,872
Equity instruments		8		5,492		4,744		8,850
Trading derivatives		9		110,319		102,498		73,069
OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS:				28,356		19,563		39,480
Loans and advances to credit institutions		6		10,272		4,701		18,831
Loans and advances to customers		10		13,936		11,748		7,777
Debt instruments		7		3,460		2,649		4,605
Equity instruments		8		688		465		8,267
AVAILABLE-FOR-SALE FINANCIAL ASSETS:				92,266		86,613		86,235
Debt instruments		7		87,724		81,589		79,689
Equity instruments		8		4,542		5,024		6,546
LOANS AND RECEIVABLES:				758,228		779,525		768,858
Loans and advances to credit institutions		6		53,785		42,389		44,808
Loans and advances to customers		10		697,384		730,296		715,621
Debt instruments		7		7,059		6,840		8,429
HELD-TO-MATURITY INVESTMENTS				—		—		—
CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK		36		2,274		2,024		1,464
HEDGING DERIVATIVES		11		7,936		9,898		8,227
NON-CURRENT ASSETS HELD FOR SALE		12		4,330		5,338		6,285
INVESTMENTS:		13		4,454		4,155		273
Associates				1,957		2,082		273
Jointly controlled entities				2,497		2,073		—
INSURANCE CONTRACTS LINKED TO PENSIONS		14		405		2,146		2,220
REINSURANCE ASSETS		15		424		254		546
TANGIBLE ASSETS:				13,860		13,846		11,142
Property, plant and equipment-				10,315		9,995		9,832
For own use		16		8,136		7,797		7,508
Leased out under an operating lease		16		2,179		2,198		2,324
Investment property		16		3,545		3,851		1,310
INTANGIBLE ASSETS:				28,062		28,083		28,064
Goodwill		17		24,626		25,089		24,622
Other intangible assets		18		3,436		2,994		3,442
TAX ASSETS:				25,868		22,901		22,572
Current				6,111		5,140		5,483
Deferred		27		19,757		17,761		17,089
OTHER ASSETS		19		6,760		8,018		7,587
Inventories				173		319		455
Other				6,587		7,699		7,132
TOTAL ASSETS				1,269,628		1,251,526		1,217,501

LIABILITIES AND EQUITY	Note	2012			2011			2010
FINANCIAL LIABILITIES HELD FOR TRADING:			143,242			146,948			136,772
Deposits from central banks	20		1,128			7,740			12,605
Deposits from credit institutions	20		8,292			9,287			28,371
Customer deposits	21		8,897			16,574			7,849
Marketable debt securities	22		1			77			366
Trading derivatives	9		109,743			103,083			75,279
Short positions	9		15,181			10,187			12,302
Other financial liabilities			—			—			—
OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS:			45,418			44,909			51,020
Deposits from central banks	20		1,014			1,510			337
Deposits from credit institutions	20		10,862			8,232			19,263
Customer deposits	21		28,638			26,982			27,142
Marketable debt securities	22		4,904			8,185			4,278
Subordinated liabilities			—			—			—
Other financial liabilities			—			—			—
FINANCIAL LIABILITIES AT AMORTISED COST:			959,321			935,669			898,969
Deposits from central banks	20		50,938			34,996			8,644
Deposits from credit institutions	20		80,732			81,373			70,892
Customer deposits	21		589,104			588,977			581,385
Marketable debt securities	22		201,064			189,110			188,229
Subordinated liabilities	23		18,238			22,992			30,475
Other financial liabilities	24		19,245			18,221			19,344
CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK	36		598			876			810
HEDGING DERIVATIVES	11		6,444			6,444			6,634
LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE			1			42			54
LIABILITIES UNDER INSURANCE CONTRACTS	15		1,425			517			10,449
PROVISIONS:			12,872			15,572			15,660
Provision for pensions and similar obligations	25		7,077			9,045			9,519
Provisions for taxes and other legal contingencies	25		3,100			3,663			3,670
Provisions for contingent liabilities and commitments	25		617			659			1,030
Other provisions	25		2,078			2,205			1,441
TAX LIABILITIES:			8,019			8,174			8,618
Current			5,162			5,101			4,306
Deferred	27		2,857			3,073			4,312
OTHER LIABILITIES	26		7,962			9,516			7,600
TOTAL LIABILITIES			1,185,302			1,168,667			1,136,586
EQUITY
SHAREHOLDERS’ EQUITY:	30		81,244			80,896			77,333
Share capital	31		5,161			4,455			4,164
Registered			5,161			4,455			4,164
Less: Uncalled capital			—			—			—
Share premium	32		37,412			31,223			29,457
Reserves	33		37,153			32,980			28,307
Accumulated reserves (losses)	33		36,898			32,921			28,255
Reserves (losses) of entities accounted for using the equity method	33		255			59			52
Other equity instruments	34		250			8,708			8,686
Equity component of compound financial instruments	34		—			1,668			1,668
Other	34		250			7,040			7,018
Less: Treasury shares	34		(287	)		(251	)		(192	)
Profit for the year attributable to the Parent			2,205			5,351			8,181
Less: Dividends and remuneration	4		(650	)		(1,570	)		(1,270	)
VALUATION ADJUSTMENTS			(6,590	)		(4,482	)		(2,315	)
Available-for-sale financial assets	29		(249	)		(977	)		(1,249	)
Cash flow hedges	11		(219	)		(202	)		(172	)
Hedges of net investments in foreign operations	29		(2,957	)		(1,850	)		(1,955	)
Exchange differences	29		(3,013	)		(1,358	)		1,061
Non-current assets held for sale			—			—			—
Entities accounted for using the equity method	29		(152	)		(95	)		—
Other valuation adjustments			—			—			—
NON-CONTROLLING INTERESTS	28		9,672			6,445			5,897
Valuation adjustments			(46	)		435			838
Other			9,718			6,010			5,059
TOTAL EQUITY			84,326			82,859			80,915
TOTAL LIABILITIES AND EQUITY			1,269,628			1,251,526			1,217,501
MEMORANDUM ITEMS:
CONTINGENT LIABILITIES	35		45,033			48,042			59,795
CONTINGENT COMMITMENTS	35		216,042			195,382			203,709

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated balance sheet at December 31, 2012.

F-2

SANTANDER GROUP

CONSOLIDATED INCOME STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

(Millions of Euros)

		(Debit) Credit
	Notes	2012			2011			2010
Interest and similar income	38		59,024			60,856			52,907
Interest expense and similar charges	39		(28,877	)		(30,035	)		(23,683	)
INTEREST INCOME/(CHARGES)			30,147			30,821			29,224
Income from equity instruments	40		423			394			362
Income for companies accounted for using the equity method	41		427			57			17
Fee and commission income	42		12,827			12,749			11,681
Fee and commission expense	43		(2,519	)		(2,277	)		(1,946	)
Gains/losses on financial assets and liabilities (net)	44		3,329			2,838			2,164
Held for trading			1,460			2,113			1,312
Other financial instruments at fair value through profit or loss			159			21			70
Financial instruments not measured at fair value through profit or loss			1,789			803			791
Other			(79	)		(99	)		(9	)
Exchange differences (net)	45		(189	)		(522	)		441
Other operating income			6,693			8,050			8,195
Income from insurance and reinsurance contracts issued	46		5,541			6,748			7,162
Sales and income from the provision of non-financial services	46		369			400			340
Other	46		783			902			693
Other operating expenses			(6,585	)		(8,032	)		(8,089	)
Expenses of insurance and reinsurance contracts	46		(4,948	)		(6,356	)		(6,784	)
Changes in inventories	46		(232	)		(249	)		(205	)
Other	46		(1,405	)		(1,427	)		(1,100	)
TOTAL INCOME			44,553			44,078			42,049
Administrative expenses			(17,928	)		(17,781	)		(16,255	)
Personnel expenses	47		(10,323	)		(10,326	)		(9,329	)
Other general administrative expenses	48		(7,605	)		(7,455	)		(6,926	)
Depreciation and amortization	16 & 18		(2,189	)		(2,109	)		(1,940	)
Provisions (net)	25		(1,622	)		(2,601	)		(1,133	)
Impairment losses on financial assets (net)			(18,906	)		(11,868	)		(10,443	)
Loans and receivables	10		(18,549	)		(11,040	)		(10,267	)
Other financial instruments not measured at fair value through profit or loss	7 & 29		(357	)		(828	)		(176	)
Impairment losses on other assets (net)			(508	)		(1,517	)		(286	)
Goodwill and other intangible assets	17 & 18		(151	)		(1,161	)		(69	)
Other assets			(357	)		(356	)		(217	)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale	49		906			1,846			350
Gains from bargain purchases arising in business combinations			—			—			—
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations	50		(757	)		(2,109	)		(290	)
OPERATING PROFIT/(LOSS) BEFORE TAX			3,549			7,939			12,052
Income tax	27		(575	)		(1,776	)		(2,923	)
PROFIT FROM CONTINUING OPERATIONS			2,974			6,163			9,129
LOSS FROM DISCONTINUED OPERATIONS (Net)	37		(7	)		(24	)		(27	)
CONSOLIDATED PROFIT FOR THE YEAR			2,967			6,139			9,102
Profit attributable to the Parent			2,205			5,351			8,181
Profit attributable to non-controlling interests	28		762			788			921
EARNINGS PER SHARE
From continuing and discontinued operations
Basic earnings per share (euros)	4		0.23			0.60			0.94
Diluted earnings per share (euros)	4		0.22			0.60			0.94
From continuing operations
Basic earnings per share (euros)	4		0.23			0.60			0.94
Diluted earnings per share (euros)	4		0.22			0.60			0.94

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated balance sheet at December 31, 2012.

F-3

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSE

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

(Millions of Euros)

	2012			2011			2010
CONSOLIDATED PROFIT FOR THE YEAR		2,967			6,139			9,102
OTHER RECOGNISED INCOME AND EXPENSE		(2,588	)		(2,570	)		1,643
Available-for-sale financial assets:		1,171			344			(2,719	)
Revaluation gains/(losses)		1,729			231			(1,863	)
Amounts transferred to income statement		(558	)		156			(856	)
Other reclassifications		—			(43	)		—
Cash flow hedges:		(84	)		(17	)		117
Revaluation gains/(losses)		129			(109	)		(89	)
Amounts transferred to income statement		(249	)		92			206
Amounts transferred to initial carrying amount of hedged items		—			—			—
Other reclassifications		36			—			—
Hedges of net investments in foreign operations:		(1,107	)		106			(2,253	)
Revaluation gains/(losses)		(1,336	)		13			(2,444	)
Amounts transferred to income statement		229			9			191
Other reclassifications		—			84			—
Exchange differences:		(2,170	)		(2,824	)		5,704
Revaluation gains/(losses)		(1,833	)		(2,906	)		5,986
Amounts transferred to income statement		(330	)		85			(282	)
Other reclassifications		(7	)		(3	)		—
Non-current assets held for sale:		—			—			—
Revaluation gains/(losses)		—			—			—
Amounts transferred to income statement		—			—			—
Other reclassifications		—			—			—
Actuarial gains/(losses) on pension plans		—			—			—
Entities accounted for using the equity method:		(57	)		(95	)		—
Revaluation gains/(losses)		(61	)		(37	)		—
Amounts transferred to income statement		21			—			—
Other reclassifications		(17	)		(58	)		—
Other recognized income and expense		—			—			—
Income tax		(341	)		(84	)		794
TOTAL RECOGNISED INCOME AND EXPENSE		379			3,569			10,745
Attributable to the Parent		97			3,184			9,031
Attributable to non-controlling interests		282			385			1,714

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated balance sheet at December 31, 2012.

F-4

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

(Millions of Euros)

	Equity attributable to the Parent
	Shareholders’ equity
						Reserves
	Share capital		Share premium			Accumulated reserves (losses)			Reserves (losses) of entities accounted for using the equity method		Other equity instruments			Less: Treasury shares			Profit for the year attributable to the Parent			Less: Dividends and remuneration			Total shareholders’ equity			Valuation adjustments			Total			Non- controlling interests			Total equity
Ending balance at 12/31/11		4,455		31,223			32,921			59		8,708			(251	)		5,351			(1,570	)		80,896			(4,482	)		76,414			6,445			82,859
Adjustments due to changes in accounting policies		—		—			—			—		—			—			—			—			—			—			—			—			—
Adjustments due to errors		—		—			—			—		—			—			—			—			—			—			—			—			—
Adjusted beginning balance		4,455		31,223			32,921			59		8,708			(251	)		5,351			(1,570	)		80,896			(4,482	)		76,414			6,445			82,859
Total recognized income and expense		—		—			—			—		—			—			2,205			—			2,205			(2,108	)		97			282			379
Other changes in equity		706		6,189			3,977			196		(8,458	)		(36	)		(5,351	)		920			(1,857	)		—			(1,857	)		2,945			1,088
Capital increases		706		6,330			(235	)		—		(6,811	)		—			—			—			(10	)		—			(10	)		22			12
Capital reductions		—		—			—			—		—			—			—			—			—			—			—			(112	)		(112	)
Conversion of financial liabilities into equity		—		—			—			—		—												—			—			—			—			—
Increases in other equity instruments		—		—			—			—		133			—			—			—			133			—			133			—			133
Reclassification of financial liabilities to other equity instruments		—		—			—			—		—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—			—			—		—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—			(496	)		—		—			—			—			(650	)		(1,146	)		—			(1,146	)		(409	)		(1,555	)
Transactions involving own equity instruments (net)		—		—			85			—		—			(36	)		—			—			49			—			49			—			49
Transfers between equity items		—		(141	)		3,789			196		(63	)		—			(5,351	)		1,570			—			—			—			—			—
Increases (decreases) due to business combinations		—		—			—			—		—			—			—			—			—			—			—			5			5
Equity-instrument-based payments		—		—			(2	)		—		(40	)		—			—			—			(42	)		—			(42	)		—			(42	)
Other increases/(decreases) in equity		—		—			836			—		(1,677	)		—			—			—			(841	)		—			(841	)		3,439			2,598
Ending balance at 12/31/12		5,161		37,412			36,898			255		250			(287	)		2,205			(650	)		81,244			(6,590	)		74,654			9,672			84,326

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated balance sheet at December 31, 2012.

F-5

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

(Millions of Euros)

	Equity attributable to the Parent
	Shareholders’ equity
						Reserves
	Share capital		Share premium			Accumulated reserves (losses)			Reserves (losses) of entities accounted for using the equity method		Other equity instruments			Less: Treasury shares			Profit for the year attributable to the Parent			Less: Dividends and remuneration			Total shareholders’ equity			Valuation adjustments			Total			Non- controlling interests			Total equity
Ending balance at 12/31/10		4,164		29,457			28,255			52		8,686			(192	)		8,181			(1,270	)		77,333			(2,315	)		75,018			5,897			80,915
Adjustments due to changes in accounting policies		—		—			—			—		—			—			—			—			—			—			—			—			—
Adjustments due to errors		—		—			—			—		—			—			—			—			—			—			—			—			—
Adjusted beginning balance		4,164		29,457			28,255			52		8,686			(192	)		8,181			(1,270	)		77,333			(2,315	)		75,018			5,897			80,915
Total recognized income and expense		—		—			—			—		—			—			5,351			—			5,351			(2,167	)		3,184			385			3,569
Other changes in equity		291		1,766			4,666			7		22			(59	)		(8,181	)		(300	)		(1,789	)		—			(1,789	)		164			(1,625	)
Capital increases		120		17			(123	)		—		(17	)		—			—			—			(3	)		—			(3	)		—			(3	)
Capital reductions		—		—			—			—		—			—			—			—			—			—			—			(51	)		(51	)
Conversion of financial liabilities into equity		171		1,773			—			—		—			—			—			—			1,944			—			1,944			—			1,944
Increases in other equity instruments		—		—			—			—		185			—			—			—			185			—			185			—			185
Reclassification of financial liabilities to other equity instruments		—		—			—			—		—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—			—			—		—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—			(2,060	)		—		—			—			—			(1,570	)		(3,630	)		—			(3,630	)		(431	)		(4,061	)
Transactions involving own equity instruments (net)		—		—			(31	)		—		—			(59	)		—			—			(90	)		—			(90	)		—			(90	)
Transfers between equity items		—		(24	)		6,970			7		(41	)		—			(8,181	)		1,270			—			—			—			—			—
Increases (decreases) due to business combinations		—		—			—			—		—			—			—			—			—			—			—			162			162
Equity-instrument-based payments		—		—			—			—		(105	)		—			—			—			(105	)		—			(105	)		—			(105	)
Other increases/(decreases) in equity		—		—			(90	)		—		—			—			—			—			(90	)		—			(90	)		484			394
Ending balance at 12/31/11		4,455		31,223			32,921			59		8,708			(251	)		5,351			(1,570	)		80,896			(4,482	)		76,414			6,445			82,859

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated balance sheet at December 31, 2012.

F-6

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

(Millions of Euros)

	Equity attributable to the Parent
	Shareholders’ equity
	Share capital		Share premium			Reserves						Other equity instruments			Less: Treasury shares			Profit for the year attributable to the Parent			Less: Dividends and remuneration			Total shareholders’ equity
						Accumulated reserves (losses)			Reserves (losses) of entities accounted for using the equity method																		Valuation adjustments			Total			Non- controlling interests			Total equity
Ending balance at 12/31/09		4,114		29,305			24,540			68			7,189			(30	)		8,942			(2,296	)		71,832			(3,165	)		68,667			5,203			73,870
Adjustments due to changes in accounting policies		—		—			—			—			—			—			—			—			—			—			—			—			—
Adjustments due to errors		—		—			—			—			—			—			—			—			—			—			—			—			—
Adjusted beginning balance		4,114		29,305			24,540			68			7,189			(30	)		8,942			(2,296	)		71,832			(3,165	)		68,667			5,203			73,870
Total recognized income and expense		—		—			—			—			—			—			8,181			—			8,181			850			9,031			1,714			10,745
Other changes in equity		50		152			3,715			(16	)		1,497			(162	)		(8,942	)		1,026			(2,680	)		—			(2,680	)		(1,020	)		(3,700	)
Capital increases		50		162			(44	)		—			(168	)		—			—			—			—			—			—			—			—
Capital reductions		—		—			—			—			—			—			—			—			—			—			—			—			—
Conversion of financial liabilities into equity		—		—			—			—			—			—			—			—			—			—			—			—			—
Increases in other equity instruments		—		—			—			—			1,821			—			—			—			1,821			—			1,821			—			1,821
Reclassification of financial liabilities to other equity instruments		—		—			—			—			—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—			—			—			—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—			(1,825	)		—			—			—			—			(1,270	)		(3,095	)		—			(3,095	)		(400	)		(3,495	)
Transactions involving own equity instruments (net)		—		—			(18	)		—			—			(162	)		—			—			(180	)		—			(180	)		—			(180	)
Transfers between equity items		—		(10	)		6,712			(16	)		(40	)		—			(8,942	)		2,296			—			—			—			—			—
Increases (decreases) due to business combinations		—		—			—			—			—			—			—			—			—			—			—			101			101
Equity-instrument-based payments		—		—			—			—			(116	)		—			—			—			(116	)		—			(116	)		—			(116	)
Other increases/(decreases) in equity		—		—			(1,110	)		—			—			—			—			—			(1,110	)		—			(1,110	)		(721	)		(1,831	)
Ending balance at 12/31/10		4,164		29,457			28,255			52			8,686			(192	)		8,181			(1,270	)		77,333			(2,315	)		75,018			5,897			80,915

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated balance sheet at December 31, 2012.

F-7

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

(Millions of Euros)

	2012			2011			2010
A. CASH FLOWS FROM OPERATING ACTIVITIES:		24,322			35,995			51,874
Consolidated profit for the year		2,967			6,139			9,102
Adjustments made to obtain the cash flows from operating activities-		24,469			21,877			17,849
Depreciation and amortization		2,189			2,109			1,940
Other adjustments		22,280			19,768			15,909
Net increase/decrease in operating assets-		27,154			(337	)		28,487
Financial assets held for trading		381			(7,561	)		6,310
Other financial assets at fair value through profit or loss		5,207			(12,221	)		413
Available-for-sale financial assets		7,334			383			(3,145	)
Loans and receivables		11,665			20,569			18,481
Other operating assets		2,567			(1,507	)		6,428
Net increase/decrease in operating liabilities-		27,202			9,566			55,488
Financial liabilities held for trading		(9,970	)		(15,348	)		7,583
Other financial liabilities at fair value through profit or loss		(3,010	)		(6,351	)		285
Financial liabilities at amortized cost		39,216			32,901			47,274
Other operating liabilities		966			(1,636	)		346
Income tax recovered/paid		(3,162	)		(1,924	)		(2,078	)
B. CASH FLOWS FROM INVESTING ACTIVITIES:		(63	)		(7,099	)		(2,635	)
Payments-		3,920			10,575			5,310
Tangible assets		2,161			1,858			3,635
Intangible assets		1,726			1,540			1,505
Investments		33			1			10
Subsidiaries and other business units		—			7,176			160
Non-current assets held for sale and associated liabilities		—			—			—
Held-to-maturity investments		—			—			—
Other payments related to investing activities		—			—			—
Proceeds-		3,857			3,476			2,675
Tangible assets		815			520			696
Intangible assets		6			—			9
Investments		2			10			104
Subsidiaries and other business units		991			1,044			33
Non-current assets held for sale and associated liabilities		2,043			1,902			1,833
Held-to-maturity investments		—			—			—
Other proceeds related to investing activities		—			—			—
C. CASH FLOWS FROM FINANCING ACTIVITIES:		(703	)		(8,111	)		(11,301	)
Payments-		12,549			16,259			21,470
Dividends		1,287			3,489			4,107
Subordinated liabilities		4,080			5,329			7,727
Redemption of own equity instruments		—			—			—
Acquisition of own equity instruments		6,957			6,937			7,372
Other payments related to financing activities		225			504			2,264
Proceeds-		11,846			8,148			10,169
Subordinated liabilities		2			171			287
Issuance of own equity instruments		—			—			—
Disposal of own equity instruments		7,005			6,848			7,191
Other proceeds related to financing activities		4,839			1,129			2,691
D. EFFECT OF FOREIGN EXCHANGE RATE CHANGES		(1,592	)		(2,046	)		4,957
E. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		21,964			18,738			42,897
F. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		96,524			77,786			34,889
G. CASH AND CASH EQUIVALENTS AT END OF YEAR		118,448			96,524			77,786
COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF YEAR:
Cash		7,214			5,483			5,515
Cash equivalents at central banks		111,274			91,041			72,271
Other financial assets		—			—			—
Less: Bank overdrafts refundable on demand		—			—			—
TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR		118,488			96,524			77,786

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated balance sheet at December 31, 2012.

F-8

Banco Santander, S.A. and Companies composing Santander Group

Notes to the Consolidated Financial Statements

for the year ended December 31, 2012

1. Introduction, basis of presentation of the consolidated financial statements and other information

 a) Introduction

Banco Santander, S.A. (“the Bank” or Banco Santander) is a private-law entity subject to the rules and regulations applicable to banks operating in Spain. The Bylaws and other public information on the Bank can be consulted on the website of the Bank (www.santander.com) and at its registered office at Paseo de Pereda 9-12, Santander.

In addition to the operations carried on directly by it, the Bank is the head of a group of subsidiaries that engage in various business activities and which compose, together with it, Santander Group (“the Group” or Santander Group). Therefore, the Bank is obliged to prepare, in addition to its own separate financial statements, the Group’s consolidated financial statements, which also include the interests in joint ventures and investments in associates.

 b) Basis of presentation of the consolidated financial statements

Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the Law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements for the years beginning on or after January 1, 2005 in conformity with the International Financial Reporting Standards (“IFRSs”) previously adopted by the European Union (“EU-IFRSs”).

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 2012 were formally prepared by the Bank’s directors (at the board meeting on January 28, 2013) 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, 2012 and the consolidated results of its operations, the changes in the consolidated equity and the consolidated cash flows in 2012. These consolidated financial statements were prepared from the separate accounting records of the Bank and of each of the companies composing the Group, and include the adjustments and reclassifications required to unify the accounting policies and measurement bases applied by the Group.

The notes to the consolidated financial statements contain supplementary information to that presented in the consolidated balance sheet, consolidated income statement, consolidated statement of recognized income and expense, consolidated statement of changes in total equity and consolidated statement of cash flows.

F-9

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 came into force and were adopted by the European Union in 2012:

• Amendment to IFRS 7, Financial Instruments: Disclosures (obligatory for reporting periods beginning on or after July 1, 2011) - Transfers of Financial Assets. IFRS 7 reinforces the disclosures on transfers of financial assets that are not derecognized or, principally, those that qualify for derecognition but in which the entity still has continuing involvement.

• Amendment to IAS 12, Income Tax - IAS 12 provides that the measurement of deferred tax assets and liabilities arising from investment property is dependent on whether the carrying amount of the investment property is expected to be recovered through use or sale. IAS 12 also includes the contents of SIC 21 - “Deferred Taxes - Recovery of Revalued Non-Depreciable Assets”, which was withdrawn.

The application of the aforementioned accounting standards did not have any material effects on the Group’s consolidated financial statements.

Also, the following standards and interpretations whose effective dates are after December 31, 2012 were in force at the date of preparation of these consolidated financial statements:

• IFRS 10, Consolidated Financial Statements (obligatory for reporting periods beginning on or after January 1, 2014, early application permitted) - this standard supersedes the current IAS 27 and SIC 12, and introduces a single control-based consolidation model, irrespective of the nature of the investee. IFRS 10 modifies the current definition of control. The new definition of control sets out the following three elements of control: power over the investee; exposure, or rights, to variable returns from involvement with the investee; and the ability to use power over the investee to affect the amount of the investor’s returns.

• IFRS 11, Joint Arrangements (obligatory for reporting periods beginning on or after January 1, 2014, early application permitted) - this standard supersedes the current IAS 31. The fundamental change introduced by IFRS 11 with respect to the current standard is the elimination of the option of proportionate consolidation for jointly controlled entities, which will begin to be accounted for using the equity method.

• IFRS 12, Disclosure of Interests in Other Entities (obligatory for reporting periods beginning on or after January 1, 2014, early application permitted) - this standard represents a single standard presenting the disclosure requirements for interests in other entities (whether they be subsidiaries, associates, joint arrangements or other interests) and includes new disclosure requirements. The objective of this standard is to require an entity to disclose information that enables users of its financial statements to evaluate the nature of its interests in other entities (control), the possible restrictions on its ability to access or use assets and settle liabilities, the risks associated with its interests in unconsolidated structured entities, etc.

The Group is currently analyzing the possible effects of the aforementioned standards (IFRSs 10, 11 and 12 ). Based on the analysis performed to date, the Group does not expect the application of these standards to have a material effect on the consolidated financial statements.

• IFRS 13, Fair Value Measurement (obligatory for reporting periods beginning on or after January 1, 2013) - this standard replaces the current rules concerning fair value contained in various standards and sets out in a single IFRS a framework for measuring fair value. It does not modify the criteria set out in other standards for measuring assets and liabilities at fair value. IFRS 13 is applicable to the measurement of both financial and non-financial items and it introduces new disclosure requirements.

F-10

• Amendments to IAS 1, Presentation of Items of Other Comprehensive Income (obligatory for reporting periods beginning on or after July 1, 2012) - these amendments consist basically of the requirement for items to be classified into items that will be reclassified (recycled) to profit or loss in subsequent periods and items that will not be reclassified.

• Amendments to IAS 19, Employee Benefits (obligatory for reporting periods beginning on or after January 1, 2013) - these amendments eliminate the “corridor” under which entities are currently able to opt for deferred recognition of a given portion of actuarial gains and losses, establishing that when the amendments come into effect, all actuarial gains and losses must be recognized immediately. The amendments include significant changes in the presentation of cost components, as a result of which the service cost relating to post-employment benefit obligations (past service cost and plan curtailments and settlements) and net interest cost will be recognized in profit or loss and the remeasurement component (comprising basically actuarial gains and losses) will be recognized in Equity - Valuation adjustments and may not be reclassified to profit or loss. The Bank’s directors consider that, had this standard been applied at December 31, 2012, equity would have been reduced by EUR 3,051 million due mainly to the elimination of the “corridor”. In accordance with IAS 8, these amendments entail a change of accounting policy and, accordingly, they must be applied retrospectively from January 1, 2013, by adjusting the beginning balances of equity for the earliest period presented as though the new accounting policy had always been applied.

• Amendments to IAS 27 and IAS 28 (revised) (obligatory for reporting periods beginning on or after January 1, 2014, early application permitted) - these amendments reflect the changes arising from the new IFRS 10 and IFRS 11 described above.

• Amendments to IAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (obligatory for reporting periods beginning on or after January 1, 2014, early application permitted) - these amendments introduce a series of additional clarifications on the requirements established by the standard for an entity to be able to offset a financial asset and a financial liability, indicating that they can only be offset when an entity currently has a legally enforceable right to set off the recognized amounts and this does not depend on the occurrence of future events.

• Amendments to IFRS 7, Offsetting Financial Assets and Financial Liabilities (obligatory for reporting periods beginning on or after January 1, 2013) - these amendments introduce new disclosures for financial assets and financial liabilities that are presented net in the balance sheet and for other instruments subject to an enforceable netting arrangement.

• IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine - in view of its nature, this interpretation does not affect the Group.

Lastly, at the date of preparation of these consolidated financial statements, the following standards and interpretations which effectively come into force after December 31, 2012 had not yet been adopted by the European Union:

• IFRS 9, Financial Instruments: Classification and Measurement (obligatory as from January 1, 2015), which will in the future replace the part of the current IAS 39 relating to the classification and measurement of financial assets. IFRS 9 presents significant differences regarding financial assets 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

F-11

categories, impairment analyses only for assets measured at amortized cost and the non-separation of embedded derivatives in financial contracts. The main change introduced with regard to financial liabilities applies only to liabilities that an entity elects to measure at fair value. The portion of the change in the fair value of these liabilities attributable to changes in the entity’s own credit risk must be presented in Valuation adjustments instead of in profit or loss.

• Improvements to IFRSs, 2009-2011 cycle (obligatory for reporting periods beginning on or after January 1, 2013) - these improvements introduce minor amendments to IFRS 1, IAS 1, IAS 16, IAS 32 and IAS 34.

• Transition rules: Amendments to IFRSs 10, 11 and 12 (obligatory for reporting periods beginning on or after January 1, 2013) - these amendments clarify the transition rules for IFRSs 10, 11 and 12.

• Investment companies: Amendments to IFRS 10, IFRS 12 and IAS 27 (obligatory for reporting periods beginning on or after January 1, 2014) - these amendments provide for an exception from the consolidation rules under IFRS 10 for parent companies that meet the definition of investment companies. In view of their nature, these amendments do not affect the Group.

The Group is currently analyzing the possible effects of these new standards and interpretations.

All accounting policies and measurement bases with a material effect on the 2012 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 obligations 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 and liabilities (see Notes 6, 7, 8, 9, 10, 11, 20, 21 and 22).

F-12

 d) Other matters

i. Disputed corporate resolutions

The directors of the Bank and its 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.

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

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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. The two appellants prepared and filed extraordinary appeals on grounds of procedural infringements and a cassation appeal against the judgment. Leave to proceed was refused for the extraordinary appeals for procedural infringement and the cassation appeal filed by one of the appellants, and it was partially refused for the cassation appeal filed by the other appellant, by an order of October 13, 2010. The admitted grounds of the latter appeal were dismissed in a judgment dated May 21, 2012, thereby confirming that the appeals had been dismissed.

The appeal filed with Santander Commercial Court no. 1 in relation to the objection to the corporate resolutions adopted by the shareholders at the annual general meeting held on June 11, 2010 was withdrawn and dismissed by an order of February 24, 2012.

ii. Credit assignment transactions

Following the prolonged investigations carried out since 1992 by the Madrid Central Examining Court number 3, and the repeated applications by the Public Prosecutor’s Office and the Government Lawyer, as the representative of the Public Treasury, to have the case against the Bank and its executives dismissed and struck off, the trial commenced at Panel One of the Criminal Chamber of the National Appellate Court and after the debate on preliminary issues was held at the end of November 2006, without the appearance of the Government Lawyer, in which the Public Prosecutor’s Office reiterated its appeal to set aside the trial and interrupt the proceedings, on December 20, 2006, the Criminal Chamber of the National Appellate Court ordered the dismissal of the proceedings, as requested by the Public Prosecutor’s Office and the private prosecution.

A cassation appeal was filed against the aforementioned order by the Association for the Defence of Investors and Customers and Iniciativa per Catalunya Verds and, following the opposition by the Public Prosecutor’s Office, the Government Lawyer and the remaining appearing parties, it was dismissed by a Supreme Court decision handed down on December 17, 2007.

In an interlocutory order of April 15, 2008, the Supreme Court dismissed the request filed by the Association for the Defence of Investors and Customers for the decision handed down in the judgment of December 17, 2007 to be set aside.

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The appeal filed by the Association for the Defence of Investors and Customers against the aforementioned Supreme Court decision was given leave to proceed by the Spanish Constitutional Court, and the appearing parties submitted their pleadings. Subsequently, the appellant filed a document seeking dismissal of the appeal, which the Spanish Constitutional Court transferred to the Public Prosecutor’s Office and the appearing parties for their responses on September 25, 2012.

 e) Capital management

i. Regulatory and economic capital

The Group’s capital management is performed at regulatory and economic levels.

Regulatory capital management is based on the analysis of the capital base, the capital ratios using the criteria of the related Bank of Spain Circular and the scenarios used for capital planning. 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 and issues of equity instruments (preference shares and subordinated debt) and hybrid instruments.

The regulations on the calculation and control of minimum capital requirements in Spain have been implemented, since June 2008, by Bank of Spain Circular 3/2008, which adapts Spanish legislation to European Directives 2006/48 and 2006/49 (known as Capital Requirements Directives, or CRD I), which include, inter alia, provisions equivalent to those defined in the Basel II framework agreement. This regulatory framework is based on three pillars. Pillar I sets out the minimum capital requirements to be met, and provides for the possibility of using internal ratings and models (IRB approach) in the calculation of risk-weighted exposures and including operational risk therein. The aim is to render regulatory requirements more sensitive to the risks actually borne by entities in carrying on their business activities. Pillar II establishes a supervisory review system to improve internal risk management and internal capital adequacy assessment based on the risk profile. Lastly, Pillar III defines the elements relating to disclosures and market discipline.

In July 2009, the Basel Committee on Banking Supervision published a reform of the Basel II framework which raised the regulatory capital requirements for the trading book and complex securitization exposures, known as Basel 2.5. At European level, these greater requirements were reflected in Directive 2009/111 (CRD II) and 2010/76 (CRD III), which were in turn included in Bank of Spain Circular 03/2008 through Circular 4/2011.

In December 2010, the Committee on Banking Supervision published a new global regulatory framework in order to strengthen international capital standards (Basel III), by enhancing the quality, consistency and transparency of the capital base and improving risk coverage. This framework is scheduled for inclusion in European legislation in the near future through a new European Directive (CRD IV) and European Regulation (CRR) which will be directly applicable to the Member States.

In December 2011, the European Banking Authority (EBA) published new capital requirements for the main European credit institutions. These requirements are part of a package of measures adopted by the European Council in the second half of 2011 with the aim of restoring stability and confidence in the European markets.

At June 30, 2012, the institutions selected for the EBA sample were required to have a Tier 1 core capital ratio, determined on the basis of EBA rules, of at least 9%. These capital requirements are expected to be of an exceptional and temporary nature.

In Spain, Royal Decree-Law 2/2011 was approved on February 18, 2011, establishing the implementing regulations of the “Plan for Strengthening the Financial Sector”, which aimed, inter alia, to establish in

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advance certain capital requirements, established by Basel III, by setting a principal capital requirement of 8% or 10%, depending on the characteristics of each entity. Also, Royal Decree-Law 2/2012, on the clean-up of the financial sector, was published on February 3, 2012, setting forth additional principal capital requirements to be met by entities based on certain levels of assets relating to the property industry.

Lastly, Law 9/2012, on restructuring and resolution of credit institutions, was published on November 14, 2012, which established, effective from January 1, 2013, a single principal capital requirement of 9%, phasing in both the eligible instruments and deductions with those used by the European Banking Authority. Law 9/2012 was partially implemented by Bank of Spain Circular 7/2012, on minimum principal capital requirements.

At December 31, 2012, the Group met all the minimum capital requirements established by current legislation and those set forth in the EBA’s recommendation.

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, return on risk-adjusted capital (RORAC) and value creation data for each business unit are generated, analyzed and reported to the management committee on a quarterly basis. Within the framework of the internal capital adequacy assessment process (Pillar 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.), macroeconomic scenarios defined by the Group’s economic research service, and the impact, if any, of foreseeable regulatory changes. 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, values of equity instruments, etc. that mirror historical crises that could happen again or plausible but unlikely stress situations.

ii. Plan for the roll-out of advanced approaches and authorization from the supervisory authorities

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%.

Accordingly, the Group continued in 2012 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.

The 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, Portugal, non-retail portfolios in Mexico and large corporate portfolios in Brazil and Chile. In 2012 approval was obtained for the SMEs portfolio in Portugal. 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 Europe.

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As regards the other risks explicitly addressed in Pillar I of the Basel Capital Accord, the Group was authorized to use its internal model for market risk with respect to the treasury area’s trading activities in Madrid and the Chile, Portugal and Mexico units (the latter since March 2012), thus continuing implementation of the roll-out plan it submitted to the Bank of Spain for the other unit entities.

Lastly, as part of the Basel 2.5 requirements, regulatory approval was obtained for the Group’s corporate methodology, enabling Santander Group to calculate, for the market risk of the trading book, the incremental default and migration risk charge (IRC) and stressed value at risk (Stressed VaR).

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 is required in order to develop the internal model based on its own management experience of the various acquired entities. However, although Santander Group is currently using the standardized approach for regulatory capital calculation purposes, it is considering the possibility of adopting AMA approaches in the near future, once it has collated sufficient data using its own management model.

 f) Environmental impact

In view of the business activities carried on by the Group entities, the Group does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its consolidated equity, financial position or results. Therefore, no specific disclosures relating to environmental issues are included in these notes to the consolidated financial statements.

 g) Events after the reporting period

It should be noted that from January 1, 2013 to April 24, 2013 on which these consolidated financial statements were authorized for issue, the following significant events occurred:

• In the context of the merger of Banco Santander, S.A. with Banco Español de Crédito, S.A. (Banesto), on January 9, 2013 the boards of directors of both entities approved the common draft terms of merger. Also, on January 28, 2013 the boards of directors of Banco Santander, S.A. and Banco Banif, S.A. approved the related common draft terms of merger.

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

As of the date of this annual report on Form 20-F the mergers of Banesto and Banif with the Bank are subject to the condition precedent of authorization of the Minister of Economy and Competitiveness (see Note 3.b.xvii).

• At its meeting of January 11, 2013, 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 0.152 per share, in shares or cash. On January 30, 2013, the holders of 86.40% of the free allotment rights have chosen to receive new shares. Consequently, Banco Santander has acquired 1,403,540,519 rights for a total gross consideration of € 213 million.

• On January 31, 2013, pursuant to the Santander Dividendo Elección shareholder remuneration program, the Group announced that it would offer shareholders the option of receiving an amount equal to the 2012 final interim dividend in cash or in new shares. From May 2, 2013, the Bank will pay EUR 0.150 per share in cash to shareholders who opt for this method of receiving their remuneration. Therefore, the total envisaged shareholder remuneration in respect of the 2012 financial year will amount to approximately EUR 0.60 per share.

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• On March 18, 2013, KBC and Banco Santander announced a secondary offering of up to 19,978,913 shares in BZ WBK by way of a fully marketed follow-on offering (the “Offering”). Through the Offering, KBC plans to sell 15,125,964 shares (constituting 16.17% of BZ WBK shares outstanding at that date)

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and Santander is expected to sell not less than 195,216 but up to 4,852,949 shares (constituting between 0.21% and 5.19% of BZ WBK shares outstanding at that date). Assuming the Offering is completed in full, the free float of BZ WBK following the Offering would be 30%.

The placement of these shares would allow Banco Santander to fulfill its commitment towards the Polish regulator that at least 30% of the capital of Bank Zachodni WBK is in hands of other minority investors before the end of 2014. Banco Santander will continue to be the controlling shareholder in BZ WBK with a stake of no less than 70% following this transaction.

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

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

On March 22, 2013, we announced that Banco Santander and KBC Bank had completed the placement of 19,978,913 shares of Bank Zachodni WBK at a final price of 245 zlotys per share, amounting to a total of €1,171 million. Santander sold 4,852,949 shares, equal to 5.2% of BZ WBK’s capital, for €285 million, while KBC obtained €887 million for its 16.17% stake in BZ WBK.

• On January 29, 2013, Metrovacesa’s shareholders approved the company’s delisting tender offer. On April 18, 2013, the CNMV authorized the delisting tender offer, which will be open for acceptance until May 13, 2013 (see Note 3.b.xiv).

2. Accounting policies

The accounting policies applied in preparing the consolidated financial statements were as follows:

 a) Foreign currency transactions

i. Functional currency

The Group’s functional currency is the euro. Therefore, all balances and transactions denominated in currencies other than the euro are deemed to be denominated in foreign currency.

ii. Translation of foreign currency balances

Foreign currency balances are translated to euros in two consecutive stages:

• Translation of foreign currency to the functional currency (currency of the main economic environment in which the entity operates), and

• Translation to euros of the balances held in the functional currencies of entities whose functional currency is not the euro.

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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.

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.

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iv. Entities located in hyperinflationary economies

In 2009 the Group sold substantially all its businesses in Venezuela and at December 31, 2012 its net assets in that country amounted to only EUR 3 million (December 31, 2011: EUR 10 million; December 31, 2010: EUR 18 million).

In view of the foregoing, at December 31, 2012, 2011 and 2010 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 2012, 2011 and 2010 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, 2012, 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, the Mexican peso, the US dollar 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 US dollar and the Polish zloty.

At December 31, 2011, 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, the Mexican peso, the Chilean peso, the Polish zloty and the US dollar. 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 US dollar, the Mexican peso and the Polish zloty.

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, the 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).

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.

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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	2012			2011			2010			2012		2011		2010
US dollar		(45.1	)		(41.7	)		(39.1	)		—		2.8		—
Chilean peso		(10.2	)		(7.3	)		(11.7	)		—		6.1		7.6
Pound sterling		(75.2	)		(72.8	)		(62.0	)		—		10.5		20.3
Mexican peso		(4.7	)		(22.2	)		(42.9	)		—		9.5		9.1
Brazilian real		(77.5	)		(151.7	)		(89.2	)		—		—		—
Polish zloty		(22.1	)		(19.4	)		(2.6	)		—		3.7		—

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	2012		2011		2010		2012		2011			2010
US dollar		46.0		42.5		39.9		—		(2.9	)		—
Chilean peso		10.4		7.5		11.9		—		(6.2	)		(7.8	)
Pound sterling		76.8		74.2		63.2		—		(10.7	)		(20.7	)
Mexican peso		4.8		22.6		42.0		—		(9.7	)		(9.3	)
Brazilian real		74.3		60.1		81.0		—		—			—
Polish zloty		17.8		19.8		2.7		—		(3.8	)		—

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 (mainly foreign currency options and foreign currency purchase and sale 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, 2012 would be a decrease or increase, respectively, in equity due to valuation adjustments of EUR 90.2 million and EUR 92 million in the case of the pound sterling (2011: EUR 88.1 million and EUR 89.9 million), EUR 72.1 million and 73.5 million in the case of the Brazilian real (2011: EUR 80.5 million and EUR 82.1 million), EUR 26.5 million and EUR 27.1 million in the case of the US dollar (2011: EUR 22.5 million and EUR 23 million), and EUR 40.9 million and EUR 41.7 million for the other currencies (2011: EUR 39.2 million and EUR 40 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, 2012, 2011 and 2010.

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 b) 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 their acquisition-date fair values. 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 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.

In the consolidated financial statements, investments in jointly controlled entities 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 a jointly controlled entity are eliminated to the extent of the Group’s ownership interest in the entity.

The Appendices contain 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. Significant influence generally exists when the Bank holds 20% or more of the voting power of the investee.

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In the consolidated financial statements, investments in associates are accounted for using the equity method, i.e. at the Group’s share of net assets of the investee, after taking into account the dividends received therefrom and other equity eliminations. The profits and losses resulting from transactions with an associate are eliminated to the extent of the Group’s interest in the associate.

The Appendices contain 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, 2012, the Group controlled 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 5.59%, 4.82% and 5.16%, respectively (see Appendix I). Although the Group holds less than half the voting power, it manages and, as a result, exercises control over these entities.

In addition, at December 31, 2012 the Group exercised joint control of Luri 3, S.A., despite holding 9.63% 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 object 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). 8% of their investment property is located in Spain.

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, which is normally the consideration transferred, defined as the acquisition-date fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity instruments issued, if any, by the acquirer. Since January 1, 2010, in cases where the amount of the consideration to be transferred has not been definitively established at the acquisition date, but rather depends on future events, any contingent consideration must be recognized as part of the consideration transferred and measured at its acquisition-

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date fair value; also since that date, acquisition-related costs, such as fees paid to auditors, legal advisers, investment banks and other consultants, may not for these purposes form part of the cost of the business combination.

• 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 Gains from bargain purchases arising in business combinations in the consolidated income statement.

Since January 1, 2010, goodwill is only measured and recognized once, when control is obtained of a business.

vii. Changes in the levels of ownership interests in subsidiaries

As required under IFRSs, since January 1, 2010, acquisitions and disposals not giving rise to a change in control are recognized as equity transactions, and no gain or loss is recognized in the income statement and the initially recognized goodwill is not remeasured. The difference between the consideration transferred or received and the decrease or increase in non-controlling interests, respectively, is recognized in reserves.

Similarly, since that date, IAS 27 has established that when control over a subsidiary is lost, the assets, liabilities and non-controlling interests and any other items recognized in valuation adjustments of that company are derecognized from the consolidated balance sheet, and the fair value of the consideration received and of any remaining equity interest is recognized. The difference between these amounts is recognized in profit or loss.

With respect to non-monetary contributions to jointly controlled entities, the IASB has acknowledged the existence of a conflict between IAS 27, which establishes that if control is lost the remaining equity interest is measured at fair value, recognizing the full amount of the gain or loss in profit or loss, and IAS 31.48, together with SIC 13, which -for transactions within its scope- would only permit recognition of the portion of the gain or loss attributable to the capital owned by the other venturers in the jointly controlled entity. The Group has opted to apply the provisions of IAS 27 consistently to all transactions falling under the scope of the aforementioned standards.

viii. Acquisitions and disposals

Note 3 provides information on the most significant acquisitions and disposals in 2012, 2011 and 2010.

 c) Definitions and classification of financial instruments

i. Definitions

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

An equity instrument is any agreement that evidences a residual interest in the assets of the issuing entity after deducting all of its liabilities.

F-25

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:

1.	-	Investments in associates and jointly controlled entities (see Note 13).
2.	-	Rights and obligations under employee benefit plans (see Note 25).
3.	-	Rights and obligations under insurance contracts (see Note 15).
4.	-	Contracts and obligations relating to employee remuneration based on own equity instruments (see Note 34).

ii. Classification of financial assets for measurement purposes

Financial assets are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Non-current assets held for sale or they relate to Cash and balances with central banks, Changes in the fair value of hedged items in portfolio hedges of interest rate risk (asset side), Hedging derivatives and Investments, which are reported separately.

Financial assets are included for measurement purposes in one of the following categories:

• Financial assets held for trading (at fair value through profit or loss): this category includes the financial assets acquired for the purpose of generating a profit in the near term from fluctuations in their prices and financial derivatives that are not designated as hedging instruments.

• Other financial assets at fair value through profit or loss: this category includes hybrid financial assets not held for trading that are measured entirely at fair value and financial assets not held for trading that are included in this category in order to obtain more relevant information, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would 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.

F-26

• 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.

• 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.

F-27

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 (“reverse repos”) or borrowed (short positions).

• 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. Liabilities may only be included in this category on the date when they are issued or originated.

• 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.

F-28

• 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.

 d) Measurement of financial assets and liabilities and recognition of fair value changes

In general, financial assets and liabilities are initially recognized at fair value which, in the absence of evidence to the contrary, is deemed to be the transaction price. Financial instruments not measured at fair value through profit or loss are adjusted by the transaction costs. Financial assets and liabilities are subsequently measured at each period-end as follows:

i. Measurement of financial assets

Financial assets are measured at fair value, without deducting any transaction costs that may be incurred on their disposal, except for loans and receivables, held-to-maturity investments, equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those equity instruments as their underlying and are settled by delivery of those instruments.

The fair value of a financial instrument on a given date is taken to be the amount for which it could be bought or sold on that date by two knowledgeable, willing parties in an arm’s length transaction acting prudently. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active, transparent and deep market (quoted price or market price). At December 31, 2012, there were no significant investments in quoted financial instruments which have ceased to be recognized at their quoted price because their market cannot be deemed to be active.

F-29

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 (net) 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.

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.

F-30

iii. Valuation techniques

The following table shows a summary of the fair values, at 2012, 2011 and 2010 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
	2012						2011						2010
	Published price quotations in active markets		Internal models		Total		Published price quotations in active markets		Internal models		Total		Published price quotations in active markets		Internal models		Total
Financial assets held for trading		48,014		129,903		177,917		45,528		127,110		172,638		65,009		91,753		156,762
Other financial assets at fair value through profit or loss		3,387		24,969		28,356		2,324		17,239		19,563		9,446		30,034		39,480
Available-for-sale financial assets		65,719		26,547		92,266		68,325		18,288		86,613		69,337		16,898		86,235
Hedging derivatives (assets)		128		7,808		7,936		1,497		8,401		9,898		1,226		7,001		8,227
Financial liabilities held for trading		15,985		127,257		143,242		16,084		130,864		146,948		18,027		118,745		136,772
Other financial liabilities at fair value through profit or loss		—		45,418		45,418		—		44,909		44,909		—		51,020		51,020
Hedging derivatives (liabilities)		96		6,348		6,444		592		5,852		6,444		509		6,125		6,634
Liabilities under insurance contracts		—		1,425		1,425		—		517		517		4,163		6,286		10,449

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 2012.

The Group has developed a formal process for the systematic valuation and management of financial instruments, which has been implemented worldwide across all the Group’s units. The governance scheme for this process distributes responsibilities between two independent divisions within the Group: Treasury (development, marketing and daily management of financial products and market data) and Risk (on a periodic basis, validation of pricing models and market data, computation of risk metrics, new transaction approval policies, management of market risk and implementation of fair value adjustment policies).

F-31

The approval of new products follows a sequence of steps (request, development, validation, integration in corporate systems and quality assurance) before the product is brought into production. This process ensures that pricing systems have been properly reviewed and are stable before they are used.

The following subsections set forth the most important financial instruments and families of derivatives, and the related valuation techniques and inputs, by asset class.

Fixed income and inflation

The fixed income asset class includes basic instruments such as interest rate forwards, interest rate swaps and cross currency swaps, which are valued using forward estimation of flows and calculating net present value by discounting those flows taking into account basis swap and cross currency spreads, depending on the payment frequency and currency of each leg of the derivative. Vanilla products, including regular and digital cap and floor options as well as swaptions, are priced using benchmark industry models. More exotic derivatives are priced using more complex models which are generally accepted as standard across institutions.

These pricing models are fed with observable market data such as deposits, futures, cross currency swap and constant maturity swap rates as well as basis swap spreads. These data allow us to calculate different interest rate yield curves depending on the payment frequency and discounting curves for each currency. For derivative instruments, implied volatilities are also used as model inputs. These volatilities are observable in the market for cap and floor options and swaptions. Interpolation and extrapolation of volatilities from the quoted ranges are carried out using well-accepted industry models. More exotic instruments may involve the use of non-observable data or model parameters, such as correlation (among interest rates and cross-asset), mean reversion rates and prepayment rates. These internal parameters are usually defined from historical data or through calibration.

The inflation asset class includes inflation-linked bonds and zero-coupon or year-on-year inflation-linked swaps, valued with the net present value method using forward estimation and discounting. Some derivatives on inflation indexes are also available and are priced using standard and more complex bespoke models, as appropriate. Valuation inputs of these models consider inflation-linked swap spreads observable in the market and estimations of inflation seasonality. These data allow us to calculate a forward inflation curve. Implied volatilities taken from zero-coupon and year-on-year inflation options are also inputs for the pricing of more complex derivatives.

Equity and foreign exchange

The most important products in these asset classes are forward and futures contracts, which include vanilla, listed and OTC (over-the-counter) derivatives on single underlying assets and baskets of assets. Vanilla options are priced using the standard Black-Scholes model and more exotic derivatives involving forward returns, average performance, or digital, barrier or callable features are priced using well-accepted industry models and bespoke models, as appropriate. For derivatives on illiquid stocks, hedging is facilitated by taking into account the liquidity constraints inside models.

The inputs of equity models consider interest rate curves, spot prices, dividends, asset borrowing costs (repo margin spreads), implied volatilities, correlation among equity stocks and indexes, and cross-asset correlation. Implied volatilities are obtained from market quotes of European and American vanilla call and put options. Interpolation and extrapolation techniques allow us to obtain continuous volatility surfaces for illiquid stocks. Dividends are usually estimated for the mid and long term. Correlations are obtained from historical data or, when possible, are implied from market quotes of correlation-dependent products.

F-32

The inputs of foreign exchange models include the interest rate curve for each currency, the spot foreign exchange price and the implied volatilities and correlation among assets of this type. Volatilities are obtained from European vanilla call and put options which are quoted in markets as at-the-money, risk reversal or butterfly options. Illiquid currency pairs are usually handled by using the data of the liquid pairs from which the illiquid currency can be derived. For more exotic products, unobservable model parameters may be estimated by fitting to reference prices provided by other non-quoted market sources.

Credit

The most common instrument in this asset class is the credit default swap (CDS), which is used to hedge credit exposure to third parties. In addition, models for first-to-default (FTD), n-to-default (NTD) and single-tranche collateralized debt obligation (CDO) products are also available. These products are valued with standard industry models, which estimate probability of default of a single issuer (for CDSs) or the joint probability of default of more than one issuer for FTDs, NTDs and CDOs.

Valuation inputs are the interest rate curve, the CDS spread curve and the recovery rate. The CDS spread curve is obtained in the market for indexes and important individual issuers. For less liquid issuers, this spread curve is estimated using proxies (quoted instruments similar to the instrument to be valued) or other credit-dependent instruments. Recovery rates are usually set to standard values. For listed single-tranche CDOs, the correlation of joint default of several issuers is implied from the market. For FTDs, NTDs and bespoke CDOs, the correlation is estimated from proxies or historical data when no other option is available.

The fair value of financial instruments 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 and the subsequent comparison with the related actively traded price. However, fair value adjustments may be necessary when market quoted prices are not available for comparison purposes. There are sources of risk such as uncertain model parameters, illiquid underlying issuers, low quality market data or missing risk factors (sometimes the best available option is to use limited models with controllable risk). In these situations, in keeping with common industry practice, the Group calculates and applies a valuation adjustment in order to account for the sources of model risk described below:

For fixed income markets, examples of model risk include the correlation among fixed income indexes, the lack of stochastic basis spread modeling, calibration risk and volatility modeling. Other sources of risk arise from the estimation of market data.

In equity markets, examples of model risk include forward skew modeling, the impact of stochastic interest rates, correlation and multi-curve modeling. Other sources of risk arise from the hedging management of digital, callable and barrier option payments. In addition, sources of risk arising from the estimation of market data such as dividends, and correlation for quanto and composite options must also be considered.

For specific financial instruments relating to home mortgage loans granted by financial institutions in the UK (which are regulated and partially financed by the Government) and property asset derivatives, the Halifax House Price Index (HPI) is the main input. In these cases, assumptions include estimates of the future growth and the volatility of the HPI, mortality and the implied credit spreads.

F-33

Inflation markets are exposed to model risk resulting from the uncertainty of modeling the correlation structure among various CPI (Consumer Price Index) rates. Another source of risk may arise from the bid-offer spread of inflation-linked swaps.

Foreign exchange markets are exposed to model risk resulting from forward skew modeling, the impact of stochastic interest rates and correlation modeling for multi-asset instruments. Risk may also arise from market data, due to the existence of specific illiquid foreign exchange pairs.

The most important source of model risk for credit derivatives relates to the estimation of the correlation between the probabilities of default of different underlying issuers. For illiquid underlying issuers, the CDS spread may not be well defined.

F-34

Set forth below are the financial instruments at fair value whose measurement was based on internal models (Levels 2 and 3) at December 31, 2012, 2011 and 2010 and the potential effect on their measurement at December 31, 2012 of a shift towards other reasonably probable scenarios in the main assumptions that are not based on observable market data:

	Millions of euros
	Fair values calculated using internal models at 12/31/12						Effect of reasonable assumptions on fair values at 12/31/12
	Level 2		Level 3		Valuation techniques	Main assumptions	More favorable			Less favorable
ASSETS:
Financial assets held for trading		129,508		395				281			(254	)
Loans and advances to credit institutions		9,843		—	Present Value Method	Observable market data		—			—
Loans and advances to customers (b)		9,162		—	Present Value Method	Observable market data		—			—
Debt and equity instruments		1,320		—	Present Value Method	Observable market data, HPI		4			(4	)
Trading derivatives		109,183		395				277			(250	)
Swaps		90,759		109	Present Value Method, Gaussian Copula (c)	Observable market data, basis, liquidity		18	(e)		(18	)(e)
Exchange rate options		708		46	Black-Scholes Model	Observable market data, liquidity		—	(e)		—	(e)
Interest rate options		9,141		—	Black-Scholes Model, Heath-Jarrow-Morton Model	Observable market data, liquidity, correlation		73	(e)		(70	) (e)
Interest rate futures		78		—	Present Value Method	Observable market data		—			—
Index and securities options		3,188		—	Black-Scholes Model	Observable market data, dividends, correlation, liquidity, HPI		39	(e)		(43	)(e)
Other		5,309		240	Present Value Method, Monte Carlo simulation and other	Observable market data and other		146	(e)		(118	)(e)
Hedging derivatives		7,808		—
Swaps		7,609		—	Present Value Method	Observable market data, basis		—			—
Exchange rate options		43		—	Black-Scholes Model	Observable market data		—			—
Interest rate options		36		—	Black-Scholes Model	Observable market data		—			—
Other		120		—	N/A	N/A
Other financial assets at fair value through profit or loss		24,500		469				59			(60	)
Loans and advances to credit institutions		10,272		—	Present Value Method	Observable market data		—			—
Loans and advances to customers (d)		13,863		74	Present Value Method	Observable market data, HPI		2			(2	)
Debt and equity instruments		365		395	Present Value Method	Observable market data		56			(58	)
Available-for-sale financial assets		26,123		424				5			(5	)
Debt and equity instruments		26,123		424	Present Value Method	Observable market data		5			(5	)
LIABILITIES:
Financial liabilities held for trading		127,158		99				—			—
Deposits from central banks		1,128		—	Present Value Method	Observable market data		—			—
Deposits from credit institutions		8,292		—	Present Value Method	Observable market data		—			—
Customer deposits		8,890		7	Present Value Method	Observable market data		—			—
Debt and equity instruments		1		—	Present Value Method	Observable market data, liquidity			(a)			(a)
Trading derivatives		108,847		92				—			—
Swaps		88,450		8	Present Value Method, Gaussian Copula (c)	Observable market data, basis, liquidity, HPI			(e)			(e)
Exchange rate options		766		6	Black-Scholes Model	Observable market data, liquidity			(e)			(e)
Interest rate options		10,772		—	Black-Scholes Model, Heath-Jarrow-Morton Model	Observable market data, liquidity, correlation			(e)			(e)
Index and securities options		121		—	Black-Scholes Model	Observable market data, dividends, correlation, liquidity, HPI			(e)			(e)
Interest rate and equity futures		4,816		—	Present Value Method	Observable market data		—			—
Other		3,922		78	Present Value Method, Monte Carlo simulation and other	Observable market data and other			(e)			(e)
Hedging derivatives		6,348		—				—			—
Swaps		5,860		—	Present Value Method	Observable market data, basis		—			—
Exchange rate options		76		—	Black-Scholes Model	Observable market data		—			—
Interest rate options		17		—	Black-Scholes Model	Observable market data		—			—
Other		395		—	N/A	N/A		—			—
Other financial liabilities at fair value through profit or loss		45,312		106	Present Value Method	Observable market data		—			—
Liabilities under insurance contracts		1,425		—	See Note 15			—			—
		368,182		1,493				345			(319	)

F-35

	Millions of euros
	Fair values calculated using internal models
	12/31/11				12/31/10
	Level 2		Level 3		Level 2		Level 3		Valuation techniques	Main assumptions
ASSETS:
Financial assets held for trading		126,663		447		91,300		453
Loans and advances to credit institutions		4,636		—		16,216		—	Present Value Method	Observable market data
Loans and advances to customers (b)		8,056		—		755		—	Present Value Method	Observable market data
Debt and equity instruments		19,674		—		10,954		29	Present Value Method	Observable market data, HPI
Trading derivatives		94,298		447		63,375		424
Swaps		74,520		145		46,424		138	Present Value Method, Gaussian Copula (c)	Observable market data, basis, liquidity
Exchange rate options		964		95		658		69	Black-Scholes Model	Observable market data, liquidity
Interest rate options		7,936		—		6,632		—	Black-Scholes Model, Heath-Jarrow-Morton Model	Observable market data, liquidity, correlation
Interest rate futures		91		—		53		—	Present Value Method	Observable market data
Index and securities options		3,728		—		5,248		—	Black-Scholes Model	Observable market data, dividends, correlation, liquidity, HPI
Other		7,059		207		4,360		217	Present Value Method, Monte Carlo simulation and other	Observable market data and other
Hedging derivatives		8,400		1		7,001		—
Swaps		8,172		1		6,886		—	Present Value Method	Observable market data, basis
Exchange rate options		161		—		67		—	Black-Scholes Model	Observable market data
Interest rate options		45		—		31		—	Black-Scholes Model	Observable market data
Other		22		—		17		—	N/A	N/A
Other financial assets at fair value through profit or loss		16,882		357		29,689		345
Loans and advances to credit institutions		4,701		—		18,831		—	Present Value Method	Observable market data
Loans and advances to customers (d)		11,694		54		7,719		58	Present Value Method	Observable market data, HPI
Debt and equity instruments		487		303		3,139		287	Present Value Method	Observable market data
Available-for-sale financial assets		18,055		233		15,504		1,394
Debt and equity instruments		18,055		233		15,504		1,394	Present Value Method	Observable market data
LIABILITIES:
Financial liabilities held for trading		130,755		110		118,608		137
Deposits from central banks		7,740		—		12,605		—	Present Value Method	Observable market data
Deposits from credit institutions		9,287		—		28,370		—	Present Value Method	Observable market data
Customer deposits		16,574		—		7,849		—	Present Value Method	Observable market data
Debt and equity instruments		2		—		365		—	Present Value Method	Observable market data, liquidity
Trading derivatives		97,152		110		69,419		137
Swaps		73,614		2		48,527		6	Present Value Method, Gaussian Copula (c)	Observable market data, basis, liquidity, HPI
Exchange rate options		946		11		915		—	Black-Scholes Model	Observable market data, liquidity
Interest rate options		9,722		—		7,356		—	Black-Scholes Model, Heath-Jarrow-Morton Model	Observable market data, liquidity, correlation
Index and securities options		7,036		—		6,189		—	Black-Scholes Model	Observable market data, dividends, correlation, liquidity, HPI
Interest rate and equity futures		273		—		181		—	Present Value Method	Observable market data
Other		5,560		97		6,251		131	Present Value Method, Monte Carlo simulation and other	Observable market data and other
Hedging derivatives		5,852		—		6,125		—
Swaps		5,639		—		5,723		—	Present Value Method	Observable market data, basis
Exchange rate options		169		—		363		—	Black-Scholes Model	Observable market data
Interest rate options		21		—		16		—	Black-Scholes Model	Observable market data
Other		23		—		23		—	N/A	N/A
Other financial liabilities at fair value through profit or loss		44,740		169		50,861		159	Present Value Method	Observable market data
Liabilities under insurance contracts		517		—		6,286		—	See Note 15
		351,864		1,316		325,374		2,488

(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).

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(c) Includes credit risk derivatives with a positive net fair value of EUR 18 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 homogeneous 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 main transactions measured using unobservable market data that constitute significant inputs of the internal models (Level 3) are:

• HPI (House Price Index) derivatives at Santander UK. HPI derivatives, of which the Group, through its subsidiary in the UK, has a 90% share of the market, are considered illiquid markets. The entity’s assumptions are the main driver for their valuation.

• Illiquid CDOs at the treasury unit at Santander UK.

• Unlisted equity securities.

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, the Bank’s directors consider 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.

As detailed in the foregoing tables, at December 31, 2012 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 319 million (December 31, 2011: EUR 418 million; December 31, 2010: EUR 476 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 345 million (December 31, 2011: EUR 432 million; December 31, 2010: EUR 498 million).

The net loss recognized in the consolidated income statement for 2012 arising from the aforementioned valuation models amounted to EUR 229 million, of which a gain of EUR 20 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 (net).

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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 (net), or to exchange differences arising on monetary financial assets, which are recognized in Exchange differences (net) in the consolidated income statement).

• Items charged or credited to Valuation adjustments - Available-for-sale financial assets and Valuation adjustments - Exchange differences (net) 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:

1. The derivative hedges one of the following three types of exposure:

a. Changes in the fair value of assets and liabilities due to fluctuations, among others, in the interest rate and/or exchange rate to which the position or balance to be hedged is subject (fair value hedge);

b. Changes in the estimated cash flows arising from financial assets and liabilities, commitments and highly probable forecast transactions (cash flow hedge);

c. The net investment in a foreign operation (hedge of a net investment in a foreign operation).

2. It is effective in offsetting exposure inherent in the hedged item or position throughout the expected term of the hedge, which means that:

a. At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (prospective effectiveness).

b. There is sufficient evidence that the hedge was actually effective during the whole life of the hedged item or position (retrospective effectiveness). 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.

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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 (net) 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.

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 e) 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.

3. If the Group neither transfers nor retains substantially all the risks and rewards associated with the transferred financial asset -sale of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitization of assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases- the following distinction is made:

a. If the transferor does not retain control of the transferred financial asset, the asset is derecognized and any rights or obligations retained or created in the transfer are recognized.

b. If the transferor retains control of the transferred financial asset, it continues to recognize it for an amount equal to its exposure to changes in value and recognizes a financial liability associated with the transferred financial asset. The 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.

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 f) Offsetting of financial instruments

Financial asset and liability balances are offset, i.e. reported in the consolidated balance sheet at their net amount, only if the subsidiaries currently have a legally enforceable right to set off the recognized amounts and intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

 g) Impairment of financial assets

i. Definition

A financial asset is considered to be impaired -and therefore its carrying amount is adjusted to reflect the effect of impairment- when there is objective evidence that events have occurred which:

• In the case of debt instruments (loans and debt securities), give rise to an adverse impact on the future cash flows that were estimated at the transaction date.

• In the case of equity instruments, mean that their carrying amount may not be fully recovered.

As a general rule, the carrying amount of impaired financial instruments is adjusted with a charge to the consolidated income statement for the period in which the impairment becomes evident, and the reversal, if any, of previously recognized impairment losses is recognized in the consolidated income statement for the period in which the impairment is reversed or reduced.

Balances are deemed to be impaired, and the interest accrual is suspended, when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts and on the dates initially agreed upon, after taking into account the guarantees received by the consolidated entities to secure (fully or partially) collection of the related balances. Collections relating to impaired loans and advances are used to recognize the accrued interest and the remainder, if any, to reduce the principal amount outstanding.

Transactions classified as doubtful due to arrears are reclassified as standard if, as a result of the collection of a portion or the sum of the unpaid installments, the reasons for classifying such transactions as doubtful cease to exist -namely, when any remaining unpaid installments are less than 90 days past due-, unless other subjective reasons remain for classifying them as doubtful. The refinancing of doubtful loans does not result in their reclassification to standard unless: there is certainty that the customer can make payment in accordance with the new schedule; the customer provides effective guarantees or collateral; the customer pays the current interest receivable; and the customer complies with the cure period described in Note 54.

The following constitute effective guarantees or collateral: collateral in the form of cash deposits; quoted equity instruments and debt securities issued by creditworthy issuers; mortgages on completed housing, offices and multi-purpose premises and on rural property, net of any prior charges; and personal guarantees (bank guarantees, inclusion of new obligors, etc.) which entail the direct and joint liability of the new guarantors to the customer, these being persons or entities whose solvency is sufficiently demonstrated so as to ensure the full repayment of the transaction on the agreed terms.

The balances relating to impaired transactions continue to be recognized on the balance sheet, for their full amounts, until the Group considers that the recovery of those amounts is remote.

The Group considers recovery to be remote when there has been a substantial and irreversible deterioration of the borrower’s solvency, when commencement of the liquidation phase of insolvency proceedings has been ordered or when more than four years have elapsed since the borrower’s transaction was classified as doubtful due to arrears (the maximum period established by the Bank of Spain).

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When the recovery of a financial asset is considered unlikely, it is written off, together with the related allowance, 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

For the purpose of determining impairment losses, the Group monitors its debtors as described below:

• Individually for significant debt instruments and for instruments which, although not material, are not susceptible to being classified in a group of financial assets with similar credit risk characteristics -customers classified by the Group as “individualized”. This category includes wholesale banking enterprises, financial institutions and certain retail banking enterprises.

• Collectively, in all other cases -customers classified by the Group as “standardized”-, by grouping together instruments having similar credit risk characteristics indicative of the debtors’ ability to pay all principal and interest amounts in accordance with the contractual terms. The credit risk characteristics considered for the purpose of grouping the assets are, inter alia, instrument type, debtor’s industry and geographical location, type of guarantee or collateral, age of past-due amounts and any other relevant factor for the estimation of future cash flows. This category includes exposures to individuals, individual entrepreneurs and retail banking enterprises not classified as individualized customers.

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, and in 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 must meet the Bank of Spain requirements, which establish that, until the Spanish regulatory authority has verified and approved the internal models for the calculation of the allowance for losses arising from credit risk (to date it has only approved the internal models to be used to calculate regulatory capital), entities must calculate their credit risk coverage as set forth below:

a. Specific allowance (individuals):

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:

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i. Assets classified as doubtful due to counterparty arrears:

Debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually, taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors.

ii. Assets classified as doubtful for reasons other than counterparty arrears:

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

b. General allowance for inherent losses (collective):

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.

c. 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.

However, the coverage of the Group’s losses arising from credit risk must also meet the regulatory requirements of IFRSs and, therefore, the Group checks the allowances calculated as described above with those obtained from internal models for the calculation of the coverage of losses arising from credit risk in order to confirm that there are no material differences.

The Group’s internal models determine the impairment losses on debt instruments not measured at fair value through profit or loss and on contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, impairment losses on loans are losses incurred at the reporting date, calculated using statistical methods.

The amount of an impairment loss incurred on these debt instruments is equal to the difference between their carrying amount and the present value of their 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;

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• 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).

The Group uses the concept of incurred loss to quantify the cost of the credit risk and include it in the calculation of the risk-adjusted return of its transactions. The parameters necessary for its calculation are also used to calculate economic capital and to calculate BIS II regulatory capital under internal models (see Note 1.f).

The incurred loss is the expected cost, 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 incurred 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 discounting of the guarantees associated with the transaction and the future flows that are expected to be recovered.

The methodology for determining the general allowance for losses arising from credit risk seeks to identify the amounts of losses incurred at the reporting date which, regardless of whether they have been disclosed, the Group knows, on the basis of historical experience and other specific information, will arise in the one-year period following the reporting date.

At December 31, 2012, the estimated losses arising from credit risk calculated by the Group’s internal models did not differ materially from the allowances calculated on the basis of the Bank of Spain’s requirements.

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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.

 h) 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.

 i) Non-current assets held for sale and Liabilities associated with non-current assets held for sale

Non-current assets held for sale includes the carrying amount of individual items, 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.

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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.

 j) Reinsurance assets and Liabilities under insurance contracts

Insurance contracts involve the transfer of a certain quantifiable risk in exchange for a periodic or one-off premium. The effects on the Group’s cash 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.

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.

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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.

The most significant items forming part of the technical provisions (see Note 15) are detailed below:

• Non-life insurance provisions:

i) Provision for unearned premiums: relates to the portion of the premiums received at year-end that is allocable to the period from the reporting date to the end of the policy cover period.

ii) Provision for unexpired risks: this supplements the provision for unearned premiums to the extent that the amount of the latter is not sufficient to reflect all the assessed risks and expenses to be covered by the insurance companies in the policy period not elapsed at the reporting date.

• Life insurance provisions: represent the value of the net obligations acquired vis-à-vis life insurance policyholders. These provisions include:

i) Provision for unearned premiums and unexpired risks: this relates to the portion of the premiums received at year-end that is allocable to the period from the reporting date to the end of the policy cover period.

ii) Mathematical provisions: these relate to the value of the insurance companies’ obligations, net of the policyholders’ obligations. These provisions are calculated on a policy-by-policy basis using an individual capitalization system, taking as a basis for the calculation the premium accrued in the year, and in accordance with the technical bases of each type of insurance updated, where appropriate, by the local mortality tables.

• Provision for claims outstanding: this reflects the total obligations outstanding arising from claims incurred prior to the reporting date. This provision is calculated as the difference between the total estimated or certain cost of the claims not yet reported, settled or paid and all the amounts already paid in relation to such claims.

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• Provision for bonuses and rebates: this provision includes the amount of the bonuses accruing to policyholders, insureds or beneficiaries and that of any premiums to be returned to policyholders or insureds, to the extent that such amounts have not been assigned at the reporting date. These amounts are calculated on the basis of the conditions of the related individual policies.

• Technical provisions for life insurance policies where the investment risk is borne by the policyholders: these provisions are calculated on the basis of the indices established as a reference to determine the economic value of the policyholders’ rights.

 k) Tangible assets

Tangible assets includes the amount of buildings, land, furniture, vehicles, computer hardware and other fixtures owned by the consolidated entities or acquired under finance leases. Tangible assets are classified by use as follows:

i. Property, plant and equipment for own use

Property, plant and equipment for own use -including tangible assets received by the consolidated entities in full or partial satisfaction of financial assets representing receivables from third parties which are intended to be held for continuing use and tangible assets acquired under finance leases- are presented at acquisition cost, less the related accumulated depreciation and any estimated impairment losses (carrying amount higher than recoverable amount).

Depreciation is calculated, using the straight-line method, on the basis of the acquisition cost of the assets less their residual value. The land on which the buildings and other structures stand has an indefinite life and, therefore, is not depreciated.

The period tangible asset depreciation charge is recognized in the consolidated income statement and is calculated using the following depreciation rates (based on the average years of estimated useful life of the various assets):

	Average 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.

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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.

iii. Assets leased out under an operating lease

Property, plant and equipment - Leased out under an operating lease reflects the amount of the tangible assets, other than land and buildings, leased out by the Group under an operating lease.

The criteria used to recognize the acquisition cost of assets leased out under operating leases, to calculate their depreciation and their respective estimated useful lives and to recognize the impairment losses thereon are consistent with those described in relation to property, plant and equipment for own use.

 l) Accounting for leases

i. Finance leases

Finance leases are leases that transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee.

When the consolidated entities act as the lessors of an asset, the sum of the present value of the lease payments receivable from the lessee, including the exercise price of the lessee’s purchase option at the end of the lease term when such exercise price is sufficiently below fair value at the option date such that it is reasonably certain that the option will be exercised, 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.

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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.

In accordance with 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 IAS 17, it was required to recognize the gain or loss on the sale.

 m) Intangible assets

Intangible assets are identifiable non-monetary assets (separable from other assets) without physical substance which arise as a result of a legal transaction or which are developed internally by the consolidated entities. Only assets whose cost can be estimated reliably and from which the consolidated entities consider it probable that future economic benefits will be generated are recognized.

Intangible assets are recognized initially at acquisition or production cost and are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses.

i. Goodwill

Any excess of the cost of the investments in the consolidated entities and entities accounted for using the equity method over the corresponding underlying carrying amounts acquired, adjusted at the date of first-time consolidation, is allocated as follows:

• If it is attributable to specific assets and liabilities of the companies acquired, by increasing the value of the assets (or reducing the value of the liabilities) whose fair values were higher (lower) than the carrying amounts at which they had been recognized in the acquired entities’ balance sheets.

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• 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 twelve 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).

Goodwill is only recognized when it has been acquired for consideration and represents, therefore, a payment made by the acquirer in anticipation of future economic benefits from assets of the acquired entity that are not capable of being individually identified and separately recognized.

At the end of each reporting period or whenever there is any indication of impairment goodwill is reviewed for impairment (i.e. a reduction in its recoverable amount to below its carrying amount) and, if there is any impairment, the goodwill is written down with a charge to Impairment losses on other assets (net) - Goodwill and other intangible assets in the consolidated income statement.

An impairment loss recognized for goodwill is not reversed in a subsequent period.

ii. Other intangible assets

Other intangible assets includes the amount of identifiable intangible assets (such as purchased customer lists and computer software).

Other intangible assets can have an indefinite useful life -when, based on an analysis of all the relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the consolidated entities- or a finite useful life, in all other cases.

Intangible assets with indefinite useful lives are not amortized, but rather at the end of each reporting period or whenever there is any indication of impairment the consolidated entities review the remaining useful lives of the assets in order to determine whether they continue to be indefinite and, if this is not the case, to take the appropriate steps.

Intangible assets with finite useful lives are amortized over those useful lives using methods similar to those used to depreciate tangible assets.

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 (net) 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.

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Expenditure on research activities is recognized as an expense in the year in which it is incurred and cannot be subsequently capitalized.

n) Other assets

Other assets in the consolidated balance sheet includes the amount of assets not recorded in other items, the breakdown being as follows:

• Inventories: this item includes the amount of assets, other than financial instruments, that are held for sale in the ordinary course of business, that are in the process of production, construction or development for such purpose, or that are to be consumed in the production process or in the provision of services. Inventories includes land and other property held for sale in the property development business.

Inventories are measured at the lower of cost and net realizable value, which is the estimated selling price of the inventories in the ordinary course of business, less the estimated costs of completion and the estimated costs required to make the sale.

Any write-downs of inventories -such as those due to damage, obsolescence or reduction of selling price- to net realizable value and other impairment losses are recognized as expenses for the year in which the impairment or loss occurs. Subsequent reversals are recognized in the consolidated income statement for the year in which they occur.

The carrying amount of inventories is derecognized and recognized as an expense in the period in which the revenue from their sale is recognized.

• Other: this item includes the balance of all prepayments and accrued income (excluding accrued interest, 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.

o) Provisions and contingent assets and liabilities

When preparing the financial statements of the consolidated entities, the Bank’s 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.

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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 (see Note 25):

• Provision 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.

• 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.

 p) Court proceedings and/or claims in process

In addition to the disclosures made in Note 1, at the end of 2012 certain court proceedings and claims were in process against the consolidated entities arising from the ordinary course of their operations (see Note 25).

q) Own equity instruments

Own equity instruments are those meeting both of the following conditions:

• The instruments do not include any contractual obligation for the issuer: (i) to deliver cash or another financial asset to a third party; or (ii) to exchange financial assets or financial liabilities with a third party under conditions that are potentially unfavorable to the issuer.

• The instruments will or may be settled in the issuer’s own equity instruments and are: (i) a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or (ii) a derivative that will be settled by the issuer through the exchange of a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.

Transactions involving own equity instruments, including their issuance and cancellation, are deducted directly from equity.

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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.

r) 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.

s) Recognition of income and expenses

The most significant criteria used by the Group to recognize its income and expenses are summarized as follows:

i. Interest income, interest expenses and similar items

Interest income, interest expenses and similar items are generally recognized on an accrual basis using the effective interest method. Dividends received from other companies are recognized as income when the consolidated entities’ right to receive them arises.

However, the recognition of accrued interest in the consolidated income statement is suspended for debt instruments individually classified as impaired and for the instruments for which impairment losses have been assessed collectively because they have payments more than three months past due. Any interest that may have been recognized in the consolidated income statement before the corresponding debt instruments were classified as impaired, and that had not been collected at the date of that classification, is considered when determining the allowance for loan losses; accordingly, if subsequently collected, this interest is recognized as a reversal of the related impairment losses. Interest whose recognition in the consolidated income statement has been suspended is accounted for as interest income, when collected, on a cash basis.

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.

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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.

t) Financial guarantees

Financial guarantees are defined as contracts whereby an entity undertakes to make specific payments on behalf of a third party if the latter fails to do so, irrespective of the various legal forms they may have, such as guarantees, insurance policies or credit derivatives.

The Group initially recognizes the financial guarantees provided on the liability side of the consolidated balance sheet at fair value, which is generally the present value of the fees, commissions and 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.

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u) Assets under management and investment and pension funds managed by the Group

Assets owned by third parties and managed by the consolidated entities are not presented on the face of the consolidated balance sheet. Management fees are included in Fee and commission income in the consolidated income statement. Note 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.

v) Post-employment benefits

Under the collective agreements currently in force and other arrangements, the Spanish banks included in the Group and certain other Spanish and foreign consolidated entities have undertaken to supplement the public social security system benefits accruing to certain employees, and to their beneficiary right holders, for retirement, permanent disability or death, the benefits and indemnity payments payable, the contributions to employee welfare systems for 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 - Provision for pensions and similar obligations on the liability side of the consolidated balance sheet.

Defined benefit plans

The Group recognizes under Provisions - Provision 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.

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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 arises from changes to existing post-employment benefits or from the introduction of new benefits and is recognized in the consolidated income statement.

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.

w) 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).

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x) Termination benefits

Termination benefits are recognized when there is a detailed formal plan identifying the basic changes to be made, provided that implementation of the plan has begun, its main features have been publicly announced or objective facts concerning its implementation have been disclosed.

 y) Income tax

The expense for Spanish corporation tax and other similar taxes applicable to the foreign consolidated entities is recognized in the consolidated income statement, except when it results from a transaction recognized directly in equity, in which case the tax effect is also recognized in equity.

The current income tax expense is calculated as the sum of the current tax resulting from application of the appropriate tax rate to the taxable profit for the year (net of any deductions allowable for tax purposes), and of the changes in deferred tax assets and liabilities recognized in the consolidated income statement.

Deferred tax assets and liabilities include temporary differences, which are identified as the amounts expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their related tax bases, and tax loss and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled.

Tax assets includes the amount of all tax assets, which are broken down into current -amounts of tax to be recovered within the next twelve months- and deferred -amounts of tax to be recovered in future years, including those arising from 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.

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.

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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 2012, 2011 and 2010 year-end is provided in Note 51.

aa) Consolidated statements of cash flows

The following terms are used in the consolidated statements of cash flows with the meanings specified:

• Cash flows: inflows and outflows of cash and cash equivalents, which are short-term, highly liquid investments that are subject to an insignificant risk of changes in value, irrespective of the portfolio in which they are classified.

The Group classifies as cash and cash equivalents the balances recognized under Cash and balances with central banks in the consolidated balance sheet.

• Operating activities: the principal revenue-producing activities of credit institutions and other activities that are not investing or financing activities.

• Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents.

• Financing activities: activities that result in changes in the size and composition of the equity and liabilities that are not operating activities.

ab) Consolidated statements 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”.

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.

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ac) Statements 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.

3. Santander Group

a) Banco Santander, S.A. and international Group structure

The growth of the Group in the last decade has led the Bank to also act, in practice, as a holding entity of the shares of the various companies in its Group, and its results are becoming progressively less representative of the performance and earnings of the Group. Therefore, each year the Bank determines the amount of the dividends to be distributed to its shareholders on the basis of the consolidated net profit, while maintaining the Group’s traditionally high level of capitalization and taking into account that the transactions of the Bank and of the rest of the Group are managed on a consolidated basis (notwithstanding the allocation to each company of the related net worth effect).

At international level, the various banks and other subsidiaries, jointly controlled entities and associates of the Group are integrated in a corporate structure comprising various holding companies which are the ultimate shareholders of the banks and subsidiaries abroad.

The purpose of this structure, all of which is controlled by the Bank, is to optimize the international organization from the strategic, economic, financial and tax standpoints, since it makes it possible to define the most appropriate units to be entrusted with acquiring, selling or holding stakes in other international entities, the most appropriate financing method for these transactions and the most appropriate means of remitting the profits obtained by the Group’s various operating units to Spain.

The Appendices provide relevant data on the consolidated Group companies and on the companies accounted for using the equity method.

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b) Acquisitions and disposals

Following is a summary of the main acquisitions and disposals of ownership interests in the share capital of other entities and other significant corporate transactions performed by the Group in the last three years:

i. Acquisition of 75% of AIG Bank Polska Spólka Akcyina

On June 8, 2010, Santander Consumer Bank Spólka Akcyjna 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 Spólka Akcyina, representing 99.92% of its share capital. The capital 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.

ii. Sale of 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 GBP 39 million.

iii. 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, which was 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) in the consolidated income statement for 2010.

iv. 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. Shareholders owning 7.8% of the shares accepted the offer and, therefore, following the transaction Ablasa held 98.4% of the total share capital of Santander BanCorp.

Ablasa acquired the remaining shares through a short form merger performed in Puerto Rico on July 29, 2010, 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 transaction totaled approximately USD 56 million (EUR 44 million), which gave rise to a decrease of EUR 45 million in Non-controlling interests and an increase of EUR 1 million in Reserves.

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.

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v. Agreement with Skandinaviska Enskilda Banken (SEB Group) for the acquisition of its commercial banking business in Germany

On July 12, 2010, Santander Group announced the agreement with Skandinaviska Enskilda Banken (SEB Group) for the purchase by the German subsidiary Santander Consumer Bank AG of the SEB Group’s commercial banking business in Germany. As a result of the acquisition of this business, which comprises 173 branches and provides services to a million customers, the number of Santander Consumer Bank branches in Germany almost doubled and the Group’s headcount increased by approximately 2,200. The transaction was completed on January 31, 2011, after receiving the relevant regulatory approval, amounting to EUR 494 million.

The detail of the fair values of the identifiable assets acquired and liabilities assumed at the acquisition date, the cost of the investment and the goodwill is as follows:

	Millions of euros
Cash and balances with central banks		61
Loans and receivables - loans and advances to customers (*)		8,202
Tangible assets		8
Other assets		82
Total assets		8,353
Deposits from credit institutions		710
Customer deposits		4,486
Marketable debt securities and Other financial liabilities		2,467
Provisions (**)		299
Other liabilities		42
Total liabilities		8,004
Net asset value		349
Non-controlling interests		—
Cost of investment		(494	)
Goodwill at February 1, 2011 (***)		145

(*) Of which approximately 83% relate to mortgage loans and the remainder to consumer loans. EUR 126 million of additional impairment losses were considered in estimating the fair value of the loans acquired.

(**) Of which approximately EUR 66 million relate to provisions for pensions and EUR 103 million to other provisions.

(***) Belongs to the Santander Consumer Holding cash-generating unit.

The acquired business contributed a loss of EUR 58 million to pre-tax profit for 2011.

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vi. Acquisition of Bank Zachodni WBK, S.A.

On February 7, 2011, the Group announced the preparation in Poland of a takeover bid for all the shares of the Polish company Bank Zachodni WBK, S.A. (“BZ WBK”), which Allied Irish Bank (“AIB”), owner of 70.36% of BZ WBK, was obliged to accept, by virtue of the agreement entered into with Banco Santander in September 2010.

On February 18, 2011, notification of non-opposition to the Group’s acquisition of a significant holding was received from the financial regulator in Poland -KNF.

On April 1, 2011, the Group acquired 69,912,653 shares of Bank Zachodni WBK, S.A. representing 95.67% of the capital of this entity. The purchase of the aforementioned shares gave rise to a disbursement of EUR 3,987 million. Also, as had already been announced, on the same date Santander acquired the 50% ownership interest held by AIB in Bank Zachodni WBK Asset Management, S.A. for EUR 174 million in cash. Subsequently, based on the terms and conditions of the takeover bid, certain non-controlling shareholders of BZ WBK opted to sell their shares. As a result, the Group acquired 421,859 additional shares for EUR 24 million.

Following is the detail of the fair values of the identifiable assets acquired and liabilities assumed at the acquisition date, the cost of the investment and the goodwill translated to euros at the exchange rate at the date of acquisition:

	Millions of euros
Cash and balances with central banks		316
Loans and advances to credit institutions		386
Financial assets held for trading		691
Available-for-sale financial assets		3,422
Loans and receivables - loans and advances to customers (*)		8,346
Tangible assets		113
Intangible assets (**)		94
Other assets		226
Total assets		13,594
Customer deposits (***)		10,288
Deposits from credit institutions		797
Provisions		46
Other liabilities		464
Total liabilities		11,595
Net asset value		1,999
Non-controlling interests		(75	)
Cost of investment		(4,185	)
Goodwill at April 1, 2011		2,261

(*) EUR 15 million of additional impairment losses were considered in estimating the fair value of the loans and receivables.

(**) The estimate identified a customer list amounting to approximately EUR 54 million.

(***) In the estimate customer deposits were reduced by approximately EUR 178 million.

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At December 31, 2011, the Group held a total of 70,334,512 shares of Bank Zachodni WBK, S.A. (96.25%).

In 2011 Bank Zachodni WBK, S.A. contributed EUR 207 million to the profit of the Group. Had the acquisition taken place on January 1, 2011, the profit contributed to the Group would have been approximately EUR 276 million.

In August 2012, Bank Zachodni WBK S.A. performed a capital increase amounting to PLN 332 million (EUR 81 million) which was not subscribed by the Group, giving rise to a reduction of EUR 12 million in Reserves and EUR 5 million in Valuation adjustments, and to an increase of EUR 93 million in Non-controlling interests, considering the Group’s effective ownership interest in the entity. Following the aforementioned transaction, the Group holds 94.23% of the entity’s share capital.

vii. Acquisition of Santander Banif Inmobiliario

On December 3, 2010, for purely commercial reasons, the Group decided to contribute resources to the Santander Banif Inmobiliario, F.I.I. 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 unitholders and to avoid winding up the Fund. The Group offered the unitholders 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 this Fund, which is managed by the 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, which were in excess of 10% of net assets.

On March 1, 2011, the Group paid the full amount of the redemptions requested by the Fund’s unitholders, i.e. EUR 2,326 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.

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Since the Group already had a non-controlling interest in the Fund, following the aforementioned acquisition the Group owned 95.54% of the Fund. Furthermore, the suspension of redemptions was lifted from said date and the Fund is operating normally.

The detail of the fair values of the identifiable assets acquired and liabilities assumed at the acquisition date, the cost of the investment and the goodwill is as follows:

	Millions of euros
Cash and balances with central banks and loans and advances to credit institutions		69
Loans and receivables		10
Tangible assets		2,756
Other assets		9
Total assets		2,844
Customer deposits		81
Deposits from credit institutions		245
Other liabilities		17
Total liabilities		343
Net asset value		2,501
Non-controlling interests		(112	)
Cost of investment		(2,389	)
Goodwill at March 1, 2011		—

At December 31, 2011, Santander Banif Inmobiliario F.I.I. had contributed a pre-tax loss of EUR 106 million to the Group.

In 2012 the Group had acquired Fund units amounting to EUR 22 million and, accordingly, its ownership interest rose to 97.63%.

viii. Chile

In 2011 the Group performed various sales of shares representing 9.72% of the share capital of Banco Santander Chile for a total of USD 1,241 million, which gave rise to increases of EUR 434 million in Group reserves and EUR 373 million in non-controlling interests. Following these transactions, the Group holds 67% of the share capital of Banco Santander Chile and it has undertaken not to reduce its percentage of ownership for one year.

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ix. Latin American insurance companies

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.

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

Following this transaction Santander retained 49% of the share capital of the holding company and entered into a distribution agreement for the sale of insurance products in each of the signatory countries for 25 years (see Note 13).

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

x. SCUSA

In December 2011 Santander Consumer USA Inc. (SCUSA) increased capital by USD 1,158 million, of which USD 1,000 million were paid by Sponsor Auto Finance Holdings Series LP (Auto Finance Holdings), an investee of funds controlled by Warburg Pincus LLC, Kohlberg Kravis Roberts & Co. L.P. and Centerbridge Partners L.P., and the remainder by DDFS LLC (DDFS), a company controlled by Thomas G. Dundon, the managing director of SCUSA. Following this capital increase, Auto Finance Holdings and Thomas G. Dundon (indirectly) held equity interests of approximately 24% and 11%, respectively, in SCUSA, while the Group’s equity interest therein is 65%.

Also, the Group entered into an agreement with these shareholders which, inter alia, grants Auto Finance Holdings and DDFS representation on the board of directors of SCUSA and establishes a voting system whereby strategic, financial and operating decisions, as well as other significant decisions associated with the ordinary management of SCUSA, are subject to joint approval by Santander Group and the aforementioned shareholders and, accordingly, SCUSA became controlled jointly by all the shareholders.

Also as provided for in the shareholders’ agreement, if SCUSA’s earnings for 2014 and 2015 exceed certain targets, SCUSA may be required to pay up to USD 595 million to Santander Holdings USA, Inc. (SHUSA). If SCUSA’s earnings do not surpass those targets in 2014 and 2015, SCUSA may be obliged to make a payment of up to that same amount to Auto Finance Holdings. The Bank’s directors considered that SCUSA would achieve the targets set for 2014 and 2015 and that it would therefore not have to make any significant payments to either of the aforementioned shareholders under the agreement.

Lastly, the shareholders’ agreement establishes that both Auto Finance Holdings and DDFS will be entitled to sell to SHUSA their ownership interests in the share capital of SCUSA at market value on the fourth, fifth and seventh anniversaries of completion of the transaction, unless a public offering of SCUSA shares has taken place prior to those dates. The agreement also provides for this same entitlement in the event of a situation of impasse in relation to any of the matters subject to joint approval by the general meeting or the board of directors of SCUSA.

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Following this transaction the Group holds a 65% ownership interest in SCUSA and controls this company jointly with the aforementioned shareholders (see Note 13).

As a result of the aforementioned transaction, in 2011 the Group recognized a gain of EUR 872 million under Gains (losses) on disposal of assets not classified as non-current assets held for sale (see Note 49), of which EUR 649 million related to the measurement at fair value of the 65% ownership interest retained in this company. The fair value of SCUSA was determined using comparable market data, recent transactions and discounted cash flow analyses, taking into account contingent payments.

xi. Banco Santander (Brasil), S.A.

In the third quarter of 2010 the Group sold 2.616% of Santander Brasil’s share capital. 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.

In January and March 2012 the Group transferred shares representing 4.41% and 0.77% of Banco Santander (Brasil) S.A. to two leading international financial institutions that have undertaken to deliver these shares to the holders of the bonds convertible into shares of Banco Santander (Brasil) S.A. issued by Banco Santander in October 2010 upon the maturity of the bonds and under the terms laid down therein. This transaction did not give rise to changes in the Group’s equity (see Note 34).

xii. Colombia

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

Following the obtainment of the regulatory authorizations from the competent authorities and the delisting of the shares of Banco Santander Colombia S.A., in the second quarter of 2012 the Group sold its shareholding in Banco Santander Colombia S.A. and its other business subsidiaries in this country to the Corpbanca Group for a total of USD 1,229 million (EUR 983 million), giving rise to a gain of EUR 619 million which was recognized by the Group under Gains/(losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement (see Note 49).

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

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 México, S.A. B. de C.V. for USD 2,500 million. The transaction, which was completed in the third quarter of 2010, gave rise to a decrease in the balances of Non-controlling interests and Reserves of EUR 1,177 million and EUR 843 million, respectively. Following the transaction, Santander’s ownership interest in Grupo Financiero Santander México S.A. B. de C.V. stood at 99.9%.

In August 2012 the Group announced its intention to file prospectuses with the Mexican National Banking and Securities Commission (CNBV) and the US Securities and Exchange Commission for the placement of shares of the subsidiary Grupo Financiero Santander México, S.A. B. de C.V. in the secondary market.

The public offering for 1,469,402,029 series B shares of Grupo Financiero Santander México, S.A. B. de C.V. was completed on September 26, 2012. The transaction was made up of a Mexican tranche, consisting of shares, and an international tranche, including the United States, consisting of American Depositary Shares (ADSs) representing five shares each.

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The share placement was priced at MXN 31.25 (USD 2.437) per share.

Also, the underwriters involved in the offering were granted an option, exercisable before October 25, to purchase an additional 220,410,304 shares.

Once the offering as a whole had been completed and the underwriters had exercised their options, the percentage sold was 24.9%, which gave rise to increases of EUR 1,092 million in Reserves, EUR 1,493 million in Non-controlling interests and EUR 263 million in Valuation adjustments - Exchange differences.

xiv. Metrovacesa, S.A.

On March 17, 2011, the creditor entities that had been party to an agreement to restructure the Sanahuja Group’s debt in 2009, whereby they received Metrovacesa, S.A. shares as a dation in payment for the group’s debts, entered into a new capitalization and voting agreement relating to Metrovacesa, subject to certain conditions precedent, including the performance by Metrovacesa of a capital increase through monetary contributions and the conversion of debt into capital, whereby the creditor entities taken as a whole would convert approximately EUR 1,360 million of Metrovacesa’s financial debt into capital, of which EUR 492 million would relate to the Group.

On June 28, 2011, the shareholders at the annual general meeting of Metrovacesa resolved to approve the aforementioned capital increase, subject to certain conditions precedent such as the Spanish National Securities Market Commission (CNMV) releasing the Group from the obligation to launch a takeover bid for all of the share capital, since the transaction might raise the Group’s holding in the share capital of Metrovacesa above 30%. This release was granted on July 6, 2011.

Following the performance of the aforementioned capital increase, the Group became the owner of 34.88% of the shares of Metrovacesa, S.A. This ownership interest is recognized under Investments in the consolidated balance sheet and is accounted for using the equity method (see Note 13).

On December 19, 2012, the creditor entities that took part in the aforementioned debt restructuring agreement announced that they had reached an agreement to promote the delisting of the shares of Metrovacesa, S.A. and to vote in favor of this at the general meeting to be held for this purpose. Subject to the approval of the delisting and public takeover offer by the shareholders at Metrovacesa’s general meeting, the offerors will prepare a delisting public takeover offer, at a price of EUR 2.28 per share, aimed at the Metrovacesa shareholders that did not enter into the agreement. The Group’s share of the delisting public takeover offer will be 45.56% and, as a result, if the public takeover offer were accepted in full, the Group would acquire an additional 2.007% of Metrovacesa for which it would pay EUR 45 million.

xv. Merger of Bank Zachodni WBK and Kredyt Bank in Poland

On February 28, 2012 the Group announced that Banco Santander, S.A. and KBC Bank NV had entered into an investment agreement to merge their two subsidiaries in Poland, Bank Zachodni WBK and Kredyt Bank, and the merger took place in the first few days of 2013 following the obtainment of the related authorization from the Polish financial supervisory authorities (KNF). The entity resulting from the merger will reinforce its position as the third-largest bank in Poland in terms of deposits, loans, branches and profit.

Following the transaction, the Group will control approximately 75.2% of the resulting entity and KBC Bank NV will control approximately 16.2%, with the remaining 8.6% being owned by non-controlling interests. However, the Group has undertaken to assist KBC Bank NV to reduce its shareholding in the merged company to less than 10% immediately after the merger.

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xvi. Agreement to purchase Royal Bank of Scotland branch offices

In August 2010 Santander UK plc announced that it had entered into an agreement to acquire the portion of the banking business carried on by Royal Bank of Scotland (RBS) through its branches in England and Wales and the NatWest network in Scotland, as well as certain SME and corporate banking centers.

On October 12, 2012, the Group announced that the agreement had become null and void due to the foreseeable breach of the terms and conditions thereof by the agreed deadline (February 2013).

xvii. Merger by absorption of Banesto and Banco Banif

a) Common draft terms of merger between Banco Santander and Banesto

On December 17, 2012, the Bank announced that it had resolved to approve the plan for the merger by absorption of Banesto as part of the restructuring of the Spanish financial sector. After the end of the reporting period, at their respective board of directors meetings held on January 9, 2013, the directors of the Bank and Banco Español de Crédito, S.A. (Banesto) approved the common draft terms of the merger by absorption of Banesto into the Bank with the dissolution without liquidation of the former and the transfer en bloc of all its assets and liabilities to the Bank, which will acquire, by universal succession, the rights and obligations of the absorbed entity. As a result of the merger, the shareholders of Banesto, other than those forming part of the Group, will receive in exchange shares of the Bank.

• Merger exchange ratio

The ratio at which shares of Banesto will be exchanged for shares of the Bank, which was determined based on the fair value of their assets and liabilities, will be 0.633 shares of the Bank, of EUR 0.5 par value each, for each share of Banesto, of EUR 0.79 par value each, without provision for any additional cash payment.

This exchange ratio was agreed to and calculated based on the methodologies that will be set forth and supported in the report that the boards of directors of the Bank and Banesto will prepare pursuant to Article 33 of the Law on structural changes to companies formed under the Spanish Commercial Code.

The shares of both the Bank and Banesto are listed on the official stock markets. Therefore, in order to determine the fair value of the assets and liabilities of the two companies, the directors of the Bank and Banesto considered, among other valuation methods, the market price of the shares of both companies at the close of trading on December 14, 2012 (the trading day immediately preceding the announcement of the transaction). Considering that the market price of the shares of Banco Santander at the close of trading on December 14, 2012 was EUR 5.90 per share, the exchange ratio agreed upon would value the shares of Banesto at EUR 3.73 per share. Since Banesto’s shares were quoted at EUR 2.99 per share on December 14, 2012, the proposed exchange ratio represented a premium of 25% at that date.

In determining the exchange ratio, with the aforementioned premium over the market price on December 14, 2012, the Bank and Banesto took the following matters, among others, into account:

• The synergies to be achieved with the merger of the two companies.

• The fact that Banesto’s shareholders will not be able to receive the remuneration that the Bank’s shareholders will receive under the Santander Dividendo Elección programme in January/February and April/May 2013, in either cash or shares of Banco Santander, since the merger will foreseeably be completed in May. Banesto will not foreseeably distribute any dividend.

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However, the proposed exchange ratio will be subject to verification by an independent expert appointed by the Mercantile Registry of Santander in accordance with Article 34 of the Law on structural changes to companies formed under the Spanish Commercial Code.

The Bank will exchange the Banesto shares for treasury shares and, accordingly, the Bank’s share capital will not be increased for this purpose. In any case, pursuant to Article 26 of the Law on structural changes to companies formed under the Spanish Commercial Code, neither the Banesto shares owned by Santander Group nor Banesto’s treasury shares will be exchanged. These shares will be retired. At December 31, 2012, Banesto held 4,982,936 treasury shares, representing 0.7249% of its share capital, through its subsidiary Dudebasa, S.A.

Once the merger has been approved by the shareholders at the general meetings of the Bank and Banesto, the equivalent documentation referred to in Article 40.1 c) and related provisions of Royal Decree 1310/2005, of November 4, has been filed with the Spanish National Securities Market Commission (CNMV), the conditions precedent have been met and the merger deed has been registered at the Mercantile Registry of Santander, the shares of Banesto will be exchanged for shares of the Bank.

The exchange will take place from the date indicated in the notices to be published in one of the highest-circulation daily newspapers in the autonomous communities of Cantabria and Madrid, in the Official Gazettes of the Spanish Stock Exchanges, and in the Official Gazette of the Mercantile Registry. For such purpose, the Bank will act as agent, and this will be indicated in the above-mentioned notices. The shares of Banesto will be retired as a result of the merger.

• Effective date of the merger for accounting purposes

Pursuant to the Spanish National Chart of Accounts approved by Royal Decree 1514/2007, of November 16, January 1, 2013 was established as the date from which the transactions of Banesto would be considered to have been performed for accounting purposes for the account of the Bank.

• Merger balance sheets, financial statements and measurement of the assets and liabilities of Banesto to be transferred

For the purposes of Article 36.1 of the Law on structural changes to companies formed under the Spanish Commercial Code, the balance sheets of the Bank and Banesto at December 31, 2012 were taken to be the merger balance sheets.

The merger balance sheets of the Bank and Banesto, duly verified by their auditors, will be submitted for approval by the shareholders at the general meetings of each of the companies that must decide on the merger, prior to the adoption of the merger resolution itself.

As a result of the merger, Banesto will be dissolved without liquidation, and its assets and liabilities will be transferred en bloc to the Bank.

• Tax regime

The merger was performed under the tax regime provided for in Chapter VIII, Title VII and Additional Provision Two.3 of Legislative Royal Decree 4/2004, of March 5, approving the Consolidated Spanish Corporation Tax Law, and in Article 45, paragraph I. B.) 10. of Legislative Royal Decree 1/1993, of September 24, approving the Consolidated Spanish Transfer Tax Law.

The tax authorities will be notified of the use of this tax regime within three months from the registration of the merger deed, in the terms established by the relevant regulations.

• Conditions precedent

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The effectiveness of the merger is subject to the following conditions precedent:

i). The authorization of the Minister of Economy and Competitiveness for the absorption of Banesto by the Bank, pursuant to Article 45.c) of the Bank Law of December 31, 1946.

ii). The obtainment of the other authorizations that, by reason of the business activities of Banesto or its subsidiaries, must be obtained from the Bank of Spain, the CNMV or any other administrative or supervisory body.

Finally, pursuant to Article 30.3 of the Law on structural changes to companies formed under the Spanish Commercial Code, the merger plan will be subject to the approval of the shareholders at the general meetings of the Bank and Banesto within the six months following the date of the draft terms of merger. The general meetings to which the merger will foreseeably be submitted will be the respective annual general meetings in March 2013.

b) Common draft terms of merger between Banco Santander and Banco Banif

On December 17, 2012, the directors of Banco Santander, S.A. announced that they had resolved to approve the proposal for the merger by absorption of Banco Banif, S.A. as part of the restructuring of the Spanish financial sector.

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

• Effective date of the merger for accounting purposes

Pursuant to the Spanish National Chart of Accounts approved by Royal Decree 1514/2007, of November 16, January 1, 2013 was established as the date from which the transactions of Banco Banif, S.A. would be considered to have been performed for accounting purposes for the account of Banco Santander.

• Merger balance sheets

For the purposes of Article 36.1 of the Law on structural changes to companies formed under the Spanish Commercial Code, the balance sheets of Banco Santander and Banco Banif, S.A. at December 31, 2012 will be taken to be the merger balance sheets.

The merger balance sheet of Banco Santander, S.A., duly verified by its auditors, will be submitted for approval by the shareholders at the general meetings that must decide on the merger, prior to the adoption of the merger resolution itself. Also, the sole shareholder of Banco Banif, S.A. will approve its financial statements for 2012 and, therefore, the balance sheet that will serve as the merger balance sheet of Banco Banif, S.A.

As a result of the merger, Banco Banif, S.A. will be dissolved without liquidation, and its assets and liabilities will be transferred en bloc to Santander.

• Tax regime

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The merger will be performed under the tax regime provided for in Chapter VIII, Title VII and Additional Provision Two.3 of Legislative Royal Decree 4/2004, of March 5, approving the Consolidated Spanish Corporation Tax Law, and in Article 45, paragraph I. B.) 10. of Legislative Royal Decree 1/1993, of September 24, approving the Consolidated Spanish Transfer Tax Law.

The tax authorities will be notified of the use of this tax regime within three months from the registration of the merger deed, in the terms established by the relevant regulations.

• Condition precedent

The effectiveness of the merger is subject to the condition precedent of authorization by the Minister of Economy and Competitiveness of the absorption of Banco Banif, S.A. by Banco Santander, S.A., pursuant to Article 45.c) of the Bank Law of December 31, 1946.

Finally, pursuant to Article 30.3 of the Law on structural changes to companies formed under the Spanish Commercial Code, the merger plan will be subject to approval by the shareholders at the general meeting of Banco Santander, S.A. within the six months following the date of the drafts terms of merger. The general meeting to which the merger will foreseeably be submitted will be the annual general meeting in March 2013. Since Banco Banif, S.A. is a wholly-owned subsidiary of Banco Santander, S.A., and in accordance with Article 49 of the Law on structural changes to companies formed under the Spanish Commercial Code, the merger does not need to be approved by the sole shareholder at its general meeting.

xviii. Insurance business in Spain

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

The transaction is subject to the obtainment of the relevant authorizations from the Directorate-General of Insurance and Pension Funds and the European competition authorities and, therefore, it is scheduled to be completed by the first half of 2013.

*  *  *  *  *

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.

c) Off-shore entities

The Group currently has 13 subsidiaries resident in off-shore territories which are not considered tax havens according to the list published by the OECD.

The liquidation of a further 5 subsidiaries, all of which are scantly active or inactive, is expected to commence in 2013.

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Following the above-mentioned planned disposals, the Group will have a total of 8 off-shore subsidiaries. These entities have 156 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:

• Abbey National International Limited in Jersey, which engages in remote banking for British customers not resident in the UK, who are offered traditional savings products.

• Alliance & Leicester International Limited, a bank located in the Isle of Man, which focuses on attracting funds through savings accounts and deposits.

ii. Scantly active or inactive or subsidiaries:

• Serfin International Bank and Trust, Limited (Cayman Islands), an inactive bank.

• Whitewick Limited (Jersey), an inactive company.

iii. Issuing companies:

The Group has four issuing companies located in the following jurisdictions:

Issuers of preference shares:

• Totta & Açores Financing, Limited (Cayman Islands)

Issuers of debt:

• Santander Central Hispano Financial Services, Ltd. (Cayman Islands)

• Santander Central Hispano International, Ltd. (Cayman Islands)

• Santander Central Hispano Issuances, Ltd. (Cayman Islands)

The preference share and subordinated debt issues launched by the aforementioned issuers were authorized by the Bank of Spain or the Bank of Portugal as computable for eligible capital calculation purposes. Once the issues launched by these issuers have been redeemed, these entities will be liquidated.

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 2012.

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Also, the Group has 5 branches: 3 in the Cayman Islands, 1 in the Isle of Man and 1 in Jersey. These branches report to, and consolidate their balance sheets and income statements with, their respective parents.

Spain will foreseeably enter into information exchange agreements with the Cayman Islands, the Isle of Man, Jersey and Guernsey and, accordingly, these territories would cease to be tax havens under Spanish law and, consequently, the Group would no longer have any entities in off-shore territories. It should be noted that, according to the list published by the OECD, none of these jurisdictions is considered a tax haven.

Also, the Group controls from Brazil a securitization company called Brazil Foreign Diversified Payment Rights Finance Company and a segregated portfolio company called Santander Brazil Global Investment Fund SPC in the Cayman Islands, and 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, Olivant Limited in Guernsey and JC Flowers in the Cayman Islands.

Singapore and Hong Kong, in which the Group has 1 subsidiary and 2 branches, will no longer be considered off-shore centers from January and April 2013, respectively, following the application of the provisions contained in the international double taxation conventions signed with Spain in 2011.

The Group has 4 subsidiaries domiciled in off-shore territories that are not considered to be off-shore entities since they are resident for tax purposes in, and operate exclusively from, the UK.

*        *        *         *        *

The Group 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.

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4. Distribution of the Bank’s profit, Shareholder remuneration scheme and Earnings per share

 a) Distribution of the Bank’s profit and Shareholder remuneration scheme

The distribution of the Bank’s net profit for 2012 that the board of directors will propose for approval by the shareholders at the annual general meeting is as follows:

	Millions of euros
Acquisition, with a waiver of exercise, of bonus share rights from the shareholders which, under the Santander Dividendo Elección programme, opted to receive in cash remuneration equivalent to the first, second and third interim dividend -EUR 864 million- and from the shareholders which are expected to opt to receive in cash remuneration equivalent to the final dividend (EUR 209 million):		1,073
Of which:
Distributed at December 31, 2012 (*)		650
Third interim dividend Final dividend for 2012 (**)		214 209
To voluntary reserves		282
Net profit for the year		1,355

(*) Recognized under Shareholders’ equity - Dividends and remuneration.

(**) If the amount used to acquire rights from shareholders which opt to receive in cash remuneration equivalent to the final dividend is less than the amount indicated, the difference will be automatically allocated to increase voluntary reserves. Otherwise, the difference will reduce the amount allocated to increase voluntary reserves.

In addition to the EUR 1,073 million indicated above, EUR 3,684 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 March 30, 2012, whereby the Bank offered shareholders the possibility to opt to receive an amount equivalent to the first, second and third interim dividends out of 2012 profit in cash or new shares.

Similarly, under the framework of the shareholder remuneration scheme (Santander Dividendo Elección) the implementation of which will be submitted for approval by shareholders at the annual general meeting, the Bank will offer the possibility of opting to receive an amount equal to the final dividend for 2012 in cash or new shares. The Bank’s directors consider that 86.4% of shareholders will request remuneration in shares and, therefore, it is anticipated that the shareholders will be paid approximately EUR 1,329 million in shares.

F-75

The provisional accounting statements prepared by the Bank pursuant to legal requirements evidencing the existence of sufficient funds for the distribution of interim dividends on the dates on which the Santander Dividendo Elección programme was implemented were as follows:

	Millions of euros
	05/31/12		09/30/12			12/31/12			12/31/12
	First		Second			Third (*)			Fourth (*)
Profit after tax		454		1,033			1,355			1,355
Dividends paid		—		(401	)		(650	)		(650	)
		454		632			705			705
Amount relating to the acquisition, with a waiver of exercise, of bonus share rights from shareholders under the Santander Dividendo Elección programme		401		249			214			209	(**)
Cumulative amount		401		650			864			1,073
Date of payment		1-08-12		1-11-12			1-02-13			1-05-13

(*) Dividends not paid at December 31, 2012.

(**) Calculated on the basis of an 86.4% acceptance rate

The board of directors will propose to the shareholders at the annual general meeting that remuneration of approximately EUR 0.60 per share be paid for 2012.

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b) Earnings per share from continuing and discontinued operations

i. Basic earnings per share

Basic earnings per share are calculated by dividing the net profit attributable to the Group by the weighted average number of ordinary shares outstanding during the year, excluding the average number of treasury shares held in the year.

Accordingly:

	12/31/12			12/31/11			12/31/10
Profit attributable to the Group (millions of euros)		2,205			5,351			8,181
Profit (Loss) from discontinued operations (net of non-controlling interests) (millions of euros)		7			24			27
Profit from continuing operations (net of non-controlling interests) (millions of euros)		2,212			5,375			8,208
Weighted average number of shares outstanding		9,451,734,994			8,408,973,592			8,210,983,846
Assumed conversion of convertible debt		314,953,901			483,059,180			475,538,339
Adjusted number of shares		9,766,688,895			8,892,032,772			8,686,522,185
Basic earnings per share (euros)		0.23			0.60			0.94
Basic earnings per share from discontinued operations (euros)		(0.00	)		(0.00	)		(0.00	)
Basic earnings per share from continuing operations (euros)		0.23			0.60			0.94

F-77

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).

Accordingly, diluted earnings per share were determined as follows:

	12/31/12			12/31/11			12/31/10
Profit attributable to the Group (millions of euros)		2,205			5,351			8,181
Profit (Loss) from discontinued operations (net of non-controlling interests) (millions of euros)		7			24			27
Profit from continuing operations (net of non-controlling interests) (millions of euros)		2,212			5,375			8,208
Dilutive effect of changes in profit for the year arising from potential conversion of ordinary shares		—			—			—
Weighted average number of shares outstanding		9,451,734,994			8,408,973,592			8,210,983,846
Assumed conversion of convertible debt		314,953,901			483,059,180			475,538,339
Dilutive effect of options/rights on shares		66,057,677			64,715,094			57,607,691
Adjusted number of shares		9,832,746,572			8,956,747,866			8,744,129,876
Diluted earnings per share (euros)		0.22			0.60			0.94
Diluted earnings per share from discontinued operations (euros)		(0.00	)		(0.00	)		(0.00	)
Diluted earnings per share from continuing operations (euros)		0.22			0.60			0.94

5. Remuneration and other benefits paid to the Bank’s directors and senior managers

a) Remuneration of directors

i. Bylaw-stipulated emoluments

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.

The amount set by the board of directors for 2012, calculated pursuant to the aforementioned Article 58 of the Bylaws, was 0.321% of the Bank’s profit for 2012 (2011: 0.275% in like-for-like terms).

At the proposal of the appointments and remuneration committee, the directors at the board meeting held on December 17, 2012 resolved to reduce the annual emolument for 2012 by 15% with respect to the amounts paid out of the profits for 2011.

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Hence, the amounts received individually by each board member in 2012 and 2011 based on the positions held by them on the board and their membership of the board committees were as follows:

	Euros
	2012		2011
Members of the board of directors		84,954		99,946
Members of the executive committee		170,383		200,451
Members of the audit and compliance committee		39,551		46,530
Members of the appointments and remuneration committee		23,730		27,918
First and fourth deputy chairmen		28,477		33,502

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 2012 as in 2011. 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

The fixed salary remuneration of the executive directors for 2012 and 2011 approved by the board at the proposal of the appointments and remuneration committee was as follows:

	Thousands of euros
	2012		2011
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		1,344		1,344
Mr Alfredo Sáenz Abad		3,703		3,703
Mr Matías Rodríguez Inciarte		1,710		1,710
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)		2,100		1,962
Mr Francisco Luzón López (**)		108		1,656
Mr Juan Rodríguez Inciarte		987		987
Total		9,952		11,362

(*) On December 20, 2010, the board approved the fixed remuneration for Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea to reflect the assumption of her new responsibilities as chief executive officer of Santander UK. Her fixed remuneration was established at EUR 2 million which, at the exchange rate published by the Bank of Spain on the preceding business day, amounts to GBP 1,702 thousand. There was no change to that remuneration in 2012. The amounts shown in the above table are the equivalent values calculated by applying the average exchange rates in those years to the fixed remuneration in pounds sterling.

(**) Retired from the board on January 23, 2012.

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The maximum variable remuneration of the executive directors for 2012 and 2011 approved by the board at the proposal of the appointments and remuneration committee was as follows:

	Thousands of euros
	2012		2011
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		1,412		2,825
Mr Alfredo Sáenz Abad		3,510		7,019
Mr Matías Rodríguez Inciarte		2,669		3,568
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)		2,247		2,667
Mr Francisco Luzón López		—		3,717
Mr Juan Rodríguez Inciarte		1,557		2,082
Total		11,395		21,879

(*) Equivalent euro value of the original amount in pounds sterling.

The amounts shown in the foregoing table reflect the maximum total variable remuneration allocated to the executive directors for each year. These amounts include both the cash-based and share-based variable remuneration (according to the plans agreed in each year) and both the remuneration payable immediately and that which, as the case may be, is payable following a deferral period.

In recent years the Group has adapted its remuneration policy to the new requirements and best practices, increasing the variable remuneration to be deferred and paid in shares, rather than in cash. The following table shows a breakdown of the variable remuneration:

	Thousands of euros
	2012				2011
	Immediate payment		Deferred payment		Immediate payment		Deferred payment
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		564		848		1,130		1,695
Mr Alfredo Sáenz Abad		1,404		2,106		2,808		4,212
Mr Matías Rodríguez Inciarte		1,068		1,602		1,427		2,141
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)		898		1,348		1,067		1,600
Mr Francisco Luzón López		—		—		1,487		2,230
Mr Juan Rodríguez Inciarte		622		934		833		1,249
Total		4,556		6,838		8,752		13,127

(*) Equivalent euro value of the original amount in pounds sterling.

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The first cycle of the deferred conditional variable remuneration plan was approved in 2011, whereby payment of a portion of the variable remuneration for 2011 amounting to EUR 13,127 thousand is deferred over three years for it to be paid, where appropriate, in three equal portions, 50% in cash and 50% in Santander shares, provided that the conditions for entitlement to the remuneration are met. Similarly, the portion of the variable remuneration that is not deferred (immediate payment) was paid 50% in cash and 50% in shares. The second cycle of the deferred conditional variable remuneration plan was approved in 2012 under the same payment terms as the previous plan.

The amounts relating to the variable share-based remuneration reflect the equivalent value, at the agreement date, of the maximum number of shares (886,510 shares) that may be received by the directors for their participation in the various plans. The number of shares that each director will actually receive on expiry of each plan will depend on the director’s compliance with the conditions for entitlement thereto (see Note 5.e).

iii. Detail by director

The detail, by Bank director, of the foregoing remuneration for 2012 is provided below. The salaries of the executive directors disclosed in the table below relate to the maximum amounts approved by the board of directors as period remuneration, regardless of the actual year of payment and of any amounts paid to the directors under the agreed deferred remuneration scheme. Note 5.e) below includes disclosures on the shares delivered by virtue of the deferred remuneration schemes in place in previous years the conditions for delivery of which were met in the related years.

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	Thousands of euros
	2012																												2011
	Bylaw-stipulated emoluments
	Annual emolument								Attendance fees
													Salaries of executive directors
							Appointments								Variable - immediate payment				Variable - deferred payment (a)
Directors	Board		Executive Committee		Audit and compliance committee		and remuneration committee		Board		Other fees		Fixed remuneration		In cash		In shares		In cash		In shares		Total		Other remuneration (b)		Total		Total (c)
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		85		170		—		—		25		4		1,344		282		282		424		424		2,756		20		3,061		4,505
Mr Fernando de Asúa Álvarez		113		170		40		24		25		195		—		—		—		—		—		—		—		567		625
Mr Alfredo Sáenz Abad		85		170		—		—		25		4		3,703		702		702		1,053		1,053		7,213		740		8,237		11,604
Mr Matías Rodríguez Inciarte		85		170		—		—		25		160		1,710		534		534		801		801		4,380		334		5,154		6,015
Mr Manuel Soto Serrano (9)		113		—		40		24		25		150		—		—		—		—		—		—		—		352		274
Assicurazioni Generali, SpA.(1)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		108
Mr Antonio Basagoiti García-Tuñón (2)		21		42		—		—		8		44		—		—		—		—		—		—		—		115		498
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		85		170		—		—		23		4		2,100		449		449		674		674		4,346		512		5,140		5,010
Mr Francisco Javier Botín-Sanz de Sautuola y O’Shea (3)		85		—		—		—		23		—		—		—		—		—		—		—		—		108		130
Lord Burns (Terence)		85		—		—		—		21		—		—		—		—		—		—		—		—		106		119
Mr Vittorio Corbo Lioi (4)		85		—		—		—		21		—		—		—		—		—		—		—		—		106		53
Mr Guillermo de la Dehesa Romero		85		170		—		24		25		15		—		—		—		—		—		—		—		320		377
Mr Rodrigo Echenique Gordillo		85		170		40		24		25		32		—		—		—		—		—		—		40		415		480
Mr Antonio Escámez Torres (2)		21		42		—		—		8		45		—		—		—		—		—		—		2		118		528
Ms Esther Giménez-Salinas i Colomer (5)		64		—		—		—		18		—		—		—		—		—		—		—		—		82		—
Mr Ángel Jado Becerro de Bengoa		85		—		—		—		25		—		—		—		—		—		—		—		—		110		133
Mr Francisco Luzón López (6)		5		11		—		—		3		—		108		—		—		—		—		108		3		130		6,792
Mr Abel Matutes Juan		85		—		40		—		25		19		—		—		—		—		—		—		—		169		198
Mr Juan Rodríguez Inciarte		85		—		—		—		25		99		987		311		311		467		467		2,543		183		2,937		3,413
Mr Luis Ángel Rojo Duque (7)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		85
Mr Luis Alberto Salazar-Simpson Bos (2)		21		—		10		—		8		6		—		—		—		—		—		—		—		44		198
Ms Isabel Tocino Biscarolasaga (8) (9)		85		—		—		24		25		123		—		—		—		—		—		—		—		257		148
Total 2012		1,464		1,287		168		119		409		900		9,952		2,278		2,278		3,419		3,419		21,347		1,833		27,528		—
Total 2011		2,046		2,005		251		135		575		909		11,362		4,376		4,376		6,564		6,564		33,242		2,133		—		41,293

(1) Retired from the board on October 24, 2011.

(2) Retired from the board on March 30, 2012.

(3) Amounts contributed to Marcelino Botín Foundation.

(4) Board member since July 22, 2011.

(5) Board member since March 30, 2012.

(6) Retired from the board on January 23, 2012.

(7) Deceased on May 24, 2011.

(8) Member of the appointments and remuneration committee since July 21, 2011.

(9) Member of the risk committee since March 30, 2012.

(a) Maximum deferred variable remuneration for the period approved by the board of directors, at the related meetings, for each of the directors.

(b) Includes, inter alia, the life and medical insurance costs borne by the Group relating to Bank directors.

(c) Includes the corresponding deferred variable remuneration.

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b) Remuneration of the board members as representatives of the Bank

By resolution of the executive committee, all the remuneration received by the Bank’s directors who represent the Bank on the boards of directors of listed companies in which the Bank has a stake (at the expense of those companies) and which relates to appointments made after March 18, 2002, will accrue to the Group. In 2012 and 2011 the Bank’s directors did not receive any remuneration in respect of these representative duties.

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. In 2008, 2007, 2006 and 2005 he 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, 2012, the market price of the Shinsei share was JPY 171 and, therefore, the options granted would not have given rise to any gains had they been exercised.

Furthermore, other directors of the Bank received a total of EUR 1,317 thousand in 2012 as members of the boards of directors of Group companies (2011: EUR 1,413 thousand), the detail being as follows: Lord Burns received EUR 708 thousand as non-executive chairman of the board of directors of Santander UK Plc.; Mr Antonio Basagoiti García-Tuñón received EUR 120 thousand as non-executive chairman of the board of directors of Banesto and in bylaw stipulated directors’ fees, from the beginning of 2012 until March 30, 2012, when he retired as director of Banco Santander; Mr Matías Rodríguez Inciarte received EUR 42 thousand as non-executive director of U.C.I., S.A., and Mr Vittorio Corbo Lioi received EUR 119 thousand as non-executive director of Banco Santander Chile, EUR 321 thousand for advisory services provided to that entity and EUR 7 thousand as non-executive director of Grupo Financiero Santander México, S.A.B. de C.V.

c) Post-employment and other long-term benefits

At December 31, 2011, in the event of early retirement or retirement the executive directors had the right to receive a supplementary pension which could be externalized by the Bank.

F-83

The following table provides information on the pension obligations assumed and covered by the Group in respect of the Bank’s current executive directors at December 31, 2011:

	Thousands of euros (*)
	2011
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		25,400
Mr Alfredo Sáenz Abad		87,758
Mr Matías Rodríguez Inciarte		45,224
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		31,856
Mr Juan Rodríguez Inciarte		12,309
		202,547

(*) In addition, at December 31, 2011, the Group had assumed pension obligations to Mr Francisco Luzón López amounting to EUR 63,608 thousand. He took voluntary pre-retirement and resigned from his positions as director and executive vice president of the Bank in January 2012, and opted to receive his accrued pre-retirement pension (EUR 2.8 million) as a lump sum, in accordance with the following schedule: EUR 2.5 million in 2012 and EUR 0.1 million each year in 2013, 2014 and 2015. In 2013, having reached retirement age, Mr Francisco Luzón López requested to receive his pension as a lump sum. Under the settlement agreement the portion of the pension not relating to variable remuneration is paid in cash; the portion relating to accrued variable remuneration is paid in cash and must be invested in Santander shares subject to retention; and the portion of the pension relating to unaccrued variable remuneration is invested by the Bank in Santander shares and will or will not be delivered to Mr Luzón (subject to retention) depending on whether the variable remuneration finally accrues to him (see Note 5.h).

The contracts of the executive directors and the other members of the Bank’s senior management prior to the amendment mentioned below granted senior executives the right, on the date of retirement, or prior to that date, from the age of 60, to opt to receive the accrued pensions -or amounts similar thereto- in the form of an annuity or a lump sum, i.e. in one single payment. The exercise of this option meant, in all cases, that no further pension benefit would accrue and, from the date of economic effect of exercising the option, the lump sum to be received, which would be updated at the agreed-upon interest rate, would be fixed. Since the aforementioned option has been exercised, the amounts included in the foregoing table in respect of the directors Mr Emilio Botín Sanz de Sautuola y García de los Ríos, Mr Alfredo Sáenz Abad and Mr Matías Rodríguez Inciarte are those relating to the aforementioned lump sums.

In 2012, under the framework of the measures implemented by the Group in order to mitigate the risks arising from the defined-benefit pension obligations payable to certain employees, which led to an agreement with the workers’ representatives to convert the defined-benefit obligations existing under the collective agreement into defined-contribution plans (see Note 25), the contracts of the executive directors and the other members of the Bank’s senior management -the senior executives- which provided for defined-benefit pension obligations were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander Seguros y Reaseguros Compañía Aseguradora, S.A. Under the new system, the executive directors are granted the right to receive a pension benefit upon retirement which is based on the contributions made to the aforementioned system and supersedes the right to receive a pension supplement which had hitherto been payable to them upon retirement. The new system expressly excludes any obligation of the Bank to the executive directors other than the conversion of the current system into the new employee welfare system and, as the case may be, the annual contributions to be made as described below. In the event of pre-retirement, the executive directors who have not exercised the option described in the preceding paragraph are entitled to an annual emolument until the date of retirement.

F-84

A detail of each of the executive directors’ beginning balance under the new employee welfare system is provided below. This balance reflects the market value, at the date of conversion of the pension obligations under the new employee welfare system, of the assets in which the provisions for the respective accrued obligations had been invested.

	Thousands of euros
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		25,566
Mr Alfredo Sáenz Abad		88,174	(*)
Mr Matías Rodríguez Inciarte		45,524
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		34,941	(*)
Mr Juan Rodríguez Inciarte		12,824
		207,029

(*) Includes the amounts relating to the period of the provision of services at Banesto, externalized with another insurance company.

From 2013 onwards, the Bank will make annual contributions to the employee welfare system for the benefit of the executive directors and senior executives, in proportion to their individual pensionable bases, until they leave the Group, or until their retirement from the Group , death or disability (including, as the case may be, during the pre-retirement period). No contributions will be made for the executive directors and senior executives who have exercised the aforementioned option prior to the conversion of the defined-benefit pension obligations into the defined-contribution employee welfare system.

The terms of the employee welfare system regulate the impact of the deferral of the computable variable remuneration on the benefit payments covered by the system upon retirement and, as the case may be, the retention of shares arising from such remuneration.

The Group also continues to have pension obligations to other directors amounting to EUR 18 million (December 31, 2011: EUR 39 million). The payments made in 2012 to the members of the board entitled to post-employment benefits amounted to EUR 1.6 million (2011: EUR 2.6 million).

Pension provisions recognized in 2012 amounted to EUR 2,166 thousand (2011: EUR 7,826 thousand recognized and EUR 886 thousand reversed).

d) Insurance

The Group has taken out life insurance policies for the Bank’s directors, who will be entitled to receive benefits if they are declared disabled; in the event of death, the benefits will be payable to their heirs. The premiums paid by the Group are included in the Other remuneration column of the table shown in Note 5.a.iii above. Also, the following table provides information on the sums insured for the Bank’s executive directors:

	Thousands of euros
	2012		2011
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		—		—
Mr Alfredo Sáenz Abad		11,108		11,108
Mr Matías Rodríguez Inciarte		5,131		5,131
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		6,000		988
Mr Francisco Luzón López		—		9,934
Mr Juan Rodríguez Inciarte		2,961		2,961
		25,200		30,122

Additionally, other directors have life insurance policies the cost of which is borne by the Group, the related insured sum being EUR 1.4 million at December 31, 2012 (2011: EUR 3 million).

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e) Deferred variable share-based remuneration systems

Following is a description of the various share delivery plans instrumenting the directors’ share-based deferred variable remuneration (see Note 47):

i) Performance share plan

This plan involves successive three-year cycles of share deliveries to the beneficiaries, as part of their variable remuneration for the year in which each cycle begins, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end. Following the changes implemented in 2011 to the remuneration policy for the executive directors, the latter ceased to be beneficiaries of the cycle approved in 2011 and of any successive cycles which are approved.

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The table below shows the maximum number of options granted to each executive director in each cycle and the number of shares received in 2012 and 2011 under the I12 and I11 incentive plans (Plans I12 and I11), respectively. As established in these plans, the number of shares received was determined by the degree of achievement of the targets to which each plan was tied, and all plans fell short of the maximum number.

	Options at January 1, 2011		Shares delivered in 2011 (number)			Options cancelled in 2011 (number)			Options at December 31, 2011		Shares delivered in 2012 (number)			Options cancelled in 2012 (number)			Options at December 31, 2012		Grant date	Share delivery deadline
Plan I11:
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		68,848		59,209			(9,639	)		—		—			—			—	21/06/08	31/07/11
Mr Alfredo Sáenz Abad		189,628		163,080			(26,548	)		—		—			—			—	21/06/08	31/07/11
Mr Matías Rodríguez Inciarte		87,590		75,327			(12,263	)		—		—			—			—	21/06/08	31/07/11
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea (1)		46,855		40,295	(2)		(6,560	)		—		—			—			—	21/06/08	31/07/11
Mr Francisco Luzón López (3)		77,083		66,291			(10,792	)		—		—			—			—	21/06/08	31/07/11
Mr Juan Rodríguez Inciarte		50,555		43,477			(7,078	)		—		—			—			—	21/06/08	31/07/11
		520,559		447,679			(72,880	)		—		—			—			—
Plan I12:
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		82,941		—			—			82,941		24,882			(58,059	)		—	19/06/09	31/07/12
Mr Alfredo Sáenz Abad		228,445		—			—			228,445		68,534			(159,911	)		—	19/06/09	31/07/12
Mr Matías Rodríguez Inciarte		105,520		—			—			105,520		31,656			(73,864	)		—	19/06/09	31/07/12
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea (1)		56,447		—			—			56,447		16,934	(4)		(39,513	)		—	19/06/09	31/07/12
Mr Francisco Luzón López (3)		92,862		—			—			92,862		—			(92,862	)		—	19/06/09	31/07/12
Mr Juan Rodríguez Inciarte		60,904		—			—			60,904		18,271			(42,633	)		—	19/06/09	31/07/12
		627,119		—			—			627,119		160,277			(466,842	)		—
Plan I13
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		82,941		—			—			82,941		—			—			82,941	11/06/10	31/07/13
Mr Alfredo Sáenz Abad		228,445		—			—			228,445		—			—			228,445	11/06/10	31/07/13
Mr Matías Rodríguez Inciarte		105,520		—			—			105,520		—			—			105,520	11/06/10	31/07/13
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea (1)		56,447		—			—			56,447		—			—			56,447	11/06/10	31/07/13
Mr Francisco Luzón López (3)		92,862		—			—			92,862		—			(92,862	)		—	11/06/10	31/07/13
Mr Juan Rodríguez Inciarte		60,904		—			—			60,904		—			—			60,904	11/06/10	31/07/13
		627,119		—			—			627,119		—			(92,862	)		534,257

(1) Without prejudice to the Banesto shares corresponding to Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea by virtue of the various Banesto Share-Based Incentive Plans approved by the shareholders at the general meeting of Banesto (a maximum of 32,358 Banesto shares relating to her participation in the Banesto Share-Based Incentive Plan expiring in 2013).

(2) In 2011 Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea received a further 10,786 Banesto shares relating to her participation in the Banesto Share-Based Incentive Plan approved by the shareholders at the annual general meeting of Banesto held on February 24, 2010.

(3) Following his resignation on January 23, 2012, Mr Francisco Luzón López lost his entitlement arising from his participation in these plans since he did not meet all the conditions stipulated for the shares to be received.

(4) In 2012 Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea received a further 14,022 Banesto shares relating to her participation in the Banesto Share-Based Incentive Plan approved by the shareholders at the annual general meeting of Banesto held on February 24, 2010.

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ii) Obligatory investment share plan

Pursuant to the obligatory investment share plan (see Note 47), and also as part of the deferred share-based variable remuneration for each period, the current executive directors acquired, 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 exist: (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, where applicable to the executive in question; or (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards.

	Maximum number of shares to be delivered
	3rd cycle 2010-2012		2nd cycle 2009-2011		1st cycle 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 (1)		18,446		16,956		13,610
Mr Francisco Luzón López (2)		—		—		22,214
Mr Juan Rodríguez Inciarte		15,142		14,738		14,617
		128,952		124,513		124,266

(1) 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 corresponding 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 corresponding 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.

(2) Following his resignation on January 23, 2012, Mr Francisco Luzón López lost his entitlement to receive the shares relating to the second and third cycles of this plan since he did not meet all the conditions stipulated for the shares to be received.

Since the condition to retain the shares acquired and the additional requirement to stay in the Group for three years had been complied with, in March 2011 and February 2012, as approved by the board, at the proposal of the appointments and remuneration committee, the gross number of shares detailed in the foregoing table relating to the first and second cycles accrued to the executive directors, which is equivalent to the number of shares initially acquired by them. Also, the shares relating to the third cycle will be delivered in March 2013, once compliance with the conditions for delivery thereof has been verified.

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iii) 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 remuneration for 2010 of the executive directors and executives and employees of Santander Group whose variable remuneration or annual bonus for 2010 generally exceeded 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.

In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the share-based deferred remuneration is conditional upon none of the following circumstances existing, in the opinion of the board of directors, during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) 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.

The share-based bonus will be deferred over three years and will be paid, where appropriate, in three installments starting in the first year.

The number of shares allocated to each executive director for deferral purposes, the shares delivered in 2012 (first third) and the shares that were approved for delivery by the board in February 2013 (second third), once the conditions for receiving them have been met, are as follows:

	Number of shares deferred on bonus for 2010		Number of shares delivered in 2012 (1st third)		Number of shares to be delivered in 2013 (2nd third)
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		94,345		31,448		31,448
Mr Alfredo Sáenz Abad		312,450		104,150		104,150
Mr Matías Rodríguez Inciarte		135,188		45,063		45,063
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)		91,187		30,395		30,395
Mr Francisco Luzón López (**)		154,981		51,660		51,660
Mr Juan Rodríguez Inciarte		61,386		20,462		20,462

(*) Shares of Banesto, as authorized by the shareholders of that entity at the annual general meeting of February 23, 2011.

(**) On January 23, 2012, Mr Francisco Luzón López took pre-retirement and resigned from his positions as director and head of the Americas division. In accordance with the plan regulations, Mr Francisco Luzón López retains the right to receive, if appropriate, 51,660 shares in 2014, subject to compliance with the conditions established in the plan for them to be received.

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iv) Deferred conditional variable remuneration plan

Variable remuneration for 2011

The shareholders at the annual general meeting of June 17, 2011 approved the first cycle of the deferred conditional variable remuneration plan in relation to the variable remuneration or bonus for 2011 of the executive directors and certain executives (including senior management) and employees who assume risks, perform control functions or receive an overall remuneration which puts them on 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 Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors on December 10, 2010).

The purpose of this first cycle is to defer a portion of the variable remuneration or bonus of the beneficiaries thereof over a period of three years for it to be paid, where appropriate, in cash and in Santander shares; the other portion of the variable remuneration is also to be paid in cash and Santander shares, upon commencement of the cycle, in accordance with the rules set forth below.

The variable remuneration will be paid in accordance with the following percentages, based on the timing of the payment and the group to which the beneficiary belongs (the “immediate payment percentage” identifies the portion of the bonus for which payment is not deferred, and the “deferred percentage” identifies the portion of the bonus for which payment is 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	%

The payment of the deferred percentage of the bonus applicable in each case will be deferred over a period of three years and will be paid in thirds, within fifteen days following the anniversaries of the initial date in 2013, 2014 and 2015, 50% being paid in cash and 50% in shares, provided that the conditions listed below are met.

In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the deferred remuneration is conditional upon none of the following circumstances existing -in the opinion of the board of directors and following a proposal of the appointments and remuneration committee-, during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) 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 the Group’s economic capital or risk profile.

On each delivery, the beneficiaries will be paid an amount in cash equal to the dividends paid for the amount deferred in shares and the interest on the amount deferred in cash.

The maximum number of shares to be delivered is calculated taking into account the amount resulting from applying the applicable taxes and the volume-weighted average prices for the 15 trading sessions prior to the date on which the board of directors approves the bonus for the Bank’s executive directors for 2011.

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The number of Santander shares allocated as variable remuneration to each executive director, distinguishing between those which were delivered in 2012 (immediate payment) and those subject to a three-year deferral, is shown in the table below.

In January 2013, at the proposal of the appointments and remuneration committee and considering that the conditions for delivery had been met, the board approved the accrual of the first third of the plan and, accordingly, in February 2013 the cash will be paid and the shares corresponding to the first third will be delivered. These amounts are shown in the following table:

	Immediate payment (shares delivered  in 2012)		Deferred payment (maximum number  of shares to be delivered)		Cash to be paid  in 2013 (1st third) (Thousands of euros)			Number of shares to be delivered in 2013 (1st third)
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		99,552		149,327		282			49,776
Mr Alfredo Sáenz Abad		247,366		371,049		702			123,683
Mr Matías Rodríguez Inciarte		125,756		188,634		357			62,878
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		94,002		141,002		286	(2)		47,001
Mr Francisco Luzón López (1)		130,996		196,494		371			65,498
Mr Juan Rodríguez Inciarte		73,380		110,070		208			36,690
		771,052		1,156,576		2,206			385,526

(1) On January 23, 2012, Mr Francisco Luzón López took pre-retirement and resigned from his positions as director and head of the Americas division. In relation to his 2011 variable remuneration to be received in cash and in Santander shares, the board resolved, at the committee’s proposal, to deliver him EUR 743 thousand and 130,996 shares as an immediate payment. The deferred amount in cash and in shares relating to the first third will be paid in February 2013 and the rest will be paid, if appropriate, on the dates and under the conditions approved by the board (EUR 248 thousand and 65,498 shares of the Bank in 2014 and 2015). Upon each delivery of shares and, therefore, subject to the same requirements, he will be paid an amount in cash equal to the dividends paid on those shares and, if the Santander Dividendo Elección programme is applied, the price offered by the Bank for the bonus share rights relating to the aforementioned shares.

(2) Euro equivalent value of the original amount in pounds sterling.

Variable remuneration for 2012

The shareholders at the annual general meeting of March 30, 2012 approved the second cycle of the deferred conditional variable remuneration plan in relation to the variable remuneration or bonus for 2012 of the executive directors and certain executives (including senior management) and employees who assume risks, perform control functions or receive an overall remuneration which puts them on 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 Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors on December 10, 2010), under the same conditions as the first cycle.

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The number of Santander shares allocated to each executive director as variable remuneration, distinguishing between those which are delivered immediately and those subject to a three-year deferral, is as follows:

	Maximum number of shares to be delivered
	Immediate payment		Deferred payment (*)		Total
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		43,952		65,927		109,879
Mr Alfredo Sáenz Abad		109,211		163,867		273,028
Mr Matías Rodríguez Inciarte		83,059		124,589		207,648
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		69,916		104,874		174,790
Mr Juan Rodríguez Inciarte		48,466		72,699		121,165
		354,604		531,906		886,510

(*) In three years: 2014, 2015 and 2016, subject to continued service, with the exceptions provided for in the plan regulations, and compliance with the conditions relating to the first cycle.

 f) 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
	2012						2011
	Loans and credits		Guarantees		Total		Loans and credits		Guarantees		Total
Mr Alfredo Sáenz Abad		17		—		17		8		—		8
Mr Matías Rodríguez Inciarte		13		—		13		1		—		1
Mr Manuel Soto Serrano		—		—		—		1		—		1
Mr Antonio Basagoiti García-Tuñón (1)		—		—		—		12		1		13
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		7		—		7		6		—		6
Mr Javier Botín-Sanz de Sautuola y O’Shea		13		—		13		3		—		3
Mr Rodrigo Echenique Gordillo		1,178		—		1,178		1,500		—		1,500
Mr Antonio Escámez Torres (1)		—		—		—		1,851		—		1,851
Mr Ángel Jado Becerro de Bengoa		7		—		7		3,004		—		3,004
Mr Francisco Luzón López (2)		—		—		—		11,670		—		11,670
Mr Juan Rodríguez Inciarte		5,313		—		5,313		321		—		321
Mr Luis Alberto Salazar-Simpson Bos (1)		—		—		—		3		—		3
Ms Isabel Tocino Biscarolasaga		42		—		42		322		—		322
		6,591		—		6,591		18,702		1		18,703

(1) Retired from the board on March 30, 2012.

(2) Retired from the board on January 23, 2012.

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 g) Senior managers

Following is a detail of the maximum remuneration approved for the Bank’s executive vice presidents (*) in 2012 and 2011:

	Number of managers  (1)		Thousands of euros
			Salaries													Other remuneration (4)		Total
			Fixed		Variable - Immediate payment					Variable - Deferred payment				Total
					In cash			In shares		In cash		In shares
2011		22		23,095		12,584	(2)		12,584		12,584		12,584		73,431		7,887		81,318
2012		24		24,580		10,689	(3)		10,689		10,689		10,689		67,495		6,615		74,110

(*) 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 remuneration for the full year regardless of the number of months in which the position of executive vice president was occupied.

(2) The shareholders at the annual general meeting of June 17, 2011 approved the first cycle of the deferred conditional variable remuneration plan, whereby payment of a portion of the variable remuneration for 2011 amounting to EUR 25,168 thousand would be deferred over three years for it to be paid, where appropriate, in three equal portions, 50% in cash and 50% in Santander shares, provided that the conditions for entitlement to the remuneration are met. Similarly, the portion of the variable remuneration that is not deferred will be paid 50% in cash and 50% in shares.

(3) At the annual general meeting on March 30, 2012, the shareholders approved the second cycle of the deferred conditional variable remuneration plan, whereby a portion of the variable remuneration for 2012 amounting to EUR 21,298 thousand will be deferred over three years under the same deferral and payment conditions as the first cycle.

(4) Includes other remuneration items, such as life insurance premiums amounting to EUR 1,355 thousand (2011: EUR 1,104 thousand) and payments of termination or retirement benefits.

Following is a detail of the maximum number of Santander shares that the Bank’s executive vice presidents (excluding executive directors) were entitled to receive at December 31, 2012 and 2011 relating to the deferred portion under the various plans then in force (see Note 47):

Maximum number of shares to be delivered	12/31/12		12/31/11
Plan I12 (1)		—		1,468,762
Plan I13 (2)		1,463,987		1,468,762
Second cycle of obligatory investment		—		452,994
Third cycle of obligatory investment		286,317		293,140
Deferred conditional delivery plan (3)		980,780		1,496,628
Deferred conditional variable remuneration plan (2011) (4)		2,076,477		2,119,944
Deferred conditional variable remuneration plan (2012) (5)		1,622,485		—

(1) In addition, they were entitled to a maximum of 29,951 Banesto shares at December 31, 2011.

(2) In addition, they were entitled to a maximum of 114,160 Banesto shares at December 31, 2012 (December 31, 2011: 44,926 Banesto shares).

(3) In addition, they were entitled to a maximum of 14,705 Banesto shares at December 31, 2012 (December 31, 2011: 3,364 Banesto shares).

(4) In addition, they were entitled to a maximum of 123,973 Banesto shares and 79,696 Santander Brasil shares at December 31, 2012 (December 31, 2011: 97,515 Santander Brasil shares).

(5) In addition, they were entitled to a maximum of 61,328 Santander Brasil shares at December 31, 2012 and a maximum of 500,000 options on Santander Brasil shares at December 31, 2012 and 2011 under the share option plan approved in 2011, exercise of which, subject to the plan‘s terms and conditions, may commence in July 2014.

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In 2012 and 2011, since the conditions established in the related deferred share-based remuneration schemes corresponding to prior years had been met, the following number of Santander shares was delivered to the executive vice presidents:

Number of shares delivered	2012			2011
Plan I11		—			1,042,130	(1)
Plan I12		439,195	(2)		—
First cycle of obligatory investment		—			232,852
Second cycle of obligatory investment		442,319			—
Deferred conditional delivery plan (2010)		490,338	(3)		—

(1) In addition, 14,975 Banesto shares were delivered.

(2) In addition, 49,469 Banesto shares were delivered.

(3) In addition, 14,705 Banesto shares were delivered.

(4) In addition, 123,973 Banesto shares and 79,696 Santander Brasil shares were delivered.

The actuarial liability recognized in respect of post-employment benefits earned by the Bank’s executive vice presidents totaled EUR 267 million at December 31, 2011.

Settlements of EUR 10.7 million took place in 2012. The net charge to the consolidated income statement amounted to EUR 17.5 million in 2012 (2011: EUR 29 million).

As indicated in Note 5.c, in 2012 the contracts of senior executives of the Bank which provided for defined-benefit pension obligations were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander Seguros y Reaseguros Compañía Aseguradora, S.A. Under the new system, the executive directors are granted the right to receive a pension benefit upon retirement which is based on the contributions made to the aforementioned system and supersedes the right to receive a pension supplement which had hitherto been payable to them upon retirement. The new system expressly excludes any obligation of the Bank to the executives other than the conversion of the current system into the new employee welfare system and, as the case may be, the annual contributions to be made. In the event of pre-retirement, the senior executives who have not exercised the option described in Note 5.c are entitled to an annual emolument until the date of retirement.

The executive directors’ beginning balance under the new employee welfare system amounted to EUR 287 million. This balance reflects the market value, at the date of conversion of the pension obligations under the new employee welfare system, of the assets in which the provisions for the respective accrued obligations had been invested.

Additionally, the total sum insured under life and accident insurance policies relating to this group amounted to EUR 73 million at December 31, 2012 (December 31, 2011: EUR 66 million).

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h) Post-employment benefits to former directors and former executive vice presidents

The post-employment benefits paid and settlements made in 2012 to former directors of the Bank and former executive vice presidents amounted to EUR 11.1 million, including EUR 2.5 million relating to Mr Francisco Luzón (see Note 5.c) and EUR 7.1 million, respectively (2011: EUR 7.9 million and EUR 7.8 million, respectively).

An expense of EUR 2 million was recognized in the consolidated income statement for 2012 in connection with the Group’s pension and similar obligations to former directors of the Bank and a period provision of EUR 509 thousand was recognized in relation to former executive vice presidents (2011: release of EUR 409 thousand and a zero period provision, respectively).

Furthermore, Provisions - Provision for pensions and similar obligations in the consolidated balance sheet at December 31, 2012 included EUR 162 million in respect of the post-employment benefit obligations to former directors of the Bank (including those relating to Mr Francisco Luzón López which, as described below, were settled in January 2013) and EUR 120 million relating to former executive vice presidents (2011: EUR 78 million and EUR 120 million, respectively).

In January 2013, upon his retirement, Mr Francisco Luzón López requested payment of the pensions to which he was entitled in a lump sum (EUR 65.4 million gross). For such purpose, his pension rights were settled in accordance with the contractual and legal terms applicable through: i) the payment in cash of EUR 21.1 million relating to the net amount of the pension calculated by taking into account the fixed remuneration and the bylaw-stipulated emoluments and EUR 7.1 million relating to the net amount of the pension calculated by taking into account the accrued variable remuneration at the retirement date, ii) the investment by Mr Luzón of those EUR 7.1 million in Santander shares (1,144,110 shares), which shall be deposited on a restricted basis until January 23, 2017 and iii) the investment by the Bank of the gross remaining amount of the pension (EUR 6.6 million), calculated by taking into account the unaccrued variable remuneration, in Santander shares (1,061,602 shares) that will be delivered to Mr Luzón (subject to the same restriction period mentioned above and net of tax) or will finally remain in the Bank’s possession depending on whether or not the variable remuneration giving rise to them finally accrues to him.

i) 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. In any other termination event, the executive directors indicated below will be eligible for the following rights:

• In the case of Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea: to take pre-retirement, earning an annual emolument. At December 31, 2012, this annual emolument would amount to EUR 2,645 thousand (December 31, 2011: EUR 2,557 thousand).

• In the case of Mr Juan Rodríguez Inciarte: to take pre-retirement, earning an annual emolument. At December 31, 2012, this annual emolument would amount to EUR 987 thousand (December 31, 2011: EUR 948 thousand).

If Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea or Mr Juan Rodríguez Inciarte take pre-retirement, they have the right to opt to receive the annual emoluments in the form of an annuity or a lump sum -i.e. in a single payment- in full but not in part.

F-95

If the other executive directors’ contracts are terminated for any reason, they may take retirement and, therefore, claim from the insurer the benefits accrued to them under the externalized employee welfare system described in Note 5.c, with no obligation whatsoever being incumbent upon the Bank in such circumstances.

Other non-director members of the Group’s senior management, other than those whose contracts were amended in 2012 as indicated above, 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. The non-director senior executives whose contracts were amended in 2012 do not retain an entitlement to such benefits in their contracts.

 j) 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:

F-96

Director	Corporate name	Number of shares		Functions
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos	Bankinter, S.A.		212,345	—
	Bank of America Corporation		560	—
	Santander Investment, S.A.		—	Chairman (1)
Mr Alfredo Sáenz Abad	Banco Bilbao Vizcaya Argentaria, S.A. (*)		367,234	—
	HSBC Holdings plc		14,254	—
	Lloyds Banking Group plc		522	—
	Banco Bradesco S.A. (*)		1,815	—
	Caixabank, S.A. (*)		6,349	—
	Banco Popular Español, S.A. (*)		14,380	—
	Banco Banif, S.A.		—	Chairman (1)
	Santander Investment, S.A.		—	Deputy chairman (1)
	Santander Private Banking S.p.A.		—	Chairman (1)
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.		183,214	—
	Istituto per le Opere di Religione (IOR)		—	Member (2)
Mr Antonio Basagoiti García-Tuñón (3)	Banco Popular Español, S.A.		530	—
	Banco Bilbao Vizcaya Argentaria, S.A. (*)		11	—
	Bankia, S.A.		27,486	—
	Banco Español de Crédito, S.A.		1,000	Chairman (1)
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea	Bankinter, S.A.		4,757,768	—
	Santander UK plc		—	CEO
	Santander Investment, S.A.		—	Director (1)
	Alliance & Leicester plc		—	Director
Mr Javier Botín-Sanz de Sautuola y O’Shea	Bankinter, S.A.		5,097,768	—
	Banco Popular Español, S.A.		8,550,000	—
	Bank of America		537,000	—
Lord Burns (Terence)	Lloyds Banking Group plc (*)		3,745	—
	Barclays plc (*)		1,901	—
	Santander UK plc		—	Chairman (1)
Mr Vittorio Corbo Lioi	Banco Santander - Chile		—	Director (1)
	Banco Santander (México), S.A. Institución de Banca Múltiple, Grupo Financiero Santander		—	Director (1)
	Santander Consumo, S.A. de C.V., Sofom,e.r.		—	Director (1)
	Santander Hipotecario, S.A. de C.V., Sofom,e.r		—	Director (1)

F-97

Director	Corporate name	Number of shares		Functions
Mr Guillermo de la Dehesa Romero	Goldman Sachs & Co. (The Goldman Sachs Group, Inc.)		19,546	—
	Banco Pastor, S.A.		11,088	—
Mr Rodrigo Echenique Gordillo	Wells Fargo & Co.		4,500	—
	Barclays plc		20,490	—
	Bank of America Corporation		12,000	—
	Banco Banif, S.A.		—	2nd deputy chairman (1)
	Santander Investment, S.A.		—	Director (1).
	Allfunds Bank, S.A		—	Chairman (1)
	Banco Santander International		—	Director (1)
Mr Antonio Escámez Torres (3)	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)
Ms Esther Giménez-Salinas i Colomer	Ambers & Co Capital Microfinanzas, S.L.		—	Director (1)
Mr Ángel Jado Becerro de Bengoa	Bankinter, S.A. (5)		1,244,000	—
	Banco Banif, S.A.		—	Director (1)
Mr Francisco Luzón López (4)	Banco Bilbao Vizcaya Argentaria, S.A.		181,660	—
	Bank of America Corporation		164,850	—
	Citigroup Inc.		23,706	—
	BNP Paribas S.A.		6,672	—
	Société Générale		12,081	—
	Barclays plc		101,274	—
	HSBC Holdings plc		60,040	—
	Caixabank, S.A.		11,614	—
Mr Abel Matutes Juan	Banco Bilbao Vizcaya Argentaria, S.A.(*)		715,865	—
	Banco Español de Crédito, S.A. (*)		11,980	—
	Citibank (*)		109,062	—
Mr Juan Rodríguez Inciarte	Banco Bilbao Vizcaya Argentaria, S.A.		1,016	—
	Wells Fargo & Co.		107	—
	Santander UK plc		—	Deputy chairman (1)
	Banco Banif, S.A.		—	Director (1)
	Santander Consumer Finance, S.A.		—	Director (1)
Ms Isabel Tocino Biscarolasaga	Banco Bilbao Vizcaya Argentaria, S.A.		2,531	—
	Citigroup Inc.		1,130	—

F-98

(*) Ownership interests held by related persons.

(1) Non-executive.

(2) Non-executive member of the control committee.

(3) Retired from the board on March 30, 2012. Data at 2011 year-end.

(4) Retired from the board on January 23, 2012. Data at 2011 year-end.

(5) 244,000 shares are held by related persons.

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.

6. Loans and advances to credit institutions

The detail, by classification, type and currency, of Loans and advances to credit institutions in the consolidated balance sheets is as follows:

	Millions of euros
	2012			2011			2010
Classification:
Financial assets held for trading		9,843			4,636			16,216
Other financial assets at fair value through profit or loss		10,272			4,701			18,831
Loans and receivables		53,785			42,389			44,808
		73,900			51,726			79,855
Type:
Reciprocal accounts		1,863			2,658			1,264
Time deposits		15,669			11,419			13,548
Reverse repurchase agreements		25,486			10,647			36,721
Other accounts		30,882			27,002			28,322
		73,900			51,726			79,855
Currency:
Euro		36,955			26,066			46,254
Pound sterling		3,787			4,481			8,100
US dollar		13,567			9,784			13,451
Other currencies		19,621			11,431			12,067
Impairment losses		(30	)		(36	)		(17	)
Of which: due to country risk		—			(2	)		(8	)
		73,900			51,726			79,855

The loans and advances to credit institutions classified under Financial assets held for trading consist mainly of securities of foreign institutions purchased under reverse repurchase agreements, whereas those classified under Other financial assets at fair value through profit or loss consist of securities of Spanish public sector entities and other institutions purchased under reverse repurchase agreements.

The loans and advances to credit institutions classified under Loans and receivables are mainly guarantees given in cash to credit institutions and time deposits.

The impairment losses on financial assets recognized in Loans and receivables are disclosed in Note 10.

Note 51 contains a detail of the residual maturity periods of Loans and receivables and of the related average interest rates.

F-99

7. Debt instruments

a) Breakdown

The detail, by classification, type and currency, of Debt instruments in the consolidated balance sheets is as follows:

	Millions of euros
	2012			2011			2010
Classification:
Financial assets held for trading		43,101			52,704			57,872
Other financial assets at fair value through profit or loss		3,460			2,649			4,605
Available-for-sale financial assets		87,724			81,589			79,689
Loans and receivables		7,059			6,840			8,429
		141,344			143,782			150,595
Type:
Spanish government debt securities		37,141			39,309			35,663
Foreign government debt securities		67,222			60,553			63,602
Issued by financial institutions		12,297			16,324			23,761
Other fixed-income securities		24,828			27,847			27,713
Impairment losses		(144	)		(251	)		(144	)
		141,344			143,782			150,595
Currency:
Euro		63,169			61,577			61,844
Pound sterling		9,240			5,394			11,125
US dollar		18,183			20,383			23,442
Other currencies		50,896			56,679			54,328
Impairment losses		(144	)		(251	)		(144	)
		141,344			143,782			150,595

At December 31, 2012, the nominal amount of debt securities assigned to certain own or third-party commitments, mainly to secure financing facilities received, amounted to EUR 61,335 million. Of these securities, EUR 21,808 million related to Spanish government debt at December 31, 2012.

F-100

b) Breakdown

The detail, by origin of the issuer, of Debt instruments at December 31, 2012, 2011 and 2010, net of impairment losses, is as follows:

	Millions of euros
	2012									2011									2010
	Private fixed- income		Public fixed- income		Total		%			Private fixed- income		Public fixed- income		Total		%			Private fixed- income		Public fixed- income		Total		%
Spain		10,046		37,141		47,187		33.38	%		8,409		39,309		47,718		33.19	%		7,915		35,663		43,578		28.94	%
United States		5,994		6,965		12,959		9.17	%		11,147		2,030		13,177		9.16	%		10,793		2,953		13,746		9.13	%
United Kingdom		3,865		7,528		11,393		8.06	%		8,529		1,654		10,183		7.08	%		14,721		4,170		18,891		12.54	%
Portugal		2,843		2,217		5,060		3.58	%		3,704		1,824		5,528		3.84	%		6,108		2,819		8,927		5.93	%
Italy		375		619		994		0.70	%		545		653		1,198		0.83	%		289		767		1,056		0.70	%
Ireland		739		—		739		0.52	%		642		—		642		0.45	%		570		—		570		0.38	%
Greece		—		—		—		—			—		84		84		0.06	%		—		177		177		0.12	%
Other European countries		4,706		8,620		13,326		9.43	%		3,437		7,823		11,260		7.83	%		4,377		6,192		10,569		7.02	%
Brazil		4,810		27,359		32,169		22.76	%		4,867		29,607		34,474		23.98	%		2,504		30,948		33,452		22.21	%
Mexico		501		8,817		9,318		6.59	%		534		11,426		11,960		8.32	%		902		10,756		11,658		7.74	%
Chile		1,377		2,124		3,501		2.48	%		577		2,528		3,105		2.16	%		1,084		2,281		3,365		2.23	%
Other American countries		1,208		1,163		2,371		1.68	%		1,275		1,583		2,858		1.99	%		1,616		1,524		3,140		2.09	%
Rest of the world		517		1,810		2,327		1.65	%		360		1,235		1,595		1.11	%		451		1,015		1,466		0.97	%
		36,981		104,363		141,344		100.00	%		44,026		99,756		143,782		100.00	%		51,330		99,265		150,595		100.00	%

The detail, by issuer rating, of Debt instruments at December 31, 2012, 2011 and 2010 is as follows:

	Millions of euros
	2012									2011									2010
	Private fixed- income		Public fixed- income		Total		%			Private fixed- income		Public fixed- income		Total		%			Private fixed- income		Public fixed- income		Total		%
AAA		15,754		11,711		27,465		19.43	%		19,250		5,205		24,455		17.01	%		25,618		14,036		39,654		26.33	%
AA		714		12,724		13,438		9.51	%		2,056		3,885		5,941		4.13	%		5,428		35,842		41,270		27.41	%
A		5,524		2,611		8,135		5.76	%		9,457		45,489		54,946		38.21	%		6,152		6,067		12,219		8.11	%
BBB		3,460		74,435		77,895		55.11	%		2,739		42,377		45,116		31.38	%		6,217		41,734		47,951		31.84	%
Below BBB		4,052		2,882		6,934		4.90	%		2,196		2,800		4,996		3.47	%		1,040		1,586		2,626		1.74	%
Unrated		7,477		—		7,477		5.29	%		8,328		—		8,328		5.79	%		6,875		—		6,875		4.57	%
		36,981		104,363		141,344		100.00	%		44,026		99,756		143,782		100.00	%		51,330		99,265		150,595		100.00	%

F-101

The breakdown of the exposure by rating has been affected by the numerous reviews of the ratings of sovereign issuers in recent years, mainly of Spain (from AA in 2010 to A in 2011 and to BBB en 2012), Portugal (from A in 2010 to BB in 2011), the United States (from AAA in 2010 to AA in 2011) and Chile (from A in 2011 to AA in 2012). Brazil and Mexico maintained a BBB rating in 2012, 2011 and 2010.

The detail, by type of financial instrument, of Private fixed-income securities at December 31, 2012, 2011 and 2010, net of impairment losses, is as follows:

	Millions of euros
	2012		2011		2010
Securitised mortgage bonds		6,835		7,080		6,830
Other asset-backed bonds		1,497		3,100		2,815
Floating rate debt		15,883		16,668		19,476
Fixed rate debt		12,766		17,178		22,209
Total		36,981		44,026		51,330

c) Impairment losses

The changes in the impairment losses on Available-for-sale financial assets - Debt instruments are summarized below:

	Millions of euros
	2012			2011			2010
Balance at beginning of year		235			119			167
Net impairment losses for the year (Note 29)		13			124			(9	)
Of which:
Impairment losses charged to income		18			125			14
Impairment losses reversed with a credit to income		(5	)		(1	)		(22	)
Write-off of assets due to impairment		(109	)		—			(20	)
Exchange differences and other items		(10	)		(8	)		(19	)
Balance at end of year		129			235			119
Of which:
By geographical location of risk:
European Union		51			155			48
Latin America		78			80			71

Also, the impairment losses on Loans and receivables (EUR 15 million, EUR 16 million and EUR 25 million at December 31, 2012, 2011 and 2010, respectively) are disclosed in Note 10.

d) Other information

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.

Note 54 shows the Group’s total exposure, by origin of the issuer.

F-102

8. Equity instruments

a) Breakdown

The detail, by classification and type, of Equity instruments in the consolidated balance sheets is as follows:

	Millions of euros
	2012		2011		2010
Classification:
Financial assets held for trading		5,492		4,744		8,850
Other financial assets at fair value through profit or loss		688		465		8,267
Available-for-sale financial assets		4,542		5,024		6,546
		10,722		10,233		23,663
Type:
Shares of Spanish companies		3,338		2,960		4,778
Shares of foreign companies		4,726		4,582		6,469
Investment fund units and shares		2,658		2,691		4,560
Other securities		—		—		7,856
Of which: unit linked (*)		—		—		7,856
		10,722		10,233		23,663

(*) The decrease arose as a result of the sale in 2011 of the insurance companies in Latin America to Zurich (see Note 3).

Note 29 contains a detail of the valuation adjustments recognized in equity on available-for-sale financial assets, and also the related impairment losses.

b) Changes

The changes in Available-for-sale financial assets-Equity instruments were as follows:

	Millions of euros
	2012			2011			2010
Balance at beginning of year		5,024			6,546			7,331
Changes in the scope of consolidation		—			(493	)		—
Of which:
Metrovacesa, S.A. (Note 3)		—			(402	)		—
Net additions (disposals)		(666	)		(862	)		(1,077	)
Of which:
Spanish Bank Restructuring Asset Management Company (SAREB)		164			—			—
Cielo, S.A.		—			—			(651	)
Valuation adjustments		184			(167	)		292
Balance at end of year		4,542			5,024			6,546

F-103

The main acquisitions and disposals made in 2012, 2011 and 2010 were as follows:

i. 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 651 million), which gave rise to a gain of EUR 212 million, net of taxes and non-controlling interests.

ii. Spanish Bank Restructuring Asset Management Company (SAREB)

In December 2012 the Group, together with other Spanish financial institutions, entered into an agreement to invest in the Spanish Bank Restructuring Asset Management Company (SAREB), whereby the Group undertook to make an investment of up to EUR 840 million (25% in capital and 75% in subordinated debt), and at December 31, 2012, it had paid EUR 164 million of capital and EUR 490 million of subordinated debt.

c) Notifications of acquisitions of investments

The notifications made by the Bank in 2012, 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.

9. Trading derivatives (assets and liabilities) and Short positions

a) Trading derivatives

The detail, by type of inherent risk, of the fair value of the trading derivatives arranged by the Group is as follows (see Note 36):

	Millions of euros
	2012				2011				2010
	Debit balance		Credit balance		Debit balance		Credit balance		Debit balance		Credit balance
Interest rate risk		89,404		86,956		77,016		76,834		49,681		50,058
Currency risk		16,516		16,692		16,032		16,278		14,445		16,015
Price risk		3,289		5,081		5,853		7,068		5,643		6,413
Other risks		1,110		1,014		3,597		2,903		3,300		2,793
		110,319		109,743		102,498		103,083		73,069		75,279

F-104

b) Short positions

Following is a breakdown of the short positions:

	Millions of euros
	2012		2011		2010
Borrowed securities:
Debt instruments		5,371		1,775		2,580
Of which: Santander UK plc		4,989		850		1,173
Equity instruments		551		572		279
Short sales:
Debt instruments		9,259		7,836		9,443
Of which:
Banco Santander, S.A.		5,946		6,560		9,200
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander		3,266		1,235		241
Equity instruments		—		4		—
		15,181		10,187		12,302

10. Loans and advances to customers

a) Breakdown

The detail, by classification, of Loans and advances to customers in the consolidated balance sheets is as follows:

	Millions of euros
	2012			2011			2010
Financial assets held for trading		9,162			8,056			755
Other financial assets at fair value through profit or loss		13,936			11,748			7,777
Loans and receivables		697,384			730,296			715,621
Of which:
Disregarding impairment losses		722,888			749,232			735,318
Impairment losses		(25,504	)		(18,936	)		(19,697	)
Of which, due to country risk		(42	)		(41	)		(41	)
		720,482			750,100			724,153
Loans and advances to customers disregarding impairment losses		745,986			769,036			743,850

Note 51 contains a detail of the residual maturity periods of loans and receivables and of the related average interest rates.

Note 54 shows the Group’s total exposure, by origin of the issuer.

There are no loans and advances to customers for material amounts without fixed maturity dates.

F-105

b) Breakdown

Following is a detail, by loan type and status, 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
	2012		2011		2010
Loan type and status:
Commercial credit		12,113		13,635		15,737
Secured loans		430,388		448,681		430,072
Reverse repurchase agreements		19,477		18,438		6,166
Other term loans		220,225		228,449		234,857
Finance leases		16,320		18,399		20,260
Receivable on demand		12,123		10,147		8,850
Impaired assets		35,340		31,287		27,908
		745,986		769,036		743,850
Geographical area:
Spain		200,014		214,558		227,613
European Union (excluding Spain)		337,179		357,888		320,284
United States and Puerto Rico		51,186		48,596		57,882
Other OECD countries		10,894		7,760		6,432
Latin America		138,071		136,434		122,940
Rest of the world		8,642		3,800		8,699
		745,986		769,036		743,850
Interest rate formula:
Fixed rate		300,355		292,846		297,259
Floating rate		445,631		476,190		446,591
		745,986		769,036		743,850

At December 31, 2012, the Group had granted loans amounting to EUR 16,884 million (December 31, 2011: EUR 12,147 million; December 31, 2010: EUR 12,137 million) to the Spanish public sector (which had ratings of BBB, A and AA at December 31, 2012, 2011 and 2010, respectively), and EUR 4,983 million to the public sector in other countries (December 31, 2011: EUR 4,394 million; December 31, 2010: EUR 3,527 million). At December 31, 2012, the breakdown of this amount by issuer rating was as follows: 10.8% AA, 0.9% A, 74.7% BBB and 13.6% below BBB.

F-106

Following is a detail, by activity, of the loans and advances to customers at December 31, 2012, net of impairment losses:

	Millions of euros
					Secured loans
					Net exposure				Loan to value (a)
	Total		Without collateral		Of which: Property collateral		Of which: Other collateral		Less than or equal to 40%		More than 40% and less than or equal to 60%		More than 60% and less than or equal to 80%		More than 80% and less than or equal to 100%		More than 100%
Public sector		21,793		21,092		82		619		324		41		177		35		124
Other financial institutions		36,985		19,346		6,092		11,547		674		316		438		16,129		82
Non-financial companies and individual entrepreneurs		256,075		148,765		50,395		56,915		23,592		17,788		17,874		27,909		20,147
Of which:
Property construction and development		18,265		3,086		13,782		1,397		3,894		3,925		3,037		2,285		2,038
Civil engineering construction		9,965		2,369		4,561		3,035		870		837		634		753		4,502
Large companies		143,288		100,555		11,400		31,333		8,725		4,837		4,525		16,546		8,100
SMEs and individual entrepreneurs		84,557		42,755		20,652		21,150		10,103		8,189		9,678		8,325		5,507
Other households and non-profit institutions serving households		409,566		92,478		306,048		11,040		57,171		63,591		118,675		61,019		16,632
Of which:
Residential		302,915		434		301,128		1,353		54,736		61,769		116,410		55,629		13,937
Consumer loans		92,606		83,965		2,149		6,492		1,564		917		1,243		3,884		1,033
Other purposes		14,045		8,079		2,771		3,195		871		905		1,022		1,506		1,662
Subtotal		724,419		281,681		362,617		80,121		81,761		81,736		137,164		105,092		36,985
Less: collectively assessed impairment losses		3,937
Total		720,482
Memorandum item
Refinanced and restructured transactions		46,026		12,456		28,135		5,435		8,416		8,069		9,517		5,699		1,869

(a) The ratio of the carrying amount of the transactions at December 31, 2012 to the latest available appraisal value of the collateral.

F-107

The amount of loans with less than 90 days past due installments classified as standard amounted to €4,732 million as of December 31, 2012 (€5,208 million as of December 31, 2011).

Note 54 contains information relating to the restructured/refinanced loan book.

c) 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:

	Millions of euros
	2012			2011			2010
Balance at beginning of year		18,988			19,739			17,899
Impairment losses charged to income for the year		19,877			12,840			11,468
Of which:
Individually assessed		21,649			15,939			14,770
Collectively assessed		1,522			1,182			1,405
Impairment losses reversed with a credit to income		(3,294	)		(4,281	)		(4,707	)
Changes in the scope of consolidation (Note 3)		(266	)		(1,267	)		—
Write-off of impaired balances against recorded impairment allowance		(11,447	)		(12,430	)		(10,913	)
Exchange differences and other changes		(1,603	)		106			1,285
Balance at end of year		25,549			18,988			19,739
Of which:
By method of assessment:
Individually assessed		21,605			15,343			14,584
Of which: due to country risk (Note 2.g)		42			43			49
Collectively assessed		3,944			3,645			5,155
By geographical location of risk:
Spain		11,711			6,907			6,810
Rest of Europe		5,707			4,957			4,695
Americas		8,131			7,124			8,234
By classification of assets:
Loans and advances to credit institutions		30			36			17
Debt instruments		15			16			25
Loans and advances to customers		25,504			18,936			19,697

The increase in credit loss provisions recorded in 2012 was due mainly to two factors: (i) a rise in non-performing loans ratios in certain sectors in Spain, caused by the worsening of Spain’s macroeconomic situation as a result of economic slowdown, falling consumer spending and job market deterioration, with the unemployment rate exceeding 25% (particularly significant in this context was the increase in non-performing loans ratios in the real estate sector – 47.7% at December 31, 2012, compared with 28.6% in 2011 (see Note 54)); and (ii) the upward shift in non-performing loans ratios in certain financial systems (Brazil, Chile and Portugal).

F-108

Previously written-off assets recovered in 2012, 2011 and 2010 amounted to EUR 1,328 million, EUR 1,800 million and EUR 1,201 million, 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 18,549 million in 2011, EUR 11,040 million in 2010 and EUR 10,267 million in 2009.

d) Impaired assets

The detail of the changes in the balance of the financial assets classified as Loans and receivables - Loans and advances to customers and considered to be impaired due to credit risk is as follows:

	Millions of euros
	2012			2011			2010
Balance at beginning of year		31,287			27,908			24,049
Net additions		16,277			16,040			13,575
Written-off assets		(11,447	)		(12,430	)		(10,913	)
Changes in the scope of consolidation		(626	)		69			239
Exchange differences and other		(151	)		(300	)		958
Balance at end of year		35,340			31,287			27,908

This amount, after deducting the related allowances, represents the Group’s best estimate of the fair value of the impaired assets.

At December 31, 2012, the Group’s written-off assets totaled EUR 28,745 million (December 31, 2011: EUR 26,763 million).

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, 2012, 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 months past due		With balances past due by
			3 to 6 months		6 to 9 months		9 to 12 months		More than 12 months		Total
Spain		3,268		3,364		2,058		1,263		6,372		16,325
European Union (excluding Spain)		233		3,821		1,232		821		3,280		9,387
United States and Puerto Rico		327		216		111		83		484		1,221
Other OECD countries		12		42		40		43		—		137
Latin America		535		3,263		1,641		1,282		1,548		8,269
Rest of the world		—		—		—		—		1		1
		4,375		10,706		5,082		3,492		11,685		35,340

F-109

The detail at December 31, 2011 is as follows:

	Millions of euros
	With no past-due balances or less than 3 months past due		With balances past due by
			3 to 6 months		6 to 9 months		9 to 12 months		More than 12 months		Total
Spain		2,962		3,574		1,589		1,956		4,902		14,983
European Union (excluding Spain)		474		3,360		1,018		703		2,752		8,307
United States and Puerto Rico		406		282		137		118		533		1,476
Other OECD countries		9		34		37		43		1		124
Latin America		440		2,438		1,339		1,075		1,103		6,395
Rest of the world		—		2		—		—		—		2
		4,291		9,690		4,120		3,895		9,291		31,287

The detail at December 31, 2010 is as follows:

	Millions of euros
	With no past-due balances or less than 3 months past due		With balances past due by
			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

e) Securitization

Loans and advances to customers includes, inter alia, the securitized loans transferred to third parties on which the Group has retained the risks and rewards, 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.

F-110

	Millions of euros
	2012		2011		2010
Derecognized		6,251		8,227		9,647
Of which
Securitised mortgage assets		6,249		8,221		9,635
Other securitized assets		2		6		12
Retained on the balance sheet		95,981		137,939		133,046
Of which
Securitised mortgage assets		69,354		103,655		99,842
Of which: UK assets		56,037		81,286		73,865
Other securitized assets		26,627		34,284		33,204
Total		102,232		146,166		142,693

Securitization is used as a tool for the management of regulatory capital and as a means of diversifying the Group’s liquidity sources. In 2012, 2011 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.

The loans derecognized include assets of Santander Holdings USA, Inc. amounting to approximately EUR 5,603 million at December 31, 2012 (December 31, 2011: EUR 7,188 million; December 31, 2010: 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. At December 31, 2012, the Group recognized under Other liabilities an obligation amounting to EUR 91 million (December 31, 2011: EUR 105 million; December 31, 2010: EUR 128 million), which represents the fair value of the retained credit risk.

The loans retained on the face of the balance sheet include the loans associated with securitizations in which the Group retains a subordinated debt and/or grants any manner of credit enhancements to the new holders. In 2012, following the Bank of England’s decision to accept, as collateral in its liquidity programmes, not only securitizations but also all mortgage loans with a given credit quality, the Group companies in the UK redeemed GBP 33,800 million in order to manage more efficiently the on-balance-sheet liquidity of Santander UK.

The loans transferred through securitization are mainly mortgage loans, loans to companies and consumer loans.

F-111

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):

	Millions of euros
	2012				2011				2010
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
Fair value hedges		7,467		5,492		9,424		5,501		8,007		5,833
Of which: Portfolio hedges		544		2,621		1,493		2,515		1,540		2,683
Cash flow hedges		344		553		313		773		153		438
Hedges of net investments in foreign operations		125		399		161		170		67		363
		7,936		6,444		9,898		6,444		8,227		6,634

Note 36 contains a description of the Group’s main hedges.

12. Non-current assets held for sale

The detail of Non-current assets held for sale in the consolidated balance sheets is as follows:

	Millions of euros
	2012		2011		2010
Tangible assets		4,259		5,171		5,972
Of which:
Foreclosed assets and acquired assets		4,196		5,112		5,874
Of which: Property assets in Spain (Note 54)		3,674		4,274		5,196
Other tangible assets held for sale		63		59		98
Other assets		71		167		313
		4,330		5,338		6,285

At December 31, 2012, the allowance that covers the value of the foreclosed assets and acquired assets amounted to EUR 4,416 million (2011: EUR 4,512 million; 2010: EUR 2,500 million), which represents a coverage ratio of 51.28% of the assets’ gross value (2011: 46.88%; 2010: 29.85%). The net charges recorded in those years amounted to EUR 449 million, EUR 2,037 million and EUR 298 million, respectively (see Note 50).

In 2012, the Group sold properties amounting to EUR 2,043 million, with a gross value of EUR 3,249 million, and a provision of EUR 897 million was recognized in this connection. These sales generated losses of EUR 308 million (see Note 50).

F-112

13. Investments

a) Breakdown

The detail, by company, of Investments (see Note 2.b) is as follows:

	Millions of euros
	2012		2011		2010
Santander Consumer USA Inc.		2,026		2,063		—
Metrovacesa, S.A.		649		772		—
Zurich Santander Insurance América S.L.		1,013		1,017		—
Banco Caixa Geral Totta Angola, S.A.		102		92		95
Other companies		664		211		178
		4,454		4,155		273

b) Changes

The changes in Investments were as follows:

	Millions of euros
	2012			2011			2010
Balance at beginning of year		4,155			273			164
Acquisitions (disposals) and capital increases (reductions)		34			23			(30	)
Changes in the scope of consolidation (Note 3)		394			3,919			101
Of which:
Santander Consumer USA Inc.		—			2,063			—
Zurich Santander Insurance América, S.L.		—			932			—
Metrovacesa, S.A.		—			894			—
Income due to equity accounting		427			57			17
Impairment losses		—			(100	)		—
Dividends paid and reimbursements of share premium		(508	)		(13	)		(16	)
Exchange differences and other changes		(48	)		(4	)		37
Balance at end of year		4,454			4,155			273

c) Impairment losses

In 2012 and 2010 there was no evidence of material impairment on the Group’s investments in associates. In 2011 an impairment loss of EUR 100 million on the investment in Metrovacesa was recognized under Impairment losses on other assets (net) - Other assets in the consolidated income statement.

F-113

d) Other disclosures

Following is a summary of the financial information on the companies accounted for using the equity method (obtained from the information available at the date on preparation of the financial statements):

	Millions of euros
	2012			2011			2010
Total assets		54,367			32,344			4,630
Total liabilities		(46,933	)		(24,519	)		(3,828	)
Net assets		7,434			7,825			802
Group’s share of net assets		2,769			2,473			202
Goodwill		1,685			1,682			71
Of which:
Santander Consumer USA Inc.		979			999			—
Zurich Santander Insurance América, S.L.		526			526			—
Total Group share		4,454			4,155			273
Total income		10,232			8,428			1,047
Total profit		612			1,212			70
Group’s share of profit		427			57			17

14. Insurance contracts linked to pensions

The detail of Insurance contracts linked to pensions in the consolidated balance sheets is as follows:

	Millions of euros
	2012		2011		2010
Assets relating to insurance contracts covering post-employment benefit plan obligations:
Banco Santander, S.A.		214		1,926		1,986
Banesto		190		191		202
Other Spanish companies		1		29		30
Assets relating to insurance contracts covering other similar obligations:
Banco Santander, S.A.		—		—		1
Other Spanish companies		—		—		1
		405		2,146		2,220

In 2012 the Group entered into an agreement with Generali España, S.A. to terminate a portion of the insurance contracts linked to pensions which it held with this insurance company (see Note 25.c).

F-114

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:

	Millions of euros
	2012							2011							2010
Technical provisions for:	Direct insurance and reinsurance assumed		Reinsurance ceded			Total (balance payable)		Direct insurance and reinsurance assumed		Reinsurance ceded			Total (balance payable)		Direct insurance and reinsurance assumed		Reinsurance ceded			Total (balance payable)
Unearned premiums and unexpired risks		137		(68	)		69		166		(86	)		80		371		(170	)		201
Life insurance:		479		(229	)		250		229		(78	)		151		3,061		(51	)		3,010
Claims outstanding		391		(61	)		330		66		(55	)		11		514		(65	)		449
Bonuses and rebates		14		—			14		17		—			17		22		—			22
Life insurance policies where the investment risk is borne by the policyholders		—		—			—		—		—			—		5,763		—			5,763
Other technical provisions		404		(66	)		338		39		(35	)		4		718		(260	)		458
		1,425		(424	)		1,001		517		(254	)		263		10,449		(546	)		9,903

The decrease in the above line items in 2011 arose from the sale of the insurance companies in Latin America to Zurich (see Note 3).

In addition, on July 19, 2012, the Group entered into an agreement with Abbey Life Assurance Company Limited (“Abbey Life Assurance”), a subsidiary of Deutsche Bank, whereby Abbey Life Assurance will reinsure the entire individual life risk portfolio of Santander Group insurance companies in Spain and Portugal. Under this agreement, the Group transferred to Abbey Life Insurance, in exchange for an up-front amount, its life insurance policy portfolio at June 30, 2012 and the potential renewals of these policies. Abbey Life Insurance will assume, from the agreement date, all the risks and rewards relating to the term of these policies and their potential renewals (i.e. both the risk of changes in the actual rates of mortality and permanent total disability compared with the estimated rates, and the lapse risk of the portfolio, credit risk on the part of the insureds, etc.). The Group will continue to carry out the administrative management of these policies and will receive in exchange from Abbey Life Insurance a market consideration independent of the up-front amount received.

This transaction gave rise to income of EUR 435 million recognized under Other operating income - Income from insurance and reinsurance contracts issued in the consolidated income statement (EUR 308 million net of tax).

F-115

16. Tangible assets

a) Changes

The changes in Tangible assets in the consolidated balance sheets were as follows:

	Millions of euros
	For own use			Leased out under an operating lease			Investment property			Total
Cost:
Balances at January 1, 2010		11,239			2,400			1,223			14,862
Additions / Disposals (net) due to change in the scope of consolidation		37			11			—			48
Additions / Disposals (net)		1,545			821			268			2,634
Transfers, exchange differences and other items		568			(6	)		70			632
Balances at December 31, 2010		13,389			3,226			1,561			18,176
Additions / Disposals (net) due to change in the scope of consolidation		473			(187	)		2,759			3,045
Additions / Disposals (net)		905			(13	)		59			951
Transfers, exchange differences and other items		(165	)		50			(72	)		(187	)
Balances at December 31, 2011		14,602			3,076			4,307			21,985
Additions / Disposals (net) due to change in the scope of consolidation		41			(11	)		(69	)		(39	)
Additions / Disposals (net)		795			(105	)		105			795
Transfers, exchange differences and other items		342			157			(78	)		421
Balances at December 31, 2012		15,780			3,117			4,265			23,162
Accumulated depreciation:
Balances at January 1, 2010		(5,009	)		(687	)		(36	)		(5,732	)
Disposals		330			169			3			502
Charge for the year		(846	)		—			(10	)		(856	)
Transfers, exchange differences and other items		(322	)		(368	)		(11	)		(701	)
Balances at December 31, 2010		(5,847	)		(886	)		(54	)		(6,787	)
Disposals due to change in the scope of consolidation		22			43			—			65
Disposals		158			274			6			438
Charge for the year		(904	)		(2	)		(15	)		(921	)
Transfers, exchange differences and other items		(211	)		(261	)		(66	)		(538	)
Balances at December 31, 2011		(6,782	)		(832	)		(129	)		(7,743	)
Disposals due to change in the scope of consolidation		44			—			7			51
Disposals		423			229			8			660
Charge for the year		(1,060	)		(1	)		(13	)		(1,074	)
Transfers, exchange differences and other items		(251	)		(265	)		(37	)		(553	)
Balances at December 31, 2012		(7,626	)		(869	)		(164	)		(8,659	)

F-116

	Millions of euros
	For own use			Leased out under an operating lease			Investment property			Total
Impairment losses:
Balances at January 1, 2010		(28	)		(10	)		(96	)		(134	)
Impairment charge for the year		(22	)		(3	)		(82	)		(107	)
Exchange differences and other items		16			(3	)		(19	)		(6	)
Balances at December 31, 2010		(34	)		(16	)		(197	)		(247	)
Impairment charge for the year		2			(22	)		(131	)		(151	)
Exchange differences		9			(8	)		1			2
Balances at December 31, 2011		(23	)		(46	)		(327	)		(396	)
Impairment charge for the year		(10	)		(23	)		(185	)		(218	)
Disposals due to change in the scope of consolidation		—			—			(50	)		(50	)
Exchange differences		15			1			6			22
Balances at December 31, 2012		(18	)		(68	)		(556	)		(642	)
Tangible assets, net:
Balances at December 31, 2010		7,508			2,324			1,310			11,142
Balances at December 31, 2011		7,797			2,198			3,851			13,846
Balances at December 31, 2012		8,136			2,179			3,545			13,860

F-117

b) Property, plant and equipment for own use

The detail, by class of asset, of Property, plant and equipment - For own use in the consolidated balance sheets is as follows:

	Millions of euros
	Cost		Accumulated depreciation			Impairment losses			Carrying amount
Land and buildings		5,393		(1,354	)		(34	)		4,005
IT equipment and fixtures		2,904		(2,076	)		—			828
Furniture and vehicles		4,833		(2,346	)		—			2,487
Construction in progress and other items		259		(71	)		—			188
Balances at December 31, 2010		13,389		(5,847	)		(34	)		7,508
Land and buildings		5,654		(1,565	)		(23	)		4,066
IT equipment and fixtures		3,304		(2,419	)		—			885
Furniture and vehicles		5,239		(2,719	)		—			2,520
Construction in progress and other items		405		(79	)		—			326
Balances at December 31, 2011		14,602		(6,782	)		(23	)		7,797
Land and buildings		5,735		(1,583	)		(18	)		4,134
IT equipment and fixtures		4,174		(3,087	)		—			1,087
Furniture and vehicles		5,403		(2,873	)		—			2,530
Construction in progress and other items		468		(83	)		—			385
Balances at December 31, 2012		15,780		(7,626	)		(18	)		8,136

The carrying amount at December 31, 2012 in the foregoing table includes the following approximate amounts:

• EUR 5,615 million (December 31, 2011: EUR 5,254 million; December 31, 2010: EUR 5,104 million) relating to property, plant and equipment owned by Group entities and branch offices located abroad.

• EUR 208 million (December 31, 2011: EUR 793 million; December 31, 2010: EUR 660 million) relating to property, plant and equipment being acquired under finance leases by the consolidated entities (Note 2.k discloses additional information on these items).

c) Investment property

The fair value of investment property at December 31, 2012 amounted to EUR 3,548 million (2011: EUR 3,860 million; 2010: EUR 1,319 million). A comparison of the fair value of investment property at December 31, 2012, 2011 and 2010 with the carrying amount gives rise to gross unrealized gains of EUR 3 million for 2012, EUR 9 million for 2011 and EUR 9 million for 2010, of which EUR 2 million, EUR 5 million and EUR 1 million, respectively, are attributable to the Group.

The rental income earned from investment property and the direct costs related both to investment properties that generated rental income in 2012, 2011 and 2010 and to investment properties that did not generate rental income in those years are not material in the context of the consolidated financial statements.

F-118

d) Sale of properties

In 2007 the Group sold ten hallmark properties and 1,152 Group branch offices to various buyers. Simultaneously, the Group entered into operating leases (with maintenance, insurance and taxes payable by the Group) on those properties with the buyers for various compulsory terms (12 to 15 years for the hallmark properties and 24 to 26 years for the branch offices), with various rent review agreements applicable during those periods. The agreements are renewable for 5- or 7-year periods up to a total of 40 years, for the hallmark properties, and 45 years for the branch offices, and in general they provide for rents to be adjusted to market value in each renewal period. The agreements also include a purchase option that in general may be exercised by the Group on final expiry of the leases at the market value of the properties on the related dates, which will be determined, if appropriate, by independent experts.

Also, on September 12, 2008, the Group sold its head office complex (Ciudad Financiera or Santander Business Campus) to Marme Inversiones 2007, S.L. and simultaneously entered into an operating lease agreement with this company for the complex (with maintenance, insurance and taxes payable by the Group), with a compulsory term of 40 years, during which the rent (initially set at EUR 6.8 million per month, payable quarterly) will be reviewed annually based on the variation in the preceding twelve months in the Harmonised 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.

The rental expense recognized by the Group in 2012 in connection with these operating lease agreements amounted to EUR 269 million (2011: EUR 257 million; 2010: EUR 214 million). At December 31, 2012, 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 224 million payable within one year (December 31, 2011: EUR 218 million; December 31, 2010: EUR 212 million), EUR 827 million payable at between one and five years (December 31, 2011: EUR 805 million; December 31, 2010: EUR 784 million) –EUR 217 million in the second year (December 31, 2011: EUR 211 million; December 31, 2010: EUR 205 million), EUR 210 million in the third year (December 31, 2011: EUR 204 million; December 31, 2010: EUR 199 million), EUR 203 million in the fourth year (December 31, 2011: EUR 198 million; December 31, 2010: EUR 193 million) and EUR 197 million in the fifth year (December 31, 2011: EUR 192 million; December 31, 2010: EUR 187 million)–, and EUR 1,861 million payable at more than five years (December 31, 2011: EUR 1,940 million; December 31, 2010: EUR 2,010 million).

F-119

17. Intangible assets - Goodwill

The detail cash generating units, to which significant goodwill has been allocates, and the amounts thereto, are as follows:

	Millions of euros
	2012		2011		2010
Santander UK		9,105		8,896		8,633
Banco Santander (Brasil)		7,035		7,878		8,755
Bank Zachodni WBK		2,210		2,019		—
Santander Holdings USA		1,556		1,587		1,537
Santander Consumer Holding (Germany)		1,315		1,315		1,169
Banco Santander Totta		1,040		1,040		1,641
Banco Santander- Chile		788		742		798
Grupo Financiero Santander (Mexico)		558		531		484
Other companies		1,019		1,081		1,546
Total goodwill		24,626		25,089		24,622

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). The first step that must be taken in order to perform this analysis is the identification of the cash-generating units, i.e. the Group’s smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

The amount to be recovered of each cash-generating unit is determined taking into consideration the carrying amount (including any fair value adjustments arising on the business combination) of all the assets and liabilities of all the independent legal entities comprising the cash-generating unit, together with the related goodwill.

The amount to be recovered of the cash-generating unit is compared with its recoverable amount in order to determine whether there is any impairment.

The Group’s directors assess the existence of any indication that might be considered to be evidence of impairment of the cash-generating unit by reviewing information including the following: (i) certain macroeconomic variables that might affect its investments (population data, political situation, economic situation -including bankarization-, among others) and (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).

Regardless of whether there is any indication of impairment, every year the Group calculates the recoverable amount of each cash-generating unit to which goodwill has been allocated and, to this end, it uses price quotations, if available, market references (multiples), internal estimates and appraisals performed by independent experts.

Firstly, the Group determines the recoverable amount by calculating the fair value of each cash-generating unit on the basis of the quoted price of the cash-generating units, if available, and of the price earnings ratios of comparable local entities.

F-120

In addition, the Group performs estimates of the recoverable amounts of certain cash-generating units by calculating their value in use using discounted cash flow projections. The main assumptions used in this calculation are: (i) earnings projections based on the financial budgets approved by the directors which normally cover a five-year period (unless a longer time horizon can be justified), (ii) discount rates determined as the cost of capital taking into account the risk-free rate of return plus a risk premium in line with the market and the business in which the units operate and (iii) constant growth rates used in order to extrapolate earnings to perpetuity which do not exceed the long-term average growth rate for the market in which the cash-generating unit in question operates.

Following is a detail of the main assumptions used in determining the recoverable amount, at 2012 year-end, of the most significant cash-generating units which were valued using the discounted cash flow method:

	Projected period			Discount rate (*)			Nominal perpetual growth rate
Santander UK		5 years			10	%		2.5	%
Banco Santander (Brasil)		10 years	(**)		15	%		6.0	%
Santander Holdings USA		5 years			10	%		2.5	%
Banco Santander Totta		5 years			12	%		3.0	%

(*) Post-tax discount rate for the purpose of consistency with the earnings projections used.

(**) A ten-year period was used for Brazil in order to provide normalized earnings projections which reflect all the synergies achieved from the merger of Banco Santander Brasil with Banco Real.

Given the degree of uncertainty of these assumptions, the Group performs a sensitivity analysis thereof using reasonable changes in the key assumptions on which the recoverable amount of the cash-generating units is based in order to confirm whether their recoverable amount still exceeds their carrying amount. The sensitivity analysis involved adjusting the discount rate by +/- 50 b.p. (+/-75 b.p. in the case of Brazil) and the perpetuity growth rate by +/-50 b.p. (+/- 100 b.p. in the case of Brazil). Following the sensitivity analysis performed, the value in use of all the cash-generating units still exceeds their recoverable amount, except for the unit disclosed in the following paragraph.

Based on the foregoing, and in accordance with the estimates, projections and sensitivity analyses available to the Bank’s directors, in 2012 the Group recognized impairment losses on goodwill totaling EUR 156 million (2011: EUR 660 million; 2010: EUR 63 million) under Impairment losses on other assets (net) - Goodwill and other intangible assets which related to Group subsidiaries in Italy. These losses were due mainly to the deterioration of business expectations (earnings projections).

In 2011 all the impairment losses recognized related to Group subsidiaries in Portugal. These losses were attributed to the macroeconomic deterioration in Portugal.

At December 31, 2012, none of the cash-generating units with significant goodwill, other than the Italian subsidiary, had a recoverable amount approximating their carrying amount. The recoverable amount is considered to be close to the carrying amount when reasonable changes in the main assumptions used in the valuation cause the recoverable amount to be below the recoverable amount.

F-121

The changes in Goodwill were as follows:

	Millions of euros
	2012			2011			2010
Balance at beginning of year		25,089			24,622			22,865
Additions (Note 3)		87			2,557			16
Of which:
Bank Zachodni WBK		—			2,261			—
Skandinaviska Enskild Banken		—			145			—
Adjustments to initial acquisition price allocation		—			—			167
Impairment losses		(156	)		(660	)		(63	)
Of which:
Santander Consumer Bank (Italy)		(156	)		—			—
Banco Santander Totta					(601	)		—
Disposals or changes in scope of consolidation (Note 3)		—			(716	)		—
Of which:
Santander Consumer USA		—			(541	)		—
Santander Seguros S.A. (Brasil)		—			(173	)		—
Exchange differences and other items		(394	)		(714	)		1,637
Balance at end of year		24,626			25,089			24,622

The Group has goodwill generated by cash-generating units located in non-euro currency countries (mainly the UK, Brazil, the United States, Poland, Mexico and Chile) and, therefore, this gives rise to exchange differences on the translation to euros, at closing rates, of the amounts of goodwill denominated in foreign currencies. 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.

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18. Intangible assets - Other intangible assets

The detail of Intangible assets - Other intangible assets in the consolidated balance sheets and of the changes therein in 2012, 2011 and 2010 is as follows:

		Millions of euros
	Estimated useful life	December 31, 2011			Net additions and disposals		Change in scope of consolidation			Amortization and impairment			Application of amortization and impairment			Exchange differences and other			December 31, 2012
With indefinite useful life:
Brand names			14			—		—			—			—			—			14
With finite useful life:
IT developments	3 to 7 years		5,127			1,098		45			—			(911	)		(74	)		5,285
Other			1,494			545		11			—			(557	)		(120	)		1,373
Accumulated amortization			(3,150	)		—		(28	)		(1,115	)		1,144			43			(3,106	)
Impairment losses			(491	)		—		—			5			324			32			(130	)
			2,994			1,643		28			(1,110	)		—			(119	)		3,436

		Millions of euros
	Estimated useful life	December 31, 2010			Net additions and disposals		Change in scope of consolidation			Amortization and impairment			Application of amortization and impairment			Exchange differences and other			December 31, 2011
With indefinite useful life:
Brand names			44			—		(30	)		—			—			—			14
With finite useful life:
IT developments	3 to 7 years		4,237			1,420		145			—			(570	)		(105	)		5,127
Other			1,899			62		(104	)		—			(254	)		(109	)		1,494
Accumulated amortization			(2,732	)		—		(112	)		(1,188	)		799			83			(3,150	)
Impairment losses			(6	)		—		—			(501	)		25			(9	)		(491	)
			3,442			1,482		(101	)		(1,689	)		—			(140	)		2,994

F-123

		Millions of euros
	Estimated useful life	December 31, 2009			Net additions and disposals		Change in scope of consolidation		Amortization and impairment			Application of amortization and impairment			Exchange differences and other			December 31, 2010
With indefinite useful life:
Brand names			41			—		—		—			—			3			44
With finite useful life:
Credit cards (Abbey)	5 years		27			—		—		—			(27	)		—			—
IT developments	3 to 7 years		2,942			1,338		—		—			(357	)		314			4,237
Other			1,697			133		2		—			(62	)		129			1,899
Accumulated amortization			(1,921	)		—		—		(1,085	)		437			(163	)		(2,732	)
Impairment losses			(8	)		—		—		(6	)		9			(1	)		(6	)
			2,778			1,471		2		(1,091	)		—			282			3,442

At December 31, 2012, 2011 and 2010, 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 2012 the Group recognized reversals of impairment losses amounting to EUR 5 million under Impairment losses on other assets (net) - Goodwill and other intangible assets (2011 and 2010: impairment losses of EUR 501 million and EUR 6 million, respectively).

19. Other assets

The detail of Other assets is as follows:

	Millions of euros
	2012		2011		2010
Transactions in transit		224		616		304
Net pension plan assets (Note 25)		1,563		1,510		984
Prepayments and accrued income		1,756		2,032		2,559
Other		3,044		3,541		3,285
Inventories		173		319		455
		6,760		8,018		7,587

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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 in the consolidated balance sheets is as follows:

	Millions of euros
	2012		2011		2010
Classification:
Financial liabilities held for trading		9,420		17,027		40,976
Of which:
Deposits from central banks		1,128		7,740		12,605
Deposits from credit institutions		8,292		9,287		28,371
Other financial liabilities at fair value through profit or loss		11,876		9,742		19,600
Of which:
Deposits from central banks		1,014		1,510		337
Deposits from credit institutions		10,862		8,232		19,263
Financial liabilities at amortized cost		131,670		116,369		79,536
Of which:
Deposits from central banks		50,938		34,996		8,644
Deposits from credit institutions		80,732		81,373		70,892
		152,966		143,138		140,112
Type:
Reciprocal accounts		508		604		423
Time deposits		92,491		82,817		57,233
Other demand accounts		3,225		3,396		2,678
Repurchase agreements		50,742		51,316		78,197
Central bank credit account drawdowns		6,000		5,005		1,580
Hybrid financial liabilities		—		—		1
		152,966		143,138		140,112
Currency:
Euro		98,808		81,044		52,872
Pound sterling		8,566		9,787		25,309
US dollar		34,904		31,175		43,996
Other currencies		10,688		21,132		17,935
		152,966		143,138		140,112

Both asset and liability balances with central banks increased in 2011 and 2012 following the liquidity injections by the central banks in countries where the Group operates, particularly in the euro zone. The European Central Bank (ECB) implemented extraordinary monetary policy measures, including a wider range of collateral and three-year liquidity auctions.

The Group continued to go to these auctions and deposit in the ECB most of the funds captured, significantly increasing the liquidity buffer and improving its structure by replacing short-term maturities by longer term funding. The Group’s net borrowing position from the ECB was EUR 2 thousand billion at December 31, 2012, due mainly to Banco Santander Totta, S.A.

Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates.

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21. Customer deposits

The detail, by classification, geographical area and type, of Customer deposits is as follows:

	Millions of euros
	2012		2011		2010
Classification:
Financial liabilities held for trading		8,897		16,574		7,849
Other financial liabilities at fair value through profit or loss		28,638		26,982		27,142
Financial liabilities at amortized cost		589,104		588,977		581,385
		626,639		632,533		616,376
Geographical area:
Spain		192,588		202,022		218,788
European Union (excluding Spain)		261,135		260,529		230,929
United States and Puerto Rico		45,129		43,437		40,855
Other OECD countries		788		939		998
Latin America		126,842		125,343		124,334
Rest of the world		157		263		472
		626,639		632,533		616,376
Type:
Demand deposits-
Current accounts		144,305		155,455		148,066
Savings accounts		167,389		140,583		136,694
Other demand deposits		3,443		3,179		3,431
Time deposits-
Fixed-term deposits		257,583		257,498		275,629
Home-purchase savings accounts		132		174		231
Discount deposits		1,345		732		448
Hybrid financial liabilities		3,128		4,594		4,754
Other term deposits		590		139		154
Notice deposits		969		1,338		1,316
Repurchase agreements		47,755		68,841		45,653
		626,639		632,533		616,376

Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates.

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22. Marketable debt securities

a) Breakdown

The detail, by classification and type, of Marketable debt securities is as follows:

	Millions of euros
	2012		2011		2010
Classification:
Financial liabilities held for trading		1		77		366
Other financial liabilities at fair value through profit or loss		4,904		8,185		4,278
Financial liabilities at amortized cost		201,064		189,110		188,229
		205,969		197,372		192,873
Type:
Bonds and debentures outstanding		183,686		185,530		185,869
Notes and other securities		22,283		11,842		7,004
		205,969		197,372		192,873

At December 31, 2011 and 2010, none of these issues was convertible into Bank shares or granted privileges or rights which, in certain circumstances, make them convertible into shares, except for the “Valores Santander” issue (described in Note 34.a), which was converted into shares in 2012 and, accordingly, there were no issues of this type at December 31, 2012.

Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost at 2012, 2011 and 2010 year-end and of the related average interest rates in those years.

b) Bonds and debentures outstanding

The detail, by currency of issue, of Bonds and debentures outstanding is as follows:

							December 31, 2012
							Outstanding issue amount in foreign		Annual interest rate (%)
	Millions of euros						currency
Currency of issue	2012		2011		2010		(millions)
Euro		111,173		116,590		120,705		111,173		3.11	%
US dollar		26,186		28,995		33,680		34,550		4.15	%
Pound sterling		24,707		20,483		17,735		20,163		2.57	%
Brazilian real		14,581		12,790		7,391		39,420		6.10	%
Chilean peso		3,906		3,714		3,777		2,467,582		4.30	%
Other currencies		3,133		2,958		2,581
Balance at end of year		183,686		185,530		185,869

F-127

The changes in Bonds and debentures outstanding were as follows:

	Millions of euros
	2012			2011			2010
Balance at beginning of year		185,530			185,869			183,250
Net inclusion of entities in the Group		(1,649	)		(6,064	)		831
Of which:
Santander Consumer USA Inc.		—			(6,025	)		831
Issues		80,817			91,215			116,239
Of which:
Santander UK Group
Bonds in other currencies		32,162			49,497			24,221
Bond in pounds sterling		13,281			8,301			51,052
Banco Santander (Brasil) S.A.
Bonds		6,461			6,783			3,984
Real estate letters of credit		5,359			3,927			3,218
Agricultural letters of credit		1,612			1,274			410
Santander International Debt, S.A. Sole-Shareholder Company - Bonds		9,727			8,635			10,012
Banco Santander, S.A.
Mortgage-backed bonds - fixed rate		4,089			—			2,027
Bonds		—			3,978			2,110
Banesto
Mortgage-backed bonds - fixed rate		955			600			565
Bonds		949			1,452			5,979
Banco Santander - Chile – Bonds		1,436			874			2,135
Santander Consumer Finance, S.A. - Bonds		1,012			481			150
Motor 2012 PLC - Asset-backed securities		895			—			—
Santander Consumer Bank A.S. - Bonds		816			4			164
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander - Bonds		780			—			10
Santander Holdings USA, Inc. - Bonds		453			384			—
Svensk Autofinans 1 Limited - Asset-backed securities		407			—			—
SCF Rahoituspalvelut Limited - Asset-backed securities		237			—			—
Santander Consumer Bank Spólka Akcyjna - Bonds		112			213			166
Banco Santander Totta, S.A.
Mortgage debentures		—			875			950
Bonds		—			359			342
Santander Consumer Bank, S.p.A. - Bonds - floating rate		—			650			—
SC Private Cars 2010- 1 Limited - Asset-backed securities		—			591			—
Motor 2011 PLC - Asset-backed securities		—			320			—
Bilkreditt 1Limited - Asset-backed securities		—			288			—
Brazil Foreign Diversified Payment Rights Finance Company Asset-backed securities		—			193			185
Santander Consumer USA Inc - Asset-backed securities		—			—			4,642
Santander US Debt, S.A. Sole-Shareholder Company - Debentures - floating rate		—			—			3,068
Totta (Ireland), PLC- Bonds- floating rate		—			—			112
Redemptions		(78,706	)		(81,395	)		(112,730	)
Of which:
Santander UK Group		(41,862	)		(51,707	)		(70,071	)
Banco Santander (Brasil) S.A.		(9,346	)		(6,102	)		(3,116	)
Banco Santander, S.A.		(6,542	)		(2,968	)		(1,965	)
Banesto		(6,401	)		(7,748	)		(7,134	)
Santander International Debt, S.A. Sole-Shareholder Company		(8,479	)		(7,795	)		(11,576	)
Santander Holdings USA, Inc.		(1,236	)		—			(9,652	)
Santander US Debt, S.A. Sole-Shareholder Company		(1,146	)		(1,118	)		(1,562	)
Banco Santander- Chile		(1,112	)		(520	)		(228	)
Banco Santander Totta, S.A.		(1,014	)		(2,477	)		(1,383	)
Santander Consumer Bank AG		(863	)		(317	)		—
Santander Consumer Finance, S.A.		(481	)		(150	)		—
Santander Consumer Bank Spólka Akcyjna		(68	)		(167	)		—
Totta (Ireland), PLC		—			(112	)		(3,380	)
Hipottota No. 6 Ltd.		—			—			(1,818	)
Santander Consumer USA Inc.		—			—			(519	)
Santander Consumer Bank S.p.A.		—			—			(26	)
Exchange differences		(636	)		(11	)		2,098
Other changes		(1,670	)		(4,084	)		(3,819	)
Balance at end of year		183,686			185,530			185,869

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c) Notes and other securities

These notes were issued basically by Banco Santander, S.A., Santander Consumer Finance, S.A., Santander Commercial Paper, S.A. (Sole-Shareholder Company), Abbey National North America LLC, Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander, Banesto and Fondo de Titulización de Activos Santander 2.

d) Guarantees

At December 31, 2012, liabilities secured by financial assets amounted to EUR 103,067 million, the detail being as follows:

	Millions of euros
	2012		2011		2010
Asset-backed securities		35,853		37,466		39,279
Of which, mortgage-backed securities		29,938		31,719		28,059
Other mortgage securities		67,214		76,243		65,187
Of which: mortgage-backed bonds		38,500		42,717		41,960
		103,067		113,709		104,466

The mortgage-backed securities and other mortgage securities are secured by mortgage loans with average maturities of more than ten years. The main terms and conditions of these loans are listed below:

1. Transactions securing mortgage-backed securities:

• First mortgage for acquisition and/or refurbishment of principal or second residence, which at the date of securitization must not have any amounts more than 30 days past due. For these purposes, financing granted to property developers is excluded.

• Appraisal conducted by specialist valuer.

• The amount of the loan 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.

F-129

2. With respect to issues of mortgage-backed bonds (cédulas hipotecarias), in order to calculate the amount of the qualifying assets, the following transactions are excluded from the total base of the unsecuritized mortgage portfolio:

• Transactions classified as non-performing, at pre-action stage and at procedural stage.

• Transactions without appraisal by a specialist valuer.

• Transactions exceeding 80% of the appraised value in residential financing and 60% in the case of other assets.

• Second mortgages or mortgages with insufficient collateral.

• Transactions without insurance or with insufficient insurance.

The other securitizations, including asset-backed securities and notes issued by special-purpose vehicles (SPVs), are secured by:

• Mortgage loans to individuals to finance the acquisition and refurbishment of homes with an average maturity of 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.

• 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, S.A. (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.

e) Spanish mortgage-market issues

The members of the boards of directors of the Group entities hereby state that the Group entities have specific policies and procedures in place to cover all activities relating to the mortgage-market issues launched by the Group, 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 Circulars 7/2010 and 5/2011, and other financial and mortgage system regulations. Also, financial management defines the Group entities’ funding strategy.

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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 Bank’s general policies in this respect require the repayment capacity of each potential customer (the effort ratio in loan approval) to be analyzed using specific indicators that must be met. 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 aforementioned 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 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 they enter 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.

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 in full with the legislation, any appraisal provided by the customer is reviewed, irrespective of which appraisal company issues it, to check that 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.

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The information as of December 31, 2012 required by Bank of Spain Circulars 7/2010 and 5/2011, by application of Royal Decree 716/2009, of April 24, is as follows:

	Millions of euros
Face value of the outstanding mortgage loans and credits that support the issuance of mortgage-backed and mortgage bonds pursuant to Royal Decree 716/2009 (excluding securitized bonds)		87,595
Of which:
Loans eligible to cover issues of mortgage-backed securities		60,937
Transfers of assets retained on balance sheet: mortgage-backed certificates and other securitized mortgage assets		11,474

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.

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The outstanding mortgage-backed bonds issued by the Group totaled EUR 38,500 million at December 31, 2012 (all of which were denominated in euros), of which EUR 24,611 million were issued by Banco Santander, S.A., EUR 12,732 million were issued by Banco Español de Crédito, S.A. and EUR 1,157 million were issued by Santander Consumer Finance, S.A. The issues outstanding at December 31, 2012 and 2011 are detailed in the separate financial statements of each of these companies.

Mortgage bond issuers have an early redemption option solely for the purpose of complying with the limits on the volume of outstanding mortgage-backed bonds stipulated by mortgage market regulations.

None of the mortgage-backed bonds issued by the Group entities had replacement assets assigned to them.

23. Subordinated liabilities

a) Breakdown

The detail, by currency of issue, of Subordinated liabilities in the consolidated balance sheets is as follows:

	Millions of euros						December 31, 2012
							Outstanding issue amount in foreign currency (millions)		Annual interest rate (%)
Currency of issue	2012		2011		2010
Euro		5,214		6,848		13,701		5,214		3.69	%
US dollar		3,932		5,637		6,259		5,188		7.24	%
Pound sterling		3,292		4,568		4,876		2,686		9.42	%
Brazilian real		4,409		4,515		4,372		11,919		8.64	%
Other currencies		1,391		1,424		1,267
Balance at end of year		18,238		22,992		30,475
Of which, preference shares		421		449		435

Note 51 contains a detail of the residual maturity periods of subordinated liabilities at each year-end and of the related average interest rates in each year.

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b) Changes

The changes in Subordinated liabilities in the last three years were as follows:

	Millions of euros
	2012			2011			2010
Balance at beginning of year		22,992			30,475			36,805
Net inclusion of entities in the Group (Note 3)		(1	)		99			—
Bank Zachodni WBK S.A.		—			99			—
Issues		2			171			287
Of which:
Banco Santander- Chile		—			169			206
Banco Santander, S.A.		—			—			73
Redemptions and repurchases		(4,080	)		(8,616	)		(7,728	)
Of which:
Santander Issuances, S.A., Sole-Shareholder Company		(1,253	)		(3,190	)		(1,852	)
Santander UK plc		(1,166	)		(847	)		(1,453	)
Banesto		(608	)		(506	)		(17	)
Santander Holdings USA, Inc.		(264	)		(517	)		(148	)
Abbey National Capital Trust I		(203	)		—			—
Banco Santander – Chile		(168	)		(8	)		(30	)
Santander Perpetual, S.A., Sole-Shareholder Company		(155	)		(35	)		(848	)
Santander Finance Preferred, S.A., Sole-Shareholder Company		(99	)		—			—
Banco Santander, S.A.		(66	)		(294	)		(126	)
Santander Finance Capital, S.A., Sole-Shareholder Company		—			(1,943	)(*)		(1,000	)
Santander Central Hispano Issuances Limited		—			(1,195	)		(1,484	)
Banco Santander (Brasil) S.A.		—			—			(347	)
Banco Santander Totta, S.A.		—			—			(254	)
Exchange differences		(190	)		230			1,161
Other changes		(485	)		633			(50	)
Balance at end of year		18,238			22,992			30,475

(*) On December 30, 2011, 341,802,171 new shares were issued (3.837% of the share capital) as part of the repurchase offer made to the holders of Series X preference shares issued by Santander Finance Capital, S.A., Sole-Shareholder Company (see Note 31).

c) 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 plc 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.

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At December 31, 2012, none of these issues was convertible into Bank shares or granted privileges or rights which, in certain circumstances, make them convertible into shares.

At December 31, 2012, Santander UK plc had a GBP 200 million subordinated 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), S.A. (see Note 34).

The interest accrued on subordinated liabilities amounted to EUR 1,650 million in 2012 (2011: EUR 1,940 million; 2010: EUR 2,230 million) (see Note 39).

24. Other financial liabilities

The detail of Other financial liabilities in the consolidated balance sheets is as follows:

	Millions of euros
	2012		2011		2010
Trade payables		1,255		1,249		2,080
Clearing houses		573		1,330		1,485
Tax collection accounts:
Tax payables		2,021		1,949		2,106
Factoring accounts payable		201		390		416
Unsettled financial transactions		5,080		3,656		3,183
Other financial liabilities		10,115		9,647		10,074
		19,245		18,221		19,344

Note 51 contains a detail of the residual maturity periods of other financial liabilities at each year-end.

25. Provisions

a) Breakdown

The detail of Provisions in the consolidated balance sheets is as follows:

	Millions of euros
	2012		2011		2010
Provision for pensions and similar obligations		7,077		9,045		9,519
Provisions for taxes and other legal contingencies		3,100		3,663		3,670
Provisions for contingent liabilities and commitments (Note 2):		617		659		1,030
Of which: due to country risk		3		11		19
Other provisions		2,078		2,205		1,441
Provisions		12,872		15,572		15,660

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b) Changes

The changes in Provisions in the last three years were as follows:

	Millions of euros
	2012												2011												2010
	Pensions			Contingent liabilities and commitments			Other provisions			Total			Pensions			Contingent liabilities and commitments			Other provisions			Total			Pensions			Contingent liabilities and commitments		Other provisions			Total
Balances at beginning of year		9,045			659			5,868			15,572			9,519			1,030			5,111			15,660			10,629			642		6,262			17,533
Net inclusion of entities in the Group		(60	)		(1	)		(16	)		(77	)		71			4			(71	)		4			—			4		8			12
Additions charged to income:
Interest expense and similar charges (Note 39)		398			—			—			398			357			—			—			357			481			—		—			481
Personnel expenses (Note 47)		145			—			—			145			138			—			—			138			146			—		—			146
Period provisions		(47	)		68			1,601			1,622			198			(153	)		2,556			2,601			188			69		876			1,133
Other additions arising from insurance contracts linked to pensions		(161	)		—			—			(161	)		7			—			—			7			(29	)		—		—			(29	)
Payments to pensioners and pre-retirees with a charge to internal provisions		(980	)		—			—			(980	)		(1,051	)		—			—			(1,051	)		(1,258	)		—		—			(1,258	)
Benefits paid due to settlements		(1,006	)		—			—			(1,006	)		—			—			—			—			—			—		—			—
Insurance premiums paid		54			—			—			54			(2	)		—			—			(2	)		(3	)		—		—			(3	)
Payments to external funds		(268	)		—			—			(268	)		(614	)		—			—			(614	)		(1,205	)		—		—			(1,205	)
Amount used		—			—			(2,161	)		(2,161	)		—			—			(1,473	)		(1,473	)		—			—		(3,364	)		(3,364	)
Transfers, exchange differences and other changes		(43	)		(109	)		(114	)		(266	)		422			(222	)		(255	)		(55	)		570			315		1,329			2,214
Balances at end of year		7,077			617			5,178			12,872			9,045			659			5,868			15,572			9,519			1,030		5,111			15,660

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c) Provision for pensions and similar obligations

The detail of Provisions for pensions and similar obligations is as follows:

	Millions of euros
	2012		2011		2010
Provisions for post-employment plans - Spanish entities		3,719		5,215		5,247
Of which: defined benefit		3,710		5,211		5,244
Provisions for other similar obligations - Spanish entities		2,404		2,781		3,273
Of which: pre-retirements		2,389		2,769		3,262
Provisions for post-employment plans - Santander UK plc		38		36		28
Provisions for post-employment plans and other similar obligations
- Other foreign subsidiaries		916		1,013		971
Of which: defined benefit		911		1,006		966
Provisions for pensions and similar obligations		7,077		9,045		9,519

i. Spanish entities - Post-employment plans and other similar obligations

In 2012, the Bank and Banesto reached an agreement with the employees’ representatives to alter the form of the defined-benefit obligations arising from the collective agreement into defined-contribution plans. In addition, the senior executives’ contracts with defined-benefit pension obligations were amended to alter such obligations into a defined-contribution employee welfare system.

The amount of the obligations accrued with respect to all the current employees, both those subject to the collective agreement and executives, whose defined-benefit obligations were converted into defined-contribution plans, totaled EUR 1,573 million. The obligations thus altered were externalized through the execution of various insurance contracts with Spanish insurance companies. The effect of the settlement of such defined-benefit obligations is shown in the tables below.

At December 31, 2012, 2011 and 2010, the Spanish entities had post-employment benefit obligations under defined contribution and defined benefit plans. In addition, 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.

The expenses incurred in respect of contributions to defined contribution plans amounted to EUR 54 million in 2011 (2010: EUR 50 million; 2009: EUR 47 million).

The amount of the defined benefit obligations was determined on the basis of the work performed by independent actuaries using the following actuarial techniques:

1. Valuation method: projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.

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2. Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows:

	Post-employment plans			Other similar obligations
	2012	2011	2010	2012	2011	2010
Annual discount rate	2.75% and 3% in the case of Banesto	4.00%	4.00%	2.75% and 3% in the case of Banesto	4.00%	4.00%
Mortality tables	GRM/F-95 (PERM/F-2000 in the case of Banesto)	GRM/F-95 (PERM/F-2000 in the case of Banesto)	GRM/F-95 (PERM/F-2000 in the case of Banesto)	GRM/F-95 (PERM/F-2000 in the case of Banesto)	GRM/F-95 (PERM/F-2000 in the case of Banesto)	GRM/F-95 (PERM/F-2000 in the case of Banesto)
Cumulative annual CPI growth	1.5%	1.5%	1.5%	1.5%	1.5%	1.5%
Annual salary increase rate	2% (*)	2.50% (2.9% in the case of Banesto)	2.50% (2.9% in the case of Banesto)	n/a	n/a	n/a
Annual social security pension increase rate	1.5%	1.5%	1.5%	n/a	n/a	n/a
Annual benefit increase rate	n/a	n/a	n/a	0% to 1.5%	0% to 1.5%	0% to 1.5%

(*) Corresponds to the Group’s defined-benefit obligations.

The discount rate used for the flows was determined by reference to high-quality corporate bonds.

Any changes in the main assumptions could affect the calculation of the obligations. If the discount rate used had been increased or decreased by 50 b.p., there would have been an impact of +/- EUR 21 million, net of tax, on the consolidated income statement and of +/- EUR 215 million in unrecognized actuarial losses and gains.

3. The estimated retirement age of each employee is the first at which the employee is entitled to retire or the agreed-upon age, as appropriate.

The fair value of insurance contracts was determined as the present value of the related payment obligations, taking into account the following assumptions:

	Post-employment plans							Other similar obligations
	2012	2011			2010			2012		2011			2010
Expected rate of return on plan assets	2.75% and 3% in the case of Banesto		4.0	%		4.0	%		n/a		—			—
Expected rate of return on reimbursement rights	2.75% and 3% in the case of Banesto		4.0	%		4.0	%		n/a		4.0	%		4.0	%

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The funding status of the defined benefit obligations in 2012 and the four preceding years is as follows:

	Millions of euros
	Post-employment plans										Other similar obligations
	2012		2011		2010		2009		2008		2012		2011		2010		2009		2008
Present value of the obligations:
To current employees		58		1,533		1,240		1,200		1,273		—		—		—		—		—
Vested obligations to retired employees		4,765		4,367		4,471		4,708		4,828		—		—		—		—		—
To pre-retirees		—		—		—		—		—		2,389		2,769		3,262		3,842		4,158
Long-service bonuses and other obligations		—		—		—		—		—		7		7		8		9		8
Other		221		185		181		183		181		8		5		3		—		—
		5,044		6,085		5,892		6,091		6,282		2.404		2,781		3,273		3,851		4,166
Less-
Fair value of plan assets		144		177		183		184		193		—		—		—		—		—
Unrecognized actuarial (gains)/losses		1,190		690		457		462		489		—		—		—		—		—
Unrecognized past service cost		—		7		8		6		7		—		—		—		—		—
Provisions - Provisions for pensions		3,710		5,211		5,244		5,439		5,593		2,404		2,781		3,273		3,851		4,166
Of which:
Internal provisions for pensions		3.305		3,065		3,025		3,086		3,153		2,404		2,781		3,272		3,848		4,159
Insurance contracts linked to pensions (Note 14)		405		2,146		2,219		2,353		2,440		—		—		1		3		7

The amounts recognized in the consolidated income statements in relation to the aforementioned defined benefit obligations are as follows:

	Millions of euros
	Post-employment plans									Other similar obligations
	2012			2011			2010			2012		2011			2010
Current service cost		53			52			52			1		1			1
Interest cost		211			215			215			101		117			139
Expected return on plan assets		(7	)		(7	)		(7	)		—		—			—
Expected return on insurance contracts linked to pensions		(45	)		(86	)		(90	)		—		—			—
Extraordinary charges (credits)-
Actuarial (gains)/losses recognized in the year		216			1			3			66		(3	)		(14	)
Past service cost		22			25			40			21		—			28
Pre-retirement cost		—			2			1			55		55			10
Effect of curtailment/settlement		(585	)		(7	)		(21	)		1		—			(10	)
		(135	)		195			193			245		170			154

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The changes in the present value of the accrued defined benefit obligations were as follows:

	Millions of euros
	Post-employment plans									Other similar obligations
	2012			2011			2010			2012			2011			2010
Present value of the obligations at beginning of year		6,085			5,892			6,091			2,781			3,273			3,851
Current service cost		53			52			52			1			1			1
Interest cost		211			215			215			101			117			139
Pre-retirement cost		—			2			1			55			55			10
Effect of curtailment/settlement		(585	)		(7	)		(21	)		—			—			(10	)
Benefits paid due to settlements		(1,006	)		—			—			—			—			—
Other benefits paid		(317	)		(330	)		(465	)		(624	)		(666	)		(732	)
Past service cost		15			24			42			21			—			28
Actuarial (gains)/losses		566			235			(32	)		66			(3	)		(14	)
Other		22			2			9			3			4			—
Present value of the obligations at end of year		5,044			6,085			5,892			2,404			2,781			3,273

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
	2012			2011			2010
Fair value of plan assets at beginning of year		177			183			184
Expected return on plan assets		7			7			7
Actuarial gains/(losses)		11			(5	)		(1	)
Contributions/(surrenders)		(42	)		2			3
Benefits paid		(9	)		(10	)		(10	)
Fair value of plan assets at end of year		144			177			183

Insurance contracts linked to pensions

	Millions of euros
	Post-employment plans									Other similar obligations
	2012			2011			2010			2012			2011			2010
Fair value of insurance contracts linked to pensions at beginning of year		2,146			2,220			2,353			—			1			3
Expected return on insurance contracts (Note 38)		45			86			90			—			—			—
Actuarial gains/(losses)		(162	)		6			(28	)		1			—			—
Premiums paid/(surrenders) (Note 14)		(1,565	)		(16	)		(39	)		(1	)		—			—
Benefits paid		(59	)		(150	)		(156	)		—			(1	)		(2	)
Fair value of insurance contracts linked to pensions at end of year		405			2,146			2,220			—			—			1

In view of the conversion of the defined-benefit obligations to defined-contribution obligations, the Group will not make material current contributions in Spain in 2013 to fund its defined-benefit pension obligations.

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The plan assets and the insurance contracts linked to pensions are instrumented through insurance policies.

The following table shows the estimated benefits payable at December 31, 2012 for the next ten years:

	Millions of euros
2013		985
2014		850
2015		765
2016		668
2017		574
2018 to 2022		1,953

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 53 million in 2012 (2011: EUR 35 million; 2010: EUR 55 million).

The amount of the defined benefit obligations was determined on the basis of the work performed by independent actuaries using the following actuarial techniques:

1. Valuation method: projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.

2. Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows:

	2012	2011	2010
Annual discount rate	4.50%	4.95%	5.45%
Mortality tables	103 S1 Light TMC	103 S1 Light TMC	103 S1 Light TMC
Cumulative annual CPI growth	2.85%	3.10%	3.5%
Annual salary increase rate	2.85%	3.10%	3.5%
Annual pension increase rate	2.75%	3.00%	3.4%

The discount rate used for the flows was determined by reference to high-quality corporate bonds.

Any changes in the main assumptions could affect the calculation of the obligations. If the discount rate used had been increased or decreased by 50 b.p., there would have been a change in the present value of the obligations of +/- EUR 877 million.

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The funding status of the defined benefit obligations in 2012 and the four preceding years is as follows:

	Millions of euros
	2012			2011			2010			2009			2008
Present value of the obligations		9,260			8,467			7,824			7,116			5,445
Less-
Fair value of plan assets		9,194			8,496			7,617			5,910			4,591
Unrecognized actuarial (gains)/losses		1,039			824			767			787			202
Provisions - Provisions for pensions		(972	)		(853	)		(560	)		419			652
Of which:
Internal provisions for pensions		38			36			28			496			744
Net assets for pensions		(1,010	)		(889	)		(588	)		(77	)		(92	)

The amounts recognized in the consolidated income statements in relation to the aforementioned defined benefit obligations are as follows:

	Millions of euros
	2012			2011			2010
Current service cost		49			46			43
Interest cost		427			417			416
Expected return on plan assets		(432	)		(448	)		(370	)
Extraordinary charges (credits):
Actuarial (gains)/losses recognized in the year		30			5			22
		74			20			111

The changes in the present value of the accrued defined benefit obligations were as follows:

	Millions of euros
	2012			2011			2010
Present value of the obligations at beginning of year		8,467			7,824			7,116
Current service cost		49			46			43
Interest cost		427			417			416
Benefits paid		(258	)		(236	)		(241	)
Actuarial (gains)/losses		367			169			244
Exchange differences and other items		208			247			246
Present value of the obligations at end of year		9,260			8,467			7,824

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The changes in the fair value of the plan assets were as follows:

	Millions of euros
	2012			2011			2010
Fair value of plan assets at beginning of year		8,496			7,617			5,910
Expected return on plan assets		432			448			370
Actuarial gains/(losses)		147			122			273
Contributions		180			294			1,121
Benefits paid		(258	)		(236	)		(241	)
Exchange differences and other changes		197			251			184
Fair value of plan assets at end of year		9,194			8,496			7,617

In 2013 the Group expects to make contributions to fund these obligations for amounts similar to those made in 2012.

The main categories of plan assets as a percentage of total plan assets are as follows:

	2012			2011			2010
Equity instruments		27	%		30	%		34	%
Debt instruments		56	%		54	%		58	%
Properties		3	%		2	%		1	%
Other		14	%		14	%		7	%

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, 2012 for the next ten years:

	Millions of euros
2013		275
2014		293
2015		313
2016		334
2017		357
2018 to 2022		2,192

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iii. Other foreign subsidiaries

Certain of the consolidated foreign entities have acquired commitments to their employees similar to post-employment benefits.

At December 31, 2012, 2011 and 2010, these entities had defined-contribution and defined-benefit post-employment benefit obligations. The expenses incurred in respect of contributions to defined-contribution plans amounted to EUR 49 million in 2012 (2011: EUR 53 million; 2010: EUR 49 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.

Specifically, the discount rate used for the flows was determined by reference to high-quality corporate bonds, except in the case of Brazil where there is no extensive corporate bond market and, accordingly the discount rate was determined by reference to the series B bonds issued by the Brazilian National Treasury Secretariat.

The funding status of the obligations similar to post-employment benefits and other long-term benefits in 2012 and the four preceding years is as follows:

	Millions of euros
	2012			2011			2010			2009			2008
Present value of the obligations		12,814			11,245			11,062			9,078			6,735
Less-
Fair value of plan assets		10,410			9,745			10,176			8,497			6,307
Unrecognized actuarial (gains)/losses		2,299			1,393			667			632			386
Unrecognized past service cost		1			8			—			3			—
Provisions - Provisions for pensions		104			99			219			(54	)		42
Of which:
Internal provisions for pensions		911			1,006			966			829			688
Net assets for pensions		(553	)		(621	)		(396	)		(425	)		(418	)
Unrecognized net assets for pensions		(254	)		(286	)		(351	)		(458	)		(228	)

In December 2011 the Portuguese financial institutions, including Banco Santander Totta, S.A., transferred in part their pension obligations to the social security authorities. As a result, Banco Santander Totta, S.A. transferred the related assets and liabilities and Provisions - Provisions for pensions and similar obligations at December 31, 2011 included the present value of the obligations, net of the fair value of the related plan assets and the net unrecognized cumulative actuarial gains and/or losses.

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The amounts recognized in the consolidated income statements in relation to these obligations are as follows:

	Millions of euros
	2012			2011			2010
Current service cost		42			39			50
Interest cost		1,010			1,031			939
Expected return on plan assets		(912	)		(968	)		(851	)
Extraordinary charges (credits):
Actuarial (gains)/losses recognized in the year		142			174			83
Pre-retirement cost		(10	)		24			31
Other		(2	)		(77	)		11
		270			223			263

The changes in the present value of the accrued obligations were as follows:

	Millions of euros
	2012			2011			2010
Present value of the obligations at beginning of year		11,245			11,062			9,078
Net inclusion of entities in the Group		(70	)		71			—
Current service cost		42			39			50
Interest cost		1,010			1,031			939
Pre-retirement cost		13			24			31
Effect of curtailment/settlement		(16	)		(5	)		(8	)
Benefits paid		(735	)		(739	)		(717	)
Benefits paid due to settlements		(41	)		—			—
Past service cost		—			9			17
Actuarial (gains)/losses		2,352			553			585
Exchange differences and other items		(986	)		(800	)		1,087
Present value of the obligations at end of year		12,814			11,245			11,062

The changes in the fair value of the plan assets were as follows:

	Millions of euros
	2012			2011			2010
Fair value of plan assets at beginning of year		9,745			10,176			8,497
Net inclusion of entities in the Group		10			—			—
Expected return on plan assets		912			968			851
Actuarial gains/(losses)		1,241			(353	)		351
Contributions		165			353			130
Benefits paid		(687	)		(674	)		(646	)
Exchange differences and other items		(976	)		(725	)		993
Fair value of plan assets at end of year		10,410			9,745			10,176

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The change in 2012 in the actuarial gains and losses, in terms of both the present value of the obligations and the fair value of the plan assets, relates to the fall in interest rates. The present value of the obligations increased due to the fall in the discount rates, since rates of between 1% and 1.75% lower than in 2011 were used. The market value of the assets improved as a result of the fall in interest rates.

In 2013 the Group expects to make contributions to fund these obligations for amounts similar to those made in 2012.

The main categories of plan assets as a percentage of total plan assets are as follows:

	2012			2011			2010
Equity instruments		6	%		4	%		9	%
Debt instruments		86	%		85	%		86	%
Properties		4	%		3	%		1	%
Other		4	%		8	%		4	%

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, 2012 for the next ten years:

	Millions of euros
2013		727
2014		751
2015		783
2016		817
2017		848
2018 to 2022		5,058

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d) Provisions for taxes and other legal contingencies and Other provisions

The detail of Provisions for taxes and other legal contingencies and Other provisions by main geographical area is as follows:

	Millions of euros
	2012		2011		2010
Recognized by Spanish companies		722		680		840
Recognized by other EU companies		1,483		1,523		536
Recognized by other companies		2,973		3,665		3,735
Of which:
Brazil		2,750		3,364		3,664
		5,178		5,868		5,111

The detail of Provisions for taxes and other legal contingencies and Other provisions by each class of provision, determined by grouping those items that are of a similar nature, is as follows:

	Millions of euros
	2012		2011
Provisions for taxes		1,198		1,346
Provisions for labor proceedings (Brazil)		975		1,390
Provisions for other legal proceedings		927		927
Customer remediation (UK)		803		863
Regulatory-related provisions (UK)		227		211
Restructuring		120		98
Other		928		1,033
		5,178		5,868

Provisions for taxes comprise provisions for tax-related proceedings.

Provisions for labor proceedings (Brazil) comprise lawsuits brought by labor unions, associations, public prosecutors and former employees claiming labor rights they understand are due, especially payment for overtime and other labor rights, including retirement benefit lawsuits. The number and nature of these procedures, which are common in many other banks in Brazil, justifies the classification of these provisions as a separate group. For claims considered to be similar and usual, provisions are recognized based on the history of payments made for claims of that sort. Claims that do not fit into the previous are assessed individually, and provisions are recognized based on the status of each lawsuit and the risk assessment made by legal counsel. The average duration of labor proceedings is approximately 8 years, although they could last much longer.

Provisions for other legal proceedings include provisions for court, arbitration or administrative (other than those included in other areas) proceedings brought against Santander Group companies.

Customer remediation (UK) comprises the estimated cost of making redress payments with respect to the past sales of products in UK. In calculating the customer remediation provision, management’s best estimate of the provision was calculated based on conclusions regarding the number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case

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Regulatory-related provisions (UK) mainly include the provisions in respect of the following issues related to Santander UK:

• Financial Services Compensation Scheme (‘FSCS’): The FSCS is the UK’s independent statutory compensation fund for customers of authorized financial services firms and pays compensation if a firm is unable to pay claims against it. The FSCS is funded by levies on the industry (and recoveries and borrowings where appropriate). The levies raised comprise both management expenses levies and, where necessary, compensation levies on authorized firms.

• UK Bank Levy: the Finance Act 2011 introduced an annual bank levy in the UK which is collected through the existing quarterly Corporation Tax collection mechanism. The UK Bank Levy is based on the total chargeable equity and liabilities as reported in the balance sheet at the end of a chargeable period, although the certain amounts are excluded. During 2012, a rate of 0.088% was applied and three different rates applied during 2011 which averaged to 0.075%.

Restructuring provisions include only the direct expenditures arising from the restructuring.

Our general policy is to record provisions for tax and legal proceedings in which we assess the chances of loss to be probable and we do not record provisions when the chances of loss are possible or remote. We determine the amounts to be provided for as our best estimate of the expenditure required to settle the corresponding claim based, among other factors, on a case-by-case analysis of the facts and the legal opinion of internal and external counsel or by considering the historical average amount of the loss incurred in such type of lawsuits. 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, depend on the legal proceedings in progress.

The changes in Provisions for taxes and other legal contingencies and Other provisions are detailed in Note 25.b and mostly relate to the movement of provisions in Brazil and UK. Main charges to income in 2012 correspond to €573 million derived from labor claims in Brazil and €264 million due to customer remediation provisions in United Kingdom. This increase is more than offset by the use of available provisions, of which €730 million corresponds to labor claims in Brazil and €392 million corresponds to UK customer remediation, and the effect of the exchange differences.

e) Litigation and other matters

Our general policy is to record provisions for tax and legal proceedings in which we assess the chances of loss to be probable and we do not record provisions when the chances of loss are possible or remote. We determine the amounts to be provided for as our best estimate of the expenditure required to settle the corresponding claim based, among other factors, on a case-by-case analysis of the facts and the legal opinion of internal and external counsel or by considering the historical average amount of the loss incurred in such category of lawsuits.

i. Tax-related proceedings

As of the date of this report, 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.

• “Mandados de Segurança” filed by Banco Santander Brasil, S.A. (currently Banco Santander (Brasil) 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 Brasil, S.A., the “Mandado de Segurança” was declared unwarranted and an appeal was filed at the Federal

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Regional Court. In September 2007 the Federal Regional Court found in favor of Banco Santander Brasil, 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. (currently Banco Santander (Brasil) 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 Santander (Brasil) S.A. filed an appeal at the Federal Supreme Court.

• Banco Santander (Brasil) S.A. and other Group companies in Brazil have appealed against the assessments issued by the Brazilian tax authorities questioning the deduction of loan losses in their income tax returns (IRPJ and CSLL) on the ground that the relevant requirements under the applicable legislation were not met.

• 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 taxation for social security purposes of certain items which are not considered to be employee remuneration.

• 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 amortization of the goodwill arising on the acquisition of Banespa (currently Banco Santander (Brasil) S.A.). Banco Santander (Brasil) S.A. filed an appeal against the infringement notice at Conselho Administrativo de Recursos Fiscais (CARF), which on October 21, 2011 unanimously decided to render the infringement notice null and void. The tax authorities have appealed against this decision at a higher administrative level. 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. Based on the advice of its external legal counsel and in view of the previous decision by CARF, the Group considers that the stance taken by the Brazilian tax authorities is incorrect and that there are sound defence arguments to appeal against the infringement notice. Accordingly, the risk of incurring a 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 May 2003 the Brazilian tax authorities issued separate infringement notices against Santander Distribuidora de Títulos e Valores Mobiliarios Ltda. (DTVM) and Banco Santander Brasil, S.A. (currently Banco Santander (Brasil), S.A.) in relation to the Provisional Tax on Financial Movements (CPMF) with respect to certain transactions carried out by DTVM in the management of its customers’ funds and for the clearing services provided by Banco Santander Brasil, S.A. to DTVM in 2000, 2001 and the first two months of 2002. Both entities appealed against the infringement notices at CARF, with DTVM obtaining a favorable decision and Banco Santander Brasil, S.A. an unfavorable decision. Both decisions were appealed by the losing parties at the Higher Chamber of CARF, and the appeal relating to Banco Santander Brasil, S.A. is pending a decision. With respect to DTVM, having been notified of the decision overturning the previous favorable judgment on August 24, 2012, it lodged an appeal at the Higher Chamber of CARF on August 29, 2012. In the opinion of its legal advisors, the Group considers that the tax treatment applied in these transactions was correct.

• In December 2010 the Brazilian tax authorities issued an infringement notice against Santander Seguros S.A. (Brasil), as the successor by merger to ABN AMRO Brasil Dois Participaçoes, S.A., in relation to income tax (IRPJ and CSLL) for 2005. The tax authorities questioned the tax treatment applied to a sale of shares of Real Seguros, S.A. made in that year. The aforementioned entity filed an appeal against the infringement notice. As the former parent of Santander Seguros, S.A. (Brasil), Banco Santander (Brasil),

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S.A. is liable in the event of any adverse outcome of this proceeding. As of December 31, 2012, there is no provision in connection with this proceeding as it is considered a contingent liability. Also, the Brazilian tax authorities issued infringement notices against Banco Santander (Brasil) S.A. in connection with income tax (IRPJ and CSLL), questioning the tax treatment applied to the economic compensation received under the contractual guarantees provided by the sellers of the former Banco Meridional. The aforementioned entity filed an appeal against the infringement notice. On November 23, 2011, CARF unanimously decided to render null and void an infringement notice relating to 2002 with regard to the same matter. In February 2012 this decision was declared final in respect of 2002. The proceedings relating to the 2003 to 2006 fiscal years are still in progress. As of December 31, 2012, there is no provision in connection with this proceeding as it is considered a contingent liability.

• 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 appealed against this decision at a higher court and in December 2011 the tax authorities confirmed their intention to file the related pleadings. The hearing took place in April 2012 and the court found for the tax authorities, upholding their appeal. No appeal may be filed against this judgment. In view of the existing provisions relating to this litigation there is no adverse impact on the consolidated financial statements.

• Legal action brought by Sovereign Bancorp, Inc. (currently Santander Holdings USA, Inc.) claiming its right 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. Santander Holdings USA, Inc. continues to believe that it is entitled to claim these foreign tax credits taken with respect to the transactions and also continues to believe that Santander Holdings USA, Inc. is entitled to tax deductions for the related issuance costs and interest deductions based on tax laws. In addition, if the outcome of this legal action is favorable to the interests of Santander Holdings USA, Inc., the amounts paid over by the entity in relation to this matter with respect to 2006 and 2007 would have to be refunded. During the first quarter of 2013, the U.S. Tax Court issued an adverse opinion in a case between a US taxpayer and the IRS involving a transaction with a structure similar to Santander Holdings USA, Inc.’s financing transactions. The US taxpayer has indicated it intends to appeal the decision. Santander Holdings USA, Inc. has confidence in its position because, among other reasons, Santander Holdings USA, Inc. will raise arguments and issues in its case that were not considered by the Tax Court. The trial of this litigation is expected to take place in the last quarter of 2013.

At the date of approval of this annual report on Form 20-F certain other less significant tax-related proceedings were also in progress.

ii. Non-tax-related proceedings

As of the date of this report, the main non-tax-related proceedings concerning the Group were as follows:

• Customer remediation: claims associated with the sale by Santander UK of certain financial products (principally payment protection insurance or PPI) to its customers.

Payment protection insurance is a UK insurance product offering payment protection on unsecured personal loans (and credit cards). The product was sold by all UK banks. The mis-selling issues are predominantly related to business written before 2009. The nature and profitability of the product has changed materially since 2008, in part due to customer and regulatory pressure.

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On July 1, 2008, the UK Financial Ombudsman Service (‘FOS’) referred concerns regarding the handling of PPI complaints to the UK Financial Services Authority (‘FSA’). On September 29, 2009 and March 9, 2010, the FSA issued consultation papers on PPI complaints handling as an issue of wider implication. The FSA published its Policy Statement on August 10, 2010, setting out the evidence and guidance on the fair assessment of a complaint and the calculation of redress, as well as a requirement for firms to reassess historically rejected complaints which had to be implemented by December 1, 2010.

On October 8, 2010, the British Bankers’ Association (‘BBA’), the principal trade association for the UK banking and financial services sector, filed on behalf of certain financial institutions (which did not include Santander UK plc) an application for permission to seek judicial review against the FSA and the FOS. The BBA sought an order quashing the FSA Policy Statement and an order quashing the decision of the FOS to determine PPI sales in accordance with the guidance published on its website in November 2008. The judicial review was heard in the courts in January 2011 and on April 20, 2011 judgment was handed down by the High Court dismissing the BBA’s application.

Santander UK did not participate in the legal action undertaken by other UK banks and has been consistently making a provision and settling claims with regards to PPI complaints liabilities since they began to increase in recent years. The provisions recognized by Santander UK in this respect were calculated on the basis of the estimate of customer remediation comprising the estimated cost of making redress payments with respect to the past sales of the products.

A detailed review of the provision was performed by Santander UK in the first half of 2011 in light of the new situation, including the High Court judgment of April 2011, the BBA’s subsequent decision not to appeal and the consequent increase in actual claims levels. As a result, the provision has been revised to reflect the new information.

In this context, in 2011 the Group recognized a provision, with a net effect on results of EUR 620 million (GBP 538 million), which was calculated on the basis of the estimate of the number of claims that would be received, of the number of claims that would be upheld and of the estimated average amount of compensation in each case.

A number of uncertainties persist regarding the eventual costs of that compensation given the inherent difficulties of assessing the impact of detailed implementation of the Policy Statement for all PPI complaints, uncertainties concerning the recent rise in complaints, the availability of evidence to support the claims and the activities of claims management companies, all of which may significantly affect complaints volumes, the acceptance rates and redress costs.

The provision represents management’s best estimate of the anticipated costs of related customer contact and/or redress, including administration expenses. The provision is calculated based on a number of key assumptions which involve significant management judgment. These are as follows:

• Claim volumes – the estimated number of customer complaints received,

• Uphold rate – the estimated percentage of complaints that are, or will be, upheld in favor of the customer, and

• Average cost of redress – the estimated payment to customers, including compensation for any direct loss plus interest.

The assumptions have been based on the following:

• Analysis completed of the causes of complaints, and uphold rates, and how these are likely to vary in the future,

• Actual claims activity registered to date,

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• The level of redress paid to customers, together with a forecast of how this is likely to change over time,

• The impact on complaints levels of proactive customer contact, and

• The effect of media coverage on the issue.

The assumptions are kept under review, and regularly reassessed and validated against actual customer data, e.g. claims received, uphold rates, the impact of any changes in approach to uphold rates etc, and any re-evaluation of the estimated population. The most critical factor in determining the level of provision is the volume of claims. The uphold rate is a reasonably consistent function of the sales process and the average cost of redress can be predicted reasonably accurately given that management is dealing with a high volume and reasonably homogeneous population. In setting the provision, management estimated the total claims that were likely to be received. Previous experience has indicated that claims could be received over a number of years. While initial claim levels at the beginning of the process were quite low, this has increased in line with our initial expectations as a result of press coverage and the activities of the claims management companies (“CMC’s”). The CMC’s facilitate customer claims in return for a share of the redress payment and advertise heavily thereby resulting in an increase in the volume of claims experienced.

The table below sets out the actual claims received to date.

Movements in the number of PPI claims outstanding during the years ended December 31, 2012, 2011 and 2010 were as follows:

(thousands of claims)
	2012			2011			2010
Outstanding at January 1		1			—			2
Claims received		437			111			37
Claims paid (1)		(258	)		(90	)		(38	)
Claims rejected as invalid (1)		(149	)		(20	)		(1	)
Outstanding at December 31		31			1			—

(1) The customer has the right to appeal to the FOS if their claim is rejected. FOS may uphold or reject the appeal and if upheld Santander UK is required to provide redress to the customer. Claims paid or rejected above reflect the results of any appeals.

As anticipated, PPI complaints rose significantly in 2012, due to higher press coverage and increased focus by CMCs. The increase was partly driven by invalid complaints (which also drove an increase in the level of claims rejected) and claims originated by CMCs. In addition, Santander UK proactively contacted more than 300,000 customers during the year, which led to an increase in claims received. The number of claims settled in 2012 increased, reflecting both the increase in claims received and continued prompt settlement of claims.

Press coverage on PPI reached significant levels in 2011, following the High Court‘s dismissal of the BBA’s application for a judicial review, as highlighted above. The focus of the CMCs also started to be directed at PPI in 2011. This led to a marked increase in complaints in 2011. Complaint volumes were also driven by pro-active customer contact made by Santander UK. The number of claims settled in 2011 increased as well, reflecting both the increase in claims received and prompt settlement of claims.

Management reassess the level of provision required at each reporting period, taking account of the latest available information as well as past experience. The provision necessarily incorporates

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predictions of complaint levels for a number of periods into the future. Although complaint levels rose substantially in 2012, this increase was consistent with management’s estimates which reflected previous conduct remediation experience. Consequently, no change to the provision was required in 2012. This will continue to be kept under review.

The assumptions and consequent level of provision remain subjective. This relates particularly to the uncertainty associated with the level of future claims. It is therefore possible that the level of payments to be made may differ from current estimates, resulting in an increase or decrease to the required provision.

• 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 EUR 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, S.A. 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 issued an order to enforce the decision handed down by the Madrid Provincial Appellate Court, whereby the Bank had to subscribe to 75.1 million shares at their par value of EUR 0.4 per share, totaling EUR 30.05 million. Zed Worldwide, S.A. filed an appeal for reconsideration of the order enforcing the decision, which the Bank opposed. On May 23, 2011, the Bank was served notice of the decision of May 6, 2011, dismissing the appeal for reconsideration and upholding the order of January 25 2011. On July 14, 2011, Zed Worldwide, S.A. filed an appeal at a superior court against the decision dismissing the aforementioned appeal for reconsideration, which was upheld in an order of December 17, 2012 by the Madrid Provincial Appellate Court whereby the Bank had to subscribe 2,111,600 shares for its contribution of EUR 30.05 million

Following this order, an agreement was reached for the out-of-court enforcement of the decision whereby the Bank would subscribe and pay 6,208,802 shares for its contribution of EUR 30.05 million. As a result, on December 27, 2012, the parties requested the judge that the enforcement proceeding be discontinued and struck out, which was declared in an order dated January 23, 2013.

• Proceeding under Criminal 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 EUR 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 Bank to third-party buyers. The judgment of the Supreme Court ordered the reversal of the court foreclosure proceeding to 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 to the debtor company’s assets and their re-auction.

The damages claimed are broken down as follows: (i) EUR 18,428,076.43 relating to the value of the property auctioned; (ii) EUR 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) EUR 360,000 relating to loss of rental income.

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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 EUR 4,458,960.61, and Galesa Promociones, S.A. to pay the Bank EUR 1,428,075.70, which resulted in a net loss of EUR 3,030,874.91 for the Bank. Two appeals against this decision were filed on May 31, 2010, one by Galesa and the other 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 EUR 400,000.

Galesa de Promociones S.A. filed a cassation appeal with the Supreme Court against this decision, which was given leave to proceed in an order dated October 11, 2011, and the Bank submitted a notice of opposition.

• After the Madrid Provincial Appellate Court had rendered null and void the award handed down in the previous arbitration proceeding, on September 8, 2011 Banco Santander S.A. filed a new request for arbitration with the Secretary of the Spanish Arbitration Court against the business entity Delforca 2008, Sociedad de Valores, S.A. (formerly Gaesco Bolsa Sociedad de Valores S.A.), claiming EUR 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. The defendant Delforca 2008, S.A. voluntarily petitioned for an insolvency order, which was granted on August 3, 2012 by Barcelona Commercial Court no. 10. On October 26, 2012, as part of the insolvency proceeding, this Court ordered the stay of the arbitration proceeding and of the effects of the arbitration agreement entered into by Banco Santander, S.A. and Delforca 2008, S.A., and also requested the Spanish Court of Arbitration that the arbitration proceedings underway be stayed immediately and notice be served that the effects of the arbitration agreement had been stayed. The Bank filed an appeal for reconsideration against this decision by the Commercial Court and that Court rejected the appeal. A formal protest has been filed and a remedy of appeal shall be filed by Banco Santander, S.A. on appropriate time to be decided by the Barcelona Court of Appeal.

The Arbitration Court, in strict obedience with the decision of the Commercial Court, agreed in a decision dated January 20, 2013 to stay the arbitration proceedings at the stage reached until a decision may be reached in this respect in the insolvency proceeding.

In addition, as part of the insolvency proceeding of Delforca 2008, S.A., Banco Santander, S.A. notified its claim against the insolvent party due to the potential creditor’s rights to which it might be entitled as a result of the arbitration proceeding relating to Delforca 2008 S.A, with a view to having the claim recognized as a contingent ordinary claim without specified amount. The insolvency proceeding is in the common phase and on November 5, 2012, the insolvency manager submitted the report referred to in Articles 74 and 75 of the Insolvency Law, accompanied by the inventory and provisional list of creditors. The insolvency manager opted to exclude Banco Santander, S.A.‘s claim from the provisional list of creditors and, accordingly, on January 2, 2013, Banco Santander, S.A. filed an ancillary claim contesting the document and seeking the aforementioned claim’s recognition on the terms notified. A decision is yet to be handed down in this regard. Delforca 2008 S.A. has filed an answer to the claim but Banco Santander, S.A. has not been notified of an answer to the claim being filed by the insolvency manager.

Additionally, in April 2009 Mobilaria Monesa, S.A. (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 resolved in the aforementioned arbitration proceeding, a circumstance which was brought to the Court’s attention in the notice of opposition thereto filed by the Bank.

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This proceeding was stayed by the Santander Provincial Appellate Court in an order dated December 20, 2010 due to the Court admitting the preliminary civil ruling grounds claimed by the Bank.

The above stay currently subsists due to an order dated October 11, 2011 by Santander Court of First Instance no. 5, based on the new arbitration proceeding brought by Banco Santander S.A. An appeal was filed against this order by Delforca 2008, S.A. at the Santander Provincial Appellate Court but a judgment thereon is yet to be issued.

On April 11, 2012, Banco Santander, S.A. was notified of the claim filed by Delforca 2008, S.A., heard by Madrid Court of First Instance no. 21, in which it substantially requested indemnification for the damage and losses suffered by Delforca 2008, S.A arising from the counterclaim filed in the arbitration proceeding that was concluded with the annulled award; although in its claim, invoking Article 219.3 of the Civil Procedure Law, it leaves for a subsequent proceeding the amount to be settled (as the case may be) by Banco Santander, S.A. (which it put at a figure of up to EUR 218,000,000 in the preceding arbitration proceeding). Banco Santander, S.A. filed a motion for declinatory exception arguing that the ordinary courts lacked jurisdiction because the dispute had been submitted to arbitration, which was upheld in an order dated July 2, 2012, in which the court resolved to abstain from hearing the case and ordered a stay of the proceedings. Delforca 2008, S.A. filed an appeal against the order and a decision is yet to be handed down thereon by the Provincial Appellate Court.

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 Labour 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 Labour Court. A decision was handed down on June 25, 2008 which ordered the bank to pay the half-yearly bonus from 1996 onwards for a maximum amount equivalent to the share in the profits. Appeals against this decision were filed at the High Labour Court and the Supreme Federal Court. The High Labour Court ordered the aforementioned half-yearly bonus to be paid. The Supreme Federal Court subsequently dismissed the extraordinary appeal filed by the Bank by means of a monocratic decision (adopted by only one of the judges of the court), thereby upholding the aforementioned judgment. As a result, the Bank filed a special appeal called an “Agravo Regimental” and the 1st Chamber of the Supreme Federal Court upheld the Extraordinary Appeal filed by the Bank and denied the Association’s Appeal. Thus, the Extraordinary Appeal filed by the Bank now follows for the plenary session of the Supreme Court for decision about general repercussion and the main matters.

• “Planos económicos”: Like the rest of the banking system, Santander Brasil has been the subject of claims from customers, mostly depositors, and of class actions brought for a common reason 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 limitation period for these class actions at five years, as claimed by the banks, rather than twenty years, as sought by the claimants, which will significantly reduce the number of actions of this kind brought and the

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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 with 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 at civil law. Shortly thereafter, the Supreme Federal Court issued an injunctive relief order whereby all the proceedings in progress in this connection 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. We expect that a judgement will be handed down this year; however, this is still pending and there are no hearings scheduled at this moment.

• 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, upon 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 costs. Both the plaintiff and the defendant filed appeals to a superior court: the plaintiff in connection with the decision not to award costs and the Bank in connection with the other decisions. Both parties also filed notices of opposition against the appeal filed by the other party.

Also, on March 29, 2011, the Bank filed a notice of opposition against the specific provisional enforcement measures of the court. The Bank’s opposition to the aforementioned measures was upheld in a decision dated September 5, 2011.

A judgment handed down by the Madrid Provincial Appellate Court on October 9, 2012 upheld the appeal lodged by the Bank and dismissed the appeal lodged by Banco Occidental de Descuento, Banco Universal, C.A., dismissing the claim. The dismissal of the claim was confirmed in an ancillary order to the judgment dated December 28, 2012. A cassation appeal was filed by Banco Occidental de Descuento, Banco Universal, C.A. against the Madrid Provincial Appellate Court judgment and the parties have appeared before the Supreme Court.

• On January 26, 2011, notice was served on the Bank of an ancillary insolvency claim to annul acts detrimental to the assets available to creditors as part of the voluntary insolvency proceedings of Mediterráneo Hispa Group S.A. at Murcia Commercial Court no. 2. The aim of the principal action is to request annulment of the application of the proceeds obtained by the company undergoing insolvency from an asset sale and purchase transaction involving EUR 31,704,000 in principal and EUR 2,711,567.02 in interest. On November 24, 2011, the hearing was held with the examination of the proposed evidence. Upon completion of the hearing, it was resolved to conduct a final proceeding which was held on February 29, 2012, and a decision is yet to be issued thereon.

• 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.

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 mis-selling) for holders of one of the products sold -Seguro Banif Estructurado- issued by the insurance company Axa Aurora Vida, which had as its underlying 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 of EUR 46 million was recognized in the consolidated income statement (EUR 33 million after tax).

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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 EUR 143 million (EUR 100 million after tax), which were recognized in the consolidated income statement for 2008.

As of the date of this report, 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 for it in relation to the insolvency of Lehman. Accordingly, the risk of loss is considered to be remote.

• The intervention, 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 EUR 2,330 million, of which EUR 2,010 million related to institutional investors and international private banking customers, and the remaining EUR 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 EUR 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 (EUR 500 million -EUR 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 its intervention, Madoff Securities was an authorized broker dealer, registered and overseen by the SEC and was also authorized as an investment advisor by the US Financial Industry Regulatory Authority (FINRA). As the SEC itself stated, Madoff Securities had been inspected regularly by the supervisor in recent years and at no time was its reputation or solvency questioned either by the market or by the US supervisory authorities.

On March 18, 2009, the Group issued the preference shares earmarked for the replacement of assets offered to the private banking customers affected by the intervention of Madoff Securities. 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. (“OIS”), an indirect subsidiary of Banco Santander, S.A., announced that they had entered into an agreement with Irving H. Picard,

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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 was reached following an analysis by the trustee of how Optimal had managed its investments with Madoff Securities, including a review of Optimal’s documents relating to the due diligence review, from which the trustee concluded that there were no grounds in Optimal’s conduct for bringing claims against the Optimal companies or against any other entity in the Santander Group (other than the claims for rebates mentioned previously, which were not related to any improper management by the funds).

The agreement contains the waiver 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 waiver 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 greatest pyramid fraud in history and was sentenced to 150 years’ imprisonment.

In April 2011, by means of a corporate operation, the funds Optimal Strategic US Equity Series de Optimal Multiadvisors Ltd de Bahamas, Optimal Strategic US Equity Ireland Euro Fund de Optimal Multiadvisors Ireland Plc and Optimal Strategic US Equity Ireland US Dollar Fund de Optimal Multiadvisors Ireland Plc offered unitholders the possibility of voluntarily liquidating their units in the funds in exchange for shares in a special purpose entity in the Bahamas (SPV Optimal SUS Ltd.) to which Optimal Strategic US Equity Ltd., the company through which the aforementioned funds’ assets are held, transferred the full amount of the claim recognized by the trustee for the liquidation of Madoff Securities mentioned above, the nominal amount of which was USD 1,540,141,277.60, which was included in the SPV’s net assets.

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This arrangement enabled the investors who so wished to take direct control of their proportional part of the claim against the insolvency estate of Madoff Securities and also afforded them the chance of being able to sell it directly or by means of a sales procedure through a private auction organized by OIS.

The corporate operation meant that 1,021 million shares of the 1,539 million issued by the SPV are now directly owned by the unitholders of the three aforementioned Optimal Strategic US Equity funds that accepted the exchange of their units in the fund for shares of the SPV. Furthermore, 991 million shares of those 1,021 million were sold in the subsequent private auction organized by OIS, while 30 million opted not to participate in the auction. The remaining fund unitholders decided to maintain their units in the funds and not participate in the corporate operation.

The price reached in the auction of the SPV shares was equal to 72.14% of the amount of the claim against BLMIS, which meant that those unitholders were able to recover approximately 35% of the value of their investment in the Optimal Strategic US Equity funds at October 30, 2008.

Santander Group, as unitholder of the Optimal Strategic US Equity funds, opted to accept the exchange and subsequent partial sale of a portion of its units in the funds, and it recognized in profit or loss for 2011, as a result of the cash proceeds from that sale, a recovery of approximately EUR 249 million of the initial loss.

Subsequently, in March 2012 the Optimal Strategic US Equity Series de Optimal Multiadvisors Ltd de Bahamas, Optimal Strategic US Equity Ireland Euro Fund de Optimal Multiadvisors Ireland Plc and Optimal Strategic US Equity Ireland Dollar Fund de Optimal Multiadvisors Ireland Plc funds once again offered a similar corporate operation to that performed in April 2011.

In the second half of 2012 the Group made additional sales of its interest in the SPV and, accordingly, at December 31, 2012, it held an interest of approximately 5.54% in the SPV through the Optimal Strategic US Equity Series fund.

As of the date of preparation of this report, certain claims had been filed in relation to this matter. The Group is currently assessing the appropriate legal action to be taken. As indicated 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 two specific cases in which the decisions handed down partially upheld the claim based on the particular circumstances of these cases (which have been appealed against by the Bank), the risk of loss is considered to be remote.

• On December 17, 2010, the Bank of New York Mellon Trust Company, National Association (“the Trustee”) filed a claim against Santander Holdings USA, Inc. (formerly Sovereign Bancorp, Inc.) (“Sovereign”) at the US District Court for the Southern District of New York (the “Court”) as the trustee of the Trust PIERS (Preferred Income Equity Redeemable Securities) under an indenture dated September 1, 1999 (the version in force at that date).

The claim alleged that the acquisition of Sovereign by Banco Santander on January 31, 2009 constituted a “change of control” of the Trust PIERS.

If the acquisition constituted a “change of control” in accordance with the definitions applicable to the Trust PIERS, Sovereign would be obliged to pay a considerably higher interest rate on the Sovereign subordinated debentures deposited in trust on behalf of the Trust PIERS holders, and the principal amount of the debentures would increase to USD 50 per debenture at the date on which the “change of control” took place.

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The increased rate in the event of a “change of control” is defined in the indenture as the greater of (i) 7.41% per annum; and (ii) the rate determined by a reference agent in accordance with a process established in the indenture.

There is no “change of control” under the Trust PIERS indenture, among other reasons, if the consideration for the acquisition consisted of shares of common stock listed on a national securities market. Banco Santander issued American Depositary Shares (ADSs) in relation to the acquisition that were traded and continue to be traded on the New York Stock Exchange.

Under the claim, the Court was asked to declare that the acquisition of Sovereign constituted a “change of control” under the indenture and to order payment of damages equal to the interest which, according to the claim, should have been paid by Sovereign to the Trust PIERS holders.

On December 13, 2011, the Court handed down a decision, granting the Trustee’s motion for summary judgment and denying the cross-motion filed by Sovereign. The Court ruled that the term “common stock” used in the “change of control” provision of the indenture did not include the ADSs and, accordingly, a “change of control” had occurred. The Court referred the matter of the payment of damages to a district court judge for investigation.

On September 12, 2012, the judge in charge of the investigation issued a report recommending that the interest rate of the Trust PIERS be set at 13.61% from January 31, 2009 and that the holders of Trust PIERS should be compensated with USD 305,626,022 for unpaid interest, USD 3,160,012.31 for lawyers’ fees and USD 130,150.23 for the interest on such expenses.

On November 23, 2012, Sovereign signed a “ Settlement Agreement” with the Trustee resolving all the disputes between the Trustee and Sovereign with respect to the claim filed.

The Settlement Agreement (i) acknowledges that a “change of control” occurred in accordance with the Trust indenture as a result of the acquisition, (ii) provides that the annual interest rate on the distributions made to the Trust PIERS holders from November 15, 2012 shall be 12.835%, (iii) requires Sovereign to carry out a takeover bid for all the Trust PIERS at a purchase price of USD 78.95 in cash per USD 50.00 and (iv) establishes that Sovereign may redeem the issue in full at any time from January 30, 2014. The Settlement Agreement also requires Sovereign to make additional offers to purchase the Trust PIERS within ten business days following each quarterly distribution from the settlement date until no Trust PIERS remain outstanding, at the same purchase price mentioned above.

On November 26, 2012, Sovereign announced to the Trust PIERS holders an offer in accordance with the requirements of the Settlement Agreement indicated in point (iii) of the preceding paragraph, which was completed on December 26, 2012, and approximately 40.4% of the outstanding aggregate liquidation amount of the Trust PIERS was accepted for purchase. In addition, under the Settlement Agreement, on December 26, 2012, the parties applied to discontinue proceedings at the US District Court for the Southern District of New York and, accordingly, this litigation is therefore concluded.

At December 31, 2011, the Group had recognized the estimated amount of the contingency with third parties (USD 139 million) due to this litigation, which includes the cumulative interest at 7.410% from January 31, 2009 to December 31, 2011 and the amount due to increasing the debentures to par (USD 50). In 2012 the Group recognized USD 163 million in the consolidated income statement in relation to the Settlement Agreement that resolved the contingency with non-Group third parties.

As of the date of this report, certain other less significant non-tax-related proceedings are also in progress.

The Bank and the other Group companies are subject to claims and, therefore, are party to certain legal proceedings incidental to the normal course of their business (including those in connection with lending activities, relationships with employees and other commercial or tax matters).

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In this context, it must be considered that the outcome of court proceedings is uncertain, particularly in the case of claims for large or indeterminate amounts, those based on legal issues for which there are no precedents, those that affect a large number of parties or those at a very preliminary stage.

With the information available to it, the Group considers that at December 31, 2012, 2011 and 2010, it had reliably estimated the obligations associated with each proceeding and had recognized, where necessary, sufficient provisions to cover reasonably any liabilities that may arise as a result of these tax and legal situations. It also believes that any liability arising from such claims and proceedings will not have, overall, a material adverse effect on the Group’s business, financial position or results of operations.

The total amount of payments made by the Group arising from litigation in 2012, 2011 and 2010 is not material with respect to these consolidated financial statements.

26. Other liabilities

The detail of Other liabilities in the consolidated balance sheets is as follows:

	Millions of euros
	2012		2011		2010
Transactions in transit		784		866		321
Accrued expenses and deferred income		5,124		5,413		4,891
Other		2,054		3,237		2,388
		7,962		9,516		7,600

27. Tax matters

a) Consolidated Tax Group

Pursuant to current legislation, the Consolidated Tax Group includes Banco Santander, S.A. (as the Parent) and the Spanish subsidiaries that meet the requirements provided for in Spanish legislation regulating the taxation of the consolidated profits of corporate groups (as the controlled entities).

The other Group companies file income tax returns in accordance with the tax regulations applicable to them.

b) Years open for review by the tax authorities

At December 31, 2012, the Consolidated Tax Group had the years from 2005 to 2012 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 2003 and 2004 for the main taxes applicable to the Consolidated Tax Group was completed in April 2010. Most of the tax assessments issued were signed on a contested basis.

In 2012 the Group in Spain paid the amounts relating to the previous years’ taxes on deposits from credit institutions, without prejudice to the lodging of such appeals it considers necessary.

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In 2012 there were no developments with a significant impact in connection with the tax disputes at various instances which were pending resolution at December 31, 2011.

Because of the possible different interpretations which can be made of the tax regulations, the outcome of the tax audits of the years reviewed and of the open years might give rise to contingent tax liabilities which cannot be objectively quantified. However, the Group’s tax advisers consider that it is unlikely that such contingent liabilities will become actual liabilities, and that in any event the tax charge which might arise therefrom would not materially affect the consolidated financial statements of the Group.

c) Reconciliation

The reconciliation of the income tax expense calculated at the tax rate applicable in Spain (30%) to the income tax expense recognized and the detail of the effective tax rate are as follows:

	Millions of euros
	2012			2011			2010
Consolidated operating profit/(loss) before tax:
From continuing operations		3,549			7,939			12,052
From discontinued operations		(6	)		(23	)		(25	)
		3,543			7,916			12,027
Income tax at tax rate applicable in Spain (30%)		1,063			2,375			3,608
Effect of application of the various tax rates applicable in each country (*)		170			390			270
Of which:
Brazil		318			390			441
United Kingdom		(96	)		(52	)		(52	)
United States		43			113			64
Chile		(108	)		(112	)		(129	)
Effect of profit or loss of associates and jointly controlled entities		(128	)		(17	)		(5	)
Effect of gains not subject to taxation (1)		(186	)		(262	)		—
Effect of deduction of goodwill in Brazil		(414	)		(414	)		(506	)
Tax effect on local books of transactions eliminated on consolidation		(86	)		(188	)		(304	)
Permanent differences		157			(107	)		(138	)
Current income tax		576			1,777			2,925
Effective tax rate		16.26	%		22.45	%		24.32	%
Of which:
Continuing operations		575			1,776			2,923
Discontinued operations		1			1			2
Of which:
Current tax		3,022			3,211			2,610
Deferred tax		(2,447	)		(1,434	)		315
Taxes paid in the year		3,162			1,924			2,078

(*) Calculated by applying the difference between the tax rate applicable in Spain and the tax rate applicable in each jurisdiction to the profit or loss contributed to the Group by the entities which operate in each jurisdiction.

(1) Tax effect of the sale of Banco Santander Colombia, S.A. in 2012 and of SCUSA in 2011 (see Note 3)

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d) Tax recognized in equity

In addition to the income tax recognized in the consolidated income statement, the Group recognized the following amounts in consolidated equity:

	Millions of euros
	2012			2011		2010
Net tax credited (charged) to equity:
Measurement of available-for-sale fixed-income securities		113			396		387
Measurement of available-for-sale equity securities		(13	)		51		134
Measurement of cash flow hedges		92			69		70
Measurement of entities accounted for using the equity method		(11	)		4		—
		181			520		591

e) Deferred taxes

Tax assets in the consolidated balance sheets includes debit balances with the Spanish Public Treasury relating to deferred tax assets. Tax liabilities includes the liability for the Group’s various deferred tax liabilities.

The detail of Tax assets - Deferred and Tax liabilities - Deferred is as follows:

	Millions of euros
	2012		2011		2010
Tax assets:		19,757		17,761		17,089
Of which:
Banco Santander (Brasil) S.A.		4,347		4,138		3,572
Santander Holdings USA, Inc.		1,374		1,506		1,933
Santander UK Group		150		431		656
Pre-retirements		1,081		866		887
Other pensions		458		692		806
Valuation adjustments		844		1,017		1,265
Tax liabilities:		2,857		3,073		4,312
Of which:
Banco Santander (Brasil) S.A.		395		458		626
Santander UK Group		325		268		409
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander		112		121		275
Santander Consumer Bank AG		106		102		85
Santander Holdings USA, Inc.		45		120		128
Valuation adjustments		757		547		678

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The detail, by type, of the deferred tax assets and liabilities at December 31, 2012 is as follows:

	Millions of euros
Tax losses and tax credits		7,643
Deductible temporary differences		12,114
Taxable temporary differences		(2,857	)

The changes in Tax assets - Deferred and Tax liabilities - Deferred in the last three years were as follows:

	Millions of euros
	Balances at December 31, 2011			(Charge)/Credit to income		Foreign currency balance translation differences and other items			(Charge)/Credit to asset and liability revaluation reserve			Acquisitions for the year (net)			Balances at December 31, 2012
Deferred tax assets		17,761			2,211		(28	)		(165	)		(22	)		19,757
Deferred tax liabilities		(3,073	)		236		197			(247	)		30			(2,857	)
		14,688			2,447		169			(412	)		8			16,900

	Millions of euros
	Balances at December 31, 2010			(Charge)/Credit to income		Foreign currency balance translation differences and other items			(Charge)/Credit to asset and liability revaluation reserve			Acquisitions for the year (net)			Balances at December 31, 2011
Deferred tax assets		17,089			1,081		(198	)		(17	)		(194	)		17,761
Deferred tax liabilities		(4,312	)		353		784			103			(1	)		(3,073	)
		12,777			1,434		586			86			(195	)		14,688

	Millions of euros
	Balances at December 31, 2009			(Charge)/Credit to income			Foreign currency balance translation differences and other items			(Charge)/Credit to asset and liability revaluation reserve		Acquisitions for the year (net)		Balances at December 31, 2010
Deferred tax assets		15,827			72			882			233		75		17,089
Deferred tax liabilities		(3,667	)		(387	)		(381	)		122		1		(4,312	)
		12,160			(315	)		501			355		76		12,777

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f) Other disclosures

In conformity with the Listing Rules Instrument 2005 published by the UK Financial Services Authority, it is hereby stated that shareholders of the Bank resident in the United Kingdom will be entitled to a tax credit in respect of the withholdings the Bank is required to make from the dividends to be paid to them. The shareholders of the Bank resident in the United Kingdom who hold their ownership interest in the Bank through 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.

a) Breakdown

The detail, by Group company, of Equity - Non-controlling interests is as follows:

	Millions of euros
	2012			2011		2010
Banco Santander (Brasil) S.A.		5,147			3,606		3,557
Banco Santander - Chile		1,027			916		512
Banesto		645			573		504
Grupo Financiero Santander México, S.A. B de C.V.		1,314			5		6
Other companies		777			557		397
		8,910			5,657		4,976
Profit/(Loss) for the year attributable to non-controlling interests		762			788		921
Of which:
Banco Santander (Brasil) S.A.		585			517		539
Banco Santander - Chile		208			183		175
Banesto		(138	)		3		57
Grupo Financiero Santander México, S.A. B de C.V.		59			2		130
Other companies		48			83		18
		9,672			6,445		5,897

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b) Changes

The changes in Non-controlling interests are summarized as follows:

	Millions of euros
	2012			2011			2010
Balance at beginning of year		6,445			5,897			5,203
Changes in scope of consolidation		27			132			105
Change in proportion of ownership interest		3,337			405			(731	)
Dividends paid to non-controlling interests		(409	)		(431	)		(400	)
Changes in capital and other items		(10	)		57			6
Profit for the year attributable to non-controlling interests		762			788			921
Valuation adjustments (including exchange differences)		(480	)		(403	)		793
Balance at end of year		9,672			6,445			5,897

As described in Note 3, in 2010 the Bank acquired non-controlling interests previously held by third parties in Grupo Financiero Santander México, S.A.B. de C.V. 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.A.’s share capital. The selling 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.

Also, in 2011 the Group sold 9.72% of the share capital of Banco Santander - Chile. The selling price amounted to USD 1,241 million, which gave rise to increases of EUR 434 million in Reserves and EUR 373 million in Non-controlling interests.

Finally, as indicated in Note 3, in 2012 the Group sold 24.9% of its ownership interest in Grupo Financiero Santander México, S.A.B. de C.V., thus giving rise to an increase of EUR 1,092 million in Reserves, EUR 1,493 million in Non-controlling interests and EUR 263 million in Valuation adjustments - Exchange differences.

Also, in January and March 2012 the Group transferred shares accounting for 4.41% and 0.77% of Banco Santander (Brasil) S.A. to two leading international financial institutions, generating an increase in the balance of Non-controlling interests of EUR 1,532 million (see Note 34).

The foregoing changes are shown in the consolidated statement of changes in total equity.

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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.

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.

a) Available-for-sale financial assets

Valuation adjustments - Available-for-sale financial assets includes the net amount of unrealized changes in the fair value of assets classified as available-for-sale financial assets (see Notes 7 and 8).

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The breakdown, by type of instrument and geographical origin of the issuer, of Valuation adjustments - Available-for-sale financial assets at December 31, 2012, 2011 and 2010 is as follows:

	Millions of euros
	December 31, 2012										December 31, 2011										December 31, 2010
	Revaluation gains		Revaluation losses			Net revaluation gains/(losses)			Fair value		Revaluation gains		Revaluation losses			Net revaluation gains/(losses)			Fair value		Revaluation gains		Revaluation losses			Net revaluation gains/(losses)			Fair value
Debt instruments
Government debt securities and debt instruments issued by central banks
Spain		68		(1,286	)		(1,218	)		29,288		125		(1,175	)		(1,050	)		29,976		272		(1,797	)		(1,525	)		27,050
Rest of Europe		112		(179	)		(66	)		10,891		18		(507	)		(489	)		4,959		19		(229	)		(210	)		3,871
Latin America and rest of the world		627		(37	)		589			23,759		426		(48	)		378			22,058		503		(211	)		292			27,785
Private-sector debt securities		215		(184	)		31			23,786		264		(352	)		(88	)		24,596		461		(347	)		114			20,983
		1,022		(1,686	)		(664	)		87,724		833		(2,082	)		(1,249	)		81,589		1,255		(2,584	)		(1,329	)		79,689
Equity instruments
Domestic
Spain		201		(34	)		167			1,233		68		(91	)		(23	)		1,433		82		(326	)		(244	)		1,878
International
Rest of Europe		75		(46	)		29			1,135		111		(160	)		(49	)		1,279		47		(266	)		(219	)		1,325
United States		15		(5	)		10			1,022		94		(35	)		59			1,032		71		(32	)		39			1,550
Latin America and rest of the world		265		(56	)		209			1,152		352		(67	)		285			1,280		543		(39	)		504			1,793
		556		(141	)		415			4,542		625		(353	)		272			5,024		743		(663	)		80			6,546
Of which:
Listed		311		(68	)		243			1,849		424		(255	)		169			2,745		569		(552	)		17			4,089
Unlisted		245		(73	)		172			2,693		201		(98	)		103			2,279		174		(111	)		63			2,457
		1,578		(1,827	)		(249	)		92,266		1,458		(2,435	)		(977	)		86,613		1,998		(3,247	)		(1,249	)		86,235

F-168

At each reporting date the Group assesses whether there is any objective evidence that the instruments classified as available-for-sale (debt securities and equity instruments) are impaired.

This assessment includes but is not limited to an analysis of the following information: i) the issuer’s economic and financial position, the existence of default or late payment, analysis of the issuer’s solvency, the evolution of its business, short-term projections, trends observed with respect to its earnings and, if applicable, its dividend distribution policy; ii) market-related information such as changes in the general economic situation, changes in the issuer’s sector which might affect its ability to pay; iii) changes in the fair value of the security analyzed, analysis of the origins of such changes - whether they are intrinsic or the result of the general uncertainty concerning the economy or the country - and iv) independent analysts’ reports and forecasts and other independent market information.

In the case of equity instruments, when the changes in the fair value of the instrument under analysis are assessed, the duration and significance of the fall in its market price below cost for the Group is taken into account. As a general rule, for these purposes the Group considers a significant fall to be a 40% drop in the value of the asset and/or a continued fall over a period of 18 months. Nevertheless, it should be noted that the Group assesses, on a case-by-case basis each of the securities that have suffered losses, and monitors the performance of their prices, recognizing an impairment loss as soon as it is considered that the recoverable amount could be affected, even though the price may not have fallen by the percentage or for the duration mentioned above.

If, after the above assessment has been carried out, the Group considers that the presence of one or more of these factors could affect recovery of the cost of the asset, an impairment loss is recognized in the income statement for the amount of the loss in equity under Valuation adjustments. Also, where the Group does not intend and/or is not able to hold the investment for a sufficient amount of time to recover the cost, the instrument is written down to its fair value.

At the end of 2012 the Group performed the assessment described above and recognized in the consolidated income statement impairment losses of EUR 13 million in respect of debt instruments (2011: EUR 125 million; 2010: EUR 14 million) and of EUR 344 million in respect of equity instruments which had suffered a significant and prolonged fall in price at December 31, 2012 (2011: EUR 704 million; 2010: EUR 319 million). The impairment losses recognized on debt instruments in 2011 included EUR 106 million relating to Greek sovereign debt. In addition, the impairment losses recognized on equity instruments in 2011 included EUR 592 million relating to the impairment of the ownership interests in Iberdrola, S.A. and Assicurazioni Generali SpA. These equity instruments had suffered a significant and prolonged fall in price at December 31, 2011.

At the end of 2012, 93% of the losses recognized under Valuation adjustments - Available-for-sale financial assets arising from debt securities had been incurred in more than twelve months. Most of the losses on government debt securities recognized in the Group’s equity (approximately 97% of the total) related to the decline in value of Spanish and Portuguese government debt securities. This decline in value was not prompted by interest rate changes but rather by an increase in the credit risk spreads due to Eurozone debt market tensions exacerbated by the interventions in recent years of Ireland, Greece and Portugal; there had not been any default on payments of interest nor was there any evidence that the issuers would fail to continue to meet their payment obligations in the future, with respect both to principal and interest, and thus prevent recovery of the carrying amount of such securities.

At the end of 2012, 70% of the losses recognized under Valuation adjustments - Available-for-sale financial assets arising from equity instruments had been incurred in more than twelve months. After carrying out the aforementioned assessment, the Group concluded that, given its ability and intention to hold the securities in the long term, it did not expect the factors giving rise to the decline in value described above to have an impact on future cash flows and, therefore, no impairment loss was required to be recognized at year-end.

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b) Cash flow hedges

Valuation adjustments - Cash flow hedges includes the gains or losses attributable to hedging instruments that qualify as effective hedges. These amounts will remain under this heading until they are recognized in the consolidated income statement in the periods in which the hedged items affect it (see Note 11).

Accordingly, amounts representing valuation losses will be offset in the future by gains generated by the hedged instruments.

c) Hedges of net investments in foreign operations and Exchange differences

Valuation adjustments - Hedges of net investments in foreign operations includes the net amount of changes in the value of hedging instruments in hedges of net investments in foreign operations, for the portion of these changes considered as effective hedges (see Note 11).

Valuation adjustments - Exchange differences includes the net amount of exchange differences arising on non-monetary items whose fair value is adjusted against equity and the differences arising on the translation to euros of the balances of the consolidated entities whose functional currency is not the euro (see Note 2.a).

The changes in 2012 reflect the effect arising from the depreciation of foreign currencies, mainly of the Brazilian real. The changes in 2011 and 2010 reflect the effect arising from the appreciation or depreciation of foreign currencies, mainly of sterling and the Brazilian real.

Of the change in the balance in these years, a loss of EUR 388 million in 2012 and EUR 771 million in 2011 and a gain of EUR 1,640 million in 2010 related to the measurement of goodwill.

The detail, by country, of Valuation adjustments - Hedges of net investments in foreign operations and Valuation adjustments - Exchange differences is as follows:

	Millions of euros
	2012			2011			2010
Net balance at end of year		(5,970	)		(3,208	)		(894	)
Of which:
Arising on consolidation:
Subsidiaries:		(5,970	)		(3,208	)		(891	)
Brazil Group		(2,627	)		713			2,750
Chile Group		(80	)		23			301
Mexico Group		(900	)		(1,217	)		(452	)
Santander UK Group		(2,096	)		(2,405	)		(3,196	)
Other		(267	)		(322	)		(294	)
Associates		—			—			(3	)

d) Entities accounted for using the equity method

Valuation adjustments - Entities accounted for using the equity method includes the amounts of valuation adjustments recognized in equity arising from associates.

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The net changes in Valuation adjustments - Entities accounted for using the equity method were as follows:

	Millions of euros
	2012			2011			2010
Balance at beginning of year		(95	)		—			—
Revaluation gains (losses)		(61	)		(38	)		—
Net amounts transferred to profit or loss		21			—			—
Transfers		(17	)		(57	)		—
Balance at end of year		(152	)		(95	)		—
Of which:
Metrovacesa, S.A.		(55	)		(34	)		—
Zurich Santander Insurance América, S.L.		49			(14	)		—
Santander Consumer USA		(92	)		—			—

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 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 2012 is set forth below.

31. Issued capital

a) Changes

At December 31, 2009, the share capital consisted of 8,228,826,135 shares with a total par value of EUR 4,114 million.

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.

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 million.

Following these transactions, at December 31, 2010 the Bank’s share capital was represented by 8,329,122,098 shares with a total par value of EUR 4,164.5 million.

On February 1, 2011, the bonus issue through which the “Santander Dividendo Elección” programme (see Note 4) is instrumented took place, whereby 111,152,906 shares (1.33% of the share capital) relating to bonus share rights were issued in the proportion of one new share for 65 existing shares, for an amount of EUR 55.5 million.

F-171

Additionally, on October 7, 2011, after completion on October 3, 2011 of the period for the voluntary conversion of “Valores Santander” into shares, and in accordance with the terms established in the prospectus, 1,223,457 new shares were issued to cater for this exchange.

On November 2, 2011, the bonus issue through which the “Santander Dividendo Elección” programme is instrumented took place, whereby 125,742,571 shares (1.49% of the share capital) were issued, corresponding to a capital increase of EUR 62.8 million.

Finally, 341,802,171 new shares (3.837% of the share capital) with a par value of EUR 171 million and a share premium of EUR 1,773 million were issued on December 30, 2011 within the framework of the repurchase offer aimed at the holders of Series X preference shares issued by Santander Finance Capital, who, upon accepting this offer, irrevocably requested to subscribe new shares of the Bank for the amount received by them in the repurchase.

At December 31, 2011, the Bank’s share capital consisted of 8,909,043,203 shares with a total par value of EUR 4,454.5 million.

On January 31, 2012 and May 2, 2012, the bonus issues through which the “Santander Dividendo Elección” programme is instrumented took place, whereby 167,810,197 and 284,326,000 shares (1.85% and 3.04% of the share capital, respectively) were issued, giving rise to bonus issues of EUR 83.9 million and EUR 142.2 million, respectively.

The shareholders at the annual general meeting on March 30, 2012 resolved to grant holders of “Valores Santander” (see Note 34.a) the option to request the voluntary conversion of their shares on four occasions prior to October 4, 2012, the date of their mandatory conversion. As a result of the exercise of this option, 73,927,779 shares were issued on June 7, 193,095,393 on July 5, 37,833,193 on August 7, 14,333,873 on September 6 and 200,311,513 on October 9, 2012, relating to capital increases of EUR 37 million, EUR 97 million, EUR 19 million, EUR 7 million and EUR 100 million, respectively.

Also, on July 31, 2012 and November 2, 2012, the bonus issues through which the “Santander Dividendo Elección” programme is instrumented took place, whereby 218,391,102 and 222,107,497 shares (2.22% and 2.15% of the share capital, respectively) were issued, giving rise to bonus issues of EUR 109.2 and EUR 111.1 million, respectively.

At December 31, 2012, the Bank’s share capital consisted of 10,321,179,750 shares with a total par value of EUR 5,161 million.

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, 2012, the only shareholders listed in the Bank’s shareholders register with ownership interests of more than 3% were State Street Bank & Trust (with a 8.31% holding), Chase Nominees Limited (with a 7.74% holding), The Bank of New York Mellon (with a 5.34% holding), EC Nominees Ltd. (with a 5.27% holding), and Caceis Bank (with a 3.10% holding). These ownership interests are held on behalf of customers, and the Bank is not aware of any of these ultimate shareholders individually holding a stake of 3% or more.

b) Other considerations

The shareholders at the annual general meeting held on March 30, 2012 authorized additional share capital of EUR 2,269 million. The Bank’s directors have until March 30, 2015 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 506 of the Spanish Limited Liability Companies Law (Ley de Sociedades de Capital), although this power is limited to EUR 908 million.

F-172

The shareholders at the annual general meeting of March 30, 2012 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 8,000 million or the equivalent amount in another currency. The Bank’s directors have until March 30, 2017 to execute this resolution.

At December 31, 2012, the shares of the following companies were listed on official stock markets: Banco Santander Río, S.A.; Grupo Financiero Santander México, S.A. B. de C.V.; Banco Santander - Chile; Cartera Mobiliaria, S.A., SICAV; Santander Chile Holding S.A.; Banco Santander (Brasil) S.A.; Banco Español de Crédito, S.A. and Bank Zachodni WBK S.A.

At December 31, 2012, 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 44.2 million, which represented 0.43% of the Bank’s share capital. In addition, the number of Bank shares owned by third parties and received as security was 160.5 million (equal to 1.56% of the Bank’s share capital).

At December 31, 2012, 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 (see Appendix V).

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 2012, 2011 and 2010 relates to the capital increases detailed in Note 31.a. Specifically, in 2012 the share premium was increased by EUR 6,551 million as a result of the conversion of “Valores Santander” and was reduced by EUR 220 million in order to cater for the capital increases resulting from the “Santander Dividendo Elección” programme. Also, in 2012 an amount of EUR 141 million was transferred from the Share premium account to the Legal reserve (2011: EUR 24 million; 2010: EUR 10 million) (see Note 33.b.i).

33. Reserves

a) Definitions

Shareholders’ equity - Reserves - Accumulated reserves (losses) 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.

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Shareholders’ equity - Reserves (losses) of entities accounted for using the equity method includes the net amount of the accumulated profit or loss generated in previous years by entities accounted for using the equity method, recognized through the consolidated income statement.

b) Breakdown

The detail of Accumulated reserves and Reserves of entities accounted for using the equity method is as follows:

	Millions of euros
	2012		2011		2010
Accumulated reserves:
Restricted reserves-
Legal reserve		1,032		857		833
Reserve for treasury shares		1,549		821		737
Revaluation reserve Royal Decree-Law 7/1996		43		43		43
Reserve for retired capital		11		11		11
Voluntary reserves		125		1,246		1,745
Consolidation reserves attributed to the Bank		8,551		7,107		6,652
Reserves at subsidiaries		25,587		22,836		18,234
		36,898		32,921		28,255
Reserves of entities accounted for using the equity method:
Associates		255		59		52
		37,153		32,980		28,307

i. Legal reserve

Under the Consolidated Spanish Limited Liability Companies Law, 10% of net profit for each year must be transferred to the legal reserve. These transfers must be made until the balance of this reserve reaches 20% of the share capital. The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount.

In 2012 the Bank transferred EUR 141 million from the Share premium account and EUR 34 million of 2011 profit to the Legal reserve. In 2011 the Bank transferred EUR 24 million (2010: EUR 10 million) from the Share premium account to the Legal reserve. Consequently, 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, 2012 the Legal reserve was at the stipulated level.

ii. Reserve for treasury shares

Pursuant to the Consolidated 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 and the amount equivalent to loans granted by Group companies to third parties for the acquisition of treasury shares.

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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 of subsidiaries and jointly controlled entities

The detail, by company, of Reserves of 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
	2012		2011			2010
Banco Santander (Brasil), S.A. (Consolidated Group)		5,237		4,395			2,904
Santander UK Group		4,764		4,189			3,418
Banesto		4,327		4,341			4,195
Banco Santander - Chile		3,072		2,691			1,834
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander		2,104		2,399			1,931
Banco Santander Totta, S.A. (Consolidated Group)		1,860		1,985			1,949
Santander Consumer Finance Group		1,351		794			797
Santander Holdings USA		624		122			(41	)
Santander Seguros y Reaseguros, Compañía Aseguradora, S.A.		387		432			331
Banco Banif, S.A.		349		307			274
Banco Santander (Suisse) SA		333		84			44
Cartera Mobiliaria, S.A., SICAV		329		334			336
Banco Santander International -		288		245			206
Santander Investment, S.A.		219		247			217
Banco Santander Río S.A.		61		(77	)		(227	)
Exchange differences, consolidation adjustments and other companies (*)		282		348			66
		25,587		22,836			18,234
Of which: restricted		2,241		1,815			1,563

(*) Includes the charge relating to cumulative exchange differences in the transition to International Financial Reporting Standards.

34. Other equity instruments and Treasury shares

a) Other equity instruments

Other equity instruments includes the equity component of compound financial instruments, the increase in equity due to personnel remuneration, and other items not recognized in other Shareholders’ equity items.

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At December 31, 2010 and 2011, 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. It was possible to exchange these securities voluntarily for Bank shares on October 4, 2011, 2010, 2009 and 2008 and they were 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, S.A. 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 which took place on July 30, through which the “Santander Dividendo Elección” programme was instrumented, and the new reference price of the shares of Banco Santander for conversion purposes was set at EUR 12.96 per share. Consequently, the new conversion ratio applicable to the “Valores Santander” was 385,802 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 12.96).

The shareholders at the annual general meeting on March 30, 2012 resolved to grant holders of “Valores Santander” the option to request the voluntary conversion of their shares on four occasions prior to October 4, 2012, the date of their mandatory conversion. Specifically, holders of “Valores Santander” who so desired could request the conversion thereof in the 15 calendar days prior to June 4, July 4, August 4 and September 4, 2012. As a result of this option, on June 7, 2012 195,923 “Valores Santander” were voluntarily converted into Bank shares (July 5, 2012: 511,769 shares; August 7, 2012: 98,092 shares; September 6, 2012: 37,160 shares; October 9, 2012: 519,300 shares). This conversion caused a reduction of EUR 6,811 million in Other equity instruments and increases of EUR 260 million and EUR 6,551 million in Issued capital and Share premium, respectively.

In 2012 interest of EUR 226 million (2011: EUR 268 million; 2010: EUR 243 million) was paid on the “Valores Santander” with a charge to reserves. This interest was recognized under Other increases/(decreases) in equity in the consolidated statement of changes in total equity.

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), S.A. 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 shares of Banco Santander (Brasil), S.A. equivalent to 5% of its share capital at the issue date. The exchange price is BRL 23.75 per share (domestic unit) and the bonds pay a coupon in US dollars of 6.75% per annum.

At the issue date, 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.

F-176

In January and March 2012 the Group transferred shares representing 4.41% and 0.77% of Banco Santander (Brasil) S.A. to two leading international financial institutions that have undertaken to deliver these shares to the holders of the bonds convertible into shares of Banco Santander (Brasil) S.A. issued by Banco Santander, S.A. in October 2010 upon the maturity of the bonds and under the terms laid down therein. As a result of these transactions, the balances of Other equity instruments and Valuation adjustments were reduced by EUR 1,668 million and EUR 26 million, respectively, and the balances of Reserves and Non-controlling interests increased by EUR 162 million and EUR 1,532 million, respectively, and, accordingly, there was no impact on Equity.

b) Treasury shares

Shareholders’ equity - Treasury shares includes the amount of own equity instruments held by all the Group entities.

Transactions involving own equity instruments, including their issuance and cancellation, are recognized directly in equity, and no profit or loss may be recognized on these transactions. The costs of any transaction involving own equity instruments are deducted directly from equity, net of any related tax effect.

The shareholders at the Bank’s annual general meeting on June 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 0.474% of issued share capital at December 31, 2012 (December 31, 2011: 0.474%; December 31, 2010: 0.268%).

The average purchase price of the Bank’s shares in 2012 was EUR 5.49 per share and the average selling price was EUR 5.58 per share.

The effect on equity, net of tax, arising from the purchase and sale of Bank shares was an EUR 85 million increase in 2012 (2011: EUR 31 million reduction; 2010: EUR 18 million reduction).

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.

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a) Contingent liabilities

Contingent liabilities includes all transactions under which an entity guarantees the obligations of a third party and which result from financial guarantees granted by the entity or from other types of contract. The detail is as follows:

	Millions of euros
	2012		2011		2010
Financial guarantees		14,437		15,417		18,395
Of which:
Financial bank guarantees		13,706		14,697		17,518
Doubtful guarantees		731		720		604
Irrevocable documentary credits		2,866		2,978		3,816
Other bank guarantees and indemnities provided		27,285		29,093		36,733
Other guarantees		27,089		28,937		29,331
Undertakings to provide bank guarantees		196		156		7,402
Other contingent liabilities		445		554		851
Assets earmarked for third-party obligations		108		108		108
Other contingent liabilities		337		446		743
		45,033		48,042		59,795

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, 2012, the Group had recognized provisions of EUR 617 million to cover contingent liabilities (December 31, 2011: EUR 659 million; December 31, 2010: EUR 1,030 million) (see Note 25).

i. Financial guarantees

Financial guarantees includes, inter alia, financial guarantee contracts such as financial bank guarantees, credit derivatives sold, and risks arising from derivatives arranged for the account of third parties.

ii. Other bank guarantees and indemnities provided

This item 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.

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b) Contingent commitments

Contingent commitments includes those irrevocable commitments that could give rise to the recognition of financial assets.

The detail is as follows:

	Millions of euros
	2012		2011		2010
Drawable by third parties		187,664		181,559		179,964
Financial asset forward purchase commitments		891		307		1,589
Regular way financial asset purchase contracts		15,040		2,324		2,702
Securities subscribed but not paid		15		20		26
Securities placement and underwriting commitments		5		5		21
Documents delivered to clearing houses		12,132		10,925		17,410
Other contingent commitments		295		242		1,997
		216,042		195,382		203,709

c) Off-balance-sheet funds under management

The detail of off-balance-sheet funds managed by the Group is as follows:

	Millions of euros
	2012		2011		2010
Investment funds		89,176		102,611		113,510
Pension funds		10,076		9,645		10,965
Assets under management		18,889		19,200		20,314
		118,141		131,456		144,789

d) Third-party securities held in custody

At December 31, 2012, the Group held in custody debt securities and equity instruments totaling EUR 725,609 million (December 31, 2011: EUR 768,917 million) entrusted to it by third parties.

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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
	2012					2011					2010
	Notional amount		Market value			Notional amount		Market value			Notional amount		Market value
Trading derivatives:
Interest rate risk-
Forward rate agreements		324,031		(7	)		205,780		(13	)		63,575		(19	)
Interest rate swaps		2,114,198		2,942			2,344,783		366			2,097,581		481
Options and futures		655,091		(487	)		782,874		(171	)		923,975		(839	)
Credit risk-
Credit default swaps		90,119		18			107,026		(60	)		133,841		(65	)
Foreign currency risk-
Foreign currency purchases and sales		187,976		278			232,619		(122	)		165,747		(2,226	)
Foreign currency options		49,442		(18	)		50,376		32			41,419		(182	)
Currency swaps		277,392		(436	)		226,042		(157	)		183,109		838
Securities and commodities derivatives and other		149,737		(1,714	)		187,497		(460	)		241,185		(198	)
		3,847,986		576			4,136,997		(585	)		3,850,432		(2,210	)
Hedging derivatives:
Interest rate risk-
Interest rate swaps		195,416		2,154			179,010		2,546			211,964		1,225
Options and futures		8,006		19			2,169		34			5,506		25
Credit risk-
Credit default swaps		833		(7	)		1,405		50			1,808		(7	)
Foreign currency risk-
Foreign currency purchases and sales		24,758		(278	)		3,351		(8	)		3,875		(4	)
Foreign currency options		24,740		(34	)		37,724		(9	)		30,989		(294	)
Currency swaps		38,895		(399	)		21,931		981			26,913		748
Securities and commodities derivatives and other		278		37			443		(140	)		985		(100	)
		292,926		1,492			246,033		3,454			282,040		1,593
		4,140,912		2,068			4,383,030		2,869			4,132,472		(617	)

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.

F-180

The Group manages the credit risk exposure of these contracts through netting arrangements with its main counterparties and by receiving assets as collateral for its risk positions.

The detail of the cumulative credit risk exposure, by type of financial derivative, is as follows:

	Millions of euros
	2012			2011			2010
Credit derivatives		1,177			2,500			1,455
Securities derivatives		4,544			3,986			4,076
Fixed-income derivatives		143			136			135
Currency derivatives		33,389			37,241			31,560
Interest rate derivatives		127,614			116,871			59,324
Commodities derivatives		459			877			580
Collateral received		(10,555	)		(11,508	)		(6,873	)
Total gross risk		156,771			150,103			90,258
Total net risk		52,184			53,358			46,893

Cumulative credit risk exposure is presented in terms of Credit Risk Equivalent (CRE). CRE is defined as the sum of net replacement value (market value in the case of derivatives) plus the maximum potential value of the contracts in the future. This measurement is used for managing counterparty risk.

The notional amounts and fair values of the hedging derivatives, by type of hedge, is as follows:

	Millions of euros
	2012					2011					2010
	Notional amount		Fair value			Notional amount		Fair value			Notional amount		Fair value
Fair value hedges		195,486		1,975			158,096		3,924			212,705		2,174
Cash flow hedges		56,311		(209	)		57,034		(461	)		43,090		(285	)
Hedges of net investments in foreign operations		41,129		(274	)		30,903		(9	)		26,245		(296	)
		292,926		1,492			246,033		3,454			282,040		1,593

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 liabilities guaranteed by Banco Santander S.A. At 2012 year-end, the Group held derivative contracts to hedge the interest rate risk of issues with an equivalent euro notional amount of EUR 41,143 million. Of this amount, EUR 35,741 million were denominated in euros, EUR 3,389 million in US dollars and EUR 1,481 million in pounds sterling. At 2012 year-end, the fair value of these hedging derivatives gave rise to a gain of EUR 2,729 million which offset the losses recognized as a result of the measurement of the hedged items based on the related interest rate risk. The net result was a loss of EUR 101.3 million, already recognized in the consolidated income statement.

F-181

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), senior debt, preference shares, etc.).

• Interest rate risk hedges of portfolios of fixed-rate consumer loans.

• Hedges for the purpose of covering the interest rate risk of sovereign debt portfolios in various currencies (euros and pounds sterling).

• Hedges for the purpose of covering the interest rate risk of fixed-rate loans and reverse repurchase agreements with wholesale customers.

• Hedges for the purpose of covering the interest rate risk of floating rate deposits from financial institutions.

These hedges are documented at Santander UK plc, Banesto, Santander Consumer Finance Group, Bank Zachodni WBK S.A., Banco Santander (Brasil) S.A. and Santander Holdings USA Inc.

At 2012 year-end, the Group had arranged fair value hedges and cash flow hedges to hedge the interest rate or cash flow risk of portfolios of financial instruments. In fair value hedges, the gains or losses on the hedged items are recognized in assets or liabilities under Changes in the fair value of hedged items in portfolio hedges of interest rate risk.

At 2012 year-end, gains of EUR 2,274 million and losses of EUR 598 million were recognized as a result of the measurement of the items hedged by these fair value macro-hedges.

In 2012 a net gain of EUR 344 million was recognized in the consolidated income statement as a result of the measurement of hedges qualifying for hedge accounting (micro-hedges and macro-hedges); this amount resulted from a gain of EUR 1,265 million on hedged items and a loss of EUR 921 on hedging derivatives.

In 2011 a net loss of EUR 83 million was recognized in the consolidated income statement as a result of the measurement of hedges qualifying for hedge accounting (a gain of EUR 1,461 million on hedging derivatives and a loss of EUR 1,544 million on hedged items). In 2010, in turn, a net loss of EUR 1 million was recognized (a gain of EUR 585 million on hedged items and a loss of EUR 586 on hedging derivatives).

The fair value of the cash flow hedges, net of the related tax effect, is recognized under Valuation adjustments - Cash flow hedges in the Group’s equity. The detail of the terms, from December 31, 2012, within which the amounts recognized under Valuation adjustments - Cash flow hedges in equity will be recognized in the consolidated income statements in the coming years is as follows:

	Millions of euros
2012	Less than 1 year			1 to 5 years			After 5 years			Total
Debit balances (losses)		(152	)		(30	)		(37	)		(219	)

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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 2012 year-end, the Group held foreign currency options in this connection with an equivalent euro notional amount of EUR 12,370 million, of which EUR 10,468 million were denominated in Brazilian reais and EUR 1,902 million in Polish zloty. In 2012 losses amounting to EUR 571 million, which arose from the settlement of options that were exercised, were taken to equity. At 2012 year-end, the market value of the options not yet exercised represented an unrealized net loss of EUR 33 million. In addition to foreign currency options, the Group also arranged other hedging derivatives to round off its hedging of the structural foreign currency risk of its foreign currency investments: Chilean pesos for a notional amount of EUR 2,327 million, which gave rise to a loss of EUR 360 million in 2011; Brazilian reais for a notional amount of EUR 2,722 million, with a loss of EUR 377 million; and Mexican pesos for a total notional amount of EUR 4,172 million, with a loss of EUR 266 million.

Lastly, in addition to these hedges involving derivatives, foreign currency spot sales were made to offset structural foreign currency risk. By currency, spot sales were made of US dollars against euros, which amounted to EUR 1,805 million and gave rise to a gain of EUR 38 million, and of pounds sterling against euros, which totaled EUR 6,377 million and gave rise to a loss of EUR 170 million.

At 2011 year-end, the Group held foreign currency options in this connection with an equivalent euro nominal value of EUR 16,688 million, of which EUR 14,456 million were denominated in Brazilian reais, EUR 942 million in Mexican pesos and EUR 1,290 million in Polish zloty. In 2011 losses amounting to EUR 83 million arising from the settlement of options that were exercised in the year were taken to equity. At 2011 year-end, the market value of the options not yet exercised represented an unrealized loss of EUR 71 million. In addition to these foreign currency options, the Group also arranged other hedging derivatives to round off its strategy for hedging the structural foreign currency risk of its investments in the following currencies: Chilean pesos for a total notional amount of EUR 3,515 million, which gave rise to a gain of EUR 95 million in 2011; pounds sterling for a notional amount of EUR 5,604 million, which gave rise to a loss of EUR 168 million in 2011; and Mexican pesos for a total notional amount in currency swaps of EUR 2,880 million, with a gain of EUR 86 million.

Lastly, in addition to these hedges involving derivatives, the structural currency risk of the underlying carrying amount in US dollars was neutralized by hedging it directly through the spot sale of US dollars against euros, for a total amount of EUR 2,216 million, which gave rise to a loss of EUR 195 million in 2011.

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.

F-183

In line with the purpose of hedging the underlying carrying amount of currency holdings, the overall gains or losses obtained from the aforementioned hedges are offset from an equity position by valuation adjustments in euros of the Group’s investments in its investees.

37. Discontinued operations

No significant operations were discontinued in 2012, 2011 or 2010.

a) 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
	2012			2011			2010
Interest income/(charges)		8			15			33
Net fee and commission income		–			2			2
Total income		8			17			35
Personnel expenses		(2	)		(5	)		(6	)
Other general administrative expenses		(4	)		(8	)		(9	)
Depreciation and amortization		–			(2	)		(1	)
Impairment losses on financial assets		(10	)		(23	)		(37	)
Loss from operations		(8	)		(21	)		(18	)
Gains (losses) on disposal of assets not classified as non-current assets held for sale		2			(2	)		(7	)
Loss before tax		(6	)		(23	)		(25	)
Income tax		(1	)		(1	)		(2	)
Profit (loss) from discontinued operations		(7	)		(24	)		(27	)

Additionally, following is a detail of the net cash flows attributable to the operating, investing and financing activities of discontinued operations.

	Millions of euros
	2012		2011			2010
Cash and cash equivalents at beginning of year		–		–			–
Cash flows from operating activities		–		2			(2	)
Cash flows from investing activities		–		(2	)		2
Cash flows from financing activities		–		–			–
Cash and cash equivalents at end of year		–		–			–

F-184

b) Earnings per share relating to discontinued operations

The earnings per share relating to discontinued operations were as follows:

	2012			2011			2010
Basic earnings per share (euros)		(0.00	)		(0.00	)		(0.00	)
Diluted earnings per share (euros)		(0.00	)		(0.00	)		(0.00	)

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 2012, 2011 and 2010 is as follows:

	Millions of euros
	2012		2011		2010
Balances with the Bank of Spain and other central banks		2,693		3,192		1,933
Loans and advances to credit institutions		1,034		1,061		1,045
Debt instruments		7,093		7,406		6,232
Loans and advances to customers		46,360		46,909		41,854
Insurance contracts linked to pensions (Note 25)		45		86		90
Other interest		1,799		2,202		1,753
		59,024		60,856		52,907

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.

F-185

The detail of the main items of interest expense and similar charges accrued in 2012, 2011 and 2010 is as follows:

	Millions of euros
	2012		2011		2010
Balances with the Bank of Spain and other central banks		522		448		304
Deposit from credit institutions		1,968		2,427		1,369
Customer deposits		16,403		16,819		13,446
Marketable debt securities		7,277		6,430		4,959
Subordinated liabilities (Note 23)		1,650		1,940		2,230
Provisions for pensions (Note 25)		398		357		481
Other interest		659		1,614		894
		28,877		30,035		23,683

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:

	Millions of euros
	2012		2011		2010
Equity instruments classified as:
Financial liabilities held for trading		290		268		242
Available-for-sale financial assets		133		126		120
		423		394		362

41. Income for companies accounted for using the equity method

Income for companies accounted for using the equity method comprises the amount of profit or loss attributable to the Group generated during the year by associates.

The detail of Income for companies accounted for using the equity method is as follows:

	Millions of euros
	2012			2011			2010
Santander Consumer USA Inc.		349			—			—
Zurich Santander Insurance América, S.L.		134			59			—
Metrovacesa, S.A.		(100	)		—			—
Other companies		44			(2	)		17
		427			57			17

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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:

	Millions of euros
	2012		2011		2010
Collection and payment services:
Bills		336		317		316
Demand accounts		1,209		1,028		995
Cards		2,793		2,348		1,980
Cheques and other		226		290		286
Orders		347		432		351
		4,911		4,415		3,928
Marketing of non-banking financial products:
Investment funds		1,074		1,195		1,198
Pension funds		143		145		152
Insurance		2,473		2,493		2,161
		3,690		3,833		3,511
Securities services:
Securities underwriting and placement		204		204		302
Securities trading		323		337		310
Administration and custody		214		217		222
Asset management		103		77		84
		844		835		918
Other:
Foreign exchange		229		252		178
Financial guarantees		484		501		530
Commitment fees		282		233		213
Other fees and commissions		2,387		2,680		2,403
		3,382		3,666		3,324
		12,827		12,749		11,681

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:

	Millions of euros
	2012		2011		2010
Fees and commissions assigned to third parties		1,664		1,449		1,223
Of which: Cards		1,251		1,034		842
Brokerage fees on lending and deposit transactions		36		44		42
Other fees and commissions		819		784		681
		2,519		2,277		1,946

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44. Gains/losses on financial assets and liabilities

Gains/losses on financial assets and liabilities includes the amount of the valuation adjustments of financial instruments, except those attributable to interest accrued as a result of application of the effective interest method and to allowances, and the gains or losses obtained from the sale and purchase thereof.

a) Breakdown

The detail, by origin, of Gains/losses on financial assets and liabilities is as follows:

	Millions of euros
	2012			2011			2010
Other financial instruments at fair value through profit or loss (*)		159			21			70
Financial instruments not measured at fair value through profit or loss		1,789			803			791
Of which: Available-for-sale financial assets		915			627			1,020
Of which:
Debt instruments		576			328			438
Equity instruments		339			299			582
Of which: Other		874			176			(229	)
Of which:
Due to exchange and repurchase of securities		870			144			—
Hedging derivatives and other		(79	)		(99	)		(9	)
Other financial assets and liabilities held for trading (*)		1,460			2,113			1,312
		3,329			2,838			2,164

(*) 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.

Due to exchange and repurchase of securities

On January 1, 2010, Banco Santander, S.A. invited the holders of subordinated bonds (corresponding to 13 different series issued by various Group entities, with a combined outstanding principal 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. (Sole-Shareholder Company), 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, S.A. 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.

On November 15, 2011, Banco Santander, S.A. offered the holders of subordinated bonds issued by Santander Issuances, S.A. (Sole-Shareholder Company) with a combined outstanding nominal amount of approximately EUR 5,499 million and GBP 1,143 million the possibility of exchanging these securities for newly-issued, non-subordinated fixed-income securities of the Group denominated in pounds sterling and euros. Holders of securities with a cumulative nominal amount of EUR 1,256 million and GBP 217 million subscribed to this exchange. Since the characteristics of the securities received and delivered in the

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exchange differ substantially, the Group wrote down the original financial liability and recognized a new financial liability for the securities delivered, and credited to income an amount of EUR 144 million (EUR 100 million net of the related tax effect) relating to the difference between the carrying amount of the financial liability written down and the fair value of the consideration delivered.

In 2012 the Group performed several securities exchange and repurchase transactions for which EUR 870 million were credited to income. In July 2012 the Group offered the holders of certain securities issued by Santander UK plc the possibility of exchanging these securities for newly-issued Santander UK plc securities; in August 2012 Banco Santander, S.A. and Santander Financial Exchanges Limited invited the holders of securities of various issues of Santander Finance Preferred, S.A. (Sole-Shareholder Company), Santander Perpetual, S.A. (Sole-Shareholder Company) and Santander Issuances, S.A. (Sole-Shareholder Company) to submit offers for the sale of their securities, to be purchased in cash; in February 2012 Banco Español de Crédito, S.A. offered the holders of preference shares of various issues the possibility of exchanging these securities for securities of a new non-convertible bond issue and, in September 2012, Banco Español de Crédito, S.A. offered the holders of securities of various issues to submit an offer for the sale of their securities, to be purchased in cash.

b) Financial assets and liabilities at fair value through profit or loss

The detail of the amount of the asset balances is as follows:

	Millions of euros
	2012		2011		2010
Loans and advances to credit institutions		20,115		9,337		35,047
Loans and advances to customers		23,098		19,804		8,532
Debt instruments		46,561		55,353		62,475
Equity instruments		6,180		5,209		17,119
Derivatives		110,319		102,498		73,069
		206,273		192,201		196,242

The foregoing table shows the maximum credit risk exposure of these assets. The Group mitigates and reduces this exposure as follows:

• 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, 2012, the actual credit risk exposure of the derivatives was EUR 52,184 million (see Note 36).

• Loans and advances to credit institutions and Loans and advances to customers included reverse repos amounting to EUR 35,020 million at December 31, 2012.

Also, mortgage-backed assets totaled EUR 4,153 million.

• Debt instruments include EUR 38,809 million of Spanish and foreign government securities.

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At December 31, 2012, 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.

The detail of the amount of the liability balances is as follows:

	Millions of euros
	2012			2011			2010
Deposits from central banks		(2,142	)		(9,250	)		(12,942	)
Deposits from credit institutions		(19,154	)		(17,519	)		(47,634	)
Customer deposits		(37,535	)		(43,556	)		(34,991	)
Marketable debt securities		(4,905	)		(8,262	)		(4,644	)
Short positions		(15,181	)		(10,187	)		(12,302	)
Derivatives		(109,743	)		(103,083	)		(75,279	)
		(188,660	)		(191,857	)		(187,792	)

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 71 million at December 31, 2012.

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.

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46. Other operating income and Other operating expenses

Other operating income and Other operating expenses in the consolidated income statements include:

	Millions of euros
	2012			2011			2010
Insurance activity		593			392			378
Income from insurance and reinsurance contracts issued		5,541			6,748			7,162
Of which:
Insurance and reinsurance premium income		4,667			6,547			6,845
Reinsurance income (Note 15)		874			201			317
Expenses of insurance and reinsurance contracts		(4,948	)		(6,356	)		(6,784	)
Of which:
Claims paid and other insurance-related expenses		(4,440	)		(4,852	)		(5,816	)
Net provisions for insurance contract liabilities		(323	)		(1,202	)		(689	)
Reinsurance premiums paid		(185	)		(302	)		(279	)
Non-financial services		137			151			135
Sales and income from the provision of non-financial services		369			400			340
Cost of sales		(232	)		(249	)		(205	)
Other operating income and expenses		(622	)		(525	)		(407	)
Other operating income		783			902			693
Of which, fees and commissions offsetting direct costs		130			119			70
Other operating expenses		(1,405	)		(1,427	)		(1,100	)
Of which, Deposit Guarantee Fund		(530	)		(346	)		(307	)
		108			18			106

Most of the Bank’s insurance activity is carried on in life insurance.

47. Personnel expenses

a) Breakdown

The detail of Personnel expenses is as follows:

	Millions of euros
	2012		2011		2010
Wages and salaries		7,356		7,399		6,636
Social security costs		1,354		1,314		1,188
Additions to provisions for defined benefit pension plans (Note 25)		145		138		146
Contributions to defined contribution pension funds (Note 25)		156		138		151
Share-based remuneration costs		133		185		153
Of which, Bank directors		4		4		5
Other Personnel expenses		1,179		1,152		1,055
		10,323		10,326		9,329

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b) Headcount

The average number of employees in the Group, by professional category, was as follows:

	Average number of employees (**)
	2012		2011		2010
The Bank:
Senior management (*)		96		100		100
Other line personnel		16,545		16,502		16,289
Clerical staff		2,845		3,048		3,284
General services personnel		29		30		31
		19,515		19,680		19,704
Banesto		8,762		9,049		9,272
Rest of Spain		6,708		7,236		6,749
Santander UK plc		20,499		20,241		18,845
Banco Santander (Brasil) S.A.		53,543		53,431		53,829
Other companies (**)		79,752		77,596		64,510
		188,779		187,233		172,909

(*) Categories of deputy assistant executive vice presidents and above, including senior management.

(**) Excluding personnel assigned to discontinued operations.

The functional breakdown, by gender, at December 31, 2012 is as follows:

	Functional breakdown by gender
	Senior executives				Other executives				Other personnel
	Men		Women		Men		Women		Men		Women
Continental Europe		1,541		385		6,450		3,115		23,627		26,597
United Kingdom		131		26		1,070		435		9,376		14,327
Latin America		695		111		5,223		2,952		37,776		52,926
		2,367		522		12,743		6,502		70,779		93,850

The same information, expressed in percentage terms at December 31, 2012, is as follows:

	Functional breakdown by gender
	Senior executives						Other executives						Other personnel
	Men			Women			Men			Women			Men			Women
Continental Europe		80	%		20	%		67	%		33	%		47	%		53	%
United Kingdom		83	%		17	%		71	%		29	%		40	%		60	%
Latin America		86	%		14	%		64	%		36	%		42	%		58	%
		83	%		17	%		66	%		34	%		43	%		57	%

The labor relations between employees and the various Group companies are governed by the related collective labor agreements or similar regulations.

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c) Share-based payments

The main share-based payments granted by the Group at December 31, 2012, 2011 and 2010 are described below.

i. 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:

	Number of shares (in thousands)			Year granted	Employee group	Number of persons			Date of commencement of exercise period	Date of expiry of exercise period
Plans outstanding at 01/01/10		51,726
Shares delivered (Plan I10)		(12,947	)	2007	Executives		(4,930	)	06/23/07	07/31/10
Options cancelled, net (Plan I10)		(2,790	)	2007	Executives		(577	)	06/23/07	07/31/10
Options granted (Plan I13)		19,613		2010	Executives		6,782		06/11/10	07/31/13
Plans outstanding at 12/31/10		55,602
Shares delivered (Plan I11)		(13,472	)	2008	Executives		(5,379	)	06/21/08	07/31/11
Options cancelled, net (Plan I11)		(3,650	)	2008	Executives		(392	)	06/21/08	07/31/11
Options granted (Plan I14)		16,286		2011	Executives		6,500		06/17/11	07/31/14
Plans outstanding at 12/31/11		54,766
Shares delivered (Plan I12)		(5,056	)	2009	Executives		(5,749	)	06/19/09	07/31/12
Options cancelled, net (Plan I12)		(13,811	)	2009	Executives		(761	)	06/19/09	07/31/12
Options cancelled, net (Plan I14)		(1,810	)	2011	Executives		199		06/17/11	07/31/14
Plans outstanding at 12/31/12		34,089
Of which:
Plan I13		19,613		2010	Executives		6,782		06/11/10	07/31/13
Plan I14		14,476		2011	Executives		6,699		06/17/11	07/31/14

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 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.

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The plans shaping the aforementioned incentive policy are as follows: (i) performance share plan; (ii) obligatory investment share plan; (iii) deferred conditional delivery share plan and (iv) deferred conditional variable remuneration 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, except for Plan PI14 (the executive directors and senior executives who participate in the deferred conditional variable remuneration plan are not beneficiaries of PI14).

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). In June 2008, 2009, 2010 and 2011 the third, fourth, fifth and sixth and final cycles of the performance share plan (PI11, PI12, PI13 and Pl14, respectively) were approved. On July 31, 2009, 2010, 2011 and 2012 the first, second, third and fourth cycles (Pl09, Pl10, Pl11 and P12, respectively) were cancelled.

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 target, which, if met, will determine the number of shares to be delivered, is defined by comparing the Group’s performance with that of a benchmark group of financial institutions and is linked to only one parameter, namely Total Shareholder Return (TSR). With regard to the plans approved until June 2008, the targets, which, if met, determined the number of shares to be delivered, 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 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 the end of the cycle of plan Pl13, the TSR for Santander and each of the benchmark entities will be calculated and the results will be ranked from first to last, thereby determining 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 place in the TSR ranking	Percentage of maximum shares to be delivered
1st to 5th		100.0	%
6th		82.5	%
7th		65.0	%
8th		47.5	%
9th		30.0	%
10th and below		0	%

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In the case of Plan PI14, 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 place in the TSR ranking	Percentage of maximum shares to be delivered
1st to 5th		100.0	%
6th		86.0	%
7th		72.0	%
8th		58.0	%
9th		44.0	%
10th		30.0	%
11th 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 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 175 million, 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 I12 matured in 2012. 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 I11 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 27 executives, who include the executive directors, non-director members of senior management and other executives (see Note 5).

This plan, which was discontinued in 2010, is structured in three-year cycles. 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 meeting, the obligatory investments were made before February 29, 2008, February 28, 2009 and February 28, 2010, respectively.

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Participants who hold the shares acquired through the obligatory investment and remain in the Group’s employ for three years from the date on which the obligatory investment is made will be entitled to receive the same number of Bank shares as that composing their initial obligatory investment.

The shares will be delivered within a maximum period of one month from the third anniversary of the date on which the obligatory investment was made.

The shareholders at the 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 exist: (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, where applicable to the executive in question; or (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards.

(iii) 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. 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 the Group whose variable remuneration or annual bonus for 2010 generally exceeded EUR 0.3 million (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.

The share-based bonus is deferred over three years and will be paid, where appropriate, in three installments starting in the first year. The amount in shares is calculated based on the tranches of the following scale established by the board of directors on the basis of the gross variable cash-based remuneration or annual bonus for 2010:

Benchmark bonus (thousands of euros)	Percentage (deferred)
300 or less		0	%
300 to 600 (inclusive)		20	%
600 to 1,200 (inclusive)		30	%
1,200 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, 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, those relating to risks, where applicable to the executive in question; (iii) 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.

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The shareholders at the annual general meetings held on June 17, 2011 and March 30, 2012 approved the second and third cycle of this plan, respectively. The beneficiaries are the executives or employees of the Group whose variable remuneration or annual bonus for 2011 and 2012, respectively, generally exceeds EUR 0.3 million (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. These cycles are not applicable to executive directors or other senior executives and other executives who are beneficiaries of the deferred conditional variable remuneration plan described below.

The share-based bonus is deferred over three years and will be paid, where appropriate, in three installments starting in the first year. The amount in shares is calculated based on the tranches of the following scale established by the board of directors on the basis of the gross variable cash-based remuneration or annual bonus for the year:

Benchmark bonus (thousands of euros)	Percentage (deferred)
300 or less		0	%
300 to 600 (inclusive)		20	%
More than 600		30	%

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 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 internal regulations, including, in particular, those relating to risks; (iii) 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 the Group’s economic capital or risk profile.

(iv) Deferred conditional variable remuneration plan

The shareholders at the annual general meetings held on June 17, 2011 and March 30, 2012 approved the first and second cycles, respectively, of the deferred conditional variable remuneration plan in relation to the variable remuneration or bonus for 2011 and 2012, respectively, of the executive directors and certain executives (including senior management) and employees whose professional activities significantly impact the risk profile or who perform control functions or receive an overall remuneration which puts them on the same remuneration level as senior executives and employees whose professional activities significantly impact the risk profile (all of them are referred to as identified staff, in accordance with the Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors on December 10, 2010).

The purpose of these cycles is to defer a portion of the variable remuneration or bonus of the beneficiaries thereof over a period of three years for it to be paid, where appropriate, in cash and in Santander shares; the other portion of the variable remuneration is also to be paid in cash and Santander shares, upon commencement of the cycles, in accordance with the rules set forth below.

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The variable remuneration will be paid in accordance with the following percentages, based on the timing of the payment and the group to which the beneficiary belongs (the “immediate payment percentage” identifies the portion of the bonus for which payment is not deferred, and the “deferred percentage” identifies the portion of the bonus for which payment is 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	%

(*) Generally applicable percentages. In some countries deferred percentages may be higher for certain categories of executives, thereby giving rise to lower immediate payment percentages.

The payment of the deferred percentage of the bonus applicable in each case will be deferred over a period of three years and will be paid in thirds, within fifteen days following the anniversaries of the initial date in 2013, 2014 and 2015 for the first cycle and in 2014, 2015 and 2016 for the second cycle, 50% being paid in cash and 50% in shares, provided that the conditions described below are met.

In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the deferred remuneration is conditional upon none of the following circumstances existing -in the opinion of the board of directors and following a proposal of the appointments and remuneration committee-, during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) 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 the Group’s economic capital or risk profile.

On each delivery, the beneficiaries will be paid an amount in cash equal to the dividends paid for the deferred amount in shares and the interest on the amount accrued in cash.

The maximum number of shares to be delivered is calculated taking into account the amount resulting from applying the applicable taxes and the volume-weighted average prices for the 15 trading sessions prior to the date on which the board of directors approves the bonus for the Bank’s executive directors for 2011 and 2012 for the first and second cycle, respectively.

F-198

ii. Santander UK plc

The long-term incentive plans on shares of the Bank granted by management of Santander UK plc to its employees are as follows:

	Number of shares (in thousands)			Exercise price in pounds sterling (*)		Year granted	Employee group	Number of persons			Date of commencement of exercise period	Date of expiry of exercise period
Plans outstanding at 01/01/10		8,725			7,24
Options granted (Sharesave)		3,359			6,46	2010	Employees		4,752	(**)	11/01/10	11/01/13
											11/01/10	11/01/15
Options exercised		(72	)		7,54
Options cancelled (net) or not exercised		(3,073	)		6,82
Plans outstanding at 12/31/10		8,939			7,09
Options granted (Sharesave)		7,725			4,46	2011	Employees		7,429	(**)	11/01/11	11/01/14
											11/01/11	11/01/16
Options exercised		(43	)		4,09
Options cancelled (net) or not exercised		(5,348	)		6,92
Plans outstanding at 12/31/11		11,273
Options granted (Sharesave)		10,012			3,66	2012	Employees		7,089	(**)	11/01/12	11/01/15
											11/01/12	11/01/17
Options exercised		(3	)		4,56
Options cancelled (net) or not exercised		(6,469	)		5,34
Plans outstanding at 12/31/12		14,813
Of which:
Executive Options		12			4,54	2003-2004	Executives		2		03/26/06	03/24/13
Sharesave		14,801			5,37	2008-2011	Employees		13,110	(**)	11/01/08	11/01/16

(*) At December 31, 2012, 2011 and 2010, the euro/pound sterling exchange rate was EUR 1.22534/GBP 1; EUR 1.19717/GBP 1 and EUR 1.16178/GBP 1, respectively.

(**) Number of accounts/contracts. A single employee may have more than one account/contract.

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 three trading sessions prior to the approval of the plan by the UK tax authorities (HMRC). This approval must be received within 21 to 41 days following the publication of the Group’s results for the first half of the year. This scheme, which commenced in September 2008, 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, June 11, 2010, June 17, 2011 and March 30, 2012, the shareholders approved a plan with similar features to the plan approved in 2008.

iii. Fair value

The fair value of each plan granted by the Group is calculated at the grant date. 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.

F-199

The fair value of the performance share plans was calculated as follows:

• It was assumed that the beneficiaries will not leave the Group’s employment during the term of each plan.

• The fair value of the Bank’s relative TSR position was calculated, on the grant date, on the basis of the report of an independent expert whose assessment was carried out using a Monte Carlo valuation model, performing 10,000 simulations to determine the TSR of each of the companies in the benchmark group, taking into account the variables set forth below. The results (each of which represents the delivery of a number of shares) are classified in decreasing order by calculating the weighted average and discounting the amount at the risk-free interest rate.

	PI12			PI13			PI14
Expected volatility (*)		42.36	%		49.65	%		51.35	%
Annual dividend yield based on last few years		4.88	%		6.34	%		6.06	%
Risk-free interest rate (Treasury Bond yield (zero coupon) over the period of the plan)		2.04	%		3.33	%		4.07	%

(*) Calculated on the basis of historical volatility over the corresponding period (three years).

The application of the simulation model results in a percentage value of 55.42% for the I12 plan, 62.62% for the I13 plan and 55.39% for the l14 plan. Since this valuation refers to a market condition, it cannot be adjusted after the grant date.

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:

	2012	2011	2010
Risk-free interest rate	0.75%-5.2%	1.7%-5.2%	1.7%-5.2%
Dividend increase	4.6%	(2.6)%	8%
Volatility of underlying shares based on historical volatility over five years	20.3%-44.6%	20.3%-42.2%	20.3%-39.4%
Expected life of options granted	3 and 5 years	3 and 5 years	3 and 5 years

F-200

48. Other general administrative expenses

a) Breakdown

The detail of Other general administrative expenses is as follows:

	Millions of euros
	2012		2011		2010
Property, fixtures and supplies		1,918		1,845		1,731
Other administrative expenses		1,742		1,723		1,555
Technology and systems		938		875		798
Advertising		665		695		634
Communications		642		659		670
Technical reports		492		467		428
Per diems and travel expenses		298		313		276
Taxes other than income tax		417		401		376
Surveillance and cash courier services		432		412		401
Insurance premiums		61		65		57
		7,605		7,455		6,926

b) Technical reports and other

Technical reports includes the fees paid by the various Group companies (detailed in the accompanying Appendices) to their respective auditors, the detail being as follows:

	Millions of euros
	2012		2011
AUDIT FEES
Audit of the financial statements of the companies audited by Deloitte		21.0		20.4
Of which:
Santander UK plc		4.4		3.9
Santander Holdings USA, Inc.		2.2		2.2
Banco Santander (Brasil) S.A.		1.8		1.6
Audit of the Bank’s separate and consolidated financial statements		1.3		1.1
Other audit services:		17.1		15.8
Internal control audit (SOX) and regulatory capital audit (Basel)		5.8		6.2
Audit of the consolidated half-yearly financial statements		5.8		5.5
Review of documentation filed in different markets/with regulators		3.0		2.0
Comfort letters		2.5		2.1
TOTAL AUDIT FEES		38.1		36.2
AUDIT-RELATED FEES
Other work and reports required by the various national supervisory bodies of the countries in which the Group operates		6.7		4.6
Other non-recurring services:		13.9		9.0
Non-recurring reviews required by regulatory bodies		2.1		0.2
Due diligence review work		1.8		1.5
Issuance of other assurance reports		2.8		1.8
Review of procedures, data, controls and other services		7.2		5.5
TOTAL AUDIT-RELATED FEES		20.6		13.6
TOTAL AUDIT AND AUDIT-RELATED FEES		58.7		49.8
TAX FEES		4.3		3.8
ALL OTHER FEES		8.1		5.7
TOTAL		71.1		59.3

F-201

• Other information

The services commissioned from the Group’s auditors meet the independence requirements stipulated by the consolidated Audit Law (Legislative Royal Decree 1/2011, of 31 July) and by the Sarbanes-Oxley Act of 2002, and did not involve the performance of any work that is incompatible with the audit function.

Lastly, the Group commissioned services from audit firms other than Deloitte amounting to EUR 38.7 million (2011: EUR 37 million; 2010: EUR 18.9 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
	2012			2011			2010
Gains:
On disposal of tangible assets		219			128			206
On disposal of investments		775			1,795			193
Of which:
Santander Consumer USA Inc. (Note 3)		—			872			—
Latam insurance companies (Note 3)		—			908			—
Banco Santander Colombia (Note 3)		619			—			—
		994			1,923			399
Losses:
On disposal of tangible assets		(87	)		(76	)		(9	)
On disposal of investments		(1	)		(1	)		(40	)
		(88	)		(77	)		(49	)
		906			1,846			350

F-202

50. Gains / (losses) on 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	2012			2011			2010
Non-current assets held for sale		(757	)		(2,109	)		(332	)
Impairment (Note 12)		(449	)		(2,037	)		(298	)
Loss on sale (Note 12)		(308	)		(72	)		(34	)
Other gains		—			—			113
Other losses		—			—			(71	)
		(757	)		(2,109	)		(290	)

51. Other disclosures

a) Residual maturity periods and average interest rates

The detail, by maturity, of the balances of certain items in the consolidated balance sheets is as follows:

	December 31, 2012
	Millions of euros																					Average
	On			Within 1			1 to 3			3 to 12			1 to 3			3 to 5		After 5				interest
	demand			month			months			months			years			years		years		Total		rate
Assets:
Cash and balances with central banks		68,501			45,030			2,061			2,699			—			—		197		118,488		1.74	%
Available-for-sale financial assets-
Debt instruments		55			2,050			2,786			7,935			14,656			13,141		47,101		87,724		4.56	%
Loans and receivables-
Loans and advances to credit institutions		11,120			26,482			3,406			3,987			1,507			753		6,530		53,785		2.37	%
Loans and advances to customers		16,560			39,008			29,608			74,388			103,661			71,068		363,091		697,384		5.31	%
Debt instruments		3			945			277			527			1,541			421		3,345		7,059		2.90	%
		96,239			113,515			38,138			89,536			121,365			85,383		420,264		964,440		4.62	%
Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks		948			4,678			1,173			1			44,138			—		—		50,938		0.77	%
Deposits from credit institutions		4,611			25,839			7,863			15,958			11,845			11,076		3,540		80,732		2.81	%
Customer deposits		306,051			79,513			34,738			88,012			60,827			13,992		5,971		589,104		1.90	%
Marketable debt securities (*)		707			13,616			13,924			44,466			54,158			27,291		46,902		201,064		3.76	%
Subordinated liabilities		203			230			280			1,226			1,377			5,169		9,753		18,238		5.45	%
Other financial liabilities		4,101			3,309			7,403			211			517			339		3,365		19,245		n.a.
		316,621			127,185			65,381			149,874			172,862			57,867		69,531		959,321		2.38	%
Difference (assets less liabilities)		(220,382	)		(13,670	)		(27,243	)		(60,338	)		(51,497	)		27,516		350,733		5,119

(*) Includes promissory notes, certificates of deposit and other short-term debt issues.

F-203

Both asset and liability balances with central banks increased following the liquidity injections by the central banks in countries where the Group operates, particularly in the euro zone. The European Central Bank (ECB) implemented extraordinary monetary policy measures, including a wider range of collateral and three-year liquidity auctions.

The Group continued to go to these auctions and deposit in the ECB most of the funds captured, significantly increasing the liquidity buffer and improving its structure by replacing short-term maturities by longer term funding. The Group’s net borrowing position from the ECB was EUR 2 thousand million at December 31, 2012, due mainly to Banco Santander Totta, S.A.

	December 31, 2011
	Millions of euros																						Average
	On			Within 1			1 to 3			3 to 12			1 to 3			3 to 5			After 5				interest
	demand			month			months			months			years			years			years		Total		rate
Assets:
Cash and balances with central banks		68,634			21,921			2,772			3,130			66			—			1		96,524		5.59	%
Available-for-sale financial assets-
Debt instruments		84			3,650			2,288			9,131			14,734			11,446			40,256		81,589		5.25	%
Loans and receivables-
Loans and advances to credit institutions		12,963			16,476			1,385			2,652			1,547			1,841			5,525		42,389		4.22	%
Loans and advances to customers		24,468			39,916			32,585			79,727			102,718			67,432			383,450		730,296		6.77	%
Debt instruments		58			1,688			737			339			399			1,220			2,399		6,840		3.34	%
		106,207			83,651			39,767			94,979			119,464			81,939			431,631		957,638		6.38	%
Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks		113			9,601			5			1			—			25,276			—		34,996		1.63	%
Deposits from credit institutions		2,276			27,970			10,756			14,897			10,983			14,331			160		81,373		5.69	%
Customer deposits		299,631			87,398			40,465			74,515			63,284			14,301			9,383		588,977		2.64	%
Marketable debt securities (*)		503			8,093			13,532			23,325			52,077			33,899			57,681		189,110		3.32	%
Subordinated liabilities		77			1			2			237			2,846			3,402			16,427		22,992		6.38	%
Other financial liabilities		6,184			2,637			6,274			367			1,632			420			707		18,221		n.a
		308,784			135,700			71,034			113,342			130,822			91,629			84,358		935,669		3.10	%
Difference (assets less liabilities)		(202,577	)		(52,049	)		(31,267	)		(18,363	)		(11,358	)		(9,690	)		347,273		21,969

(*) Includes promissory notes, certificates of deposit and other short-term debt issues.

F-204

	December 31, 2010
	Millions of euros																					Average
	On			Within 1			1 to 3			3 to 12			1 to 3			3 to 5		After 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-
Debt instruments		291			1,939			1,395			5,836			26,329			11,086		32,813		79,689		5.23	%
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-205

b) Equivalent euro value of assets and liabilities

The detail of the main foreign currency balances in the consolidated balance sheet, based on the nature of the related items, is as follows:

	Equivalent value in millions of euros
	2012				2011				2010
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
Cash and balances with central banks		70,756		—		73,487		—		69,690		—
Financial assets/liabilities held for trading		106,813		80,893		110,645		89,833		112,990		96,089
Other financial assets at fair value through profit or loss		10,448		10,480		7,457		23,442		18,271		20,154
Available-for-sale financial assets		50,144		—		44,248		—		45,491		—
Loans and receivables		468,303		—		470,114		—		453,787		—
Investments		3,336		—		3,161		—		161		—
Tangible assets		5,667		—		5,349		—		5,270		—
Intangible assets		24,269		—		24,374		—		24,024		—
Financial liabilities at amortized cost		—		560,483		—		544,218		—		537,904
Liabilities under insurance contracts		—		—		—		—		—		9,516
Other		21,050		51,045		20,811		45,275		20,877		43,440
		760,786		702,901		759,646		702,768		750,561		707,103

c) Fair value of financial assets and liabilities not measured at fair value

The financial assets owned by the Group are measured at fair value in the accompanying consolidated balance sheet, except for loans and receivables, equity instruments whose market value cannot be estimated reliably and derivatives that have these instruments as their underlyings and are settled by delivery thereof.

Similarly, the Group’s financial liabilities -except for financial liabilities held for trading, those measured at fair value and derivatives other than those having as their underlying equity instruments whose market value cannot be estimated reliably- are measured at amortized cost in the accompanying consolidated balance sheet.

F-206

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
	2012				2011				2010
Assets	Carrying amount		Fair value		Carrying amount		Fair value		Carrying amount		Fair value
Loans and receivables:
Loans and advances to credit institutions		53,785		54,397		42,389		42,351		44,808		45,103
Loans and advances to customers		697,384		704,055		730,296		741,556		715,621		721,887
Debt instruments		7,059		7,241		6,840		6,583		8,429		8,097
		758,228		765,693		779,525		790,490		768,858		775,087

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
	2012				2011				2010
Liabilities	Carrying amount		Fair value		Carrying amount		Fair value		Carrying amount		Fair value
Financial liabilities at amortized cost:
Deposits from central banks		50,938		50,938		34,996		34,996		8,644		8,644
Deposits from credit institutions		80,732		81,819		81,373		82,287		70,893		71,036
Customer deposits		589,104		590,278		588,977		589,173		581,385		582,624
Marketable debt securities		201,064		204,014		189,110		190,410		188,229		189,671
Subordinated liabilities		18,238		18,356		22,992		25,175		30,475		32,006
Other financial liabilities		19,245		19,246		18,221		18,194		19,343		19,282
		959,321		964,651		935,669		940,235		898,969		903,263

F-207

52. Geographical and business segment reporting

a) Geographical segments

Business segment reporting is a basic tool used for monitoring and managing the Group’s various activities. 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 the United States, based on the location of the Group’s assets.

The Continental Europe area encompasses all the Commercial 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. The United States area includes the businesses of Sovereign Bank and Santander Consumer USA Inc.

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. The Corporate Activities segment also manages all the property exposure held by the Group in Spain through a corporate area created in 2009 and specialized in this type of property asset; this area encompasses the entire business cycle -commercial management, legal and court proceedings and sales- and directly reports to senior management. Finally, 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. In 2012 the consumer credit business relating to the United Kingdom was incorporated in the United Kingdom and that relating to the United States was incorporated in the US, in both cases after an exit from Continental Europe. As a result, the segment reporting figures for 2011 and 2010 have been recalculated in order to facilitate their comparison with the figures for 2012.

Consequently, the sum of the figures in the various segment income statements is equal to those in the consolidated income statements. 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-208

The condensed balance sheets and income statements of the various geographical segments are as follows:

	Millions of euros
	2012
(Condensed) balance sheet	Continental Europe		United Kingdom		Latin America		United States		Corporate activities		Intra-Group eliminations			Total
Loans and advances to customers		285,146		250,527		140,090		41,331		3,388		—			720,482
Financial assets held for trading (excluding loans and advances)		87,451		38,177		28,403		275		4,606		—			158,912
Available-for-sale financial assets		21,595		6,718		23,499		14,791		25,663		—			92,266
Loans and advances to credit institutions		54,889		18,123		25,799		714		45,752		(71,377	)		73,900
Non-current assets		5,857		2,561		4,490		560		3,828		—			17,296
Other asset accounts		51,735		43,620		46,753		5,265		154,312		(94,913	)		206,772
Total assets / liabilities and equity		506,673		359,726		269,034		62,936		237,549		(166,290	)		1,269,628
Customer deposits		258,691		194,452		134,765		38,116		615		—			626,639
Marketable debt securities		37,049		73,919		28,107		820		66,074		—			205,969
Subordinated liabilities		293		5,534		5,733		1,986		4,692		—			18,238
Liabilities under insurance contracts		1,425		—		—		—		—		—			1,425
Deposits from central banks and credit institutions		85,297		29,253		32,089		14,214		63,490		(71,377	)		152,966
Other liability accounts		92,636		43,416		47,931		2,621		22,989		(24,891	)		184,702
Equity (share capital and reserves)		31,282		13,152		20,409		5,179		79,689		(70,022	)		79,689
Other customer funds under management		43,391		13,919		60,831		—		—		—			118,141
Investment funds		27,079		13,919		48,178		—		—		—			89,176
Pension funds		10,076		—		—		—		—		—			10,076
Assets under management		6,236		—		12,653		—		—		—			18,889
Customer funds under management		339,424		287,823		229,437		40,922		71,381		—			968,987

The Corporate Activities segment acts as the Group’s holding company. Therefore, it manages all equity (share capital and reserves of all the units) and determines the allocation thereof to each unit. The Group’s equity (EUR 79,689 million) is initially assigned to this segment, and is then allocated in accordance with corporate policies to the business units (EUR 70,022 million). This allocation is shown as an asset of the Corporate Activities segment (included in Other asset accounts) and as a liability of each business unit (included in Equity (share capital and reserves)). Therefore, the allocation is reflected in the intra-Group elimination adjustment balance sheet in order not to duplicate the balances and obtain the total consolidated balance sheet for the Group.

F-209

	Millions of euros
	2011
(Condensed) balance sheet	Continental Europe		United Kingdom		Latin America		United States		Corporate activities		Intra-Group eliminations			Total
Loans and advances to customers		311,536		255,700		139,867		40,193		2,804		—			750,100
Financial assets held for trading (excluding loans and advances)		78,803		41,440		31,705		271		7,727		—			159,946
Available-for-sale financial assets		24,640		55		26,186		12,435		23,297		—			86,613
Loans and advances to credit institutions		51,504		16,808		19,181		678		59,582		(96,027	)		51,726
Non-current assets		5,030		2,290		4,312		493		4,715		—			16,840
Other asset accounts		26,501		39,855		53,594		5,706		138,783		(78,138	)		186,301
Total assets / liabilities and equity		498,014		356,148		274,845		59,776		236,908		(174,165	)		1,251,526
Customer deposits		247,582		194,318		134,078		36,883		19,672		—			632,533
Marketable debt securities		39,390		70,823		23,253		1,653		62,253		—			197,372
Subordinated liabilities		965		8,260		6,015		2,275		5,477		—			22,992
Liabilities under insurance contracts		517		—		—		—		—		—			517
Deposits from central banks and credit institutions		83,491		31,203		46,813		11,564		66,093		(96,027	)		143,137
Other liability accounts		95,460		38,512		45,170		2,859		6,298		(10,439	)		177,860
Equity (share capital and reserves)		30,609		13,032		19,516		4,542		77,115		(67,699	)		77,115
Other customer funds under management		45,809		15,744		69,902		1		—		—			131,456
Investment funds		31,038		15,744		55,829		—		—		—			102,611
Pension funds		9,645		—		—		—		—		—			9,645
Assets under management		5,126		—		14,073		1		—		—			19,200
Customer funds under management		333,746		289,145		233,248		40,812		87,402		—			984,353

F-210

	Millions of euros
	2010
(Condensed) balance sheet	Continental Europe		United Kingdom		Latin America		United States		Corporate activities		Intra-Group eliminations			Total
Loans and advances to customers		308,985		237,117		127,268		48,138		2,645		—			724,153
Financial assets held for trading (excluding loans and advances)		57,690		45,187		31,580		211		5,123		—			139,791
Available-for-sale financial assets		23,608		204		30,697		10,438		21,288		—			86,235
Loans and advances to credit institutions		66,528		29,178		21,632		1,077		36,869		(75,429	)		79,855
Non-current assets		4,893		2,325		4,880		578		1,908		—			14,584
Other asset accounts		21,776		42,082		57,186		3,795		139,496		(91,452	)		172,883
Total assets / liabilities and equity		483,480		356,093		273,243		64,237		207,329		(166,881	)		1,217,501
Customer deposits		247,715		184,548		137,848		32,007		14,258		—			616,376
Marketable debt securities		42,392		64,326		15,376		7,967		62,812		—			192,873
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		68,437		57,203		38,103		15,164		36,634		(75,429	)		140,112
Other liability accounts		95,238		29,940		45,913		2,893		11,075		(28,265	)		156,794
Equity (share capital and reserves)		27,025		11,932		20,805		3,425		70,422		(63,187	)		70,422
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		345,813		271,386		236,087		42,785		89,198		—			985,269

F-211

	Millions of euros
	2012
(Condensed) income statement	Continental Europe			United Kingdom			Latin America			United States			Corporate activities			Total
INTEREST INCOME/(CHARGES)		9,470			3,559			17,881			1,695			(2,458	)		30,147
Dividends		289			1			60			20			53			423
Income for companies accounted for using the equity method		27			(5	)		183			341			(119	)		427
Net fee and commission income/(expense)		3,626			1,238			5,097			378			(31	)		10,308
Gains/losses on financial assets and liabilities (net) and exchange differences (net)		461			1,231			1,071			244			133			3,140
Other operating income/(expenses)		(17	)		22			(357	)		(74	)		534			108
TOTAL INCOME		13,856			6,046			23,935			2,604			(1,888	)		44,553
General administrative expenses		(5,640	)		(2,356	)		(8,198	)		(1,029	)		(705	)		(17,928	)
Personnel expenses		(3,496	)		(1,475	)		(4,617	)		(566	)		(169	)		(10,323	)
Other general administrative expenses		(2,144	)		(881	)		(3,581	)		(463	)		(536	)		(7,605	)
Depreciation and amortization		(662	)		(385	)		(865	)		(145	)		(132	)		(2,189	)
Provisions (net)		(38	)		(522	)		(1,027	)		(170	)		135			(1,622	)
Impairment losses		(4,127	)		(1,246	)		(7,381	)		(265	)		(5,887	)		(18,906	)
PROFIT (LOSS) FROM OPERATIONS		3,389			1,537			6,464			995			(8,477	)		3,908
Impairment losses on non-financial assets		(131	)		—			(17	)		(24	)		(336	)		(508	)
Other income and charges		(153	)		(1	)		226			8			69			149
PROFIT (LOSS) BEFORE TAX		3,105			1,536			6,673			979			(8,744	)		3,549
Income tax		(736	)		(361	)		(1,502	)		(168	)		2,192			(575	)
PROFIT (LOSS) FROM ORDINARY ACTIVITIES		2,369			1,175			5,171			811			(6,552	)		2,974
Loss from discontinued operations		(7	)		—			—			—			—			(7	)
CONSOLIDATED PROFIT (LOSS) FOR THE YEAR		2,362			1,175			5,171			811			(6,552	)		2,967
Attributable to non-controlling interests		57			—			866			—			(161	)		762
PROFIT (LOSS) ATTRIBUTABLE TO THE PARENT		2,305			1,175			4,305			811			(6,391	)		2,205

F-212

	Millions of euros
	2011																		2010
(Condensed) income statement	Continental Europe			United Kingdom			Latin America			United States			Corporate activities			Total			Continental Europe			United Kingdom			Latin America			United States			Corporate activities			Total
INTEREST INCOME/(CHARGES)		8,875			4,356			16,473			3,289			(2,172	)		30,821			8,320			4,941			14,678			3,113			(1,828	)		29,224
Dividends		264			1			71			1			57			394			217			—			80			1			64			362
Income for companies accounted for using the equity method		14			1			37			—			5			57			9			—			10			—			(2	)		17
Net fee and commission income (expense)		3,774			1,079			4,992			643			(16	)		10,472			3,483			1,035			4,661			596			(40	)		9,735
Gains/losses on financial assets and liabilities (net) and exchange differences (net)		232			405			1,067			192			420			2,316			837			462			1,409			38			(141	)		2,605
Other operating income/(expenses)		119			25			(199	)		(56	)		129			18			170			29			(163	)		(67	)		137			106
TOTAL INCOME		13,278			5,867			22,441			4,069			(1,577	)		44,078			13,036			6,467			20,675			3,681			(1,810	)		42,049
General administrative expenses		(5,660	)		(2,243	)		(7,983	)		(1,162	)		(733	)		(17,781	)		(5,030	)		(2,280	)		(7,192	)		(1,065	)		(688	)		(16,255	)
Personnel expenses		(3,531	)		(1,415	)		(4,455	)		(640	)		(285	)		(10,326	)		(3,194	)		(1,314	)		(3,955	)		(599	)		(267	)		(9,329	)
Other general administrative expenses		(2,129	)		(828	)		(3,528	)		(522	)		(448	)		(7,455	)		(1,836	)		(966	)		(3,237	)		(467	)		(420	)		(6,926	)
Depreciation and amortization		(600	)		(352	)		(926	)		(126	)		(105	)		(2,109	)		(601	)		(311	)		(778	)		(117	)		(133	)		(1,940	)
Provisions (net)		(142	)		(964	)		(1,232	)		(43	)		(220	)		(2,601	)		(15	)		(157	)		(990	)		(85	)		114			(1,133	)
Impairment losses		(3,528	)		(634	)		(5,447	)		(1,005	)		(1,254	)		(11,868	)		(3,134	)		(986	)		(4,687	)		(1,368	)		(268	)		(10,443	)
PROFIT (LOSS) FROM OPERATIONS		3,348			1,674			6,853			1,733			(3,889	)		9,719			4,256			2,733			7,028			1,045			(2,784	)		12,278
Impairment losses on non-financial assets		53			—			(38	)		(118	)		(1,414	)		(1,517	)		(48	)		—			(12	)		(19	)		(207	)		(286	)
Other income and charges		(303	)		(3	)		241			—			(198	)		(263	)		(55	)		46			255			(7	)		(179	)		60
PROFIT (LOSS) BEFORE TAX		3,098			1,671			7,056			1,615			(5,501	)		7,939			4,153			2,779			7,271			1,019			(3,170	)		12,052
Income tax		(718	)		(448	)		(1,653	)		(557	)		1,600			(1,776	)		(1,023	)		(756	)		(1,693	)		(318	)		867			(2,923	)
PROFIT (LOSS) FROM ORDINARY ACTIVITIES		2,380			1,223			5,403			1,058			(3,901	)		6,163			3,130			2,023			5,578			701			(2,303	)		9,129
Loss from discontinued operations		(24	)		—			—			—			—			(24	)		(14	)		—			—			—			(13	)		(27	)
CONSOLIDATED PROFIT (LOSS) FOR THE YEAR		2,356			1,223			5,403			1,058			(3,901	)		6,139			3,116			2,023			5,578			701			(2,316	)		9,102
Attributable to non-controlling interests		69			—			739			48			(68	)		788			74			—			850			22			(25	)		921
PROFIT (LOSS) ATTRIBUTABLE TO THE PARENT		2,287			1,223			4,664			1,010			(3,833	)		5,351			3,042			2,023			4,728			679			(2,291	)		8,181

F-213

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 2012, 2011 and 2010.

	Revenue (millions of euros)
	Revenue from external customers							Inter-segment revenue									Total revenue
Segment	2012		2011		2010			2012			2011			2010			2012			2011			2010
Continental Europe		27,012		30,585		27,538			893			565			130			27,905			31,150			27,668
United Kingdom		12,582		10,674		10,201			72			176			92			12,654			10,850			10,293
Latin America		37,287		40,046		35,197			200			(176	)		(414	)		37,487			39,870			34,783
United States		3,004		2,865		2,850			(23	)		(40	)		(42	)		2,981			2,825			2,808
Corporate activities		2,411		717		(477	)		4,462			2,400			2,980			6,873			3,117			2,503
Inter-segment revenue adjustments and eliminations		—		—		—			(5,604	)		(2,925	)		(2,746	)		(5,604	)		(2,925	)		(2,746	)
		82,296		84,887		75,309			—			—			—			82,296			84,887			75,309

b) Business segments

At this secondary level of segment reporting, the Group is structured into commercial banking, asset management and insurance and global wholesale banking; the sum of these three segments is equal to that of the primary operating geographical segments. Total figures for the Group are obtained by adding to the business segments the data for the corporate activities segment.

The commercial banking segment encompasses the entire commercial banking business (except for the corporate banking business managed globally using the global relationship model). The asset management and insurance segment includes the contribution to the Group arising from the design and management of the investment fund, pension and insurance businesses of the various units. The global wholesale banking segment reflects the returns on the global corporate banking business, those on investment banking and markets worldwide, including all the globally managed treasury departments and the equities business.

F-214

The condensed income statements and other significant data are as follows:

	Millions of euros
	2012															2011															2010
(Condensed) income statement	Commercial banking			Global wholesale banking			Asset management and insurance			Corporate activities			Total			Commercial banking			Global wholesale banking			Asset management and insurance			Corporate activities			Total			Commercial banking			Global wholesale banking			Asset management and insurance			Corporate activities			Total
INTEREST INCOME/(CHARGES)		29,986			2,501			118			(2,458	)		30,147			30,319			2,416			258			(2,172	)		30,821			28,487			2,336			229			(1,828	)		29,224
Income from equity instruments		121			249			—			53			423			95			242			—			57			394			100			197			1			64			362
Income for companies accounted for using the equity method		399			—			147			(119	)		427			23			—			29			5			57			19			—			—			(2	)		17
Net fee and commission income (expense)		8,804			1,162			373			(31	)		10,308			8,929			1,149			410			(16	)		10,472			8,042			1,288			445			(40	)		9,735
Gains/losses on financial assets and liabilities (net) and exchange differences (net)		2,215			785			7			133			3,140			1,103			788			5			420			2,316			1,338			1,359			49			(141	)		2,605
Other operating income/(expenses)		(655	)		7			222			534			108			(556	)		12			433			129			18			(389	)		(30	)		388			137			106
TOTAL INCOME		40,870			4,704			867			(1,888	)		44,553			39,913			4,607			1,135			(1,577	)		44,078			37,597			5,150			1,112			(1,810	)		42,049
General administrative expenses		(15,494	)		(1,455	)		(274	)		(705	)		(17,928	)		(15,242	)		(1,488	)		(318	)		(733	)		(17,781	)		(13,911	)		(1,346	)		(310	)		(688	)		(16,255	)
Personnel expenses		(9,055	)		(943	)		(156	)		(169	)		(10,323	)		(8,877	)		(987	)		(177	)		(285	)		(10,326	)		(8,000	)		(895	)		(167	)		(267	)		(9,329	)
Other general administrative expenses		(6,439	)		(512	)		(118	)		(536	)		(7,605	)		(6,365	)		(501	)		(141	)		(448	)		(7,455	)		(5,911	)		(452	)		(143	)		(420	)		(6,926	)
Depreciation and amortization		(1,867	)		(155	)		(35	)		(132	)		(2,189	)		(1,827	)		(134	)		(43	)		(105	)		(2,109	)		(1,609	)		(146	)		(52	)		(133	)		(1,940	)
Provisions (net)		(1,718	)		(25	)		(14	)		135			(1,622	)		(2,321	)		(14	)		(46	)		(220	)		(2,601	)		(1,226	)		(6	)		(15	)		114			(1,133	)
Impairment losses		(12,756	)		(262	)		(1	)		(5,887	)		(18,906	)		(10,469	)		(144	)		(1	)		(1,254	)		(11,868	)		(10,170	)		(2	)		(3	)		(268	)		(10,443	)
PROFIT (LOSS) FROM OPERATIONS		9,035			2,807			543			(8,477	)		3,908			10,054			2,827			727			(3,889	)		9,719			10,681			3,649			732			(2,784	)		12,278
Net impairment losses on non-financial assets		(147	)		(25	)		—			(336	)		(508	)		(82	)		(21	)		—			(1,414	)		(1,517	)		(68	)		(10	)		(1	)		(207	)		(286	)
Other non-financial gains/(losses)		71			2			7			69			149			(56	)		—			(9	)		(198	)		(263	)		234			5			—			(179	)		60
PROFIT (LOSS) BEFORE TAX		8,959			2,784			550			(8,744	)		3,549			9,916			2,806			718			(5,501	)		7,939			10,847			3,644			731			(3,170	)		12,052
Income tax		(1,869	)		(750	)		(148	)		2,192			(575	)		(2,392	)		(753	)		(231	)		1,600			(1,776	)		(2,614	)		(972	)		(204	)		867			(2,923	)
PROFIT (LOSS) FROM ORDINARY ACTIVITIES		7,090			2,034			402			(6,552	)		2,974			7,524			2,053			487			(3,901	)		6,163			8,233			2,672			527			(2,303	)		9,129
Loss from discontinued operations		(7	)		—			—			—			(7	)		(24	)		—			—			—			(24	)		(14	)		—			—			(13	)		(27	)
CONSOLIDATED PROFIT (LOSS) FOR THE YEAR		7,083			2,034			402			(6,552	)		2,967			7,500			2,053			487			(3,901	)		6,139			8,219			2,672			527			(2,316	)		9,102
Attributable to non-controlling interests		697			207			19			(161	)		762			591			214			51			(68	)		788			646			241			59			(25	)		921
PROFIT (LOSS) ATTRIBUTABLE TO THE PARENT		6,386			1,827			383			(6,391	)		2,205			6,909			1,839			436			(3,833	)		5,351			7,573			2,431			468			(2,291	)		8,181

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53. Related parties

The parties related to the Group are deemed to include, in addition to its subsidiaries, associates and jointly controlled entities, the Bank’s key management personnel (the members of its board of directors and the executive vice presidents, together with their close family members) and the entities over which the key management personnel may exercise significant influence or control.

Following is a detail of the ordinary business transactions performed by the Group with its related parties, distinguishing between associates and jointly controlled entities, members of the Bank’s board of directors, the Bank’s executive vice presidents, and other related parties. Related-party transactions were made on terms equivalent to those that prevail in arm’s-length transactions or, when this was not the case, the related compensation in kind was recognized.

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	Millions of euros
	2012												2011												2010
	Associates and jointly controlled entities			Members of the board of directors			Executive vice presidents			Other related parties			Associates and jointly controlled entities			Members of the board of directors			Executive vice presidents			Other related parties			Associates and jointly controlled entities			Members of the board of directors			Executive vice presidents			Other related parties
Assets:
Loans and advances to credit institutions		5,635			—			—			—			5,855			—			—			—			3,921			—			—			—
Loans and advances to customers		544			7			33			1,233			146			19			31			1,508			144			15			30			1,330
Debt instruments		447			—			—			184			506			—			—			394			594			—			—			534
Liabilities:
Deposits from credit institutions		(422	)		—			—			—			(1,136	)		—			—			—			(231	)		—			—			—
Customer deposits		(122	)		(14	)		(15	)		(529	)		(114	)		(22	)		(27	)		(364	)		(183	)		(16	)		(59	)		(498	)
Marketable debt securities		—			—			—			—			—			—			—			—			—			—			—			(2,828	)
Income statement:
Interest and similar income		94			—			—			36			155			—			—			35			78			—			—			173
Interest expense and similar charges		(4	)					(1	)		(5	)		(2	)		—			(1	)		(4	)		(3	)		—			(1	)		(19	)
Gains/losses on financial assets and liabilities		59			—			—			24			12			—			—			20			37			—			—			9
Fee and commission income		43			—			—			14			50			—			—			9			41			—			—			19
Fee and commission expense		(31	)		—			—			—			(38	)		—			—			—			(13	)		—			—			—
Other:
Contingent liabilities		—			—			—			303			222			—			—			590			2			—			—			442
Contingent commitments		3,431			1			7			3			257			1			10			3			90			1			5			3
Derivative financial instruments		9,142			—			—			2,652			10,387			—			—			4,458			6,878			—			—			1,378

In addition to the detail provided above, there were insurance contracts linked to pensions amounting to EUR 372 million at December 31, 2012 (December 31, 2011: EUR 2,146 million; December 31, 2010: EUR 2,220 million).

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54 Risk management

1. CORPORATE RISK MANAGEMENT, CONTROL AND APPETITE PRINCIPLES

1.1 Corporate principles

The Group’s risk management model underlying the business model is based on the following principles:

• Independence of the risk function with respect to the business. The head of the Group’s risk division, 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, in order to ensure that different opinions are taken into account and avoid individual decision making, even at branch level. Decisions on credit transactions taken jointly by the risk and commercial areas, and the ultimate decision lies with the risk area in the event of discrepancy.

• 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 and 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, and all geographical areas).

At the Group, the risk management and control process is conducted as follows:

• Definition of risk appetite, the purpose of which is to delimit, synthetically and explicitly, the levels and types of risk the Group is willing to assume in the performance of its business.

• Establishment of risk policies and procedures, which constitute the basic regulatory framework governing risk activities and processes. The local risk units use the mirror structures they have established to transpose the corporate risk regulations into their internal policies.

• Construction, independent validation and approval of the risk models developed pursuant to corporate methodological guidelines. These tools enable Santander to systematize the risk origination, monitoring and recovery processes, the calculation of expected loss and capital required, and the measurement of the held-for-trading portfolio.

• Implementation of a risk monitoring and control system which checks, on a daily basis and with the corresponding reports, the degree to which the Group’s risk profile matches the risk policies approved and the risk limits set.

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1.2 Risk culture

The Group’s risk culture is based on the principles of the Group’s risk management model detailed above and is transmitted to all of the organization’s business and management units, supported, inter alia, by the following levers:

• At the Group, the risk function is independent from the business units. This allows its criteria and opinions to be taken into account in the various spheres in which the Group’s businesses are carried on.

• The structure of the delegation of powers at the Group requires a large number of transactions to be submitted for decision by one of the Group’s central services risk committees, namely the global risk unit committee, the risk committee or the Group’s executive committee. The highly frequent nature of the meetings of these risk acceptance and monitoring committees (twice a week in the case of the risk committee; once a week in the case of the executive committee) enables a high degree of agility in the resolution of proposals while, at the same time, ensuring the assiduous participation of senior management in the daily management of the Group’s various risks.

• The Group has detailed action manuals and policies regarding risk management. The risk and business teams hold periodic business orientation meetings which establish approaches that are in line with the Group’s risk culture. Similarly, risk and business executives participate as speakers at the meetings of the Group central services’ various transaction resolution committees mentioned above, and this facilitates the transmission of the criteria and approaches emanating from senior management to both the teams of executives and the organization’s other risk committees. The non-assignment of personal powers requires all decisions to be taken by group bodies, which makes decision-making more rigorous and transparent.

• Limit plan: the Group has implemented a risk limit system, which is updated at least once a year and encompasses both credit risk and the various trading, liquidity and structural market risk exposures (for each business unit and by risk factor). Credit risk management is supported by credit management programmes (individual customers and small businesses), rating systems (exposures to medium-sized and large companies) and pre-classifications (large corporate customers and financial counterparties).

• The exposure information and aggregation systems in place at the Group allow it to monitor exposures on a daily basis, to check that the approved limits are complied with systematically, and to adopt, if necessary, the appropriate corrective measures.

• The main risks are analyzed not only when they are originated or when problems arise in the ordinary recovery process, but also on an ongoing basis for all customers.

• Other procedures supporting the transmission of the risk culture are the training activities performed at the corporate risk school, the remuneration and incentives policy -which always includes performance-based variables that take into account risk quality and the Group’s long-term results-, employees’ strict adherence to the general codes of conduct and systematic, independent action taken by the internal audit services.

1.3 Risk appetite at the Group

Risk appetite is defined at the Group as the amount and type of risk that it considers reasonable to assume in implementing its business strategy, in order to ensure that it can continue to operate normally if unexpected events occur which, taking into account severe but possible scenarios, might have an adverse impact on its levels of capital or liquidity, its profits and/or its share price.

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The board of directors is the body responsible for establishing and annually updating the Group’s risk appetite, for monitoring its actual risk profile and for ensuring consistency between the two. The risk appetite is determined both for the Group as a whole and for each of the main business units using a corporate methodology adapted to the circumstances of each unit/market. At local level, the boards of directors of the related subsidiaries are responsible for approving the respective risk appetite proposals once they have been validated by the Group’s executive committee.

Senior management is responsible for achieving the desired risk profile -which is reflected in the approved annual budget and in the medium-term strategic plan-, and for the day-to-day management of risk. Thus, it ensures that the habitual limit structures formalized for each risk are properly connected to the established risk appetite metrics.

These limit structures for each risk are complementary to the risk appetite and fundamental to the articulation of an effective management thereof on a day-to-day basis. If the established risk appetite levels are reached, once the board has been informed the required management measures must be adopted so that the desired risk profile can be restored.

Every quarter, the risk committee and the executive committee of the Group check compliance with the risk appetite at both Group and business unit level.

Risk appetite framework

The Group’s risk appetite framework contains both quantitative and qualitative elements making up a group of primary metrics and a separate series of supplementary indicators.

Quantitative elements of the risk appetite

The primary quantitative metrics of the risk appetite are as follows:

• The maximum losses the Group is willing to assume,

• The minimum capital position the Group wishes to maintain, and

• The minimum liquidity position the Group wishes to have.

These metrics are calculated for severe stress scenarios that are unlikely but possible.

Also, the Group has a series of transversal metrics aimed at limiting excessive concentration of the risk profile, both in terms of risk factors and from the perspective of customers, businesses, geographical areas and products.

Losses

One of the three primary metrics used to formulate the Group’s risk appetite is expressed in terms of the maximum unexpected effect on results that the Group is willing to accept in the event of adverse scenarios that are plausible but unlikely to occur.

These scenarios affect mainly both the losses arising from credit risk exposure of retail and wholesale portfolios (considering both the direct credit loss and the reduction in margin) and the potential adverse effect of the exposure to market risk. After applying these credit and market impacts to the budgeted results, in the context of the monitoring of the risk appetite, senior management assesses whether the resulting margin is sufficient to absorb any unexpected effects arising from technology and operational risk and compliance and reputational risk.

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The time horizon for the materialization of the adverse effects for all the risks considered is usually twelve months, except in the case of credit risk, for which a supplementary impact analysis is performed with a three-year time horizon. In any case, the time horizon for the formulation of the risk appetite is one year.

With regard to this loss metric, the Group’s risk appetite establishes that the combined effect on all risks arising from these scenarios must be lower than the net margin after ordinary provisions, i.e. ordinary operating profit/(loss) before tax.

Capital position

The Group has decided to operate with an ample capital base that enables it not only to meet regulatory requirements but also to have a reasonable capital buffer. It has set a target core capital ratio of more than 9%, defined in terms of Basel II, and has also established minimum return on risk-adjusted capital (RORAC) targets at Group level.

Also, in view of the related stress scenarios referred to in the preceding section, the Group’s risk appetite establishes that its risk profile must be such that the unexpected effect of these stress scenarios does not impair the core capital ratio by more than 100 b.p.

This capital approach included in the risk appetite framework is complementary to and consistent with the capital target for the Group that was approved as part of the capital planning process (Pillar II) implemented at the Group for a period of three years.

Liquidity position

The liquidity management model at the Group is based on the following principles:

• Decentralized liquidity model.

• Needs arising from medium- and long-term business activities must be financed with medium- and long-term instruments.

• High proportion of customer deposits in a balance sheet of a commercial nature.

• Diversification of wholesale funding sources by: instruments/investors; markets/currencies; and maturity periods.

• Limited recourse to short-term financing.

• Availability of a sufficient liquidity reserve, including the capacity for discounting at central banks to be used in adverse situations.

In view of the Group’s desire to have a structure based on autonomous subsidiaries, liquidity management is performed at each subsidiary, with the related control being exercised at corporate level. Therefore, each of the subsidiaries has to be self-sufficient in terms of the availability of liquidity.

Supplementary quantitative metrics of concentration risk appetite

The Group wishes to maintain a widely diversified risk portfolio from the perspective of its exposure to large risks, to certain markets and to specific products. This is obtained primarily by virtue of its focus on the retail banking business with a high level of international diversification.

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Concentration risk is measured using the following metrics for which risk appetite thresholds are established as a proportion of capital or loans and credits (generally):

• Customer (in proportion to capital): a) maximum individual net exposure to corporate customers (also, customers with internal ratings below the investment grade equivalent and which exceed a certain exposure level are monitored); b) maximum aggregate net exposure to the Group’s 20 largest corporate customers (Top 20); c) maximum aggregate net exposure of the exposures considered to be large exposures (corporate and financial customers); and d) maximum effect on earnings before tax (EBT) of the simultaneous default of the five largest corporate exposures (jump to default Top 5).

• Sector: maximum exposure of the corporate portfolio in a given economic sector as a percentage of loans and credits (both total loans and credits and those to the corporate segment).

• Portfolios with a high risk profile (defined as retail portfolios with percentage risk premiums above the established threshold): maximum percentages of exposure to this type of portfolio as a proportion of loans and credits (both total and retail loans and credits) and for the various business units.

Qualitative elements of the risk appetite

In general, the Group’s risk appetite framework is based on maintaining the following qualitative objectives:

• A predictable general medium-low risk profile based on a business model focusing on retail banking with a diversified international presence and significant market shares, and a wholesale banking model which prioritizes the relationship with the customer base in the Group’s principal markets.

• A target rating of between AA- and A-, both at Group level and for the local units (at local scale), based on the environment and on the performance of sovereign risk.

• A stable, recurring earnings generation and shareholder remuneration policy based on a strong capital and liquidity base and a strategy to effectively diversify funding sources and maturities.

• A corporate structure based on autonomous subsidiaries that are self-sufficient in capital and liquidity terms, minimizing the use of non-operating or purely instrumental companies, and ensuring that no subsidiary has a risk profile that might jeopardize the Group’s solvency.

• An independent risk function with highly active involvement of senior management to guarantee a strong risk culture focused on protecting and ensuring an adequate return on capital.

• To maintain a management model that ensures that all risks are viewed in a global interrelated way through a robust corporate risk control and monitoring environment with global responsibilities: all risks, all businesses, and all geographical areas.

• A business model that focuses on the products with respect to which the Group considers that it has sufficient knowledge and management capacity (systems, processes and resources).

• The confidence of customers, shareholders, employees and professional counterparties, enabling the Group to conduct its business within the bounds of its social and reputational commitment, in accordance with its strategic objectives.

• The availability of sufficient and adequate human resources, systems and tools in order to enable Santander Group to maintain a risk profile compatible with the established risk appetite, at both global and local level.

• The application of a remuneration policy containing the incentives required to ensure that the individual interests of employees and executives are in line with the corporate risk appetite framework and that the incentives are consistent with the Group’s long-term earnings performance.

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Risk appetite and living will

The Group has a corporate structure based on autonomous subsidiaries that are self-sufficient in capital and liquidity terms and it ensures that no subsidiary has a risk profile that might jeopardize the Group’s solvency.

In 2010 the Group filed its corporate living will with the supervisor of the consolidated Group, the Bank of Spain. As required, the living will included a recovery plan and all the information required to plan a possible liquidation (resolution plan). Also, although it was not required, in 2010 more summarized individual plans were prepared for the important geographical units, including Brazil, Mexico, Chile, Portugal and the UK.

In 2012 the third version of the corporate living will was prepared. As with the first two versions in 2011 and 2010, the Group submitted the third version of the recovery plan to its CMG (Crisis Management Group) in July 2012. The 2012 living will comprises the corporate plan (corresponding to Banco Santander, S.A.) and the individual plans for most of its most important local units (UK, Brazil, Mexico and Sovereign). Particularly noteworthy is the case of the UK, where, irrespective of the obligation to be part of the corporate living will, a complete version was prepared in compliance with local regulatory initiatives.

Mention must be made of the important contribution that the preparation of the corporate living will makes to the conceptual delimitation of the Group’s risk appetite and risk profile.

2. 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 appetite 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 the Group and also comprises a further four directors of the Bank.

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 previously defined risk appetite.

• To be informed of, assess and follow such remarks and recommendations as may periodically be 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.

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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 risk 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. He is also a member of the board of directors and chairman of the risk committee, and two general risk units report to him. These units are independent of the business areas from both a hierarchical and functional standpoint, and their organizational and functional structure is as follows:

• The risk unit (“DGR”). The DGR is responsible for the executive credit risk and financial risk management functions and is adapted to the structure of the business, both by type of customer and by activity and geographical area (global/local perspective).

The areas of the risk unit 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. This block, which is called intelligence and global control, encompasses the following areas/functions: solvency risk, market risk 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. This block, which is called performance and management integration, encompasses the following areas/functions: standardized risk management, individualized corporates risk management, global loan recoveries, wholesale banking risk management, Santander Consumer Finance risk management and global business risk management.

Between these two blocks is the corporate management integration area the purpose of which is to intensify and systematize the use of corporate risk management models (for credit, market and structural risk), to accelerate their implementation and to ensure their integration in the management of all Group entities.

The above structure is complemented by a global systematic governance area, which supports and advises the risk unit and is responsible for implementing the organizational model and ensuring the effective execution of internal control (including quality control procedures), and by a corporate development and management area that leads the risk unit’s initiatives and projects, which involve several areas and/or local units, such as a common reporting model and a global corporate platform.

The scope of action of these functions is global, i.e. they feature in all the units in which the risk division acts and this structure is mirrored in the local units. The fundamental elements through which the global functions are replicated in each unit are the corporate frameworks. These are the central elements for disseminating and transferring global practices, reflecting the action policies and criteria for each area and establishing the Group’s compliance standards to be applied at all local units.

In general, it is possible to distinguish the main functions performed by the global areas of the DGR and by the units:

• The risk unit establishes risk policies and criteria, global limits and decision-making and control processes, it generates management schemes, systems and tools and it adapts the best practices of both the banking industry and the various local units for their application in the Group.

• The local units apply the policies and systems to the local market; they adapt the management schemes and organization to the corporate frameworks; they contribute criticism and best practices; and they lead local projects.

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• The integrated risk control and internal risk validation unit. This unit has global-reaching corporate responsibilities, which provide support to the Group’s governing bodies, namely:

• Internal validation of the credit and market risk and economic capital models in order to measure their suitability for management and regulatory purposes. The validation exercise envisages the review of the theoretical fundamentals of the model, the quality of the data used to build and calibrate the model, and its use and the associated corporate governance process.

• Integrated risk control, the purpose of which is to supervise the quality of the Group’s risk management, in order to ensure that the systems for the management and control of the risks inherent to its activity comply with the strictest criteria and the best practices observed in the industry and/or required by the regulators, and to verify that the risk profile actually assumed is within the guidelines laid down by senior management.

3. INTEGRATED RISK CONTROL AND INTERNAL RISK VALIDATION

The integrated risk control and internal risk validation functions are located, at corporate level, within the integrated risk control and internal risk validation unit, reporting directly to the third deputy chairman of the Group and chairman of the risk committee, and provide support for the Group’s governing bodies in risk control and management matters.

3.1 Integrated risk control function

In 2008 the Group launched the integrated risk control function in order to ensure an integrated view of the management of all the risks affecting the performance of the Group’s ordinary activities. The risks considered 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 risk control function is articulated in three complementary activities:

1) To guarantee that the management and control systems for the various risks inherent in the Group’s activities comply with the most stringent criteria and the best practices observed in the industry and/or required by regulators.

2) To ensure that senior management of the Group 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.

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 supervisors to which the Group is subject.

The function is characterized by having global and corporate scope and encompasses all risks, all businesses and 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 each officer responsible for the control of each risk at corporate level (second layer of control). This system ensures a vision and, therefore, the integrated supervision of all the risks the Group incurs in its business activities.

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Methodology and tools

This function is performed using an internally developed methodology and a series of supporting tools with a view to systematizing its operation and tailoring it to the Group’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 of the three complementary activities referred to above are articulated in the following modules:

Module 1): testing or review guidelines are available for each risk, and are 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 an annual basis, and any new tests included are based on the latest best practices observed in the industry and/or required by the regulators. The supporting tool is a repository for the findings of each test and for 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.

Module 2): senior management is provided with monitoring capacity in terms of an all-embracing view of the various risks assumed and their consistency with the pre-determined risk appetite.

Module 3): in order to proactively follow up the recommendations on risk management and control made by internal audit and by the supervisory authorities, the Group uses a tool which also enables the recommendations made by the integrated risk control function itself to be registered.

The Bank of Spain has unrestricted access to these tools and, accordingly, to the working papers used to perform the integrated risk control function.

3.2 Independent internal validation of risk models

In addition to constituting a regulatory requirement, the internal validation of risk models function provides essential support to the board’s risk committee and the local and corporate risk committees in the performance of their duties to authorize the use of the models (for management and regulatory purposes) and to review them regularly.

Internal model validation involves the obtainment, by a sufficiently independent specialized unit of the Group, of an expert opinion on the adequacy of the internal models for the intended internal management and/or regulatory purposes (calculation of regulatory capital, level of provisions, etc.), expressing a conclusion on their robustness, usefulness and effectiveness.

Internal model validation at the Group encompasses credit risk models, market risk models, financial asset pricing models and the economic capital model. The scope of the validation includes not only the more theoretical or methodological aspects, but also the technology systems and the data quality that facilitate and underpin the effective operation of the models, and, in general, all the relevant aspects of risk management (controls, reporting, uses, involvement of senior management, etc.).

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. From a functional and hierarchical standpoint, these centers are fully accountable to the corporate center, which makes it possible to ensure 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 that provide a corporate framework to be used at all the Group’s units and which automate certain verifications to ensure efficient reviews.

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The Group’s corporate internal validation framework is fully consistent with the internal validation standards for advanced approaches issued by the Bank of Spain and by the other supervisors to which the Group is subject. 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.

Following is an analysis of the Group’s main types of risk: credit, market, operational, compliance and reputational risks.

4. CREDIT RISK

4.1 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.

In credit risk management terms, segmentation is based on the distinction between two types of customers:

• Individualized customers are defined as those to which a risk analyst has been assigned. This category includes global wholesale banking customers (corporates, financial institutions and sovereigns) and the retail banking companies whose risk level is above a set exposure threshold for each unit. Risk management is performed through expert analysis supplemented by decision-making support tools.

• Standardized risks: standardized customers are those which have not been assigned a risk analyst. This segment includes exposures to individuals, independent professionals 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 when required by the expert judgment of teams of analysts.

4.2 Main aggregates and variations

4.2.1 Global credit risk map - 2012

Credit risk is diversified across the main geographical areas where the Group has a presence: Europe accounts for 72% of the exposure, Latin America 22% and the US 6%.

In 2012 credit risk exposure increased by 1.3%, due mainly to the rise in the amounts drawn down by credit institutions, largely because of the increase in balances with central banks.

Disregarding the effect of changes in the exchange rates of the main currencies against the euro, credit risk exposure grew by 2% in 2012.

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4.2.2 Variations in aggregates in 2012

Following are the main aggregates relating to credit risk arising on customer business:

	Credit risk exposure to customers (1) (millions of euros)				Non-performing loans ratio (%)				Coverage ratio (%)
	2012		2011		2012		2011		2012		2011
Continental Europe		334,028		364,622		6.25		5.20		72.5		55.5
Santander Network		111,756		118,060		9.65		8.47		67.5		39.9
Banesto		71,976		78,860		6.28		5.01		71.3		53.1
Santander Consumer Finance		59,387		59,442		3.90		3.77		109.5		113.0
Portugal		28,188		30,607		6.56		4.06		53.1		54.9
Poland		10,601		9,120		4.72		4.89		68.3		65.2
United Kingdom		255,519		255,735		2.05		1.86		45.4		38.1
Latin America		160,413		159,445		5.42		4.32		87.5		97.0
Brazil		89,142		91,035		6.86		5.38		90.2		95.2
Mexico		22,038		19,446		1.94		1.82		157.3		175.7
Chile		32,697		28,462		5.17		3.85		57.7		73.4
Puerto Rico		4,567		4,559		7.14		8.64		62.0		51.4
Argentina		5,378		4,957		1.71		1.15		143.3		206.9
Sovereign		44,678		43,052		2.29		2.85		105.9		96.2
Total Group		794,901		822,657		4.54		3.89		72.6		61.4

(1) Including gross loans and advances to customers, guarantees, documentary credits and the mark-to-market of customer derivatives (EUR 5,735 million).

The Group’s non-performing loans ratio stands at 4.54%, up 65 b.p. on 2011. The Group’s coverage ratio stands at 72.6%, up from 61.4% in 2011.

4.3 Detail of geographical areas with the highest concentrations

Following is a description of the portfolios in the geographical areas where the Group’s risk concentration is highest:

4.3.1 UK

Credit risk exposure to UK customers amounted to EUR 255,519 million at 2012 year-end, and represented 32.1% of the Group total.

Due to its importance, not only to Santander UK, but also to the Group’s credit risk exposure as a whole, the mortgage loan portfolio (which totaled EUR 191,827 million at 2012 year-end) must be highlighted.

This portfolio is composed entirely of first-mortgage home purchase or refurbishment loans to new and existing customers, since transactions involving second or successive liens on mortgaged properties are no longer originated.

The property on which the mortgage guarantee is constituted must always be located in the UK, irrespective of where the funding is to be employed. Loans may be granted for the purchase of residences abroad, but the mortgage guarantee must in all cases be constituted on a property located in the UK.

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All properties are appraised independently prior to the approval of each new transaction, in accordance with the Group’s risk management principles.

For mortgage loans that have already been granted, the appraised value of the mortgaged property is updated quarterly by an independent agency using an automatic appraisal system in accordance with standard procedure in the market and in compliance with current legislation.

The non-performing loans ratio of this portfolio rose from 1.46% in 2011 to 1.74% at 2012 year-end, although at all times it remained below the ratio for the industry as a whole, according to data published by the Council of Mortgage Lenders. The two reasons for this rise are as follows: the fall in loans and credits due to the application of the strict lending and pricing policies implemented in recent years, and the fall in the number of loans that became reperforming in 2012.

The decrease in the number of loans that became reperforming in the year was due mainly to the introduction of new debt recovery procedures within the framework of the regulatory initiative known as “Treating Customers Fairly”. This gave rise to an increase in the administrative procedures to be performed in managing defaults, which resulted in customers being classified as non-performing for a longer period of time.

As regards the profile of the portfolio, the application of the strict lending policies mentioned above has enabled new NPLs to be kept at very similar levels to those of 2011. Thus, the maximum loan-to-value criteria were reduced to 75% for loans on which principal and interest are repaid and to 50% for loans on which interest is paid periodically and the principal is repaid on maturity. The simple average LTV for the total portfolio stood at 52.2%, while the weighted average LTV was 49%. The proportion of the portfolio with an LTV above 90% remained at 12%, comfortably below the UK market average (above 17%) (CACI Mortgage Market Data).

Current credit risk policies expressly prohibit loans considered to be high risk (subprime mortgages), and establish demanding requirements regarding the credit quality of both loans and customers. For example, in 2009 the granting of mortgage loans with LTVs exceeding 100% was forbidden. Between 2009 and 2012 less than 0.1% of new production had an LTV higher than 90%, and in 2012 a maximum limit of 75% was established for this ratio, as stated above.

Another indicator of the sound performance of the portfolio is the small volume of foreclosed properties, which amounted to EUR 157 million at 2012 year-end, representing just 0.1% 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.

SMEs and companies: In line with the aim of becoming the first-choice bank for SMEs and companies, the most representative portfolios in this segment saw growth of around 18% in 2012.

4.3.2 Spain

4.3.2.1 Portfolio overview

The total credit risk exposure (including guarantees and documentary credits) of the Group’s businesses in Spain at 2012 year-end represented 31% of the total for the Group, displaying an appropriate level of diversification, in terms of both products and customer segments.

In 2012 there was a decrease in lending levels as a result of the fall in the demand for credit, the economic situation and, as far as real estate loans were concerned, the active policy to reduce these exposures.

Due mainly to the impairment of real estate loans, the NPL ratio of the portfolio as a whole increased to 6.74% in 2012.

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Excluding the real estate loan portfolio, the NPL ratio stood at 4.0% in 2012, up 65 b.p. on 2011. The provisions recognized at 2012 year-end represented a coverage of 70.6% of doubtful balances (compared with 45.5% at 2011 year-end).

4.3.2.2 Portfolio of home purchase loans to families

The loans granted to families to purchase residential property by the main businesses in Spain amounted to EUR 55,997 million at 2012 year-end and represented 22.4% of total credit risk exposure. Of this amount, 98.9% was secured by mortgages.

In millions of euros	12/31/12				12/31/11
	Gross amount		Of which: Doubtful		Gross amount		Of which: Doubtful
Home purchase loans		55,997		1,425		59,453		1,607
Without mortgage guarantee		574		8		918		28
With mortgage guarantee		55,423		1,417		58,535		1,579

The non-performing loans ratio of the mortgage loan portfolio fell slightly year-on-year and ended 2012 at 2.6%, a figure clearly lower than that recorded by the other businesses in Spain.

In the home purchase loans detailed in the foregoing table, the guarantee is the financed home on which the Group has a priority claim in the event of default. At December 31, 2012, 94% of these loans related to principal-residence houses (December 31, 2011: 97%).

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.

• There is a 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.

• High quality of the collateral, since the portfolio consists almost exclusively of principal-residence loans.

• 89% of the portfolio has an LTV of less than 80%.

• Stable average debt-to-income ratio at around 29%.

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The following table sets forth the loan to value ratio of our home purchase loan portfolio with mortgage guarantee as of the December 31, 2012 taking into account guarantee values at the time of origination and updated as of December 31, 2012 as explained below:

In millions of euros	12/31/12
	Loan-to-value ratio
	Less than or equal to 40%		More than 40% and less than 60%		More than 60% and less than 80%		More than 80% and less than or equal to 100%		More than 100%		Total
Gross amount at origination		12,774		16,444		19,915		5,702		588		55,423
Gross amount updated (*)		12,986		11,898		14,137		10,732		5,670		55,423
Of which: Doubtful		155		198		359		547		158		1,417

(*) The gross amount is updated using published housing prices indices.

For internal management purposes, the Group updates the LTV ratios at least once a year, taking into consideration published house price indices. Also, if a debtor becomes doubtful the Group updates the appraisals undertaken by valuers, which are taken into account in the estimate of impairment losses.

4.3.2.3 Portfolio of loans to non-real estate companies

The total lending to non-real estate companies of the Group’s businesses in Spain stood at EUR 139,851 million at 2012 year-end.

More than 90% of this segment relates to individualized customers to which a risk analyst has been assigned because of the risk assumed. The risk analyst monitors the customer on an ongoing basis in all the phases of the risk cycle.

The non-performing loans ratio of this portfolio remained at levels below those of the businesses in Spain as a whole, and stood at 4.4% at 2012 year-end.

4.3.2.4 Real estate loan portfolio

The real estate exposure in Spain amounted to EUR 23,705 million at 2012 year-end, of which EUR 15,867 million relate to loans and EUR 7,838 million to foreclosed properties.

The policy severely reducing the balances in this segment continued in 2012, and the balances fell by 25.9% compared with 2011 and decreased by 44.2% compared with 2008.

	2012			2011
	(in millions of euros)			(in millions of euros)
Opening balance		23,442			27,334
Foreclosures assets		(1,630	)		(914	)
Sales of portfolios		(63	)		(—	)
Cash recoveries		(2,029	)		(1,228	)
Third party subrogations		(2,165	)		(1,514	)
Write offs and forgiveness of debts		(1,688	)		(236	)
Closing balance (net)		15,867			23,442

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Third party subrogations correspond to the replacement of the original borrower (real estate developer) with a private individual who acquires a share of the loan equivalent to the house acquired from the developer by such individual. These loans are included in the “Home purchase loan portfolio and as mentioned in Note 54 of our financial statements have a stable delinquency rate (2.6% as December 31, 2012).

Millions of euros	12/31/12
	Gross amount		Excess over collateral value		Specific allowance
Financing for construction and property development recorded by the Group’s credit institutions (business in Spain)		15,867		6,893		7,034
Of which: Doubtful		7,576		3,843		3,786
Of which: Substandard		2,149		1,000		833
Memorandum item: Written-off assets		975

Memorandum item: Data from the public consolidated balance sheet	12/31/12
Millions of euros	Carrying amount
Total loans and advances to customers excluding the public sector (business in Spain)		183,130
Total consolidated assets		1,269,628
Impairment losses and credit risk allowances. Collective coverage (business in Spain)		270

In accordance with the requirements of the Bank of Spain, the collateral values presented in the table above have been obtained using external appraisals as of the date of origination for standard loans and as of the date the loans became doubtful for non-performing loans. The valuation of collateral for projects that are in process contemplates the values “as is” and not “as completed.

Notwithstanding the above, for internal management purposes, we update LTVs for all secured loans at least once a year taking into consideration the price index published by the corresponding government institution.

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The NPL ratio of this portfolio ended the year at 47.7% (compared with 28.6% at December 2011) due to the increase in the proportion of doubtful assets in the problem loan portfolio and, in particular, to the sharp reduction in lending in this segment. The distribution of the portfolio is as follows:

	Loans: Gross amount		Loans: Gross amount
	12/31/12		12/31/11
1. Without mortgage guarantee		2,225		4,737
2. With mortgage guarantee		13,642		18,705
2.1 Completed buildings		7,025		11,805
2.1.1 Residential		3,491		6,006
2.1.2 Other		3,534		5,799
2.2 Buildings under construction		1,493		1,985
2.2.1 Residential		1,080		1,458
2.2.2 Other		413		527
2.3 Land		5,124		4,915
2.3.1 Developed land		4,705		3,118
2.3.2 Other land		419		1,797
Total		15,867		23,442

The coverage ratio of the real estate exposure in Spain stands at 47% (22% at December 2011).

The Group calculates the loan loss allowance individually as the difference between the carrying amount of the debt and the present value of its estimated cash flows over the life of the agreement, including those from the guarantees, less costs to sell.

At year-end, this portfolio had 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: 66% of outstanding risk.

• Developments with a percentage of completion of more than 80%: 11% of outstanding risk.

• Developments with a percentage of completion of between 50 and 80%: 4% of outstanding risk.

• Percentage of completion of less than 50%: 19%.

The detail of the stages of completion of the property developments shows that nearly 86% 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 exposure, the Group has specialized teams that not only form part of the risk areas but also supplement the management of this exposure and cover the entire life cycle of these transactions: commercial management, legal processes, court procedures and potential recovery management.

As has already been discussed in this section, the Group’s anticipatory management of these risks enabled it to significantly reduce its exposure, and it has a granular, geographically diversified portfolio in which the financing of second residences accounts for a very small proportion of the total.

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Mortgage lending on non-urban land represents a low percentage of mortgage exposure to land, while the remainder relates to land already classified as urban or developable, which can therefore be developed.

In the case of home financing projects in which the construction work has already been completed, the significant reduction in the exposure is supported by various actions. As well as the specialized marketing channels already in existence, campaigns were carried out with the support of specific teams of managers for this function who, in the case of the Santander Network, were directly supervised by the recoveries business area. These campaigns, which involved the direct management of the projects with property developers and purchasers, reducing sale prices and adapting the lending conditions to the buyers’ needs, enabled loans already in force to be subrogated. 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. The Group has created a set of specific tools for this function. All mortgage distributions, amounts drawn down of any kind, changes made to the grace periods, etc. are authorized on a centralized basis.

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 achieve this aim, the projects are analyzed on a case-by-case basis in order to adopt the most effective series of measures for each case (structured payments to suppliers to ensure completion of the work, specific schedules for drawing down amounts, etc.).

The management of on-balance-sheet property assets is performed by companies that specialize in the sale of property (Altamira Santander Real Estate, S.A.) and is supplemented by the commercial network structure. The assets are sold with price reductions in keeping with the market situation.

Foreclosed properties

As a last resort, the acquisition and foreclosure of property assets is one of the mechanisms adopted in Spain in order to manage the portfolio efficiently. At December 31, 2012, the net balance of these assets amounted to EUR 3,674 million (gross amount: EUR 7,838 million; recognized allowance: EUR 4,164 million).

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The following table shows the detail of the assets acquired and foreclosed by the businesses in Spain at 2012 and 2011 year-end:

Millions of euros	12/31/12				12/31/11
	Carrying amount		Of which: Allowance		Carrying amount		Of which: Allowance
Property assets arising from financing provided to construction and property development companies		2,906		3,650		2,988		3,536
Of which:
Completed buildings		793		498		1,001		760
Residential		393		236		661		505
Other		400		262		340		255
Buildings under construction		283		281		255		265
Residential		274		273		235		244
Other		9		8		20		21
Land		1,830		2,871		1,732		2,511
Developed land		1,302		2,024		1,121		1,540
Other land		528		847		611		971
Property assets from home purchase mortgage loans to households		707		454		1,223		689
Other foreclosed property assets		61		60		63		53
Total property assets		3,674		4,164		4,274		4,278
Equity instruments, ownership interests and financing provided to non-consolidated companies holding these assets		649		749		818		580
Total		4,323		4,913		5,092		4,858

In recent years, the Group has considered asset acquisition/foreclosure to be a more efficient method for resolving cases of default than legal proceedings. The Group initially recognizes foreclosed assets at the lower of the carrying amount of the debt (net of provisions) and the fair value of the acquired/foreclosed asset (less estimated costs to sell). If fair value (less costs to sell) is lower than the net value of the debt, the difference is recognized under Impairment losses on financial assets (net) - Loans and receivables in the consolidated income statement for the year. Subsequent to initial recognition, the assets are measured at the lower of fair value (less costs to sell) and the amount initially recognized. The fair value of this type of assets is determined by the Group’s directors based on evidence obtained from qualified valuers or evidence of recent transactions.

Net additions to acquired and foreclosed assets continued to fall in 2012, due to the higher level of growth in disposals than in additions.

	Thousands of  millions of euros
	2012			2011
Gross additions		2.1			2.3
Disposals		2.8			1.3
Difference		(0.7	)		1.0

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4.3.3 Brazil

The loan portfolio in Brazil grew by 9.58% to EUR 89,142 million in 2012 (excluding the exchange-rate effect), representing 11% of the Group’s total lending. This growth is in line with the growth in the Brazilian economy.

The portfolio mix is characterized by customer diversification and the significant volume of retail transactions: 56.1% of loans are loans to individuals, consumer loans and loans to SMEs.

Loans to individuals increased by 11% in 2012. By segment, the highest growth recorded in the loans to individuals portfolio was that of the mortgages segment, although its weight in the portfolio continues to be low (5% of total lending in Brazil).

The NPL ratio was 6.86% at 2012 year-end, compared with 5.38% in 2011, against a backdrop of a slowdown in the Brazilian economy that gave rise to an increase in non-performing loans in the system.

The non-performing loans coverage ratio stands at 90.2% (2011 year-end: 95%).

4.4. Credit risk from other standpoints

4.4.1 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 derivative products intended to provide service to the Group’s customers.

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).

Derivatives exposures

The net total credit risk exposure in derivatives activities amounted to EUR 52,184 million in 2012, and was concentrated at counterparties with high credit quality: 76.6% of the exposure was to counterparties with ratings of A- or above.

Around 50% of the derivatives exposure is to financial institutions with which almost all transactions are entered into under netting and collateral arrangements. The other transactions with various financial institution customers relate generally to hedging transactions. On occasion, non-hedging transactions may be entered into, but only with specialist customers.

The Group uses credit derivatives to hedge credit transactions, to conduct customer business in financial markets, and as part of its trading operations.

The risk inherent to these transactions is controlled using an 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.

In notional terms, the position in CDSs includes protection purchased for EUR 47,105 million and protection sold for EUR 42,529 million.

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At December 31, 2012, for the Group’s trading activities, the sensitivity of the lending business to one-basis-point increases in spreads was EUR -0.3 million, similar to the 2011 figure, and the average annual VaR amounted to EUR 2.9 million, significantly lower than in 2011 (average VaR of EUR 10.6 million).

4.4.2. Concentration risk

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”. Pursuant to the rules contained in Bank of Spain Circular 3/2008 (on the calculation and control of minimum capital requirements) and subsequent amendments thereto, the value of a credit institution’s total exposure to a single individual, entity or economic group, including the non-consolidated portion of its own economic group, may not exceed 25% of its capital. Exposures to a single individual, legal entity or economic group are deemed to be large exposures when their value exceeds 10% of the credit institution’s capital. Exposures to governments and central banks belonging to the OECD are excluded from this treatment.

At December 31, 2012, there were several economic and financial groups with respect to which the Group’s exposure initially exceeded 10% of capital: three financial institutions in the EU, two financial institutions in the US, one oil corporation and one central counterparty in the EU. Following the application of risk mitigation techniques and the regulations applicable to large exposures, the exposure to each of these entities represented less than 5.5% of eligible capital.

At December 31, 2012, the Group’s credit exposure to the top 20 borrower economic and financial groups, excluding AAA-rated governments and sovereign bonds denominated in local currency, accounted for 5.0% of the credit risk exposure to customers (lending plus off-balance-sheet exposures), which is the same as the year-ago figure. From a sector-based standpoint, the distribution of the corporate portfolio is adequately diversified.

The Group’s risk division works closely with the finance division in the active management of credit portfolios, which includes reducing the concentration of exposures through several techniques, such as the arrangement of credit derivatives for hedging purposes or the performance of securitization transactions, in order to optimize the risk/return ratio of the total portfolio.

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The detail, by activity and geographical area of the counterparty, of the concentration of the Group’s risk at December 31, 2012 is as follows:

	Millions of euros
	Total			Spain		Other EU countries		Americas		Rest of the world
Credit institutions		178,855			38,939		82,219		48,452		9,245
Public sector		128,680			54,646		21,339		51,393		1,302
Of which:
Central government		94,653			40,597		18,459		34,325		1,272
Other		34,027			14,049		2,880		17,068		30
Other financial institutions		75,394			11,610		38,779		22,425		2,580
Non-financial companies and individual entrepreneurs		324,336			122,714		68,208		118,464		14,950
Of which:
Property construction and development		18,885			8,723		3,814		6,348		—
Civil engineering construction		18,528			11,238		2,297		4,841		152
Large companies		175,467			65,462		35,397		69,228		5,380
SMEs and individual entrepreneurs		111,456			37,291		26,700		38,047		9,418
Other households and non-profit institutions serving households		410,951			70,950		260,795		78,248		958
Of which:
Residential		303,225			56,833		217,469		28,707		216
Consumer loans		92,606			8,630		39,750		43,512		714
Other purposes		15,120			5,487		3,576		6,029		28
Subtotal		1,118,216			298,859		471,340		318,982		29,035
Less: impairment losses on assets, collectively assessed		(4,026	)
Total (*)		1,114,190

(*) For the purposes of this table, the definition of risk includes the following items in the public balance sheet: Loans and advances to credit institutions, Loans and advances to customers, Debt instruments, Equity instruments, Trading derivatives, Hedging derivatives, Investments and Contingent liabilities.

4.4.3 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, 2012, the country risk exposure for which allowances must be recorded amounted to EUR 342 million. At 2011 year-end, the total regulatory country risk exposure amounted to EUR 380 million. The allowance recognized in this connection at 2012 year-end amounted to EUR 45 million, as compared with EUR 55 million at 2011 year-end.

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4.4.4 Sovereign risk

As a general rule, the Group considers sovereign risk to be 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 that have 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.

In general, sovereign risk exposure arises 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. The vast majority of these exposures are taken in local currency and are financed out of local customer deposits, also denominated in local currency.

Also, the sovereign risk investment strategy takes into account each country’s credit quality when establishing maximum exposure limits.

As could be expected, the distribution of sovereign exposure by rating was affected by the numerous revisions of sovereign issuers’ ratings in recent years, mainly Spain, Portugal, the US and Chile.

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The detail of the Group’s total risk exposure to the so-called peripheral countries of the euro zone at December 31, 2012 and 2011, distinguishing, based on the country of the issuer or borrower, between sovereign risk and private sector exposure, is as follows (for the purpose of presenting the following tables, the term “sovereign exposure” is considered in its broadest sense and includes, in addition to exposure to the State/central banks, the exposure to other public authorities, such as autonomous community governments and municipal councils):

12/31/12
Sovereign risk by country of issuer/borrower (**)
	Millions of euros
			Debt instruments (Note 7)								Derivatives (***)
	Balances with central banks		Financial assets held for trading and other financial  assets at fair value through profit or loss		Available- for-sale financial assets		Loans and receivables		Loans and advances to customers (Note 10) (*)		Other than CDSs		CDSs		Total on- balance-sheet exposure		Contingent liabilities and commitments (Note 35)		Total exposure
Spain		1,218		6,680		29,288		1,173		16,884		148		—		55,391		2,341		57,732
Portugal		1,156		94		1,998		125		644		1,174		1		5,192		33		5,325
Italy		3		353		267		—		40		—		—		663		204		867
Greece		—		—		—		—		—		—		—		—		—		—
Ireland		—		—		—		—		—		277		—		277		—		277

(*) Presented excluding valuation adjustments and impairment losses recognized (EUR 20 million).

(**) Exposure to reverse repurchase agreements is included under Balances with central banks and Loans and advances to customers.

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

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12/31/12
Private sector exposure by country of issuer/borrower (**)
			Millions of euros
			Debt instruments (Note 7)								Derivatives (***)
	Reverse repurchase agreements (Note 6)		Financial assets held for trading and other financial assets at fair value through profit or loss		Available- for-sale financial assets		Loans and receivables		Loans and advances to customers (Note 10) (*)		Other than CDSs			CDSs			Total on- balance-sheet exposure		Contingent liabilities and commitments (Note 35)		Total exposure
Spain		11,471		2,391		6,525		1,130		183,130		6,798			(40	)		211,405		63,101		274,506
Portugal		—		903		518		1,422		25,215		635			(4	)		28,689		7,397		36,086
Italy		—		176		116		83		7,473		(2	)		8			7,854		3,234		11,088
Greece		—		—		—		—		96		—			—			96		135		231
Ireland		—		146		414		179		481		351			—			1,571		224		1,795

(*) Presented excluding valuation adjustments and impairment losses recognized (EUR 12,671 million).

(**) Exposure to reverse repurchase agreements is included under Balances with central banks and Loans and advances to customers.

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

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12/31/11
Sovereign risk by country of issuer/borrower (**)
	Millions of euros
			Debt instruments (Note 7)								Derivatives (***)
	Balances with central banks		Financial assets held for trading and other financial  assets at fair value through profit or loss		Available- for-sale financial assets		Loans and receivables		Loans and advances to customers (Note 10) (*)		Other than CDSs		CDSs			Total on- balance-sheet exposure		Contingent liabilities and commitments (Note 35)		Total exposure
Spain		4,841		8,060		29,975		1,274		12,147		225		—			56,522		2,848		59,370
Portugal		1,359		83		1,741		—		847		846		—			4,876		272		5,148
Italy		9		406		247		—		—		15		(15	)		662		—		662
Greece		—		—		84		—		—		—		—			84		—		84
Ireland		—		—		—		—		—		139		—			139		—		139

(*) Presented excluding valuation adjustments and impairment losses recognized (EUR 3 million).

(**) Exposure to reverse repurchase agreements is included under Balances with central banks and Loans and advances to customers.

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

12/31/11
Private sector exposure by country of issuer/borrower (**)
			Millions of euros
			Debt instruments (Note 7)								Derivatives (***)
	Reverse repurchase agreements (Note 6)		Financial assets held for trading and other financial  assets at fair value through profit or loss		Available- for-sale financial assets		Loans and receivables		Loans and advances to customers (Note 10) (*)		Other than CDSs			CDSs			Total on- balance-sheet exposure		Contingent liabilities and commitments (Note 35)		Total exposure
Spain		5,547		2,069		5,385		955		202,411		3,226			(46	)		219,547		63,025		282,572
Portugal		—		862		907		1,935		23,337		468			(8	)		27,501		7,706		35,207
Italy		—		359		88		98		11,705		(308	)		(4	)		11,938		3,402		15,340
Greece		—		—		—		—		170		64			—			234		138		372
Ireland		—		211		281		150		491		286			—			1,419		110		1,529

(*) Presented excluding valuation adjustments and impairment losses recognized (EUR 7,237 million).

(**) Exposure to reverse repurchase agreements is included under Balances with central banks and Loans and advances to customers.

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

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Following is certain information on the notional amount of the CDSs at December 31, 2012 and 2011 detailed in the foregoing tables:

12/31/12
Millions of euros
		Notional amount							Fair value
		Bought		Sold		Net			Bought		Sold			Net
Spain	Sovereign		—		—		—			—		—			—
	Private		2,202		2,952		(750	)		3		(43	)		(40	)
Portugal	Sovereign		225		207		18			14		(13	)		1
	Private		398		418		(20	)		7		(11	)		(4	)
Italy	Sovereign		518		608		(90	)		12		(12	)		—
	Private		1,077		1,025		52			40		(32	)		8
Greece	Sovereign		—		—		—			—		—			—
	Private		20		20		—			1		(1	)		—
Ireland	Sovereign		9		9		—			—		—			—
	Private		16		16		—			—		—			—

12/31/11
Millions of euros
		Notional amount							Fair value
		Bought		Sold		Net			Bought		Sold			Net
Spain	Sovereign		—		—		—			—		—			—
	Private		3,288		4,122		(834	)		96		(142	)		(46	)
Portugal	Sovereign		211		211		—			60		(60	)		—
	Private		409		448		(39	)		93		(101	)		(8	)
Italy	Sovereign		429		614		(185	)		46		(61	)		(15	)
	Private		1,106		1,129		(23	)		114		(118	)		(4	)
Greece	Sovereign		223		223		—			158		(158	)		—
	Private		54		44		10			9		(9	)		—
Ireland	Sovereign		9		9		—			1		(1	)		—
	Private		60		60		—			5		(5	)		—

In addition, our total risk exposure to Cyprus at December 31, 2012 was €12.9 million, mainly secured loans granted in Spain and the UK to individuals resident in Cyprus.

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4.4.5 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 assumption of these principles involves a commitment to assess and take into consideration social and environmental risk and, accordingly, to grant loans only to those projects that can evidence that their social and environmental impacts are properly managed. The methodology used is as follows:

• For transactions amounting to USD 10 million or more, an initial general questionnaire is completed, designed to establish the social and environmental risk 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, non-high income OECD country), a more exhaustive questionnaire is completed, which is adapted according to the business sector involved.

• 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 individualized companies in commercial banking (Spain), using a system that classifies each of the companies into one of seven categories, depending on the degree of environmental risk incurred.

4.5. Credit risk cycle

The credit risk management process consists of identifying, analyzing, controlling and deciding on, as appropriate, the risks incurred in the Group’s operations. The parties involved in this process are the business areas, senior management and the risk units.

The process involves 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. The process is being permanently updated, with the findings and conclusions of the post-sale phase being fed back into the risk analysis and planning of the pre-sale phase.

4.5.1 Risk analysis and credit rating process

In general, the risk analysis consists of examining the customer’s ability to meet its contractual obligations to the Bank. This involves analyzing the customer’s credit quality, its risk transactions, its solvency and the return to be obtained in view of the risk assumed.

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Since 1993 the Group has used internal rating models for this purpose. These mechanisms are used in all the individualized segments, both the wholesale segments (sovereigns, financial institutions and corporate banking) and the other individualized companies and institutions.

The rating is obtained from a quantitative module based on balance sheet ratios or macroeconomic variables and supplemented by the analyst’s expert judgment.

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 contrast to the use of ratings in the individualized segments, in the standardized segment scoring techniques predominate; in general, these tools automatically assign a score to proposed transactions.

4.5.2 Risk limit planning and setting

The purpose of this phase is to efficiently and comprehensively limit the risk levels the Group assumes.

The credit risk planning process is used to establish the budgets and limits at portfolio or customer level depending on the segment in question.

Thus, 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.

For individualized risks, customers represent the most basic level and individual limits are established (pre-classification) when certain features, generally materiality, concur.

Thus, for large corporate groups a pre-classification model, based on an economic capital measurement and monitoring system, is used. The result of the pre-classification is the maximum level of risk that can be assumed vis-à-vis a customer or group in terms of amount or maturity. In the corporate segment, a simplified pre-classification model is applied for customers meeting certain requirements (thorough knowledge, rating, etc.).

Scenario analysis

An important aspect of the planning phase is the consideration of the volatility of the macroeconomic variables supporting the preparation of the budget.

The Group performs simulations of the performance of its portfolio in various adverse and stress scenarios (stress testing), which 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).

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• 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.

The scenarios are developed from the standpoint of each unit and from that of 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.

4.5.3 Transaction decision-making

The sale phase consists of the decision-making process, providing support to the business units which need the analysis and approval of risks so that a transaction can be performed.

The purpose of the decision-making process is to analyze and resolve transactions, since approval by the risk unit is a pre-requisite for the arrangement of any risk transaction. The decision-making process must consider the transaction approval policies defined and take into account both the risk appetite and any transaction elements that are important in achieving a balance between risk and return.

In the standardized customer sphere, the management of large volumes of loan transactions will be facilitated by the use of automatic decision-making models that rate the customer/loan relationship. Thus, loans are classified in homogeneous risk groups using the rating assigned to the transaction by the model on the basis of information on the features of each transaction and the borrower. These models are used in individual banking and business banking and for standardized SMEs.

As stated above, the previous limit-setting stage can follow two different paths, giving rise to different types of decisions in the individualized customer sphere:

• It can be automatic, consisting of verification by the business that the proposed transaction (in terms of amount, product, maturity and other conditions) falls within the limits authorized pursuant to the aforementioned pre-classification. This process is generally applied to corporate pre-classifications.

• It may always require the analyst’s authorization, even if the transaction meets the amount, product, maturity and other conditions established in the pre-classified limit. This process applies to pre-classifications of individualized retail banking companies.

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Credit risk mitigation techniques

Although they are important in all the phases of the credit risk cycle, mitigation techniques play a particularly important role in the decisions on transactions.

The Group applies various methods of reducing credit risk, depending, inter alia, on the type of customer and product. As we shall see, some of these methods are specific to a particular type of transaction (e.g. real estate guarantees) while others apply to groups of transactions (e.g. netting and collateral arrangements).

The various mitigation techniques can be grouped into the following categories:

Netting

Netting refers to the possibility of offsetting transactions of the same type, under the umbrella of a framework agreement such as ISDA or similar agreements.

It consists of netting off the positive and negative market values of the derivatives transactions entered into by the Group with a particular counterparty, so that, in the event of default, the counterparty owes the Group (or the Group owes the counterparty, if the net figure is negative) a single net figure and not a series of positive or negative amounts relating to each of the transactions entered into with the counterparty.

An important aspect of framework agreements is that they represent a single legal obligation encompassing all the transactions they cover. This is the key to being able to offset the risks of all the transactions covered by the contract with the same counterparty.

Collateral

Collateral refers to the assets pledged by the customer or a third party to secure the performance of an obligation. Collateral may be:

• Financial: cash, security deposits, gold, etc.

• Non-financial: property (both residential and commercial), other movable property.

From the risk acceptance standpoint, collateral of the highest possible quality is required. For regulatory capital calculation purposes, only collateral that meets the minimum quality requirements described in the Basel capital accords, i.e. not all collateral, can be considered to reduce the capital requirement.

One very important example of financial collateral is the collateral agreement. Collateral agreements are a set of instruments with economic value that are deposited by a counterparty in favor of another party in order to guarantee or reduce such counterparty credit risk as might arise from the portfolios of transactions between the parties in which there is exposure to risk.

Collateral agreements vary in nature but, whichever the specific form of collateralization may be, the ultimate aim, as in the netting technique, is to reduce counterparty risk through the recovery of all or part of the benefits generated at a given point in time by the transaction (measured at market price).

Transactions subject to collateral agreements are assessed periodically (normally on a daily basis). The agreed-upon parameters defined in the agreement are applied to these assessments, from which the collateral amount (normally cash), payable to or receivable from the counterparty, is obtained.

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With regard to real estate collateral, periodic re-appraisal processes are in place, based on the actual market values for different types of real estate, which meet all the requirements established by the regulator.

When mitigation techniques are used, the minimum requirements established in the credit risk management policy manual are adhered to. In short, these consist of monitoring the following:

• Legal certainty. Collateral and guarantees must be examined to ensure that at all times it is possible to legally enforce the settlement thereof.

• A substantial positive correlation must not exist between the counterparty and the value of the collateral.

• Collateral and guarantees must be correctly documented.

• The availability of documentation of the methodologies used for each mitigation technique.

• The appropriate periodic monitoring and control of the methodologies.

Personal guarantees and credit derivatives

Personal guarantees are guarantees that make a third party liable for another party’s obligations to the Group. They include, inter alia, suretyships, bank guarantees and stand-by letters of credit. Only guarantees provided by third parties that meet the minimum requirements established by the supervisor can be recognized for capital calculation purposes.

Credit derivatives are financial instruments whose main purpose is to hedge credit risk by buying protection from a third party, whereby the Bank transfers the risk of the issuer of the underlying instrument. Credit derivatives are OTC instruments, i.e. they are not traded in organized markets. Credit derivative hedges, mainly credit default swaps, are entered into with leading financial institutions.

4.5.4 Monitoring

The monitoring function is based on an ongoing process of permanent observation to enable early detection of any changes that might arise in customers’ credit quality, so that actions can be adopted to correct adverse changes.

Monitoring is based on the segmentation of customers, is performed by dedicated local and global risk teams and is complemented by the work performed by internal audit.

Monitoring involves, inter alia, identifying and monitoring companies under special surveillance, reviewing ratings and ongoing monitoring of standardized customers’ indicators.

The system called “companies under special surveillance” (FEVE, using the Spanish acronym) distinguishes four categories based on the degree of concern raised by the circumstances observed (extinguish, secure, reduce and monitor). The inclusion of a company in the FEVE system does not mean that there has been a default, but rather that it is deemed advisable to adopt a specific policy for this company, to place a person in charge and to set the policy implementation period. Customers classified as FEVE are reviewed at least every six months, or every three months for those classified in the most severe categories. A company can be classified as FEVE as a result of the monitoring process itself, a review performed by internal audit, a decision made by the sales manager responsible for that company or the triggering of the automatic warning system.

Assigned ratings are reviewed at least annually, but should any weakness be detected, or depending on the rating itself, more frequent reviews are performed.

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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 programmes.

4.5.5 Measurement and control

In addition to monitoring customers’ credit quality, the Group establishes the control procedures required to analyze the current credit risk portfolio and the changes therein over the various credit risk phases.

The risk control function is performed by assessing risks from various complementary perspectives, the main pillars being control by geographical location, business area, management model, product, etc., thus facilitating the early detection of specific areas of attention and the preparation of action plans to correct possible impairment.

Each control pillar can be analyzed in two ways:

Quantitative and qualitative analysis of the portfolio

In the analysis of the portfolio, any variances in the Group’s risk exposure with respect to 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.

In addition to the traditional metrics, the following, inter alia, are used in the credit risk control phase:

• Change in non-performing loans (VMG)

VMG measures the change in non-performing loans in the period, discounting the loans written off and taking recoveries into account. It is an aggregate measure at portfolio level that enables action to be taken in the event of deteriorations in the trend of non-performing loans. VMG and its component parts play a decisive role as monitoring variables.

• EL (expected loss) and capital

Expected loss is the estimated financial loss that will occur over the next twelve months on the portfolio existing at any given time.

It is an additional cost of the activity and must be charged in the transaction price. It is calculated using three basic parameters:

• EAD (exposure at default): the maximum amount that could be lost as a result of a default.

• PD (probability of default): is the probability that a customer will default in the next twelve months.

• LGD (loss given default): represents the percentage of the exposure that will not be recovered in the event of default. To calculate the LGD, the amounts recovered throughout the recovery process are discounted to the time of default, and this figure is compared, on a percentage basis, with the amount owed by the customer at that date.

Thus, other relevant factors are taken into account in estimating the risk involved in transactions, such as the quantification of off-balance-sheet exposures, or the expected percentage of recoveries, which is related to the guarantees associated with the transaction and other characteristics of the transaction: type of product, term, etc.

The risk parameters are also involved in the calculation of both economic and regulatory capital. The inclusion of capital metrics in management is fundamental to the rationalization of their use.

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Assessment of the control processes

This includes a systematic periodic review of the procedures and methodology, and is performed over the entire credit risk cycle to ensure that they are in force and effective.

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. In this connection, the risk division assesses the efficiency of the internal control of its activities on an annual basis.

Furthermore, the integrated risk control and internal risk validation unit, as part of its mission to supervise the quality of the Group’s risk management, guarantees that the systems for the management and control of the risks inherent to its activity comply with the strictest criteria and the best practices observed in the industry and/or required by the regulators. Also, internal audit is responsible for ensuring that the policies, methods and procedures are appropriate, effectively implemented and regularly reviewed.

4.5.6 Recovery management

Recovery management is a strategic function in the Group’s risk management area.

In order to manage recovery properly, action is taken in four main phases: arrears management, recovery of non-performing loans, recovery of written-off loans and management of foreclosed assets. In fact, the actions taken by the recovery function commence even before the first missed payment, i.e. when there are signs of a deterioration of the customer’s ability to pay, and they end when the customer’s debt has been paid or has returned to performing status. The recovery function aims to anticipate default events and focuses on preventive management.

The current macroeconomic environment has a direct effect on customer default and non-performing loans ratios. Therefore, the quality of the portfolios is fundamental to the development and growth of the Group’s businesses in the various countries, and particular attention is paid, on an permanent basis, to the debt collection and recovery functions in order to guarantee that this quality reaches the expected levels at all times.

The Group has in place a corporate management model that defines the general recovery action guidelines. These guidelines are applied in the various countries, always taking into account the local peculiarities required for the recovery activity, due either to the local economic environment, to the business model or to a combination of both. This corporate model is subject to the permanent review and enhancement of the management processes and methodology that underpin it. For the Group, recovery management entails the direct involvement of all areas of management (sales, technology and operations, human resources and risk), which has contributed to the incorporation of solutions improving the effectiveness and efficiency of the aforementioned model.

Also, the differing characteristics of the Group’s customers make segmentation necessary for the performance of proper recovery management. The mass management of large groups of customers with similar profiles and products is performed using highly technological processes, while personalized and individualized management is reserved for customers who, due to their profile, require the assignment of a specific manager and a more tailored analysis.

The recovery activity has been aligned with the social and economic reality of the different countries, and various management mechanisms have been used, all with the appropriate prudential criteria. These mechanisms include the modification of the terms of transactions, based on their age, collateral and conditions, while always ensuring the required ratings and provisions are maintained.

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Restructured/refinanced portfolio

On September 28, 2012, the Bank of Spain published Circular 6/2012 establishing the regulations relating to the information on refinancing and restructuring transactions that Spanish credit institutions must disclose in their financial statements. Bank of Spain Circular 6/2012 uses the general term “restructured/refinanced portfolio” to refer to transactions in which the customer has, or might foreseeably have, financial difficulty in meeting its payment obligations under the terms and conditions of the current agreement and, accordingly, it may be advisable to cancel the agreement and/or even enter into a new transaction. Also, Bank of Spain Circular 6/2012 requires credit institutions to disclose a summary of their restructuring/refinancing policies in their financial statements.

Restructuring/refinancing policy

The Group follows highly rigorous definitions and policies in this management process, so that it is performed in accordance with the best practices and in strictest compliance with regulatory requirements. In this connection, the Group has a detailed corporate policy with regard to transactions in which the customer has, or might foreseeably have, difficulty in meeting its payment obligations under the terms and conditions of the current agreement and, accordingly, it may be advisable to modify or cancel the agreement and/or even enter into a new transaction.

Applicable to all countries and all customers, this policy is adapted to local requirements and regulations and is always subordinate to compliance with any stricter local regulation that might apply. Its principles include the following:

• The restricted use of this practice, which must be accompanied by additional guarantees or efforts by the customer, avoiding any actions that might defer the recognition of non-performing loans.

• Its purpose must be to recover all the amounts owed, which entails recognizing any unrecoverable amounts as soon as possible. Delaying the immediate recognition of losses would be contrary to good management practices.

• It must always envisage maintaining the existing guarantees and, if possible, enhancing them or extending their coverage. Effective guarantees do not only mitigate losses given default, but might also reduce the probability of default.

• This practice must not give rise to the granting of additional funding to the customer, or be used to refinance debts to competitors or as a cross-selling instrument.

• All the alternatives and their impacts must be assessed, making sure that the results of this practice exceed those which would foreseeably be obtained if it were not performed.

• It may not give rise to an improvement in the classification of the loan until such time as the experience with the customer has proven to be satisfactory.

Given that the purpose of restructuring/refinancing is to enable the customer to continue to settle its debts, the focal point of any analysis is the ability to pay. The main factors considered in determining whether there has been a deterioration in the borrower’s economic situation and, therefore, a possible impairment of its ability to pay, are: non-payment, frequent payment delays or a reduction in income levels. The scope of this practice and corporate policy does not include, therefore, the changes made to the terms and conditions of a transaction as a result of the habitual commercial relationship with the customer and where the borrower is not experiencing any financial difficulties.

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The Group’s approach to managing restructured/refinanced transactions varies depending on the degree of deterioration of the borrower’s financial situation at the time the terms and conditions of the transaction are modified. Thus, in managing these transactions, it distinguishes between:

• Transactions which at the time of their restructuring/refinancing were current in their payments or did not have any payments more than three months past due, with respect to which it is expected that the borrower might possibly experience a reduction in its ability to pay. The approach adopted is to adapt the terms and conditions of the debt to suit the customer’s new payment capacity. This early action represents one of the main levers of the Group’s credit risk management. 77% of the total restructured/refinanced portfolio relates to transactions of this kind.

• Transactions which at the time of their restructuring/refinancing were classified as doubtful due to payment arrears (more than three months) or other situations. This restructuring/refinancing does not entail the release of provisions and the borrowers continue to be classified as doubtful, unless the criteria established in the regulations based on Bank of Spain circulars are met (i.e. collection of ordinary interest outstanding and, in any case, provision of new effective guarantees or reasonable assurance of ability to pay) and the precautionary requirements included for prudential reasons in the Group’s corporate policy are also satisfied (i.e. sustained payment for a certain period, depending on the transaction features and the type of guarantee).

This practice of loan restructuring/refinancing is confined, subject to 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 Group’s position in terms of expected loss, and

• in which restructuring/refinancing does not discourage an additional effort by customers.

For standardized customers, the following general principles are applied, although exceptional circumstances are handled on a case-by-case basis:

• The overall customer risk is assessed.

• The exposure to the customer is not increased.

• All the alternatives and their impacts are assessed, making sure that the results of this practice exceed those which would foreseeably be obtained if it were not performed.

• Special attention is paid to the guarantees and the possible future changes in their value.

• The use of loan restructuring/refinancing is restricted, with priority being given to additional efforts from customers, and actions that only postpone the problem are avoided.

• Restructured/refinanced transactions are subject to special monitoring, which continues until the debt has been repaid in full.

In the case of individualized customers, these principles are used as a point of reference, but a case-by-case analysis of each customer is of particular importance.

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The corporate policy establishes different types of modifications to be made to the terms and conditions of the transactions, based on the borrower’s economic situation:

1. Borrowers displaying a severe but transitory deterioration in their ability to pay (which is expected to be recovered in a short space of time):

a. Increasing installment: used when the customer’s ability to pay is likely to improve gradually over time; thus, the installment gradually increases in order to match the improved payment capacity.

b. Short-term adjustments: a payment moratorium is applied on the principal during a short period, until the customer recovers his original payment capacity.

2. Borrowers displaying a slight but prolonged deterioration in their ability to pay:

a. Term extension: the customer’s installment is reduced by means of lengthening the amortization period of the loan.

b. Final bullet: the customer’s installment is reduced by postponing part of the principal, which is paid together with the last installment. This alternative is considered only where it is not viable to extend the term of the loan and there is an effective guarantee that increases the likelihood of collecting the final installment (e.g. mortgages).

Each case is analyzed on an individual basis, with priority being given to modifications for customers displaying a slight but prolonged deterioration, since those who have suffered severe transitory deterioration carry a higher risk, as they depend on the accuracy of the estimated time of their future recovery.

The Group has a series of mechanisms for the management and control of loan restructuring/refinancing, which allow it to manage these transactions in a differentiated way, paying particular attention to the processes of:

• Planning and budgeting, including preparing the pertinent business plans, projections and limits for the most relevant items.

• Monitoring portfolio evolution and assessing the degree of compliance with the projections prepared in the planning phase.

This portfolio of loans is segregated into a separate loan pool for the purposes of determining the allowance for loan losses. Restructuring/refinancing does not entail the release of provisions recognized for a particular transaction. It is not considered appropriate to classify products for provisioning purposes based on the support measures they may have received. Transactions must have a previous classification and, under certain circumstances, an improvement in their status could be studied. Meanwhile, the provision remains unaltered, i.e. the provisioning percentage is frozen until reasonable certainty of payment, which exists at the time of modification of the terms of the transaction, can be evidenced.

In the event of repeated defaults after modification of the agreement that lead to the loan being classified as doubtful, the recognition of provisions is recalculated from the date of the oldest past-due amount of the original transaction.

Our corporate policy establishes a maximum of one restructuring per year and three restructurings every 5 years together with more restrictive criteria: subsequent restructurings, which are not common, are only carried out after an exhaustive analysis of viability and when it has been determined that subsequent renegotiation can assure the payment with a reasonable certainty. Additionally, our corporate policy prescribes significant requirements (such as an extended period and new effective guaranties requested) before a restructured loan with subsequent restructuration to be reclassified as standard.

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For the purpose of determining losses, the Group monitors its debtors differentiating between:

• Customers classified by the Group as “standardized”: grouping together instruments having similar credit risk characteristics indicative of the debtors’ ability to pay all principal and interest amounts in accordance with the contractual terms. This category includes exposures to individuals, individual entrepreneurs and retail banking enterprises not classified as individualized customers.

• Customers classified by the Group as “individualized”: they are monitored individually for significant debt instruments and for instruments which, although not material, are not susceptible to being classified in a group of financial assets with similar credit risk characteristics. This category includes wholesale banking enterprises, financial institutions and certain retail banking enterprises.

Our internal models, used to calculate our loan loss provisions, incorporate re-defaults of the restructured loans in the following manner:

• Customers classified by the Group as “standardized”: our internal models consider restructured loans as a pool with differentiated behavior, which has its own probability of default calculated based on past credit history, which consider, among others, successive restructuration.

• Customers classified by the Group as “individualized”: internal ratings are the key input for determining the probability of default of these loans and it takes into consideration subsequent restructuring to a loan. In this sense, our corporate risk policy establishes that the “rating” for restructured customers must be updated at least every six months reflecting new financial conditions or modifications.

Quantitative information required by Bank of Spain Circular 6/2012

Set forth below is the quantitative information required by Bank of Spain Circular 6/2012 on the restructured/refinanced transactions in force at December 31, 2012. The following terms are used in Bank of Spain Circular 6/2012 with the meanings specified:

• Refinancing transaction: transaction granted or used for reasons relating to -current or foreseeable- financial difficulties the borrower may have in repaying one or more of the transactions granted to it, or through which the payments on such transactions are brought fully or partially up to date, in order to enable the borrowers of cancelled or refinanced transactions to repay the debt (principal and interest) because the borrower is unable, or might foreseeably become unable, to comply with the conditions thereof in due time and form.

• Restructured transaction: transaction with respect to which, for economic or legal reasons relating to current or foreseeable financial difficulties of the borrower, the financial terms and conditions are modified in order to facilitate the payment of the debt (principal and interest) because the borrower is unable, or might foreseeably become unable, to comply with the aforementioned terms and conditions in due time and form, even if such modification is envisaged in the agreement.

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CURRENT REFINANCING AND RESTRUCTURING BALANCES (a)

	Millions of euros
	Standard (b)												Substandard														Doubtful														Total
	Full property mortgage guarantee				Other collateral (c)				Without collateral				Full property mortgage guarantee				Other collateral (c)				Without collateral				Specific allowance		Full property mortgage guarantee				Other collateral  (c)				Without collateral				Specific allowance
	Number of transactions		Gross amount		Number of transactions		Gross amount		Number of transactions		Gross amount		Number of transactions		Gross amount		Number of transactions		Gross amount		Number of transactions		Gross amount				Number of transactions		Gross amount		Number of transactions		Gross amount		Number of transactions		Gross amount				Number of transactions		Gross amount		Specific allowance
Public sector		1		200		4		94		113		628		—		—		3		124		2		1		13		3		3		1		—		49		31		4		176		1,081		17
Other legal entities and individual entrepreneurs		15,021		6,001		2,181		2,289		76,922		4,469		8,933		4,244		1,014		799		21,379		2,224		1,344		13,540		7,761		1,530		1,828		87,612		3,692		5,820		228,132		33,307		7,164
Of which: Financing for construction and property development		3,052		2,600		396		564		1,642		208		1,419		1,362		211		273		559		115		621		3,971		4,759		515		1,116		1,154		593		3,171		12,919		11,590		3,792
Other individuals		69,495		5,920		22,867		432		976,867		2,206		54,794		6,492		10,049		562		205,703		812		425		29,675		2,364		15,582		378		1,033,448		2,160		2,082		2,418,480		21,326		2,507
Total		84,517		12,121		25,052		2,815		1,053,902		7,303		63,727		10,736		11,066		1,485		227,084		3,037		1,782		43,218		10,128		17,113		2,206		1,121,109		5,883		7,906		2,646,788		55,714		9,688

(a) Including all refinanced or restructured transactions as defined in section 1.g) of Annex IX of Bank of Spain Circular 4/2004

(b) Standard risks classified as under special monitoring pursuant to section 7.a) of Annex IX of Bank of Spain Circular 4/2004

(c) Including transactions without a full property mortgage guarantee, i.e. with a loan-to-value ratio of more than 1, and transactions with collateral other than a real estate mortgage, irrespective of their loan-to-value ratio.

It should be noted that 67% of all the transactions restructured/refinanced by the Group are not classified as doubtful. Also, from the guarantee standpoint, more than 70% are secured by collateral (92% in the case of real estate companies).

Of the total gross amount of transactions restructured/refinanced by the Group at December 31, 2012, EUR 32,867 million relate to portfolios in Spain, with the following features:

• EUR 11,256 million relate to real estate companies, and 72% of this balance is classified as doubtful or substandard, with a specific allowance of 46%.

• 34% of the total portfolio in Spain is classified as doubtful, with a coverage ratio of 42%.

• EUR 29,380 million (89%) relate to transactions previously classified as other than doubtful, with collateral of 82%.

• The remaining EUR 3,487 million (11%) relate to transactions previously classified as doubtful, with collateral of 84%.

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Following is a detail of the restructured/refinanced portfolio at December 31, 2012, distinguishing, on the basis of their management, the transactions previously classified as other than doubtful from those previously classified as doubtful:

	Standard		Substandard					Doubtful					Total
	Millions of euros		Millions of euros		Specific allowance %			Millions of euros		Specific allowance %			Millions of euros		% of  total			Specific allowance %
Transactions previously classified as other than doubtful		18,638		13,179		10	%		11,117		41	%		42,934		77	%		14	%
Transactions previously classified as doubtful		3,601		2,079		23	%		7,100		48	%		12,780		23	%		30	%
Total		22,239		15,258		12	%		18,217		43	%		55,714		100	%		17	%

The table below sets forth the movements in our restructured/refinanced loans for the period shown:

(In millions of euros)	Year ended Dec. 31, 2012
	Transactions which at the time of their restructuring/ refinancing were classified as doubtful		Transactions which at the time of their restructuring/ refinancing were classified as other than doubtful		Total
Opening balance		10,334		41,872		52,206
Of which: Performing loans		4,765		34,354		39,119
Non-performing loans		5,569		7,518		13,087
New entries during period		9,924		19,082		29,006
Reductions (*)		7,478		14,171		21,649
Other movements		—		3,849		3,849
Closing balance		12,780		42,934		55,714
Of which: Performing loans		5,680		31,817		37,497
Non-performing loans		7,100		11,117		18,217

(*) Includes movements due to cash recoveries, forecloses and write-offs

The transactions presented in the foregoing tables are classified at December 31, 2012, by nature, as follows:

• Doubtful: transactions that are in the process of becoming standard or those which, having been classified as standard or substandard during the term of the transaction, have again encountered payment difficulties. Pursuant to the corporate policy of prudence, if this deterioration should worsen, the loan would be classified as written-off.

• Substandard: transactions previously classified as doubtful with respect to which sustained payments have been made for a certain period, depending on the transaction features and the type of guarantee. In the specific case of transactions with a grace period on the repayment of principal, the transaction is classified as substandard, unless it has already been classified as doubtful, and it will remain in this category until the end of the grace period. Also, if a transaction classified as standard falls into arrears (non-payment), this is sufficient reason for the transaction to be classified as substandard.

• Standard: transactions previously classified as doubtful or substandard which have successfully completed a precautionary observation period evidencing that payment capacity pursuant to the terms established in the corporate policy has been re-established. According to this policy, transactions classified as standard must remain under special surveillance for a minimum precautionary period of two years and until 20% of their principal has been repaid, except in the case of transactions involving some form of debt reduction, which must remain under special surveillance until they are extinguished.

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5. MARKET RISK

5.1 Activities subject to market risk and types of market risk

The measurement, control and monitoring of the market risk area comprises all operations in which net worth risk is assumed as a result of changes in market factors. This risk arises from changes in the risk factors -interest rates, inflation rates, exchange rates, equity prices, credit spreads, commodity prices and the volatility thereof- and from the liquidity risk of the various products and markets in which the Group operates.

• Interest rate risk is the possibility that fluctuations in interest rates might have an adverse effect on the value of a financial instrument, on a portfolio or on the Group as a whole. Interest rate risk affects, inter alia, loans, deposits, debt securities, most financial assets and liabilities held for trading and derivatives.

• Inflation rate risk is the possibility that fluctuations in inflation rates might have an adverse effect on the value of a financial instrument, on a portfolio or on the Group as a whole. Inflation rate risk affects, inter alia, loans, debt securities and derivatives, the returns on which are linked to inflation or to an actual variation rate.

• Foreign currency risk is defined as the sensitivity of the value of a position in a currency other than the base currency to a potential change in exchange rates. Accordingly, a long position in a foreign currency will generate a loss if this currency depreciates against the base currency. The positions affected by this risk include investments in subsidiaries in currencies other than the euro, and loans, securities and derivatives denominated in foreign currencies.

• Equity risk is the sensitivity of the value of the open positions in equity securities to adverse changes in the market prices of those equity securities or in future dividend expectations. Equities risk affects, among other instruments, positions in shares, equity indices, convertible bonds and equity derivatives (puts, calls, equity swaps, etc.).

• Credit spread risk is the sensitivity of the value of open positions in fixed-income securities or in credit derivatives to fluctuations in the credit spread curves or in the recovery rates (RR) of specific issuers and types of debt. The spread is the differential between the quoted price of certain financial instruments over other benchmark instruments, mainly the IRR of government bonds and interbank interest rates.

• Commodity price risk is the risk arising from the effect of potential changes in commodity prices. The Group’s exposure to commodity price risk is not material and it is concentrated in commodity derivatives with customers.

• Volatility risk is the sensitivity of the value of the portfolio to changes in the volatility of risk factors, i.e. the volatility of interest rates, exchange rates, credit spreads and commodities. Volatility risk arises on financial instruments whose measurement model includes volatility as a variable, most notably financial option portfolios.

All these market risks can be mitigated in part or in full through the use of derivatives such as options, futures, forwards and swaps.

In addition, there are other market risks, which are more difficult to hedge, the detail being as follows:

• Correlation risk. Correlation risk is defined as the sensitivity of the value of the portfolio to changes in the relationship between risk factors (correlation), whether they are the same type (e.g. between two exchange rates) or different (e.g. between an interest rate and a commodity price).

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• Market liquidity risk. The risk that a Group entity or the Group as a whole may not able to unwind or close a position on time without affecting the market price or the cost of the transaction. Market liquidity risk may be caused by the reduction in the number of market makers or institutional investors, the execution of large volumes of transactions, market instability or the increase in concentration in certain products and currencies.

• Prepayment or termination risk. When the contractual relationship in certain transactions explicitly or implicitly permits early repayment before maturity without negotiation, there is a risk that the cash flows might have to be reinvested at a potentially lower interest rate. It mainly affects mortgage loans or securities.

• Underwriting risk. Underwriting risk arises as a result of an entity’s involvement in the underwriting of a placement of securities or other type of debt, thus assuming the risk of owning part of the issue or the loan if the entire issue is not placed among the potential buyers.

The activities are segmented by risk type as follows:

a) Trading: this item includes financial services for customers, trading operations and positions taken mainly in fixed-income, equity and foreign currency products.

b) Structural risks: these consist of the market risks inherent in the balance sheet, excluding financial assets and liabilities held for trading. The structural risks are as follows:

• Structural interest rate risk: arises as a result of the maturity and repricing gaps of all the assets and liabilities on the balance sheet.

• Structural foreign currency risk/hedges of results: foreign currency risk resulting from the fact that investments in consolidable and non-consolidable companies are made in currencies other than the euro (structural exchange rate). In addition, this item includes the positions 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 and available-for-sale portfolios comprising equity positions.

The GBM (Global Banking and Markets) division carries the main responsibility for managing the positions taken in the trading business in order to develop customer business in financial markets and, secondly, to a lesser extent, to take own-account positions.

The financial management division is responsible for executing the structural risk management strategy through the application of uniform methodologies adapted to the situation of each market in which the Group operates, either directly through the Parent or in coordination with the other units. Decisions affecting the management of these risks are taken through the ALCO committees in the respective countries and in coordination with the Group’s markets committee. The aim pursued 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 metrics in order to reflect their risk profiles as accurately as possible.

5.2. Market risks in 2012

5.2.1 Trading

In 2012 the Group intensified its strategy of focusing its trading activity on the customer business and minimizing as far as possible the outstanding directional risk exposures in net terms. This was reflected in the performance of value at risk (VaR), which declined with respect to previous years.

The structured derivative activity is focused mainly on designing investment products and hedging risk for customers. Management is geared towards ensuring that the net outstanding risk is as low as possible.

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This type of transaction includes equity, fixed-income and foreign currency options.

The management units in which this activity was carried out are primarily Madrid, Banesto and Santander UK and, to a lesser extent, Brazil and Mexico.

The Group continued to have very limited exposure to complex structured instruments or vehicles. Specifically, at 2012 year-end, the Group had:

• CDOs and CLOs at fair value classified as Level 3: the Group’s position continued to be scantly material, at EUR 207 million. This position is largely a result of the integration of the Alliance&Leicester portfolio in 2008.

• Hedge funds: the total exposure was not material (EUR 274 million at December 31, 2012) and consisted largely of the financing provided to these funds (EUR 169 million), the remainder being direct portfolio investment. This exposure featured low loan-to-value ratios, of below 20% (collateral of EUR 1,480 million at the end of December). 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.

• Conduits: there was no exposure.

• Monolines: the Group’s exposure to monoline insurers amounted to EUR 151 million¹ in December 2012, and was concentrated mainly on an indirect exposure of EUR 145 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. 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 23%- with respect to 2011.

In short, the exposure to instruments of this kind in the ordinary course of the Group’s business generally continued to decrease in 2012. It is due mainly to the integration of exposures at entities acquired by the Group, such as Alliance&Leicester and 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.

The Group’s policy with respect to the approval of new transactions involving these products continues to be prudent and conservative and is subject to strict supervision by the Group’s senior management. Before approval is given for a new transaction, product or underlying, the risk division checks:

• whether there is an adequate valuation model (mark-to-market, mark-to-model or mark-to-liquidity) to monitor the value of each exposure.

• whether the inputs enabling application of this valuation model are observable in the market.

Provided the two aforementioned conditions are met, the risk division ascertains:

• the availability of adequate systems duly adapted for the daily calculation and 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.

Calibration and test measures

In 2012 the Group continued to perform regular analyses and tests to check the accuracy of the value-at-risk (VaR) calculation model, and drew conclusions which enabled it to verify the reliability of the model. The objective of these tests is to determine whether it is possible to accept or reject the model used to estimate the maximum loss of a portfolio for a given confidence level and time horizon.

The most important tests are the backtesting exercises, which are analyzed at local and global level by the market risk control units. The backtesting methodology is applied homogenously to all the Group’s portfolios and sub-portfolios.

The backtesting exercise consists of comparing the projected VaR measurements, for a given confidence level and time horizon, with the actual losses obtained in the same time horizon.

1 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 1,341 million at December 2011.

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Three types of backtesting are calculated and assessed at the Group:

• Clean backtesting: the daily VaR is compared with the results obtained without taking into account the intra-day results or the changes in the portfolio’s positions. This model serves to check the accuracy of the individual models used to assess and measure the risks of the various positions.

• Dirty backtesting: daily VaR is compared with the day’s net results, including the results of intra-day operations and those generated by fees and commissions.

• Dirty backtesting without mark-ups or fees and commissions: daily VaR is compared with the day’s net results, including the results of intra-day operations but excluding those generated by margins and fees and commissions. This method is intended to obtain an idea of the intra-day risk assumed by the Group’s treasury areas.

In the first case, for the entire portfolio, in 2012 there were three violations of VaR at 99% (i.e. days when the daily loss was higher than VaR): two in May, the first of which can be explained mainly by the sharper-than-normal increase in the Brazilian real curve indexed to inflation following the publication of higher-than-expected inflation data; and the second by sharper-than-normal increases in Spain and Mexico’s yield curves; and one in June, due to the sudden widening of credit spreads, the falls in the stock markets and the depreciation of most currencies against the dollar due to the worsening of expectations as to the outcome of the Summit of the Heads of State or Government of the European Union (June 29).

The number of violations is in line with the expected performance of the VaR calculation model, given that a confidence level of 99% and a time horizon of one year are used (with a longer time horizon one could expect an average of two or three violations a year).

The backtesting exercises are carried out regularly for each significant portfolio or strategy of each Group trading unit, and their main objective (as in the case of the other benchmark tests) is to detect anomalies in the VaR model of each portfolio in question (e.g. deficiencies in the parameterization of the valuation models of certain instruments, scantly adequate proxies, etc.). This is a dynamic process in the context of the procedure to review and validate the model.

5.2.2 Structural market risks ²

5.2.2.1 Structural interest rate risk

Europe and the United States

In these mature markets which are witnessing a scenario of low interest rates, the general positioning has been to maintain balance sheets with a positive sensitivity to interest rate rises in terms of both the net interest margin (NIM) and the market value of equity (MVE).

At the end of December 2012, the sensitivity of the net interest margin at one year to parallel shifts of 100 basis points was concentrated on the euro, US dollar and pound sterling yield curves, the Parent bank, the US subsidiary and Santander UK, plc being the main contributors with EUR 183 million, USD 60 million and GBP 14 million, respectively. As regards the euro yield curve, the contributions to the exposure by Banesto and Santander Consumer Finance are also significant. The sensitivity of the margin for other convertible currencies was scantly material.

Also at 2012 year-end, the most significant sensitivity of the market value of equity to parallel shifts of 100 basis points (EUR 527 million at the Parent bank) was that of the euro yield curve. With respect to the US dollar and pound sterling curves, the sensitivities were USD 297 million and GBP 215 million, respectively.

Latin America

Due to the differences in macroeconomic context and the degree of maturity of these markets, the positions with respect to the net interest margin (NIM) were not homogenous. Accordingly, in certain geographical areas the balance sheets were positioned for rising interest rates and in others they were positioned for falling rates.

In relation to the sensitivity of the market value of equity (MVE), the general positioning of the balance sheets was such that the average term of the assets exceeded that of the liabilities (negative sensitivity to interest rate rises).

2 Includes the total balance sheet, except for financial assets and liabilities held for trading.

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In any case, the level of exposure in all countries is very low in relation to the annual budget and the amount of capital.

5.2.2.2 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 more quickly than it is being discounted in the market.

At 2012 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 US dollar, the Mexican peso, the Chilean peso and the Polish zloty. 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.

5.2.2.3 Structural equity risk

The Group has equity positions in its balance sheet (banking book) in addition to the trading positions. These positions are classified as available-for-sale financial assets (equity instruments) or as investments, depending on the length of time they are expected to remain in the portfolio.

These positions are exposed to market risk. VaR is calculated for these positions using series of market prices for listed shares and proxies for unlisted securities.

5.3. Methodologies

5.3.1 Trading

The standard methodology applied to trading activities by the Group in 2012 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 2 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.

The historical simulation VaR has many advantages as a risk metric (it summarizes in one single number a portfolio’s market risk, it is based on market changes that have actually occurred without having to make assumptions regarding functions or correlation between market factors, etc.), but it also has limitations. The most significant limitations are the high sensitivity of the historical window used, the inability to capture plausible events with a major impact if they do not occur in the historical window used, the existence of measurement parameters in which there is no market input available (such as correlations, dividends and recovery rates) and the slow adaptation to new volatilities and correlations if the most recent data are given the same weight as the oldest data.

Most of these limitations are corrected by using stressed VaR, by calculating a VaR with exponential decline and by applying conservative valuation adjustments.

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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.

On a regular basis (at least once a month) the Group calculates and analyses the potential impact on results of applying different stress scenarios to all the trading portfolios, considering the same situations by risk factor. A minimum of three types of scenarios (possible, severe and extreme) are defined 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.

Particularly worthy of note are the derivatives and credit management activities which are controlled daily using specific measures due to their atypical nature. 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 metric, the incremental risk charge (IRC), is calculated to cover the default risk and rating migration 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 IRC 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.

5.3.2 Structural market risks

5.3.2.1 Structural 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 Group. These measures can range from the taking of positions on markets to the definition of the interest rate features of commercial products.

The metrics 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 and value at risk (VaR) in order to calculate economic capital.

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 maturities to be detected. Additionally, it is a useful tool for estimating the possible impact of potential changes in interest rates on the entity’s net interest margin and market value of equity.

The flows of all the on- and off-balance-sheet aggregates must be broken down and placed at the point of repricing or maturity. The duration and sensitivity of aggregates that do not have a contractual maturity date are analyzed and estimated using an internal model.

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Net interest margin (NIM) sensitivity

The sensitivity of the net interest margin measures the change in the expected Interest income/(charges) 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.

5.3.2.2 Structural foreign currency risk / hedges of results

These activities are monitored by measuring positions, VaR and results on a daily basis.

5.3.2.3 Structural equity risk

These activities are monitored by measuring positions, VaR and results on a monthly basis.

5.4. Management framework

Organizational and governance structure

The market and structural risk area forms part of one of the two Group risk units. The tasks of the market risk function are as follows:

• Definition and supervision of the market risk management model, which includes corporate policies, definition of the risk map and segmentation criteria.

• Control, consolidation, reporting and centralized approval of market risks.

These tasks are based on five basic pillars that are crucial for a correct market risk management:

• Measurement, analysis and control of market and liquidity risk.

• Calculation, analysis, explanation and reconciliation of results.

• Definition, capture, validation and distribution of market data.

• Approval of limits, products and underlyings.

• Consolidation of data.

Market risk management is in turn guided by the following basic principles:

• Involvement of senior management

• Independence of the risk function from the business.

• Clear definition of powers.

• Risk measurement.

• Risk limitation.

• Analysis and control of risk positions.

• Establishment of risk policies and procedures.

• Assessment of risk methodologies validated or developed by the methodology area.

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5.5. Internal model

At 2012 year-end, the Group had 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, Mexico and Portugal units. The Group intends to gradually extend this approval to its other units.

The consolidated regulatory capital for the Group per the internal market risk model is obtained by adding the regulatory capital of each of the units for which the related approval has been obtained from the Bank of Spain. This criterion for consolidating the Group’s capital is conservative, since it does not take into account the savings in capital arising from the diversification effect among the various geographical areas.

Following this approval, the regulatory capital of the trading activities for the above-mentioned scope is calculated using advanced approaches, applying as fundamental metrics VaR, Stressed VaR and the incremental risk capital charge (IRC) for default risk and rating migration risk, in keeping with the new capital requirements in the Basel accords.

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 new requirements, in line with the documents issued by the Basel Committee to strengthen the capital of financial institutions.

6. LIQUIDITY AND FUNDING RISK

6.1 Liquidity management framework - Monitoring and control of liquidity risk

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.

Liquidity management at the Group is based on the following principles:

• Decentralized liquidity model.

• Medium and long-term liquidity needs arising from the business must be funded using medium and long-term instruments.

• High proportion of customer deposits, as a result of a commercial balance sheet.

• Diversification of wholesale funding sources by: instrument/investor; market/currency; and maturity.

• Restrictions on recourse to short-term financing.

• Availability of a sufficient liquidity reserve, including a capacity for discounting at central banks, to be drawn upon in adverse situations.

In order to ensure the effective application of these principles by all the Group entities, it was necessary to develop a single management framework resting on the following three cornerstones:

• A sound organizational and governance model to ensure that senior management of the subsidiaries is involved in the decision-making process and is included in the Group’s global strategy.

• An in-depth balance-sheet analysis and liquidity risk measurement to support the decision-making process and the control thereof.

• A management approach adapted in practice to the liquidity needs of each business.

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6.1.1. Organizational and governance model

Decisions relating to all structural risks, including liquidity risk, are made though local asset-liability committees (ALCOs) in coordination with the markets committee.

The markets committee is the highest-ranking body at Group level responsible for coordinating and supervising all global decisions affecting liquidity risk measurement, management and control. It is chaired by the Group’s chairman and its members are the second deputy chairman and managing director, the third deputy chairman (who, in turn, is the chairman of the risk committee), the finance and risk executive vice presidents, and the heads of the business and analysis units.

Following the aforementioned principles, the local ALCO committees establish strategies to guarantee and/or anticipate the funding requirements of their business. They are assisted in the performance of their duties by the financial management area and the market risk area, which submit analyses and management proposals and monitor compliance with the limits set.

The Group has established 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).

6.1.2. 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 liquidity requirements with stable funding sources, optimizing the impact of funding costs on the income statement.

This requires the monitoring of the balance sheet structure, the preparation of short- and medium-term liquidity projections and the establishment of basic metrics.

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.

The results of these balance-sheet, projection and scenario analyses provide the inputs required to prepare the Group’s various contingency plans, which, if necessary, would enable it to anticipate a broad spectrum of potential adverse situations.

All 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 is currently in the observation phase.

Methodology for liquidity risk monitoring and control

The liquidity risk measures adopted by the Group pursue the following goals:

• To attain the highest degree of effectiveness in liquidity risk measurement and control.

• To provide support for financial management, to which end the measures are adapted to the manner in which the Group’s liquidity is managed.

• To be aligned with Basel III, in order to avoid any “conflicts” between varying limits and to facilitate limit management.

• To constitute an early warning system that anticipates potential risk situations by monitoring certain indicators.

• To achieve involvement at country level. Although the metrics are developed on the basis of common, uniform concepts affecting liquidity, they have to be analyzed and adapted by each unit.

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Two kinds of basic metrics are used to control liquidity risk: dynamic and static. Dynamic metrics include basically the liquidity gap, while static metrics feature the net structural balance-sheet position. The Group supplements these metrics by developing various stress scenarios. Following is a detailed description of these three metrics:

a) Liquidity gap

The liquidity gap provides information on cash inflows and outflows -both contractual and those estimated using assumptions- for a given period. Liquidity gap analyses are prepared for each of the main currencies in which the Group operates.

The gap supplies data on the projected sources and applications of funds of all on- and off-balance sheet items in specific time periods. This analysis tool is obtained by considering the net result of the maturity and cash flow structure for each of the time buckets established. The tool is constructed by including the available liquidity and contrasting it with the liquidity requirements resulting from maturities.

In practice, since the same item will behave differently at the various Group subsidiaries, a set of common standards and methodologies are in place to make it possible to construct the liquidity risk profiles of each unit in a uniform manner and to submit these profiles in a comparable form to the Bank’s senior management.

Consequently, in the case of Group, a consolidated view of the liquidity gaps is of very limited use for the management and understanding of liquidity risk. Its usefulness is further diminished if the gaps are obtained by using contractual maturities.

The various analyses conducted using the liquidity gap as a basis include most notably the wholesale funding analysis. Based on this analysis, a metric has been defined the aim of which is to ensure that the Group has sufficient liquid assets to attain a minimum liquidity horizon in a scenario in which wholesale financing is not renewed on maturity.

The minimum liquidity horizons are established at corporate level and on a uniform basis for all units/countries, which must calculate their wholesale liquidity metric for the main currencies in which they operate.

Bearing in mind the pressures experienced by the markets in 2012, the wholesale liquidity gap was monitored particularly closely at the Parent and at the units in the euro zone.

At the end of 2012, all units were comfortably positioned with respect to the horizons set at corporate level for the aforementioned scenario.

b) Net structural position

The purpose of this metric is to determine the reasonableness of the balance-sheet funding structure. The Group’s aim is to ensure that its structural needs (lending, non-current assets, etc.) are satisfied by means of an appropriate combination of wholesale funding sources and a stable retail customer base.

Each unit prepares its liquidity balance sheet based on the nature of its business and compares its liquidity needs with the various funding sources available to it. The essential factors taken into account in determining this metric are the degree of recurrence of the business to be financed, the stability of the funding sources and the readiness with which assets can be converted into cash.

In practice, each subsidiary prepares its own liquidity balance sheet (different from the balance sheet for accounting purposes) by classifying the various asset, liability and off-balance-sheet items on the basis of their nature in terms of liquidity. Thus, the funding structure of each subsidiary is determined, which must at all times conform to a fundamental premise: namely that the basic businesses must be financed with stable funds and medium and long-term financing. The combination of these measures guarantees the robustness of the Group’s financial structure and the sustainability of its business plans.

At the end of 2012, the Group had a structural liquidity surplus of EUR 157,000 million following the improved situation reported by the main units.

c) Scenario analysis

In order to supplement the aforementioned metrics, the Group develops a series of stress scenarios. Its main objective is to identify the critical factors in each potential crisis and, at the same time, to define the most appropriate management measures to address each of the situations assessed.

In their liquidity analyses the units generally consider three different scenarios: systemic, idiosyncratic and hybrid. These scenarios constitute the minimum standard analysis established for all Group units to be reported to senior management. Also, each unit develops ad-hoc scenarios which replicate major historical crises or the liquidity risks specific to its particular environment.

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At the end of 2012, in the event of a potential systemic crisis affecting the wholesale funding of the units located in Spain, the Group would have an adequate liquidity position.

In addition to these three metrics, the Group has defined a series of internal and market variables to act as early warning signals for potential crises; these signals are also capable of indicating the nature and severity of such crises. The incorporation of these variables in day-to-day liquidity management enables the Group to anticipate any situations that might have an adverse effect on its liquidity risk. Although these alerts vary from country to country and from entity to entity, based on the specific conditioning factors in each case, certain parameters are used across the Group, such as the price of Banco Santander CDSs, the changes in deposits and the trend in central bank interest rates.

6.1.3 Management tailored to business needs

In practice, in keeping with the funding principles mentioned above, the Group’s liquidity management 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 funds in the short-term markets, the financial management area establishes an issue and securitization plan for the year at subsidiary/global business level.

• Year-round monitoring of the actual changes in the balance sheet and in the funding requirements of the subsidiaries/businesses, which results in the relevant updates of the plan.

• Continuous active presence in a wide range of wholesale funding markets, enabling the Group to maintain an adequate issue structure that is diversified in terms of product type and has a conservative average maturity.

The effectiveness of this management effort is based on the fact that it is implemented at all subsidiaries. Specifically, each subsidiary budgets the liquidity requirements resulting from its intermediation activity and assesses its own ability to raise funds in the wholesale markets so that, in ongoing coordination with the Group, it can establish an issue and securitization plan.

The Group’s main subsidiaries are currently self-sufficient in terms of their structural funding. The exception is Santander Consumer Finance, which requires the support of other Group units, especially the Parent, since it specializes in consumer financing mainly through dealer/retailer recommendations. Funding of subsidiaries is conducted at all times at market rates, taking into consideration the term of the financing and the internal rating of the borrowing unit.

In any case, over the last three years the amount of the support provided to Santander Consumer Finance by the Parent has fallen to less than a third (down to EUR 4,500 million from EUR 15,000 million in 2009). The measures currently being taken to enable Santander Consumer Finance to achieve self-financing levels similar to those of the other subsidiaries, via both retail customer funds and wholesale financing, are successfully reaching the milestones set and will be completed in the short term.

6.2 Funding strategy and evolution of liquidity in 2012

6.2.1 Funding strategy

In the last few years the Group’s funding activity has achieved its goal of obtaining sufficient funds for the Group’s recurring business, in a highly demanding environment marked by a heightened perception of risk, scant liquidity at certain time horizons and the increased cost of funding.

This sound performance was underpinned by the extension of the management model to all Group subsidiaries, including recent acquisitions, and, above all, by the adaptation of subsidiaries’ strategies to the growing market demands. These demands were not uniform across the markets and reached far higher levels of difficulty and pressure in certain areas, such as the peripheral regions of Europe.

In any case, it is possible to identify a series of general trends in the policies implemented by Group’s subsidiaries in their funding and liquidity management strategies over the last three years, namely:

• Reduced growth in lending due to the environment, reflected more intensely in the economies currently undergoing adjustment, such as Spain and Portugal.

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• Priority focus on attracting customer funds. Group deposits excluding repos (but including retail promissory notes) rose by almost EUR 122,000 million. Deposits increased across all geographical areas, above all at the units with the highest growth in lending.

• Maintenance of adequate, stable medium and long-term wholesale funding levels at Group level. The Group’s model of decentralized subsidiaries has helped it to continue to be very active in the wholesale markets in a highly demanding period.

• Holding a sufficient volume of assets eligible for discount at central banks as part of the liquidity reserve to cater for episodes of stress on wholesale markets.

In particular, in 2012 the Group raised its total discount capacity to approximately EUR 130,000 million (up from around EUR 100,000 million in 2010 and 2011). In order to achieve this, it was necessary for the subsidiaries to implement an ongoing strategy for the generation of discountable assets with which to offset the reduced value of collateral resulting from the lowering of ratings in the period, above all those of sovereign debt and related assets.

This total discount capacity was generated largely by the units located in the euro zone. These units took advantage of the quality of their assets and the extraordinary monetary policy measures introduced by the European Central Bank (ECB) in late 2011 and early 2012 (basically, extension of collateral eligibility and three-year liquidity auctions) to substantially increase their liquidity buffers

Consequently, at the end of 2012 the Group’s total volume of discountable assets amply exceeded the commercial gap (i.e. the difference between net loans and deposits) at Group level. Specifically, it represented more than 160% of the gap, following the increase in the volume thereof discussed above, which was more intense in the last year.

In 2012, in view of the situation of the euro markets, the Group pursued a prudent strategy of depositing most of the funds raised by it as an immediate liquidity reserve at the European System of central banks and, as a result, its net global position was virtually zero.

In January 2013, the improvement in the liquidity position of the Group and that of its Spanish units, together with the loosening-up of the wholesale funding markets, will enable the Group to repay, in January 2013, all of the funds received by Banco Santander and Banesto in the first LTRO (Long Term Refinancing Operations) auction performed by the ECB in December 2011. Specifically, Santander will repay the EUR 24,000 million deposited at the European System of central banks, which is the maximum amount allowed in the first repayment window offered by the European monetary authority.

Thanks to all these developments, conducted on the basis of a liquidity management model, the Group currently enjoys a funding structure that sets it apart from most of its peers worldwide. The basic features of this distinguishing structure are as follows:

• High proportion of customer deposits in a predominantly commercial balance sheet.

Customer deposits are the Group’s major source of funding. If retail promissory notes are included (given that in Spain they are a substitute for term deposits), these deposits represent around two thirds of the Group’s net liabilities (i.e. of the liquidity balance sheet) and at the end of 2012 they accounted for 89% of net loans.

Furthermore, these customer deposits are regarded as highly stable funds given their predominantly retail origin (more than 85% of deposits relate to commercial banking).

• Diversified wholesale funding, primarily at medium and long term, with a very small proportion maturing in the short term.

Medium and long-term wholesale funding represents just under a quarter of the Group’s total funding and enables it to comfortably cater for the loans not financed with customer deposits (commercial gap).

The bulk of the medium and long-term wholesale funding consists of debt issues. At the end of 2012 the outstanding nominal balance in the market was EUR 153,000 million, with an adequate maturity profile (average 3.8 years) with no risk concentrations.

In addition to the debt issues, the medium and long-term wholesale funding also comprises the facilities of the Federal home loan banks in the United States (EUR 10,000 million drawn at the end of the reporting period) and the funds obtained from securitization activities. These last-mentioned funds include market-issued asset-backed bonds, structured and other special financing arrangements totaling EUR 50,000 million with an average maturity of around 2.5 years that compares favorably with market standards.

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Wholesale funding in the form of short-term issue programmes constitutes a residual portion of the structure, accounting for less than 2% of total funding (excluding the retail promissory notes referred to above), and is more than fully covered by liquid financial assets.

At December 2012 the outstanding balance of the short-term funding was less than EUR 17,000 million, raised basically by the United Kingdom unit and the Parent through the existing issue programmes.

6.2.2 Evolution of liquidity in 2012

6.2.2.1 Improvements in the basic liquidity ratios

At the end of 2012, in comparison with 2011, the Group reported:

• A reduction in the ratio of loans to net assets (total assets less trading derivatives and interbank balances) to 74% due to the decrease in lending in the climate of deleveraging referred to earlier. Nevertheless, this figure still mirrors the commercial nature of the Group’s balance sheet.

• An improvement in the loan-to-deposit (LTD) ratio, which stood at 113% (including retail promissory notes), down from 117% in 2011. This dip continues the sliding trend that began in 2008 (150%) as a result of the Group-wide effort to attract retail deposits.

• An improvement also in the ratio of customer deposits plus medium and long-term funding to loans, owing to the combination of improved liquidity resulting from commercial management efforts and the Group’s unchanged issue capacity. This ratio stood at 118% (2011: 113%), by far surpassing the 104% reported in 2008.

• At the same time, there was a continuing limited recourse to short-term wholesale funds, at 2% around the same level as in 2011.

• Lastly, in 2012 the Group’s structural surplus (i.e. the excess of structural funding resources -deposits, medium and long-term funding, and capital- over structural liquidity requirements -non-current assets and loans-) increased significantly to EUR 157 billion, due basically to the narrowing of the commercial gap. This surplus is based mainly on fixed income securities (EUR 114 billion), equities (EUR 5 billion) and net deposits at central banks (EUR 56 billion) .

The Group captured EUR 43,000 million in medium and long term issues of fixed income and securitizations in 2012. The chart below sets out their distribution by instruments and geographic areas.

Issues were made in 10 currencies, involving 13 issuers in 10 countries, with an average maturity of around 4.3 years.

Medium and long term issues (senior debt and covered bonds) raised EUR 31,000 million. Two points are worth mentioning:

• The parent bank’s issuance capacity (almost EUR 16,000 million with Banesto) in a scenario as adverse as that in 2012, which underscored Santander’s financial strength for international investors.

• The jump made by Latin American units both in quantitative (more than EUR 8,000 million issued) and qualitative terms: the four main countries (Brazil, Mexico, Chile and Argentina) made issues. Furthermore, Mexico and Chile made benchmark issues in the region (10-year senior debt in dollars with a high quality international demand).

In securitizations, the Group’s subsidiaries placed in the market close to EUR 12,000 million of securitization bonds and medium and long term structured funding collateralized by securitization bonds or covered bonds.

Along with the UK market which took 84% of the Group’s placements, also noteworthy was the securitization activity of Santander Consumer Finance backed by investors’ appetite for its assets. This demand enabled two new units of Santander Consumer to access new wholesale markets (Finland and Sweden). In both cases, the Group made the first securitization of loans for auto finance.

This improvement of the liquidity position at Group level is the result of the trends reported at the various subsidiaries.

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6.2.2.2 Increase in the liquidity reserve

The liquidity reserve is the stock of highly-liquid assets held by the Group and its subsidiaries in order to serve as a source of funds of last resort in situations of extreme market stress when it is not possible to obtain financing with adequate maturities at acceptable prices.

Consequently, this reserve includes cash and balances with central banks, as well as central-bank eligible assets and government debt securities. The existence of this reserve further bolsters the robust liquidity position enjoyed by the Group and its subsidiaries.

At the end of 2012, the Group’s liquidity reserve amounted to EUR 217 billion, equal to 22% of the Group’s funding. The structure of this volume by type of asset, according to the effective value (net of haircuts), was as follows:

LIQUIDITY RESERVE AT 31/12/2012 Effective value (net of haircuts) in million euros
Cash and holdings at central banks	83,909
Uncumbered sovereign debt	41,930
Undrawn credit lines granted by central banks	79,116
Assets eligible as collateral and undrawn credit lines	12,120
Liquidity reserve	217,075

  Note: the reserve excludes other assets of high liquidity such as listed fixed income and equity portfolios.

As of December 31, 2012, the liquidity reserve was located: EUR 107 billion in the UK, EUR 90 billion in the rest of the units in the convertible currencies area, and the remaining EUR 20 billion mainly in Latin America and Poland.

In 2012, the Group was particularly active in generating eligible assets linked in general to development of business with customers. This enabled both the maturities of existing assets as well as cuts in credit ratings and in the value of guarantees to be offset when obtaining liquidity from central banks.

At the same time, the extraordinary liquidity measures put into effect by central banks have increased the discounting capacity of the banking sector as a whole. In the case of Grupo Santander, and backed by the quality of its assets, this capacity rose from around €100,000 million in 2010 and 2011 to around €133,000 million at the end of 2012.

7. OPERATIONAL RISK

7.1 Definition and objectives

The 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 generally 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 aim pursued by the Group in operational risk control and management is primarily to identify, measure/assess, control/mitigate and report on 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, the 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 the Group.

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7.2 Corporate governance and organizational model

The organizational model for risk management and control follows the Basel guidelines and establishes three levels or layers of control:

• First level: management and control functions performed by the Group’s units. Attempts to ensure that the business and the entity as a whole do not incur this type of risk.

• Second level: control functions performed by the corporate areas. Establishes regulations and controls compliance by the first layer of control.

• Third level: integrated supervision functions performed by the risk division, from the integrated risk control and internal risk validation area (CIVIR).

This model is reviewed on a recurring basis by the internal audit division.

Within the technology and operations division, the corporate technology and operational risk area (ACRTO) is responsible for the definition of policies and methodology and for the management and control of technology and operational risks.

The Group considers it is advisable for the first and second layer control functions to be performed within the aforementioned technology and operations division, which manages operational risk more directly and which has resources and personnel better suited to the identification, measurement, valuation and mitigation of operational risk. All of the above forms part of the recurring supervision of the Group’s control bodies, in line with its strong risk management culture.

The implementation, integration and local adaptation of the policies and guidelines established by the corporate area are the responsibility of the local areas, through the operational risk officers identified in each unit.

This operational risk management structure is based on the knowledge and experience of the executives and professionals of the various Group units, with particular importance being attached to the role of the local operational risk officers.

The technology and operational risk management model includes the following phases:

• Identification of the operational risk inherent in all the Group’s activities, products, processes and systems.

• Objective and continued measurement and assessment of operational risk, consistent with the industry and regulatory standards (Basel, Bank of Spain, etc.), and setting of risk tolerance limits.

• Continuous monitoring of operational risk exposures, implementation of control procedures, improvement of internal awareness and mitigation of losses.

• Establishment of mitigation measures to eliminate or minimize operational risk.

• Generation of periodic reports on the exposure to operational risk and its 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 control model implemented by the Group provides the following benefits:

• Integrated and effective management of operational risk (identification, measurement/ assessment, control/mitigation and reporting).

• 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.

• Setting of limits for operational risk appetite.

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Model implementation: global initiatives and results

The main functions, activities and global initiatives adopted, which seek to ensure the effective management of operational and technology risk, can be 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 at the local units.

• 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.

• Definition of policies and structures to minimize the impacts on the Group in the event of major disasters.

• Adequate control of the activities carried out by third parties, enabling the Group to respond to potential critical situations.

• 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 technology risk (risk associated with the use of technology -development and maintenance of applications, design, implementation and maintenance of technology platforms, production of computer processes, etc.).

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.

In general, all the Group’s units continue to improve all matters relating to operational risk management, as disclosed in the annual review performed by internal audit.

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7.3 Risk measurement and assessment model

In order to measure and assess technology and operational risk, the Group defined a set of quantitative and qualitative corporate techniques/tools that are combined to perform a diagnosis (based on the identified risks) and obtain a valuation (through the measurement/assessment) of the area/unit.

7.4 Other matters relating to operational risk control and monitoring

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 the Group.

In addition to monitoring all operational control-related matters, in all its units the Group placed greater emphasis on the following aspects:

• 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 the Group, obtained from the combined study of the results of qualitative and quantitative analyses of operational risk.

Information is also prepared on the following aspects:

• The 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.

• Business continuity plans and contingency plans.

• Regulatory framework: BIS II.

• Insurance

This information acts as the basis for meeting reporting requirements to the risk committee, senior management, regulators, rating agencies, etc.

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The role of insurance in operational risk management

The Group considers insurance as a key factor in operational risk management. Since 2004 the operational risk area has worked closely with the Group’s insurance management area in all activities leading to improvements in the two areas. Some notable examples are as follows:

• Cooperation in the presentation of the 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 databases and the cover provided by the insurance policies of 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.

8. COMPLIANCE AND REPUTATIONAL RISK

8.1 Definitions and objective

Compliance risk is the risk of receiving penalties (financial or otherwise) or being subject to other types of disciplinary measures by the supervisors as a result of failing to comply with laws, regulations, standards, the organization’s self-regulatory standards or codes of conduct applicable to the activity carried on.

Reputational risk is the risk associated with the perception of the Group held by the various internal and external stakeholders with which it is related as part 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.

The Group’s objective regarding compliance and reputational risk management is: (i) to minimize the probability of irregularities arising; and (ii) to identify, report and swiftly resolve any irregularities that might possibly arise. As for reputational risk, bearing in mind the diversity of sources from which it can arise, management of this risk aims to identify such sources and ensure that they are duly attended to so that the probability of their occurring is reduced and the possible impact thereof is mitigated.

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8.2 Corporate governance and organizational model

It is the responsibility of the Bank’s board or directors, as part of its supervisory function, to approve the Group’s general risk policy. In the corporate compliance and reputational risk area, the board is in charge of the Group’s general code of conduct, the global policy on the prevention of money-laundering and terrorist financing and the product and service marketing policy.

The risk committee proposes the Group’s risk policy to the board. Also, as the body responsible for global risk management, it measures reputational risk in its area of activity and decision-making.

The audit and compliance committee is entrusted, inter alia, with the functions of supervising compliance with legal requirements, watching over the effectiveness of internal control and risk management systems, supervising compliance with the Group’s code of conduct in the securities markets, with the manuals and procedures for the prevention of money-laundering and, in general, with the bank’s rules of governance and compliance, and making any necessary proposals for improvement, as well as reviewing compliance of the actions and measures resulting from reports or actions of the administrative supervisory and control authorities.

The compliance function reports to the board on an ongoing basis, mainly through the audit and compliance committee, to which the Group’s head of compliance reported at the eleven meetings held by this committee in 2012. The Group’s head of compliance also reported to one meeting of the risk committee, without prejudice to attending other sessions of this committee when transactions with a possible impact from the reputational risk standpoint are submitted to it.

The last layer of governance comprises the corporate committees for regulatory compliance, analysis and resolution and marketing (the last two specialize in their respective subjects: the prevention of money-laundering and the marketing of products and services), which have a global scope (all geographical areas, all businesses) and are replicated at local level.

As part of the risk division, in the exercise of its functions to support the risk committee, the integrated risk control and internal risk validation area (CIVIR) supervises the control framework applicable to compliance and reputational risk and, in turn, facilitates information in this connection to the Group’s control bodies.

The organizational model revolves around the corporate compliance and reputational risk area, forming part of the general secretary’s division, which is entrusted with managing the Group’s compliance and reputational risks. Within this area, which is led by the Group’s head of compliance, are the corporate regulatory compliance risk management office, the corporate reputational risk management office and the central department for the prevention of money-laundering and terrorist financing. This structure is replicated at local level and also in the global businesses, since the appropriate functional reporting channels to the corporate area have been established.

8.3 Risk management model

The main responsibility for compliance and reputational risk management is shared by the compliance department and the various business and support units that conduct the activities giving rise to risk. The responsibility for developing policies and implementing the corresponding controls lies with the compliance department, which is also responsible for advising senior management on these matters and fostering a culture of compliance, all as part of an annual programme whose effectiveness is periodically evaluated.

The compliance department directly manages the basic components of these risks (money-laundering, codes of conduct, product marketing, etc.) and ensures that the other components are duly addressed by the corresponding Group unit (responsible financing, data protection, customer claims, etc.), for which purpose it has established the appropriate control and verification systems.

The integrated risk control and internal risk validation area ensures that the risk management model is properly executed. Also, as part of its functions, internal audit performs the tests and reviews required to check that the standards and procedures established at the Group are being complied with.

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Policies

The general code of conduct is the central plank of the Group’s compliance programme. The general code of conduct contains the ethical principles and standards of conduct that must guide the actions of all the Group employees and is complemented in certain matters by the standards contained in the industry-specific codes and manuals³.

Also, the code establishes: i) the functions and responsibilities regarding compliance by the Group’s relevant governing bodies and divisions; ii) the standards regulating the consequences of the failure to comply; and iii) a channel through which notifications of allegedly illicit actions are formulated and processed.

Governance and organization

It is the role of the corporate compliance office, under the supervision of the audit and compliance committee and the regulatory compliance committee, to ensure the effective implementation and monitoring of the general code of conduct.

The regulatory compliance committee, which is chaired by the Group’s general secretary, has authority on all matters relating to the compliance function, without prejudice to the matters assigned to the two specialist bodies in this area (the corporate marketing committee with regard to the marketing of products and services, and the analysis and resolution committee with regard to the prevention of money-laundering and terrorist financing). The regulatory compliance committee is composed of representatives from internal audit, the general secretary’s division, financial management, human resources and the most directly affected business units.

The Group’s compliance department has been entrusted with the following compliance and reputational risk management functions:

1. Implement the Group’s general code of conduct and other codes and industry-specific manuals.

2. Supervise the training activities on the compliance programme conducted by the human resources area.

3. Direct investigations into any possible breaches, with help from internal audit, and propose the appropriate penalties to the related committee.

4. Cooperate with internal audit in the periodic reviews carried out by internal audit on compliance with the general code and with the industry-specific codes and manuals, without prejudice to the periodic reviews of matters of regulatory compliance which are conducted by the compliance department directly.

5. Receive and handle the complaints made by employees or third parties through the complaints channel.

6. Advise on the resolution of doubts arising from the application of the codes and manuals.

7. Prepare an annual report on the application of the compliance programme for submission to the audit and compliance committee.

8. Regularly report to the general secretary, the audit and compliance committee and the board of directors on the implementation of the compliance policy and the compliance programme.

9. Assess, every year, the changes that it might be appropriate to make to the compliance programme, particularly in the event of detecting unregulated risk areas and improvable procedures, and propose such changes to the audit and compliance committee.

3 The industry-specific codes and manuals include the prevention of money-laundering and terrorist financing manual, the code of conduct in securities markets, the procedures manual for the sale of financial products, the analysis code of conduct, the research policy manual, the foreclosed asset management manual of conduct, the purchase management manual of conduct, etc., in addition to the notes and circulars implementing specific points of these codes and manuals.

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The Group’s compliance department has also been entrusted with the management of the criminal risk prevention model, which resulted from the entry into force of Organic Law 5/2010, which made legal entities criminally responsible for crimes committed on their account or for their benefit by directors or representatives or employees as a result of a lack of control. 2012 saw the completion of the implementation at the Group in Spain of this model, which includes the design and implementation of a risk map with the related controls; the preparation of a prevention manual and protocols that would be applicable if criminal proceedings were initiated; and various employee training and awareness-raising measures on criminal risk.

As regards the industry-specific codes and manuals, the focus of the compliance programme is on the following operational spheres, inter alia:

• Prevention of money-laundering and the financing of terrorism.

• Marketing of products and services.

• Conduct in securities markets.

• Relations with regulators and supervisors.

• Preparation and dissemination of the Group’s institutional information.

Prevention of money-laundering and terrorist financing

Policies

As a socially responsible organization, it is a strategic objective for the Group to have an advanced effective system for the prevention of money-laundering and the financing of terrorism that is constantly adapted to the latest international regulations and has the capacity to respond to the appearance of new techniques employed by criminal organizations.

The prevention of money-laundering and terrorist financing function is articulated in certain policies that establish minimum standards that the Group’s units must observe, and which are prepared in conformity with the principles contained in the 40 recommendations of the Financial Action Task Force (FATF) and the obligations and stipulations of Directive 2005/60/EC of the European Parliament and of the Council of October 26, 2005 on the prevention of the use of the financial system for the purpose of money-laundering and terrorist financing.

The corporate policy and the standards implementing it must obligatorily be complied with at all Group units worldwide. In this regard, units should be taken to be all Banco Santander’s banks, subsidiaries, departments or branches, both in Spain and abroad, which, in accordance with their legal status, must be subject to the regulations on the prevention of money-laundering and terrorist financing.

Governance and organization

The organization of the prevention of money-laundering and terrorist financing function is based on three figures: the analysis and resolution committee (CAR), the central money-laundering prevention department (DCPBC) and the persons responsible for prevention at various levels.

The CAR is a collective body with a corporate scope which is chaired by the Group’s general secretary and is composed of representatives of internal audit, the general secretary’s division, human resources and the most directly affected business units.

The DCPBC’s function is to establish, coordinate and supervise the systems and procedures for the prevention of money-laundering and terrorist financing at all Group units.

Also, there are persons responsible for the prevention of money-laundering and terrorist financing at four different levels: area, unit, branch and account. In each case their role is to provide support to the DCPBC based on their proximity to the customer and transactions.

The Group has established corporate systems at all its units and business areas based on decentralized computer software which makes it possible to present directly to the account branches or the relationship managers the transactions and customers which need to be analyzed because of their risk. The aforementioned tools are supplemented by other tools used centrally by the teams of analysts in the prevention units and, based on certain risk profiles and changes in certain customer operational behavior patterns, they enable transactions that might be linked to money-laundering or terrorist financing to be analyzed, identified on a preventative basis and monitored.

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Banco Santander is a founder member, along with ten other large international banks, of the Wolfsberg Group. The Wolfsberg Group’s objective is to establish international standards to increase the effectiveness of programmes to combat money-laundering and terrorist financing in the financial community. Various initiatives have been developed which have addressed, inter alia, issues such as the prevention of money-laundering in private banking and correspondent banking, and the financing of terrorism as regulatory authorities and experts in this area consider that the Wolfsberg Group and the principles and guidelines set by it represent an important step in the fight against money-laundering, corruption, terrorism and other serious crimes.

Product and service marketing

Policies

The Group manages the risk that may arise from an inadequate sale of products or an improper provision of services by the Group in accordance with the corporate policies regarding the marketing of products and services.

These corporate policies aim to establish a single corporate framework for all regions, businesses and entities that: (i) reinforces the organizational structures; (ii) ensures that decision-making committees oversee not only the approval of products and services, but also the monitoring thereof over their whole lives; and (iii) establishes the guidelines for defining uniform Group-wide criteria and procedures for the marketing of products and services, which encompass all its phases (approval, pre-sale, sale and follow-up or post-sale).

These policies are developed and specifically adapted to the actual local situation and to local regulatory requirements through the local internal rules of the various Group units, once authorization has been obtained from the corporate compliance and reputational risk area.

Governance and organization

The management of the risk that might arise from the incorrect selling of products or services is organized by corporate and local marketing committees, the global consultative committee, the corporate monitoring committee, and corporate and local reputational risk management offices.

The corporate marketing committee (CCC) is the Group’s highest decision-making body regarding the approval of products and services. Chaired by the Group’s general secretary, it 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, private banking, asset management and insurance.

The CCC pays particular attention to the suitability of the product or service for the environment in which it is to be marketed, placing particular emphasis on ensuring that:

• Each product or service is sold by competent sales personnel.

• Customers are furnished with the required appropriate information.

• The product or service fits the customer’s risk profile.

• Each product or service is assigned to the appropriate market, not only from a legal or tax standpoint, but also with regard to the financial culture of that market.

• The product or service meets the requirements of the corporate marketing policies and, in general, the applicable internal or external regulations.

Also, local marketing committees (CLCs) are created at local level to channel proposals for the approval of new products to the CCC -after issuing a favorable opinion, since initially they do not have any delegated powers- 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.

The global consultative committee (CGC) is the advisory body of the corporate marketing committee and consists of area representatives who provide an insight into risks, regulations and markets. The CGC, which meets on an estimated quarterly basis, may recommend the review of products affected by market changes, impaired solvency (country, sectors or companies) or changes in the Group’s market perception at medium and long term.

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The corporate monitoring committee (CCS) is the Group’s decision-making body regarding the monitoring of products and services. This committee is chaired by the general secretary and is attended by internal audit, legal advisory, compliance, customer care and the business areas concerned (with the ongoing representation of the commercial network).

The purpose of the corporate reputational risk management office (OCGRR) is to provide the relevant governing bodies with the information required to enable 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.

At local level reputational risk management offices have been established, which are responsible for promoting corporate culture and for ensuring that products are approved and monitored in the respective local spheres in keeping with corporate guidelines.

Conduct in securities markets

Policy

This is set by the code of conduct in the securities markets, complemented, inter alia, by the code of conduct for analysis activities, the research policy manual and the procedure for detecting, analyzing and communicating transactions suspected of market abuse.

Governance and organization

The organization is centered on the corporate compliance office and local and subsidiaries’ compliance divisions.

The Group’s compliance department performs the following main functions in relation to the rules of conduct in securities markets:

1. Register and control sensitive information that is known by and/or generated at the Group;

2. Keep lists of the securities affected and the initiated persons, and monitor transactions with these securities;

3. Monitor transactions with restricted securities depending on the type of activity, portfolios or groups to which the restriction applies;

4. Receive and attend to notifications of and requests for authorization of transactions for own account;

5. Control transactions for own account of the persons subject to compliance with the code of conduct;

6. Manage breaches;

7. Resolve doubts raised on the CCMV;

8. Record and resolve conflicts of interest and the situations that might give rise to them;

9. Assess and manage any conflicts that might arise in the analysis activity.

10. Maintain the files required to control compliance with the obligations established in the CCMV;

11. Develop ordinary contact with the regulators;

12. Organize training and, in general, perform the actions required to apply the CCMV; and

13. Analyze actions that might be suspected of constituting market abuse and, where appropriate, report them to the supervisors.

Relationships with supervisors and dissemination of information to the markets

The compliance department is responsible for responding to the information requirements of the regulatory and supervisory bodies, both in Spain and in other countries where the Group operates, monitoring implementation of the measures arising from the reports or inspections conducted by these bodies and supervising the way in which the Group disseminates institutional information in the markets, transparently and in accordance with the regulators’ requirements. The audit and compliance committee is informed of the main issues at each of its meetings.

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Other actions

In 2012 Santander continued to perform various other activities in the regulatory compliance field –review of the Bank’s internal regulations prior to their publication, verification to ensure that treasury share transactions are in line with internal and external regulations, maintenance of the regulatory information section of the corporate website, review of the reports on voting recommendations in the general meetings prepared by the principal consultants on this matter, regular submission of regulatory information to the supervisors, etc.– and it cooperated in new corporate projects, e.g. adapting the Group to the US FATCA and Dodd-Frank Acts.

The losses incurred by the Group due to compliance and reputational risk are included in the events database managed by the Group’s corporate technology and operational risk area (ACRTO).

9. CAPITAL

9.1 Compliance with the new regulatory framework

The new regulatory framework established by Basel III will heighten the capital requirements very significantly, from both a quantitative standpoint (gradual increase in the minimum requirements for the core capital and Tier 1 capital ratios, greater deductions from the capital base, establishment of various capital buffers) and a qualitative standpoint (higher quality of capital required). The analysis of the impact of the new future regulations did not have a material effect on the Group’s capital adequacy ratios. The date of the entry into force of the new Basel III regulations in Europe and the definition of the content thereof are subject to the conclusion of the European legislative process and the corresponding transposition into Spanish law, but they are expected to enter into force in 2014.

With regard to credit risk, the Group intends to adopt, over the next few years, the advanced internal ratings-based (AIRB) approach under Basel 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 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 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, the Group continued in 2012 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. The 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, Portugal and certain portfolios in Mexico, Brazil and Chile. 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 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 on the treasury areas’ trading activities in Spain, Chile, Portugal and Mexico, 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 an entity through the corporate guidelines and criteria established after assuming control, which are a distinctive feature of Santander Group. The Group currently uses the standardized approach for regulatory capital calculation purposes and it is considering the possibility of adopting AMA approaches in the near future, once it has collated sufficient data using its own management model.

With respect to Pillar II, the 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

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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 1 (concentration risk, interest rate risk, business risk, and risks relating to pensions, goodwill, other intangible assets, etc.).

In accordance with the capital requirements set by the European Directive and Bank of Spain rules, the Group publishes its Pillar III disclosures report on an annual basis. This report comfortably meets the market transparency requirements in relation to Pillar 3. The 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 3 disclosures report incorporates the recommendations made by the European Banking Authority (EBA) to make Santander an international benchmark in terms of market transparency, as is already the case with its annual report.

Parallel to the roll-out of advanced approaches at the various Group units, Santander is carrying out an ongoing 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 capital standards.

9.2 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 position.

The Group’s economic capital model enables it to quantify the consolidated risk profile taking into account all the significant risks of the business (not only those contemplated in Pillar 1), as well as the diversification effect inherent in a multi-national, multi-business group such as Santander. In addition, the definition of capital included in Santander’s model is different to the regulatory definition and it enables, in our opinion, the capital available for stress scenarios to be better separated from the risks to be assessed. The Group uses 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.

In the internal definition of available capital, unlike the regulatory capital base, certain on-balance-sheet assets (such as goodwill, etc.) to which the regulator does not grant any value from a prudential point of view are not deducted, since in Santander’s model risks and capital requirements are also calculated for these assets.

The concept of diversification is fundamental for the proper measurement and understanding of the risk profile of a group with global operations such as Santander. The fact that the Group conducts its business activities in various countries through a structure of differentiated legal entities, across a broad spectrum of customer and product segments, thereby also incurring various types of risks, means that the Group’s earnings are less vulnerable to any adverse situation that might arise with respect to a particular market, portfolio, customer or risk. Despite the current high level of globalization of the world’s economies, the economic cycles are not the same and do not have the same intensity in the various geographical regions. As a result, groups with global presence display more stable results and have a greater capacity to withstand possible crises affecting specific markets or portfolios, which is synonymous with a lower level of risk. In other words, the risk and the associated economic capital borne by the Group as a whole is less than the risk and the capital arising from the sum of its various components considered separately.

Lastly, 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-based or geographical concentration. Any geographical or product concentration in retail portfolios is captured through the application of an appropriate correlation model.

Economic capital is a fundamental tool for the internal management and implementation of the Group’s strategy from the viewpoint of both the assessment of capital adequacy and management of the risk of portfolios and businesses.

As regards capital adequacy, in the context of Pillar 2 of Basel, the Group uses its economic model for the internal capital adequacy assessment process, which includes all the risks relating to its activities, over and above the risks contemplated in the regulatory approach, and considers essential matters that are not captured by regulatory capital, such as portfolio concentration and diversification of risks and geographical

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areas. To this end, the Group plans the business performance and the capital requirements under a central scenario and under alternative stress scenarios. With this planning the Group ensures that it maintains its capital adequacy targets, even in adverse economic scenarios.

Also, the economic capital metrics enable the risk-return targets to be assessed, including the effects of off-setting, pricing of transactions by risk, measurement of the economic viability of projects, units or lines of business, with the ultimate objective of maximizing the generation of shareholder value.

RORAC and value creation

The Group has used RORAC methodology in its risk management since 1993, with the following objectives:

• Calculation of economic capital requirements and of the return thereon for the Group’s business units, segments, portfolios and 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 like-for-like 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 the recurring profit obtained by each unit 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 Banco Santander share in relation to the market trend.

If a transaction or portfolio yields a positive return, it will be contributing to the Group’s profit, although it will only create shareholder value when this return exceeds the cost of capital.

In 2012 value creation by the business units was disparate, falling in Europe and increasing in the United States. The Group’s results and, therefore, the RORAC and value creation figures were shaped by the weakness of the economic cycle of various Group units in Europe and, in particular, in Spain.

55. Other Disclosures

This Note includes relevant information about additional disclosure requirements.

55.1 Consolidated financial statements

Following are the consolidated balance sheets and consolidated statements of income of the Group under the IFRS reformatted to conform to the presentation guidelines for bank holding companies set forth in Regulation S-X of the Securities and Exchange Commission of the United States of America.

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts and allocations of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

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CONSOLIDATED BALANCE SHEET
	Millions of Euros
	2012			2011			2010
Assets
Cash and due from banks		111,663			87,085			70,858
Interest earning deposits in other banks		28,214			25,042			25,063
Securities purchased under agreements to resell		13,527			11,817			9,989
Trading account assets		206,273			192,201			196,242
Banks		31,644			14,146			35,054
Loans		11,569			14,995			8,525
Derivatives		110,319			102,498			73,069
Debt securities		46,561			55,353			62,477
Equity securities		6,180			5,209			17,117
Investment securities		99,325			93,453			94,664
Available-for-sale		99,325			93,453			94,664
Net Loans and leases		684,819			714,479			702,459
Loans and leases, net of unearned income		710,283			733,363			722,121
Less-Allowance for loan losses		(25,464	)		(18,884	)		(19,662	)
Premises and equipment, net		14,483			13,985			12,780
Investment in affiliated companies		4,454			4,155			273
Other assets		106,465			107,163			102,953
Intangible Assets		3,436			2,994			3,442
Goodwill in consolidation		24,626			25,089			24,622
Accrual Accounts		1,757			2,032			2,559
Hedge derivatives		7,936			9,898			8,227
Others		68,710			67,150			64,103
Total assets		1,269,223			1,249,380			1,215,281
Liabilities
Deposits		678,383			653,036			633,938
Non interest deposits		5,285			5,380			4,825
Interest bearing		673,098			647,656			629,113
Demand deposits		149,186			160,540			153,185
Savings deposits		167,389			140,583			136,694
Time deposits		356,523			346,533			339,234
Certificates of deposit		—			—			—
Short-term debt		120,481			131,930			130,730
Long-term debt		202,223			208,590			216,476
Other liabilities		183,810			172,965			153,222
Taxes Payable		8,019			8,174			8,618
Accounts Payable		4,908			6,632			8,286
Accrual Accounts		5,181			5,470			4,953
Pension Allowance		6,672			6,899			7,299
Stock borrowing liabilities		—			—			—
Derivatives		116,187			109,527			81,913
Liabilities under insurance contracts		1,425			517			10,449
Other Provisions		5,795			6,526			6,141
Short securities positions		15,181			10,187			12,303
Others		20,442			19,033			13,260
Total liabilities		1,184,897			1,166,521			1,134,366
Equity
Stockholders’ equity
Capital stock		5,161			4,455			4,164
Additional paid-in-capital		37,412			31,223			29,457
Other additional capital		(937	)		(1,821	)		(1,462	)
Current year earnings		2,205			5,351			8,181
Other reserves		30,813			37,206			34,678
Total stockholders’ equity		74,654			76,414			75,018
Non-controlling interests		9,672			6,445			5,897
Total Equity		84,326			82,859			80,915
Total liabilities and Equity		1,269,223			1,249,380			1,215,281

The Group has issued Mortgage backed securities, called Cédulas Hipotecarias (see Note 22). Additionally, as of December 31, 2012, 2011 and 2010, the investment debt securities assigned to certain Group or third-party commitments amounted to €61,335 million, €43,899 million and €27,034 million, respectively.

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CONSOLIDATED STATEMENTS OF INCOME	Millions of Euros
	2012			2011			2010
Interest income:
Interest and fees on loans and leases		47,309			48,031			42,514
Interest on deposits in other banks		2,851			3,806			2,881
Interest on securities purchased under agreements to resell		1,474			1,175			979
Interest on investment securities		7,767			8,152			6,801
Dividends		—			—			—
Total interest income		59,401			61,164			53,175
Interest expenses:
Interest on deposits		(16,572	)		(17,045	)		(13,733	)
Interest on short-term borrowings		(4,397	)		(4,531	)		(3,258	)
Interest on long-term debt		(6,731	)		(6,928	)		(5,117	)
Total interest expense		(27,700	)		(28,504	)		(22,108	)
Interest income / (Charges)		31,701			32,660			31,067
Provision for credit losses		(18,562	)		(11,164	)		(10,258	)
Interest income / (Charges) after provision for credit losses		13.139			21,496			20,809
Non interest income:
Commissions and fees from fiduciary activities		1,217			1,340			1,350
Commissions and fees from securities activities, net		702			668			784
Fees and commissions from insurance activities		7,829			8,939			9,044
Other Fees and commissions, net		5,916			5,971			5,439
Gains (losses) from:
Affiliated companies’ securities		1,200			1,851			170
Investment securities		2,483			(540	)		2,108
Foreign exchange, derivatives and other, net		339			2,169			320
Sale of premises		133			52			197
Income from non financial entities		369			401			345
Gains on sale of non-current assets / liabilities held for sale not classified as discontinued operations		325			92			210
Other income		1,110			1,113			811
Total non interest income		21,623			22,056			20,778
Non interest expense:
Salaries and employee benefits		(10,656	)		(10,860	)		(9,917	)
Occupancy expense of premises, depreciation and maintenance, net		(2,944	)		(2,693	)		(2,502	)
General and administrative expenses		(5,734	)		(5,683	)		(5,280	)
Impairment of goodwill		(156	)		(760	)		(63	)
Impairment / amortization of intangible assets		(1,111	)		(1,689	)		(1,091	)
Impairment of tangible assets		(1,019	)		(2,176	)		(530	)
Provisions for specific allowances		(1,652	)		(2,387	)		(924	)
Payments to Deposit Guarantee Fund		(530	)		(346	)		(307	)
Insurance claims		(5,516	)		(7,164	)		(7,591	)
Expenses of non financial entities		(232	)		(249	)		(205	)
Losses on sale of non-current assets / liabilities held for sale not classified as discontinued operations		(633	)		(404	)		(201	)
Other expenses		(1,030	)		(1,202	)		(924	)
Total non interest expense		(31,213	)		(35,613	)		(29,535	)
Income before income taxes		3.549			7,939			12,052
Income tax expense		(575	)		(1,776	)		(2,923	)
Net consolidated income for the year		2,974			6,163			9,129
Net income attributed to non-controlling interests		762			788			921
Income from discontinued operation, net of taxes		(7	)		(24	)		(27	)
NET INCOME ATTRIBUTED TO THE GROUP		2,205			5,351			8,181

F-284

	Millions of Euros
	2012			2011			2010
NET CONSOLIDATED PROFIT FOR THE YEAR		2,967			6,139			9,102
OTHER COMPREHENSIVE INCOME		(2,588	)		(2,570	)		1,643
Available-for-sale financial assets:		1,171			344			(2,719	)
Revaluation gains/(losses)		1,729			231			(1,863	)
Amounts transferred to income statement		(558	)		156			(856	)
Other reclassifications		—			(43	)		—
Cash flow hedges:		(84	)		(17	)		117
Revaluation gains/(losses)		129			(109	)		(89	)
Amounts transferred to income statement		(249	)		92			206
Amounts transferred to initial carrying amount of hedged items		—			—			—
Other reclassifications		36			—			—
Hedges of net investments in foreign operations:		(1,107	)		106			(2,253	)
Revaluation gains/(losses)		(1,336	)		13			(2,444	)
Amounts transferred to income statement		229			9			191
Other reclassifications		—			84			—
Exchange differences:		(2,170	)		(2,824	)		5,704
Revaluation gains/(losses)		(1,833	)		(2,906	)		5,986
Amounts transferred to income statement		(330	)		85			(282	)
Other reclassifications		(7	)		(3	)		—
Non-current assets held for sale:		—			—			—
Revaluation gains/(losses)		—			—			—
Amounts transferred to income statement		—			—			—
Other reclassifications		—			—			—
Actuarial gains/(losses) on pension plans		—			—			—
Entities accounted for using the equity method:		(57	)		(95	)		—
Revaluation gains/(losses)		(61	)		(37	)		—
Amounts transferred to income statement		21			—			—
Other reclassifications		(17	)		(58	)		—
Other comprehensive income		—			—			—
Income tax		(341	)		(84	)		794
TOTAL COMPREHENSIVE INCOME		379			3,569			10,745
Attributable to the Parent		97			3,184			9,031
Attributable to non-controlling interests		282			385			1,714

F-285

Following are the summarized balance sheets of Banco Santander, S.A. as of December 31, 2012, 2011 and 2010.

	2012		2011		2010
CONDENSED BALANCE SHEETS (Parent company only)	(Millions of Euros)
Assets
Cash and due from banks		94,931		73,254		70,716
Of which:
To bank subsidiaries		30,004		35,270		35,591
Trading account assets		95,556		91,330		67,807
Investment securities		47,097		43,746		29,850
Of which:
To bank subsidiaries		18,491		16,581		9,576
To non-bank subsidiaries		164		—		—
Net Loans and leases		152,933		174,775		186,505
Of which:
To non-bank subsidiaries		26,553		37,602		31,039
Investment in affiliated companies		72,714		68,559		60,497
Of which:
To bank subsidiaries		64,550		62,988		58,105
To non-bank subsidiaries		8,163		5,571		2,392
Premises and equipment, net		990		1,211		1,272
Other assets		11,416		13,134		12,648
Total assets		475,637		466,009		429,295
Liabilities
Deposits		249,928		225,232		221,027
Of which:
To bank subsidiaries		20,775		17,447		27,779
To non-bank subsidiaries		54,300		56,818		59,393
Short-term debt		34,080		42,785		26,924
Long-term debt		48,643		56,486		59,801
Total debt		82,723		99,271		86,725
Of which:
To bank subsidiaries		4,474		4,009		133
To non-bank subsidiaries		18,174		25,815		29,111
Other liabilities		97,774		96,128		76,825
Total liabilities		430,425		420,631		384,577
Stockholders’ equity
Capital stock		5,161		4,455		4,165
Retained earnings and other reserves		40,051		40,923		40,553
Total stockholders’ equity		45,212		45,378		44,718
Total liabilities and Stockholders’ Equity		475,637		466,009		429,295

In the financial statements of the Parent Company, investments in subsidiaries, jointly controlled entities and associates are recorded at cost.

F-286

Following are the summarized statements of income of Banco Santander, S.A. for the years ended December 31, 2012, 2011 and 2010.

CONDENSED STATEMENTS OF INCOME (Parent company only)	2012			2011			2010
	(Millions of Euros)
Interest income
Interest from earning assets		10,448			10,355			9,061
Dividends from affiliated companies		5,311			3,913			5,515
Of which:
From bank subsidiaries		4,716			3,557			5,452
From non-bank subsidiaries		595			356			63
		15,759			14,268			14,576
Interest expense		(6,677	)		(7,193	)		(5,817	)
Interest income / (Charges)		9,082			7,075			8,759
Provision for credit losses		(6,072	)		(1,985	)		(2,132	)
Interest income / (Charges) after provision for credit losses		3,010			5,090			6,627
Non interest income:		4,638			393			716
Non interest expense:		(6,677	)		(3,295	)		(3,950	)
Income before income taxes		971			2,188			3,393
Income tax expense		384			(37	)		(61	)
Net income		1,355			2,151			3,332

Following are the summarized condensed statement of comprehensive income of Banco Santander, S.A. for the years ended December 31, 2012, 2011 and 2010:

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME	Millions of Euros
(Parent company only)	2012			2011			2010
NET INCOME		1,355			2,151			3,332
OTHER COMPREHENSIVE INCOME		(111	)		446			(1,423	)
Available-for-sale financial assets:		(135	)		617			(2,057	)
Revaluation gains/(losses)		(112	)		357			(2,098	)
Amounts transferred to income statement		(23	)		260			41
Other reclassifications		—			—			—
Cash flow hedges:		—			—			2
Revaluation gains/(losses)		—			—			—
Amounts transferred to income statement		—			—			2
Amounts transferred to initial carrying amount of hedged items		—			—			—
Other reclassifications		—			—			—
Hedges of net investments in foreign operations:		(20	)		17			17
Revaluation gains/(losses)		(20	)		21			47
Amounts transferred to income statement		—			(4	)		(30	)
Other reclassifications		—			—			—
Exchange differences:		—			—			—
Non-current assets held for sale:		—			—			—
Actuarial gains/(losses) on pension plans		—			—			—
Other comprehensive income		—			—			—
Income tax		44			(188	)		617
TOTAL COMPREHENSIVE INCOME		1,244			2,597			1,909

F-287

Following are the summarized cash flow statements of Banco Santander, S.A. for the years ended December 31, 2011, 2010 and 2009.

CONDENSED CASH FLOW STATEMENTS (Parent company only)	2012			2011			2010
	(Millions of Euros)
1. Cash flows from operating activities
Consolidated profit		1,355			2,151			3,332
Adjustments to profit		6,841			4,172			3,054
Net increase/decrease in operating assets		18,872			2,958			(14,923	)
Net increase/decrease in operating liabilities		5,784			17,295			13,166
Reimbursements/payments of income tax		82			6			215
Total net cash flows from operating activities (1)		32,934			26,582			4,844
2. Cash flows from investing activities
Investments (-)		(6,235	)		(9,377	)		(1,329	)
Divestments (+)		4,281			1,470			4,577
Total net cash flows from investment activities (2)		(1,954	)		(7,907	)		3,248
3. Cash flows from financing activities
Disposal of own equity instruments		1,266			2,621			2,343
Acquisition of own equity instruments		(1,324	)		(2,621	)		(2,314	)
Issuance of debt securities		—			—			6,970
Redemption of debt securities		(6,891	)		(3,881	)		(9,438	)
Dividends paid		(1,287	)		(3,489	)		(4,107	)
Issuance/Redemption of equity instruments		—			—			—
Other collections/payments related to financing activities		(675	)		(115	)		(377	)
Total net cash flows from financing activities (3)		(8,911	)		(7,485	)		(6,923	)
4. Effect of exchange rate changes on cash and cash equivalents (4)		(65	)		110			251
5. Net increase/decrease in cash and cash equivalents (1+2+3+4)		22,004			11,300			1,420
Cash and cash equivalents at beginning of period		19,347			8,047			6,627
Cash and cash equivalents at end of period		41,351			19,347			8,047

F-288

55.2 Preference Shares and Preferred Securities

The following table shows the balance of the preference shares and preferred securities as of December 31, 2012, 2011 and 2010:

	2012		2011		2010
	(Millions of Euros)
Preference shares		421		449		435
Preferred securities		4,319		5,447		6,917
Total at year-end		4,740		5,896		7,352

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, 2012, 2011 and 2010.

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 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:

	Outstanding at December 31, 2012
Preference Shares Issuer/Date of issue	Currency	Amount in currency (million)		Interest rate	Redemption Option (1)
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		150.4	12.000%	May 16, 2020
Santander Holdings USA, Inc, May 2006	US Dollar		75.5	7.300%	May 15, 2011

F-289

	Outstanding at December 31, 2012
Preferred Securities Issuer/Date of issue	Currency	Amount in currency (million)		Interest rate	Maturity date
Banesto Group
Banco Español de Crédito, October 2004	Euro		36.5	€CMS 10 + 0.125%	Perpetuity
Banco Español de Crédito (1), November 2004	Euro		119.9	5.5%	Perpetuity
Banco Español de Crédito, June 2009	Euro		7.8	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		20.9	Euribor (3M) + 2.2%	Perpetuity
Santander Finance Preferred, S.A. (Unipersonal)
March 2004	US Dollar		89.3	6.41%	Perpetuity
September 2004	Euro		146.9	€CMS 10 +0.05% subject to a maximum distribution of 8% per annum	Perpetuity
October 2004	Euro		159.0	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		6.4	7.01%	Perpetuity
July 2009	Pounds Sterling		640.7	Libor (3M) + 7.66%	Perpetuity
July 2009	Euro		111.8	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		980.2	2.00%	Perpetuity
March 2009	Euro		8.6	2.00%	Perpetuity
Santander UK Group
Abbey National Capital Trust I, February 2000	US Dollar		366.4	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		12.0	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		125.0	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 arrears 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 arrears 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-290

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, 2012 and 2011 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 100% 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)	2012			2011
Assets:
Cash		1,631			4,757
Deposits with Parent Bank		520,722			522,520
Accrual accounts		7,999			7,934
Other assets		—			—
Total Assets		530,352			535,211
Liabilities and stockholders’ equity:
LIABILITIES:
Public entities		23			3,107
Accrual accounts		7,960			7,952
Non-commercial debts		—			—
Commercial debts		36			23
Debts with Group companies		423			367
Provisions for taxes		—			—
Preferred securities		520,893			522,671
Total Liabilities		529,335			534,120
STOCKHOLDERS’ EQUITY:
Capital stock		151			151
Retained earnings		940			621
Net income		(74	)		319
Total Stockholders’ Equity		1,017			1,091
Total Liabilities and Stockholders’ Equity		530,352			535,211

F-291

Statement of income

	Thousands of Euros
SANTANDER FINANCE CAPITAL, S.A. (UNIPERSONAL)	2012			2011
Interest income		10,873			93,879
Interest expenses		(10,813	)		(93,300	)
Non interest income		—			1
Non interest expenses		(78	)		(121	)
Corporate income tax		(56	)		(140	)
Net income / (loss)		(74	)		319

Statement of comprehensive income

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME	Thousands of Euros
(Parent company only)	2012			2011
NET INCOME/(LOSS)		(74	)		319
Income and expense recognised directly in equity		—			—
Arising from revaluation of financial instruments:		—			—
Arising from cash flow hedges		—			—
Grants, donations and legacies received		—			—
Arising from actuarial gains and losses and other adjustments		—			—
Tax effect		—			—
Total income and expense recognised directly in equity		—			—
Transfers to profit or loss		—			—
Arising from revaluation of financial instruments:		—			—
Arising from cash flow hedges		—			—
Grants, donations and legacies received		—			—
Tax effect		—			—
Total transfers to profit or loss		—			—
TOTAL COMPREHENSIVE INCOME		(74	)		319

Statement of changes in stockholders’ equity

	Capital stock				Retained Earnings			Net income			Total Stockholders’ Equity
Changes in Stockholders’ Equity	Common Shares		Thousands of Euros
Balance at January 1, 2011		1,505		151		(2	)		623			772
2010 Income allocation		—		—		623			(623	)		—
Net income 2011		—		—		—			319			319
Balance at December 31, 2011		1,505		151		621			319			1,091
2011 Income allocation		—		—		319			(319	)		—
Net income 2012		—		—		—			(74	)		(74	)
Balance at December 31, 2012		1,505		151		940			(74	)		1,017

F-292

In October 2005, the board of directors authorized a capital increase of 903 shares of common stock with a €100 par value. This capital increase was fully subscribed and paid by Banco Santander, S.A.

After this capital increase, the capital stock of Santander Finance Capital S.A. (Unipersonal), as of December 31, 2005, amounted to 1,505 shares of common stock with a €100 par value, fully subscribed and paid by Banco Santander, S.A. (wholly owner of this company).

Preferred Securities

	Issue Date		Thousands of Euros at 12/31/12
Issuances
Series VI		03/18/2009		13,781
Series VII		03/18/2009		18,929
Series VIII		03/18/2009		313,745
Series IX		03/18/2009		153,700
Series X		06/30/2009		20,863
Total				521,018
Issuances expenses
Series VI				—
Series VII				—
Series VIII				(70	)
Series IX				(34	)
Series X				(21	)
Total				(125	)
Total				520,893

• 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.

F-293

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

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

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

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

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

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

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 100% owned by Banco Santander, S.A.

F-294

Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander Finance Preferred, S.A. (Unipersonal), prepared in conformity with IFRS.

Balance sheets

	Thousands of Euros
SANTANDER FINANCE PREFERRED, S.A. (UNIPERSONAL)	2012		2011
Assets:
Cash		34,117		33,238
Deposits with Parent Bank		3,725,047		3,737,691
Accrual accounts		64,393		73,508
Total Assets		3,823,557		3,844,437
Liabilities and stockholders’ equity:
LIABILITIES:
Public entities		—		27
Accrual accounts		52,588		55,561
Commercial debts		38		86
Non-commercial debts		—		—
Deferred income		—		—
Debts with group companies		1,377,472		1,296,968
Provisions for taxes		—		—
Preferred securities		2,389,994		2,488,782
Total Liabilities		3,820,092		3,841,424
STOCKHOLDERS’ EQUITY:
Capital stock		151		151
Retained earnings		2,862		1,569
Net income		452		1,293
Total Stockholders’ Equity		3,465		3,013
Total Liabilities and Stockholders’ Equity		3,823,557		3,844,437

Statement of income

	Thousands of Euros
SANTANDER FINANCE PREFERRED, S.A. (UNIPERSONAL)	2012			2011
Interest income		299,859			293,086
Interest expenses		(298,166	)		(290,977	)
Non interest income		—			669
Non interest expenses		(863	)		(1,403	)
Corporate income tax		(378	)		(82	)
Net income / (loss)		452			1,293

F-295

Statement of comprehensive income

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME	Thousands of Euros
(Parent company only)	2012		2011
NET INCOME/(LOSS)		452		1,293
Income and expense recognised directly in equity		—		—
Arising from revaluation of financial instruments:		—		—
Arising from cash flow hedges		—		—
Grants, donations and legacies received		—		—
Arising from actuarial gains and losses and other adjustments		—		—
Tax effect		—		—
Total income and expense recognised directly in equity		—		—
Transfers to profit or loss		—		—
Arising from revaluation of financial instruments:		—		—
Arising from cash flow hedges		—		—
Grants, donations and legacies received		—		—
Tax effect		—		—
Total transfers to profit or loss		—		—
TOTAL COMPREHENSIVE INCOME		452		1,293

Statement of changes in stockholders’ equity

	Capital stock				Retained Earnings			Net income			Total Stockholders’ Equity
Changes in Stockholders’ Equity	Common Shares		Thousands of Euros
Balance at January 1, 2011		1,505		151		2,672			(1,103	)		1,720
2010 Income allocation		—		—		(1,103	)		1,103			—
Net income 2011		—		—		—			1,293			1,293
Balance at December 31, 2011		1,505		151		1,569			1,293			3,013
2011 Income allocation		—		—		1,293			(1,293	)		—
Net income 2012		—		—		—			452			452
Balance at December 31, 2012		1,505		151		2,862			452			3,465

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).

F-296

Preferred Securities

	Issue Date		Thousands of Euros at 12/31/11
Issuances
Series 1- $190,000		03/11/2004		144,005
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		378,960
Series 5- $600,000		31/01/2007		454,752
Series 6- $350,000		05/03/2007		265,272
Series 7- £250,000		07/10/2007		306,335
Series 8- £679,400		07/27/2009		832,496
Series 9- €125,700		07/27/2009		125,700
Series 10- $825,110		09/29/2009		625,367
Series 11- $161,587		09/29/2009		122,470
				3,755,358
Issuances expenses
Series 1		—		—
Series 2		—		—
Series 3		—		—
Series 4		—		—
Series 5		—		(801	)
Series 6		—		(28	)
Series 7		—		—
Series 8		—		(39	)
Series 9		—		(39	)
Series 10		—		(43	)
Series 11		—		(43	)
				(993	)
Total				3,754,365

• 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-297

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 100% owned by Banco Santander, S.A.

Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander International Preferred, S.A. (Sociedad Unipersonal), prepared in conformity with IFRS.

Balance sheets

	Thousands of Euros		Thousands of Euros
SANTANDER INTERNATIONAL PREFERRED, S.A. (SOCIEDAD UNIPERSONAL)	2012		2011
Assets:
Cash		278		231
Deposits with Parent Bank		751,800		766,447
Accrual accounts		12,137		12,255
Other current assets		—		—
Total Assets		764,215		778,933
Liabilities and stockholders’ equity:
LIABILITIES:
Public entities		—		—
Commercial debts		17		14
Debts with group companies		697		656
Accrual accounts		11,901		12,098
Preferred securities		751,385		766,026
Total Liabilities		764,000		778,794
STOCKHOLDERS’ EQUITY:
Capital stock		60		60
Retained earnings		79		22
Net income		76		57
Total Stockholders’ Equity		215		139
Total Liabilities and Stockholders’ Equity		764,215		778,933

F-298

Statement of income

	Thousands of Euros			Thousands of Euros
SANTANDER INTERNATIONAL PREFERRED, S.A. (SOCIEDAD UNIPERSONAL)	2012			2011
Interest income		15,666			14,421
Interest expenses		(15,494	)		(14,275	)
Non interest income		—			—
Non interest expenses		(58	)		(65	)
Corporate income tax		(38	)		(24	)
Net income / (loss)		76			57

Statement of comprehensive income

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME	Thousands of Euros
(Parent company only)	2012		2011
NET INCOME/(LOSS)		76		57
Income and expense recognised directly in equity		—		—
Arising from revaluation of financial instruments:		—		—
Arising from cash flow hedges		—		—
Grants, donations and legacies received		—		—
Arising from actuarial gains and losses and other adjustments		—		—
Tax effect		—		—
Total income and expense recognised directly in equity		—		—
Transfers to profit or loss		—		—
Arising from revaluation of financial instruments:		—		—
Arising from cash flow hedges		—		—
Grants, donations and legacies received		—		—
Tax effect		—		—
Total transfers to profit or loss		—		—
TOTAL COMPREHENSIVE INCOME		76		57

F-299

Statement of changes in stockholders’ equity

	Capital stock				Retained Earnings			Net income			Total Stockholders’ Equity
Changes in Stockholders’ Equity	Common Shares		Thousands of Euros
Balance at January 1, 2011		602		60		(17	)		39			82
2010 Income allocation		—		—		39			(39	)		—
Net income 2011		—		—		—			57			57
Balance at December 31, 2011		602		60		22			57			139
2011 Income allocation		—		—		57			(57	)		—
Net income 2012		—		—		—			76			76
Balance at December 31, 2012		602		60		79			76			215

At December 31, 2012, 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

	Issue Date		Thousands of Euros at 12/31/11
Issuances
Series 1 ($)		03/19/2009		743,514
Series 2 (€)		03/19/2009		8,582
				752,096
Issuances expenses				(95	)
Total				752,001

• 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 100% 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, 2012, 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 2013.

F-300

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.

Balance sheets

	Thousands of Euros		Thousands of Euros
SANTANDER US DEBT, S.A. (SOCIEDAD UNIPERSONAL)	2012		2011
Assets:
Cash		1,906		1,226
Deposits with Parent Bank		1,991,609		3,190,347
Other current assets		1		6
Total Assets		1,993,516		3,191,579
Liabilities and stockholders’ equity:
LIABILITIES:
Public entities		—		26
Commercial debts		24		35
Debts with group companies		972		25,228
Senior debt		1,992,186		3,166,041
Total Liabilities		1,993,182		3,191,330
STOCKHOLDERS’ EQUITY:
Capital stock		120		120
Retained earnings		129		203
Net income		85		(74	)
Total Stockholders’ Equity		334		249
Total Liabilities and Stockholders’ Equity		1,993,516		3,191,579

Statement of income

	Thousands of Euros			Thousands of Euros
SANTANDER US DEBT, S.A. (SOCIEDAD UNIPERSONAL)	2012			2011
Interest income		71,733			81,377
Interest expenses		(71,029	)		(80,402	)
Non interest income		148			—
Non interest expenses		(768	)		(1,058	)
Corporate income tax		1			9
Net income / (loss)		85			(74	)

F-301

Statement of comprehensive income

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Parent company only)	Thousands of Euros
	2012		2011
NET INCOME/(LOSS)		85		(74	)
Income and expense recognised directly in equity		—		—
Arising from revaluation of financial instruments:		—		—
Arising from cash flow hedges		—		—
Grants, donations and legacies received		—		—
Arising from actuarial gains and losses and other adjustments		—		—
Tax effect		—		—
Total income and expense recognised directly in equity		—		—
Transfers to profit or loss		—		—
Arising from revaluation of financial instruments:		—		—
Arising from cash flow hedges		—		—
Grants, donations and legacies received		—		—
Tax effect		—		—
Total transfers to profit or loss		—		—
TOTAL COMPREHENSIVE INCOME		85		(74	)

Statement of changes in stockholders’ equity

	Capital stock				Retained Earnings			Net income			Total Stockholders’ Equity
Changes in Stockholders’ Equity	Common Shares		Thousands of Euros
Balance at January 1, 2011		1,200		120		443			(240	)		323
2010 Income allocation		—		—		(240	)		240			—
Net income 2011		—		—		—			(74	)		(74	)
Balance at December 31, 2011		1,200		120		203			(74	)		249
2011 Income allocation		—		—		(74	)		74			—
Net income 2012		—		—		—			85			85
Balance at December 31, 2012		1,200		120		129			85			334

At December 31, 2012, 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).

F-302

Exhibit I

Subsidiaries of Banco Santander, S.A. (1)

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
2 & 3 Triton Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY
A & L CF (Guernsey) Limited (f)	Guernsey		0.00	%		100.00	%		100.00	%	LEASING
A & L CF (Jersey) Limited (f)	Jersey		0.00	%		100.00	%		100.00	%	LEASING
A & L CF December (1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF December (10) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF December (11) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF June (1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF June (2) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF June (3) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF June (8) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF March (1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF March (3) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF March (5) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF March (6) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF March (8) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF March (9) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF September (3) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF September (4) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A & L CF September (5) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
A N (123) plc	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
A N Loans Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
A&L Services Limited	Isle of Man		0.00	%		100.00	%		100.00	%	SERVICES
Abbey Business Services (India) Private Limited	India		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey Covered Bonds (Holdings) Limited	United Kingdom		—				(a)		—		SECURITIZATION
Abbey Covered Bonds (LM) Limited	United Kingdom		—				(a)		—		SECURITIZATION
Abbey Covered Bonds LLP	United Kingdom		—				(a)		—		SECURITIZATION
Abbey National (America) Holdings Inc.	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National (America) Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National (Holdings) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National Alpha Investments (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National American Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National Baker Street Investments (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National Beta Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National Business Cashflow Finance Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FACTORING
Abbey National Business Office Equipment Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
Abbey National Capital LP I	United States		—				(a)		—		FINANCE
Abbey National Financial Investments 3 B.V.	The Netherlands		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National Financial Investments 4 B.V.	The Netherlands		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National General Insurance Services Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES
Abbey National GP (Jersey) Limited	Jersey		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National Homes Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National International Limited	Jersey		0.00	%		100.00	%		100.00	%	BANKING

F-303

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
Abbey National Investments (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National Investments Holdings Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National Legacy Holdings Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National Legacy Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National Nominees Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BROKER-DEALER
Abbey National North America Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National North America LLC	United States		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National Pension (Escrow Services) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PENSION FUND MANAGEMENT COMPANY
Abbey National PLP (UK) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National Property Investments	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National Property Services Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY
Abbey National Securities Inc.	United States		0.00	%		100.00	%		100.00	%	BROKER-DEALER
Abbey National September Leasing (3) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
Abbey National Sterling Capital plc (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National Treasury Investments	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National Treasury Services (Transport Holdings) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National Treasury Services Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Abbey National Treasury Services Overseas Holdings	United Kingdom		0.00	%		99.99	%		99.99	%	HOLDING COMPANY
Abbey National Treasury Services plc	United Kingdom		0.00	%		100.00	%		100.00	%	BANKING
Abbey National UK Investments	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Abbey Stockbrokers (Nominees) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BROKER-DEALER
Abbey Stockbrokers Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BROKER-DEALER
Ablasa Participaciones, S.L.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY
Ablasa Participações S.A.	Brazil		99.90	%		0.10	%		100.00	%	HOLDING COMPANY
ABN AMRO Administradora de Cartões de Crédito Ltda. (d)	Brazil		0.00	%		0.00	%		0.00	%	CARDS
ABN AMRO Brasil Partipações e Investimentos S.A. (d)	Brazil		0.00	%		0.00	%		0.00	%	HOLDING COMPANY
Administración de Bancos Latinoamericanos Santander, S.L.	Spain		24.11	%		75.89	%		100.00	%	HOLDING COMPANY
AEH Purchasing, Ltd. (b)	Ireland		—				(a)		—		SECURITIZATION
Afisa S.A.	Chile		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Agrícola Tabaibal, S.A.	Spain		0.00	%		66.55	%		100.00	%	AGRICULTURE AND LIVESTOCK
AKB Marketing Services Sp. Z.o.o.	Poland		0.00	%		70.00	%		100.00	%	MARKETING
Alcaidesa Golf, S.L.	Spain		0.00	%		44.82	%		50.00	%	SPORTS OPERATIONS
Alcaidesa Holding, S.A. (consolidated)	Spain		0.00	%		44.82	%		50.00	%	PROPERTY
Alcaidesa Inmobiliaria, S.A.	Spain		0.00	%		44.82	%		50.00	%	PROPERTY
Alcaidesa Servicios, S.A.	Spain		0.00	%		44.82	%		50.00	%	SERVICES
ALCF Investments Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Aljarafe Golf, S.A.	Spain		0.00	%		80.15	%		89.41	%	PROPERTY
Aljardi SGPS, Lda.	Portugal		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Alliance & Leicester (Jersey) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Cash Solutions Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Commercial Bank plc	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Commercial Finance (Holdings) plc (b)	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Alliance & Leicester Equity Investments (Guarantee) Limited	United Kingdom		—				(a)		—		FINANCE
Alliance & Leicester Estate Agents (Mortgage & Finance) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Financing plc (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Independent Financial Advisers Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE

F-304

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
Alliance & Leicester International Limited	Isle of Man		0.00	%		100.00	%		100.00	%	BANKING
Alliance & Leicester Investments (Derivatives No.3) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments (Derivatives) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments (Jersey) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments (No.2) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments (No.3) LLP (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments (No.4) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Personal Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester plc	United Kingdom		0.00	%		100.00	%		100.00	%	BANKING
Alliance & Leicester Print Services Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	SERVICES
Alliance & Leicester Share Ownership Trust Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Sharesafe Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Unit Trust Managers Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGER
Alliance Bank Limited	United Kingdom		100.00	%		0.00	%		100.00	%	FINANCE
Alliance Corporate Services Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Altamira Santander Real Estate, S.A.	Spain		79.82	%		18.15	%		100.00	%	PROPERTY
Amazonia Trade Limited	United Kingdom		100.00	%		0.00	%		100.00	%	HOLDING COMPANY
Andaluza de Inversiones, S.A.	Spain		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
ANITCO Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Aquanima Brasil Ltda.	Brazil		0.00	%		99.42	%		100.00	%	E-COMMERCE
Aquanima Chile S.A.	Chile		0.00	%		99.42	%		100.00	%	E-COMMERCE
Aquanima México S. de R.L. de C.V.	Mexico		0.00	%		99.42	%		100.00	%	E-COMMERCE
Aquanima S.A.	Argentina		0.00	%		99.42	%		100.00	%	SERVICES
Argenline, S.A.	Uruguay		0.00	%		100.00	%		100.00	%	FINANCE
Arizona Concentrating Solar I LLC	United States		0.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Arka Emerging Markets SICAV - FIS	Luxembourg		0.00	%		94.23	%		100.00	%	OPEN-END INVESTMENT COMPANY
Asesoría Estratega, S.C.	Mexico		0.00	%		100.00	%		100.00	%	SERVICES
Atual Companhia Securitizadora de Créditos Financeiros	Brazil		0.00	%		75.21	%		100.00	%	FINANCIAL SERVICES
Aurum Inversiones Limitada	Chile		50.00	%		50.00	%		100.00	%	HOLDING COMPANY
Aviación Antares, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	RENTING
Aviación Británica, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	RENTING
Aviación Centaurus, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	RENTING
Aviación Intercontinental, A.I.E.	Spain		65.00	%		0.00	%		65.00	%	RENTING
Aviación RC II, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	RENTING
Aviación Real, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	RENTING
Aviación Regional Cántabra, A.I.E.	Spain		73.58	%		0.00	%		73.58	%	RENTING
Aviación Scorpius, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	RENTING
Aviación Tritón, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	RENTING
Aymoré Crédito, Financiamento e Investimento S.A.	Brazil		0.00	%		75.21	%		100.00	%	FINANCE
Bajondillo, S.A.	Spain		0.00	%		89.65	%		100.00	%	PROPERTY
Banbou S.A.R.L.	France		0.00	%		90.00	%		100.00	%	HOLDING COMPANY
Banco Bandepe S.A.	Brazil		0.00	%		75.21	%		100.00	%	BANKING
Banco Banif, S.A.	Spain		100.00	%		0.00	%		100.00	%	BANKING
Banco de Albacete, S.A.	Spain		100.00	%		0.00	%		100.00	%	BANKING

F-305

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
Banco de Asunción, S.A. (b)	Paraguay		0.00	%		99.33	%		99.33	%	BANKING
Banco Español de Crédito, S.A.	Spain		88.85	%		0.79	%		89.65	%	BANKING
Banco Madesant - Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%	BANKING
Banco Santander - Chile	Chile		0.00	%		67.01	%		67.18	%	BANKING
Banco Santander (Brasil) S.A.	Brazil		0.00	%		75.21	%		76.09	%	BANKING
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander	Mexico		0.00	%		75.11	%		99.99	%	BANKING
Banco Santander (Panamá), S.A.	Panama		0.00	%		100.00	%		100.00	%	BANKING
Banco Santander (Suisse) SA	Switzerland		0.00	%		100.00	%		100.00	%	BANKING
Banco Santander Bahamas International Limited	Bahamas		0.00	%		100.00	%		100.00	%	BANKING
Banco Santander Consumer Portugal, S.A.	Portugal		0.00	%		100.00	%		100.00	%	BANKING
Banco Santander International	United States		100.00	%		0.00	%		100.00	%	BANKING
Banco Santander Perú S.A.	Peru		99.00	%		1.00	%		100.00	%	BANKING
Banco Santander Puerto Rico	Puerto Rico		0.00	%		100.00	%		100.00	%	BANKING
Banco Santander Río S.A.	Argentina		8.23	%		91.07	%		99.02	%	BANKING
Banco Santander Totta, S.A.	Portugal		0.00	%		99.76	%		99.89	%	BANKING
Banco Santander, S.A.	Uruguay		97.75	%		2.25	%		100.00	%	BANKING
Banesto Banca Privada Gestión, S.A. S.G.I.I.C.	Spain		0.00	%		89.65	%		100.00	%	FUND MANAGEMENT COMPANY
Banesto Banco de Emisiones, S.A.	Spain		0.00	%		89.65	%		100.00	%	BANKING
Banesto Bolsa, S.A., Sdad. Valores y Bolsa	Spain		0.00	%		89.65	%		100.00	%	BROKER-DEALER
Banesto Financial Products, Plc.	Ireland		0.00	%		89.64	%		99.99	%	FINANCE
Banesto Renting, S.A.	Spain		0.00	%		89.65	%		100.00	%	FINANCE
Banif Gestión, S.A., S.G.I.I.C.	Spain		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Bank Zachodni WBK S.A.	Poland		94.23	%		0.00	%		94.23	%	BANKING
Bansa Santander S.A.	Chile		0.00	%		100.00	%		100.00	%	PROPERTY
Bansalud, S.L.	Spain		53.00	%		12.00	%		65.00	%	TECHNOLOGY SERVICES
Bansamex, S.A.	Spain		50.00	%		0.00	%		50.00	%	CARDS
Bel Canto SICAV Erodiade	Luxembourg		0.00	%		100.00	%		100.00	%	OPEN-END INVESTMENT COMPANY
Besaya ECA Limited	Ireland		—				(a)		—		FINANCE
Bilkreditt 1 Limited	Ireland		—				(a)		—		SECURITIZATION
Bilkreditt 2 Limited	Ireland		—				(a)		—		SECURITIZATION
Boadilla R.E.I. Lux S.à.r.l	Luxembourg		0.00	%		100.00	%		100.00	%	PROPERTY
Bracken Securities Holdings Limited (b)	United Kingdom		—				(a)		—		SECURITIZATION
Bracken Securities Option Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITIZATION
Bracken Securities plc (b)	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITIZATION
Brazil Foreign Diversified Payment Rights Finance Company	Cayman Islands		—				(a)		—		SECURITIZATION
BRS Investments S.A.	Argentina		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
BST International Bank, Inc.	Puerto Rico		0.00	%		99.76	%		100.00	%	BANKING
BZ WBK Asset Management S.A.	Poland		50.00	%		47.12	%		100.00	%	FUND MANAGEMENT COMPANY
BZ WBK Faktor Sp. z o.o.	Poland		0.00	%		94.23	%		100.00	%	FINANCIAL SERVICES
BZ WBK Finanse & Leasing S.A.	Poland		0.00	%		94.23	%		100.00	%	LEASING AND FULL-SERVICE LEASING
BZ WBK Finanse Sp. z o.o.	Poland		0.00	%		94.23	%		100.00	%	FINANCIAL SERVICES
BZ WBK Inwestycje Sp. z o.o.	Poland		0.00	%		94.23	%		100.00	%	BROKER-DEALER
BZ WBK Leasing S.A.	Poland		0.00	%		94.23	%		100.00	%	LEASING
BZ WBK Nieruchomości S.A.	Poland		0.00	%		94.22	%		99.99	%	SERVICES

F-306

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
BZ WBK Towarzystwo Funduszy Inwestycyjnych S.A.	Poland		0.00	%		97.12	%		100.00	%	FUND MANAGEMENT COMPANY
CA Premier Banking Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BANKING
Caja de Emisiones con Garantía de Anualidades Debidas por el Estado, S.A.	Spain		0.00	%		56.36	%		62.87	%	FINANCE
Cántabra de Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY
Cántabro Catalana de Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY
Capital Riesgo Global, SCR de Régimen Simplificado, S.A.	Spain		93.53	%		6.47	%		100.00	%	VENTURE CAPITAL COMPANY
Capital Street Delaware, LP	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Capital Street Holdings, LLC	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Capital Street REIT Holdings, LLC	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Capital Street S.A.	Luxembourg		0.00	%		100.00	%		100.00	%	FINANCE
Carfax (Guernsey) Limited (f)	Guernsey		0.00	%		100.00	%		100.00	%	INSURANCE BROKER
Carpe Diem Salud, S.L.	Spain		100.00	%		0.00	%		100.00	%	SECURITIES INVESTMENT
Cartera Mobiliaria, S.A., SICAV	Spain		0.00	%		81.40	%		93.08	%	SECURITIES INVESTMENT
Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander	Mexico		0.00	%		75.09	%		99.97	%	BROKER-DEALER
Cater Allen Holdings Limited	United Kingdom		0.00	%		99.99	%		100.00	%	HOLDING COMPANY
Cater Allen International Limited	United Kingdom		0.00	%		99.99	%		100.00	%	BROKER-DEALER
Cater Allen Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BANKING
Cater Allen Lloyd’s Holdings Limited	United Kingdom		0.00	%		99.99	%		100.00	%	HOLDING COMPANY
Cater Allen Pensions Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	PENSION FUND MANAGEMENT COMPANY
Cater Allen Syndicate Management Limited	United Kingdom		0.00	%		99.99	%		100.00	%	ADVISORY SERVICES
Central Eólica Santo Antonio De Padua S.A.	Brazil		0.00	%		75.21	%		100.00	%	ELECTRICITY PRODUCTION
Central Eólica Sao Cristovao S.A.	Brazil		0.00	%		75.21	%		100.00	%	ELECTRICITY PRODUCTION
Central Eólica Sao Jorge S.A.	Brazil		0.00	%		75.21	%		100.00	%	ELECTRICITY PRODUCTION
Certidesa, S.L.	Spain		0.00	%		100.00	%		100.00	%	LEASE OF AIRCRAFT
Clínica Sear, S.A.	Spain		0.00	%		45.34	%		50.58	%	HEALTHCARE
Club Zaudin Golf, S.A.	Spain		0.00	%		76.24	%		95.11	%	SERVICES
Costa Canaria de Veneguera, S.A.	Spain		0.00	%		66.55	%		74.23	%	PROPERTY
Crawfall S.A.	Uruguay		100.00	%		0.00	%		100.00	%	SERVICES
Credicenter Empreendimentos e Promoções Ltda. (d)	Brazil		0.00	%		0.00	%		0.00	%	FINANCIAL SERVICES
Credisol, S.A. (b)	Uruguay		0.00	%		100.00	%		100.00	%	CARDS
Crefisa, Inc.	Puerto Rico		100.00	%		0.00	%		100.00	%	FINANCE
CRV Distribuidora de Títulos e Valores Mobiliários	Brazil		0.00	%		75.21	%		100.00	%	MANAGEMENT COMPANY
Darep Limited	Ireland		100.00	%		0.00	%		100.00	%	REINSURANCE
Depósitos Portuarios, S.A.	Spain		0.00	%		89.65	%		100.00	%	SERVICES
Digital Procurement Holdings N.V.	The Netherlands		0.00	%		99.42	%		100.00	%	HOLDING COMPANY
Diners Club Spain, S.A.	Spain		75.00	%		0.00	%		75.00	%	CARDS
Dirección Estratega, S.C.	Mexico		0.00	%		100.00	%		100.00	%	SERVICES
Dom Maklerski BZ WBK S.A.	Poland		0.00	%		94.23	%		99.99	%	BROKER-DEALER
Dudebasa, S.A.	Spain		0.00	%		89.65	%		100.00	%	FINANCE
Elerco, S.A.	Spain		0.00	%		89.65	%		100.00	%	PROPERTY
Embuaca Geração e Comercialização de Energia S.A.	Brazil		0.00	%		75.19	%		100.00	%	ELECTRICITY PRODUCTION
Empresas Banesto 2, Fondo de Titulización de Activos	Spain		—				(a)		—		SECURITIZATION
Empresas Banesto 5, Fondo de Titulización de Activos	Spain		—				(a)		—		SECURITIZATION
Empresas Banesto 6, Fondo de Titulización de Activos	Spain		—				(a)		—		SECURITIZATION
Energía Eólica de México, S.A. de C.V. (consolidated)	Mexico		0.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION

F-307

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
EOL Brisa Energias Renováveis S.A.	Brazil		0.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
EOL Vento Energias Renováveis S.A.	Brazil		0.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
EOL Wind Energias Renováveis S.A.	Brazil		0.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Eólica Bela Vista Geração e Comercialização de Energia S.A.	Brazil		0.00	%		75.19	%		100.00	%	ELECTRICITY PRODUCTION
Eólica Icaraí Geração e Comercialização de Energia S.A.	Brazil		0.00	%		75.19	%		100.00	%	ELECTRICITY PRODUCTION
Eólica Mar e Terra Geração e Comercialização de Energia S.A.	Brazil		0.00	%		75.19	%		100.00	%	ELECTRICITY PRODUCTION
Erestone S.A.S.	France		0.00	%		90.00	%		90.00	%	PROPERTY
FFB - Participações e Serviços, Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Fideicomiso 100740 SLPT	Mexico		0.00	%		75.11	%		100.00	%	FINANCE
Fideicomiso 2002114	Mexico		0.00	%		75.11	%		100.00	%	HOLDING COMPANY
Fideicomiso GFSSLPT Banca Serfín, S.A.	Mexico		0.00	%		75.11	%		100.00	%	FINANCE
Fideicomiso Super Letras Hipotecarias Clase I	Argentina		0.00	%		99.30	%		100.00	%	TRUST SERVICES
Fideicomiso Super Letras Hipotecarias Clase II	Argentina		0.00	%		99.30	%		100.00	%	TRUST SERVICES
Financiación Banesto 1, Fondo de Titulización de Activos	Spain		—				(a)		—		SECURITIZATION
First National Motor Business Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
First National Motor Contracts Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
First National Motor Facilities Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
First National Motor Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES
First National Motor Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
First National Motor plc	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
First National Tricity Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Fomento e Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY
Fondo de Titulización de Activos PYMES Santander 3	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos PYMES Santander 4	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander 2	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Consumer Spain 09-1	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Consumer Spain Auto 07-1	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Consumer Spain Auto 2010-1	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Consumer Spain Auto 2011-1	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Consumer Spain Auto 2012-1	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Empresas 1	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Empresas 10	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Empresas 2	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Empresas 3	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Empresas 4	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Empresas 8	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Empresas 9	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Financiación 5	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Hipotecario 6	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Hipotecario 7	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Hipotecario 8	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización de Activos Santander Público 1	Spain		—				(a)		—		SECURITIZATION
Fondo de Titulización Santander Financiación 1	Spain		—				(a)		—		SECURITIZATION
Fondos Santander, S.A. Administradora de Fondos de Inversión (in liquidation) (b)	Uruguay		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Formación Integral, S.A.	Spain		0.00	%		89.65	%		100.00	%	TRAINING
Fortensky Trading, Ltd.	Ireland		0.00	%		100.00	%		100.00	%	FINANCE

F-308

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
Fosse (Master Issuer) Holdings Limited	United Kingdom		—				(a)		—		SECURITIZATION
Fosse Funding (No.1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITIZATION
Fosse Master Issuer PLC	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITIZATION
Fosse PECOH Limited	United Kingdom		—				(a)		—		SECURITIZATION
Fosse Trustee (UK) Limited	United Kingdom		—				(a)		—		SECURITIZATION
Fosse Trustee Limited	Jersey		—				(a)		—		SECURITIZATION
FTPYME Banesto 2, Fondo de Titulización de Activos	Spain		—				(a)		—		SECURITIZATION
FTPYME Santander 2 Fondo de Titulización de Activos	Spain		—				(a)		—		SECURITIZATION
Garilar, S.A.	Uruguay		0.00	%		100.00	%		100.00	%	INTERNET
Geoban UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SERVICES
Geoban, S.A.	Spain		100.00	%		0.00	%		100.00	%	SERVICES
Gesban México Servicios Administrativos Globales, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	SERVICES
Gesban Santander Servicios Profesionales Contables Limitada	Chile		0.00	%		100.00	%		100.00	%	INTERNET
Gesban Servicios Administrativos Globales, S.L.	Spain		99.99	%		0.01	%		100.00	%	SERVICES
Gesban UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	COLLECTION AND PAYMENT SERVICES
Gescoban Soluciones, S.A.	Spain		0.00	%		89.65	%		100.00	%	FINANCE
Gestión de Instalaciones Fotovoltaicas, S.L. Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Gestión Santander, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión, Grupo Financiero Santander	Mexico		0.00	%		75.12	%		100.00	%	FUND MANAGEMENT COMPANY
Gestora de Procesos S.A. in liquidation (b)	Peru		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Girobank Carlton Investments Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Girobank Investments Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Golden Bar (Securitization) S.r.l.	Italy		—				(a)		—		SECURITIZATION
Golden Bar Securitization Programme I	Italy		—				(a)		—		SECURITIZATION
Golden Bar Securitization Programme IV	Italy		—				(a)		—		SECURITIZATION
Golden Bar Securitization Programme V	Italy		—				(a)		—		SECURITIZATION
Golden Bar Securitization Programme VI	Italy		—				(a)		—		SECURITIZATION
Golden Bar Securitization Programme VII	Italy		—				(a)		—		SECURITIZATION
Golden Bar Securitization Programme VIII	Italy		—				(a)		—		SECURITIZATION
Golden Bar Stand Alone 2012-2 (CBCQS)	Italy		—				(a)		—		SECURITIZATION
Grupo Alcanza, S.A. de C.V.	Mexico		100.00	%		0.00	%		100.00	%	HOLDING COMPANY
Grupo Empresarial Santander, S.L.	Spain		99.11	%		0.89	%		100.00	%	HOLDING COMPANY
Grupo Financiero Santander, S.A.B. de C.V.	Mexico		51.05	%		24.07	%		75.17	%	HOLDING COMPANY
Grupo Konecta Centros Especiales de Empleo, S.L.	Spain		0.00	%		51.86	%		100.00	%	TELEMARKETING
Grupo Konecta Maroc S.A.R.L. à associé unique	Morocco		0.00	%		51.86	%		100.00	%	TELEMARKETING
Grupo Konecta UK Limited	United Kingdom		0.00	%		51.86	%		100.00	%	FINANCE
Grupo Konectanet México, S.A. de C.V.	Mexico		0.00	%		51.86	%		100.00	%	TELEMARKETING
Grupo Konectanet, S.L.	Spain		7.08	%		44.77	%		51.86	%	HOLDING COMPANY
Guaranty Car, S.A. Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%	AUTOMOTIVE
Hansar Finance Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Hipototta No. 1 FTC	Portugal		—				(a)		—		SECURITIZATION
Hipototta No. 1 plc	Ireland		—				(a)		—		SECURITIZATION
Hipototta No. 10 FTC (b)	Portugal		—				(a)		—		SECURITIZATION
Hipototta No. 10 Limited (b)	Ireland		—				(a)		—		SECURITIZATION
Hipototta No. 11	Portugal		—				(a)		—		SECURITIZATION
Hipototta No. 12	Portugal		—				(a)		—		SECURITIZATION

F-309

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
Hipototta No. 2 FTC (b)	Portugal		—				(a)		—		SECURITIZATION
Hipototta No. 2 plc (b)	Ireland		—				(a)		—		SECURITIZATION
Hipototta No. 3 FTC (b)	Portugal		—				(a)		—		SECURITIZATION
Hipototta No. 3 plc (b)	Ireland		—				(a)		—		SECURITIZATION
Hipototta No. 4 FTC	Portugal		—				(a)		—		SECURITIZATION
Hipototta No. 4 plc	Ireland		—				(a)		—		SECURITIZATION
Hipototta No. 5 FTC	Portugal		—				(a)		—		SECURITIZATION
Hipototta No. 5 plc	Ireland		—				(a)		—		SECURITIZATION
Hipototta No. 7 FTC	Portugal		—				(a)		—		SECURITIZATION
Hipototta No. 7 Limited	Ireland		—				(a)		—		SECURITIZATION
Hipototta No. 8 FTC (b)	Portugal		—				(a)		—		SECURITIZATION
Hipototta No. 8 Limited (b)	Ireland		—				(a)		—		SECURITIZATION
Hispamer Renting, S.A. Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%	RENTING
Holbah II Limited	Bahamas		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Holbah Limited	Bahamas		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Holmes Funding Limited	United Kingdom		—				(a)		—		SECURITIZATION
Holmes Holdings Limited	United Kingdom		—				(a)		—		SECURITIZATION
Holmes Master Issuer plc	United Kingdom		—				(a)		—		SECURITIZATION
Holmes Trustees Limited	United Kingdom		—				(a)		—		SECURITIZATION
Holneth B.V.	The Netherlands		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Home Services On Line Solutions, S.L.	Spain		0.00	%		51.86	%		100.00	%	SERVICES
HRE Investment Holdings II-A S.à.r.l.	Luxembourg		0.00	%		73.70	%		0.00	%	HOLDING COMPANY
HSH Delaware L.P.	United States		0.00	%		69.83	%		0.00	%	HOLDING COMPANY
Hualle, S.A.	Spain		0.00	%		89.65	%		100.00	%	SECURITIES INVESTMENT
Ibérica de Compras Corporativas, S.L.	Spain		91.63	%		7.80	%		100.00	%	E-COMMERCE
Idaho Wind I LLC	United States		0.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Independence Community Bank Corp.	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Independence Community Commercial Reinvestment Corp.	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Infraestructuras Americanas, S.L.	Spain		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Ingeniería de Software Bancario, S.L.	Spain		100.00	%		0.00	%		100.00	%	IT SERVICES
Inmo Francia 2, S.A.	Spain		0.00	%		100.00	%		100.00	%	PROPERTY
Instituto Santander Serfin, A.C.	Mexico		0.00	%		75.11	%		100.00	%	NOT-FOR-PROFIT INSTITUTE
Insurance Funding Solutions Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Interfinance Holanda B.V.	The Netherlands		100.00	%		0.00	%		100.00	%	HOLDING COMPANY
Inversiones Marítimas del Mediterráneo, S.A.	Spain		100.00	%		0.00	%		100.00	%	INACTIVE
Isban Argentina S.A.	Argentina		87.42	%		12.58	%		100.00	%	FINANCIAL SERVICES
Isban Brasil S.A.	Brazil		0.00	%		100.00	%		100.00	%	SERVICES
Isban Chile S.A.	Chile		0.00	%		100.00	%		100.00	%	IT SERVICES
Isban DE GmbH	Germany		0.00	%		100.00	%		100.00	%	IT SERVICES
Isban México, S.A. de C.V.	Mexico		100.00	%		0.00	%		100.00	%	IT SERVICES
Isban U.K., Ltd.	United Kingdom		0.00	%		100.00	%		100.00	%	IT SERVICES
Island Insurance Corporation	Puerto Rico		0.00	%		99.99	%		99.99	%	INSURANCE
J.C. Flowers II-A L.P.	Canada		0.00	%		70.15	%		4.43	%	HOLDING COMPANY
JCF BIN II-A	Mauritania		0.00	%		69.47	%		4.43	%	HOLDING COMPANY
JCF II-A AIV K L.P.	Canada		0.00	%		69.43	%		0.00	%	HOLDING COMPANY
JCF II-A Special AIV K L.P.	Canada		0.00	%		72.29	%		4.99	%	HOLDING COMPANY
Jupiter III C.V.	The Netherlands		0.00	%		72.75	%		4.99	%	HOLDING COMPANY

F-310

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
Jupiter JCF AIV II-A C.V.	The Netherlands		0.00	%		69.41	%		4.99	%	HOLDING COMPANY
Konecta Activos Inmobiliarios, S.L.	Spain		0.00	%		49.34	%		52.80	%	PROPERTY
Konecta Brazil Outsourcing Ltda.	Brazil		0.00	%		51.85	%		99.99	%	SERVICES
Konecta Broker, S.L.	Spain		0.00	%		51.86	%		100.00	%	SERVICES
Konecta Bto, S.L.	Spain		0.00	%		51.86	%		100.00	%	TELECOMMUNICATIONS
Konecta Catalunya, S.L.	Spain		0.00	%		51.86	%		100.00	%	SERVICES
Konecta Chile Limitada	Chile		0.00	%		51.86	%		100.00	%	SERVICES
Konecta Colombia Grupo Konecta Colombia Ltda	Colombia		0.00	%		51.86	%		100.00	%	TELEMARKETING
Konecta Field Marketing, S.A.	Spain		0.00	%		51.86	%		100.00	%	MARKETING
Konecta Perú S.A.C.	Peru		0.00	%		51.86	%		100.00	%	SERVICES
Konecta Portugal, Lda.	Portugal		0.00	%		51.86	%		100.00	%	MARKETING
Konecta Servicios Administrativos y Tecnológicos, S.L.	Spain		0.00	%		51.86	%		100.00	%	SERVICES
Konecta Servicios de BPO, S.L.	Spain		0.00	%		51.84	%		99.97	%	SERVICES
Konectanet Andalucía, S.L.	Spain		0.00	%		51.86	%		100.00	%	SERVICES
Konectanet Comercialización, S.L.	Spain		0.00	%		51.86	%		100.00	%	MARKETING
Kontacta Comunicaciones, S.A.	Spain		0.00	%		38.89	%		75.00	%	SERVICES
La Unión Resinera Española, S.A. (consolidated)	Spain		74.87	%		21.48	%		96.44	%	CHEMICALS
Laboratorios Indas, S.A.	Spain		0.00	%		73.22	%		73.22	%	HEALTH PRODUCTS
Langton Funding (No.1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITIZATION
Langton Mortgages Trustee (UK) Limited	United Kingdom		—				(a)		—		SECURITIZATION
Langton Mortgages Trustee Limited	Jersey		—				(a)		—		SECURITIZATION
Langton PECOH Limited	United Kingdom		—				(a)		—		SECURITIZATION
Langton Securities (2008-1) plc	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITIZATION
Langton Securities (2008-2) plc (b)	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITIZATION
Langton Securities (2010-1) PLC	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITIZATION
Langton Securities (2010-2) PLC	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITIZATION
Langton Securities (2012-1) PLC	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITIZATION
Langton Securities Holdings Limited	United Kingdom		—				(a)		—		SECURITIZATION
Laparanza, S.A.	Spain		61.59	%		0.00	%		61.59	%	AGRICULTURE AND LIVESTOCK
Larix Chile Inversiones Limitada	Chile		0.00	%		89.65	%		100.00	%	FINANCE
Lease Totta No. 1 FTC	Portugal		—				(a)		—		SECURITIZATION
Leasetotta No. 1 Limited	Ireland		—				(a)		—		SECURITIZATION
Liquidity Import Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FACTORING
Liquidity Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FACTORING
Luresa Inmobiliaria, S.A.	Spain		0.00	%		96.35	%		100.00	%	PROPERTY
Luri 1, S.A. (e)	Spain		0.00	%		5.59	%		100.00	%	PROPERTY
Luri 2, S.A. (e)	Spain		0.00	%		4.82	%		100.00	%	PROPERTY
Luri 4, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	PROPERTY
Luri Land, S.A. (e)	Belgium		0.00	%		5.16	%		100.00	%	PROPERTY
MAC No. 1 Limited	United Kingdom		—				(a)		—		MORTGAGE LOAN COMPANY
Mantiq Investimentos Ltda.	Brazil		0.00	%		75.21	%		100.00	%	BROKER-DEALER
Marylebone Road CBO 3 BV	The Netherlands		—				(a)		—		SECURITIZATION
Mata Alta, S.L.	Spain		0.00	%		61.59	%		100.00	%	PROPERTY
Merciver, S.L.	Spain		0.00	%		89.65	%		100.00	%	FINANCIAL ADVISORY
Mesena CLO 2011-1 B.V.	The Netherlands		—				(a)		—		SECURITIZATION
Mitre Capital Partners Limited	United Kingdom		0.00	%		100.00	%		100.00	%	MORTGAGE LOAN COMPANY
Motor 2011 Holdings Limited	United Kingdom		—				(a)		—		SECURITIZATION

F-311

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
Motor 2011 PLC	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITIZATION
Motor 2012 Holdings Limited	United Kingdom		—				(a)		—		SECURITIZATION
Motor 2012 PLC	United Kingdom		0.00	%		100.00	%		100.00	%	SECURITIZATION
MS Participações Societárias S.A.	Brazil		0.00	%		75.19	%		99.97	%	HOLDING COMPANY
Multinegocios S.A.	Chile		0.00	%		99.54	%		100.00	%	ADVISORY SERVICES
Multiservicios de Negocios Limitada	Chile		0.00	%		100.00	%		100.00	%	FINANCIAL SERVICES
N&P (B.E.S.) Loans (b)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
Naviera Mirambel, S.L.	Spain		0.00	%		100.00	%		100.00	%	FINANCE
Naviera Trans Gas, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	RENTING
Naviera Trans Ore, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	RENTING
Naviera Trans Wind, S.L.	Spain		99.99	%		0.01	%		100.00	%	RENTING
Nebraska Wind I LLC	United States		0.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
NIB Special Investors IV-A LP	Canada		0.00	%		99.70	%		4.99	%	HOLDING COMPANY
NIB Special Investors IV-B LP	Canada		0.00	%		95.80	%		4.99	%	HOLDING COMPANY
Norbest AS	Norway		7.94	%		92.06	%		100.00	%	SECURITIES INVESTMENT
NW Services CO.	United States		0.00	%		99.42	%		100.00	%	E-COMMERCE
Oil-Dor, S.A.	Spain		0.00	%		89.64	%		99.99	%	FINANCE
Open Bank, S.A.	Spain		100.00	%		0.00	%		100.00	%	BANKING
Optimal Alternative Investments, S.G.I.I.C., S.A.	Spain		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Optimal Investment Services S.A.	Switzerland		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Optimal Multiadvisors Ireland Plc / Optimal Strategic US Equity Ireland Euro Fund	Ireland		0.00	%		53.06	%		51.09	%	FUND MANAGEMENT COMPANY
Optimal Multiadvisors Ireland Plc / Optimal Strategic US Equity Ireland US Dollar Fund	Ireland		0.00	%		48.38	%		54.47	%	FUND MANAGEMENT COMPANY
Optimal Multiadvisors Ltd / Optimal Strategic US Equity Series (consolidated)	Bahamas		0.00	%		65.44	%		63.79	%	FUND MANAGEMENT COMPANY
Palm Valley Topco LLC (consolidated)	United States		0.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Parasant SA	Switzerland		100.00	%		0.00	%		100.00	%	HOLDING COMPANY
Parque Eólico Valcaire, S.L.	Spain		0.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
PBE Companies, LLC	United States		0.00	%		100.00	%		100.00	%	PROPERTY
Peak Market, S.L.	Spain		0.00	%		89.65	%		100.00	%	SERVICES
PECOH Limited	United Kingdom		—				(a)		—		SECURITIZATION
Pereda Gestión, S.A.	Spain		99.99	%		0.01	%		100.00	%	HOLDING COMPANY
Perevent Empresa de Servicios Eventuales S.A.	Argentina		0.00	%		99.97	%		100.00	%	SERVICES
Pingham International, S.A.	Uruguay		0.00	%		100.00	%		100.00	%	SERVICES
Portada S.A. in liquidation (b)	Chile		0.00	%		96.17	%		96.17	%	FINANCE
Portal Universia Argentina S.A.	Argentina		0.00	%		75.75	%		75.75	%	INTERNET
Portal Universia Portugal, Prestação de Serviços de Informática, S.A.	Portugal		0.00	%		100.00	%		100.00	%	INTERNET
Portal Universia, S.A.	Spain		0.00	%		56.56	%		56.56	%	INTERNET
Procura Digital de Venezuela, S.A.	Venezuela		0.00	%		99.42	%		100.00	%	E-COMMERCE
Produban Servicios Informáticos Generales, S.L.	Spain		99.96	%		0.04	%		100.00	%	SERVICES
Produban Serviços de Informática S.A.	Brazil		0.00	%		100.00	%		100.00	%	IT SERVICES
Programa Multi Sponsor PMS, S.A.	Spain		50.00	%		50.00	%		100.00	%	ADVERTISING
Promociones y Servicios Monterrey, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	PROPERTY
Promociones y Servicios Polanco, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	PROPERTY
Promociones y Servicios Santiago, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	PROPERTY
Promodomus Desarrollo de Activos, S.L.	Spain		0.00	%		45.72	%		51.00	%	PROPERTY

F-312

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
Puntoform, S.L.	Spain		0.00	%		51.86	%		100.00	%	TRAINING
Real Corretora de Seguros S.A. (d)	Brazil		0.00	%		0.00	%		0.00	%	INSURANCE BROKER
REB Empreendimentos e Administradora de Bens S.A.	Brazil		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Reintegra, S.A.	Spain		55.00	%		45.00	%		100.00	%	SERVICES
Retail Financial Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Riobank International (Uruguay) SAIFE (b)	Uruguay		0.00	%		100.00	%		100.00	%	BANKING
Rosenlease, S.L.	Spain		99.99	%		0.00	%		99.99	%	RENTING
Ruevilliot 26, S.L.	Spain		0.00	%		70.00	%		70.00	%	PROPERTY
Saja Eca Limited	Ireland		—				(a)		—		SECURITIZATION
Sancap Investimentos e Participações S.A.	Brazil		0.00	%		75.21	%		100.00	%	HOLDING COMPANY
Sánchez Ramade Santander Financiera, S.L.	Spain		0.00	%		50.00	%		50.00	%	FINANCIAL SERVICES
Saninv - Gestão e Investimentos, Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Sansol S.r.l.	Italy		0.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Santander (CF Trustee Property Nominee) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SERVICES
Santander (CF Trustee) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY
Santander (UK) Group Pension Scheme Trustees Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY
Santander Administradora de Consórcios Ltda. (d)	Brazil		0.00	%		0.00	%		0.00	%	FINANCE
Santander Agente de Valores Limitada	Chile		0.00	%		67.33	%		100.00	%	BROKER-DEALER
Santander Ahorro Inmobiliario 2 S.I.I., S.A.	Spain		78.05	%		0.01	%		78.06	%	PROPERTY
Santander AM Holding, S.L.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY
Santander Asset Finance (December) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
Santander Asset Finance plc	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
Santander Asset Management - Sociedade Gestora de Fundos de Investimento Mobiliário, S.A.	Portugal		0.00	%		99.76	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Asset Management Chile S.A.	Chile		0.01	%		99.83	%		100.00	%	SECURITIES INVESTMENT
Santander Asset Management Corporation	Puerto Rico		0.00	%		100.00	%		100.00	%	MANAGEMENT COMPANY
Santander Asset Management Luxembourg, S.A.	Luxembourg		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Asset Management S.A. Administradora General de Fondos	Chile		0.00	%		67.02	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Asset Management UK Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Asset Management UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGER
Santander Asset Management, S.A., S.G.I.I.C.	Spain		28.30	%		71.70	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Back-Offices Globales Especializados, S.A.	Spain		99.99	%		0.01	%		100.00	%	SERVICES
Santander Back-Offices Globales Mayoristas, S.A.	Spain		100.00	%		0.00	%		100.00	%	SERVICES
Santander BanCorp	Puerto Rico		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Banif Inmobiliario, F.I.I.	Spain		88.09	%		9.54	%		98.73	%	PROPERTY
Santander Bank & Trust Ltd.	Bahamas		0.00	%		100.00	%		100.00	%	BANKING
Santander Benelux, S.A./N.V.	Belgium		83.20	%		16.80	%		100.00	%	BANKING
Santander Brasil Administradora de Consórcio Ltda.	Brazil		0.00	%		75.21	%		100.00	%	SERVICES
Santander Brasil Advisory Services S.A.	Brazil		0.00	%		72.60	%		96.52	%	CONSULTANCY SERVICES
Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A.	Brazil		0.00	%		75.21	%		100.00	%	MANAGEMENT COMPANY
Santander Brasil, EFC, S.A.	Spain		0.00	%		75.21	%		100.00	%	FINANCE
Santander Capital Desarrollo, SGECR, S.A.	Spain		100.00	%		0.00	%		100.00	%	VENTURE CAPITAL COMPANY
Santander Capital Structuring, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	COMMERCE
Santander Capitalização S.A.	Brazil		0.00	%		75.21	%		100.00	%	INSURANCE
Santander Carbón Finance, S.A.	Spain		99.98	%		0.02	%		100.00	%	SECURITIES INVESTMENT

F-313

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
Santander Cards Ireland Limited	Ireland		0.00	%		100.00	%		100.00	%	CARDS
Santander Cards Limited	United Kingdom		0.00	%		100.00	%		100.00	%	CARDS
Santander Cards UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Santander Carteras, S.G.C., S.A.	Spain		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Central Hispano Financial Services Limited	Cayman Islands		100.00	%		0.00	%		100.00	%	FINANCE
Santander Central Hispano International Limited	Cayman Islands		100.00	%		0.00	%		100.00	%	FINANCE
Santander Central Hispano Issuances Limited	Cayman Islands		100.00	%		0.00	%		100.00	%	FINANCE
Santander Chile Holding S.A.	Chile		22.11	%		77.43	%		99.54	%	HOLDING COMPANY
Santander Commercial Paper, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE
Santander Consulting (Beijing) Co., Ltd.	China		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES
Santander Consumer (UK) plc	United Kingdom		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES
Santander Consumer Bank AG	Germany		0.00	%		100.00	%		100.00	%	BANKING
Santander Consumer Bank AS	Norway		0.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Bank GmbH	Austria		0.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Bank S.p.A.	Italy		0.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Bank Spólka Akcyjna	Poland		0.00	%		70.00	%		70.00	%	BANKING
Santander Consumer Beteiligungsverwaltungsgesellschaft mbH	Germany		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Consumer Chile S.A.	Chile		51.00	%		0.00	%		51.00	%	FINANCE
Santander Consumer Credit Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Finance Benelux B.V.	The Netherlands		0.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Finance Media S.r.l.	Italy		0.00	%		65.00	%		65.00	%	FINANCE
Santander Consumer Finance Oy	Finland		0.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Finance Zrt.	Hungary		0.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Finance, S.A.	Spain		63.19	%		36.81	%		100.00	%	BANKING
Santander Consumer Finanse Spólka Akcyjna	Poland		0.00	%		70.00	%		70.00	%	SERVICES
Santander Consumer Holding Austria GmbH	Austria		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Consumer Holding GmbH	Germany		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Consumer Leasing GmbH	Germany		0.00	%		100.00	%		100.00	%	LEASING
Santander Consumer Multirent Spółka z ograniczoną odpowiedzialnością	Poland		0.00	%		70.00	%		100.00	%	LEASING
Santander Consumer Renting, S.L.	Spain		0.00	%		100.00	%		100.00	%	RENTING
Santander Consumer Services GmbH	Austria		0.00	%		100.00	%		100.00	%	SERVICES
Santander Consumer, EFC, S.A.	Spain		0.00	%		100.00	%		100.00	%	FINANCE
Santander Consumo Perú S.A.	Peru		55.00	%		0.00	%		55.00	%	FINANCE
Santander Consumo, S.A. de C.V., SOFOM, E.R.	Mexico		0.00	%		75.11	%		100.00	%	CARDS
Santander Corredora de Seguros Limitada	Chile		0.00	%		67.10	%		100.00	%	INSURANCE BROKER
Santander Corretora de Câmbio e Valores Mobiliários S.A.	Brazil		0.00	%		75.21	%		100.00	%	BROKER-DEALER
Santander de Titulización S.G.F.T., S.A.	Spain		81.00	%		19.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Energías Renovables I, SCR de Régimen Simplificado, S.A.	Spain		56.76	%		0.00	%		56.76	%	VENTURE CAPITAL COMPANY
Santander Envíos, S.A.	Spain		100.00	%		0.00	%		100.00	%	TRANSFER OF FUNDS FOR IMMIGRANTS
Santander Estates Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY
Santander Factoring S.A.	Chile		0.00	%		99.54	%		100.00	%	FACTORING
Santander Factoring y Confirming, S.A., E.F.C.	Spain		100.00	%		0.00	%		100.00	%	FACTORING
Santander Finance 2012-1 LLC	United States		0.00	%		100.00	%		100.00	%	FINANCIAL SERVICES
Santander Financial Exchanges Limited	United Kingdom		100.00	%		0.00	%		100.00	%	FINANCE
Santander Financial Products plc	Ireland		0.00	%		100.00	%		100.00	%	FINANCE
Santander Financial Services, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%	LENDING COMPANY

F-314

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
Santander GBM Secured Financing Limited	Ireland		—				(a)		—		SECURITIZATION
Santander Generales Seguros y Reaseguros, S.A.	Spain		0.00	%		100.00	%		100.00	%	INSURANCE
Santander Gestão de Activos, SGPS, S.A.	Portugal		0.00	%		99.76	%		100.00	%	HOLDING COMPANY
Santander Gestión de Recaudación y Cobranzas Ltda.	Chile		0.00	%		99.54	%		100.00	%	FINANCIAL SERVICES
Santander Gestión Inmobiliaria, S.A.	Spain		0.01	%		99.99	%		100.00	%	PROPERTY
Santander Getnet Serviços para Meios de Pagamento S.A.	Brazil		0.00	%		37.61	%		50.00	%	SERVICES
Santander Global Consumer Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Santander Global Facilities, S.A. de C.V.	Mexico		100.00	%		0.00	%		100.00	%	PROPERTY MANAGEMENT
Santander Global Facilities, S.L.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY
Santander Global Property México, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	PROPERTY
Santander Global Property U.S.A., Inc.	United States		0.00	%		100.00	%		100.00	%	SERVICES
Santander Global Property, S.L.	Spain		97.34	%		2.66	%		100.00	%	SECURITIES INVESTMENT
Santander Global Services, S.A. (b)	Uruguay		0.00	%		100.00	%		100.00	%	SERVICES
Santander Global Sport, S.A.	Spain		100.00	%		0.00	%		100.00	%	SPORTS OPERATIONS
Santander Guarantee Company	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING
Santander Hipotecario 1 Fondo de Titulización de Activos	Spain		—				(a)		—		SECURITIZATION
Santander Hipotecario 2 Fondo de Titulización de Activos	Spain		—				(a)		—		SECURITIZATION
Santander Hipotecario 3 Fondo de Titulización de Activos	Spain		—				(a)		—		SECURITIZATION
Santander Hipotecario, S.A. de C.V., SOFOM, E.R.	Mexico		0.00	%		75.11	%		100.00	%	FINANCE
Santander Holanda B.V.	The Netherlands		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Holding Internacional, S.A.	Spain		99.95	%		0.05	%		100.00	%	HOLDING COMPANY
Santander Holding Vivienda, S.A. de C.V.	Mexico		0.00	%		75.11	%		100.00	%	SERVICES
Santander Holdings USA, Inc.	United States		100.00	%		0.00	%		100.00	%	HOLDING COMPANY
Santander Insurance Agency, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%	INSURANCE BROKER
Santander Insurance Agency, U.S., LLC	United States		0.00	%		100.00	%		100.00	%	INSURANCE
Santander Insurance Europe Limited	Ireland		0.00	%		100.00	%		100.00	%	INSURANCE BROKER
Santander Insurance Holding, S.L.	Spain		99.99	%		0.01	%		100.00	%	HOLDING COMPANY
Santander Insurance Life Limited	Ireland		0.00	%		100.00	%		100.00	%	INSURANCE BROKER
Santander Insurance Services Ireland Limited	Ireland		0.00	%		100.00	%		100.00	%	SERVICES
Santander Insurance Services UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY
Santander Intermediación Correduría de Seguros, S.A.	Spain		0.00	%		100.00	%		100.00	%	INSURANCE BROKER
Santander International Debt, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE
Santander International Securities, Inc.	United States		0.00	%		100.00	%		100.00	%	BROKER-DEALER
Santander Inversiones Limitada	Chile		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Investimentos em Participações S.A. (d)	Brazil		0.00	%		0.00	%		0.00	%	COLLECTION AND PAYMENT SERVICES
Santander Investment Bank Limited	Bahamas		0.00	%		100.00	%		100.00	%	BANKING
Santander Investment Bolsa, S.V., S.A.	Spain		0.00	%		100.00	%		100.00	%	BROKER-DEALER
Santander Investment Chile Limitada	Chile		0.00	%		100.00	%		100.00	%	FINANCE
Santander Investment I, S.A.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY
Santander Investment Limited	Bahamas		0.00	%		100.00	%		100.00	%	BROKER-DEALER
Santander Investment Securities Inc.	United States		0.00	%		100.00	%		100.00	%	BROKER-DEALER
Santander Investment, S.A.	Spain		100.00	%		0.00	%		100.00	%	BANKING
Santander ISA Managers Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGER
Santander Issuances, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE
Santander Lease, S.A., E.F.C.	Spain		70.00	%		30.00	%		100.00	%	LEASING

F-315

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
Santander Leasing S.A. Arrendamento Mercantil	Brazil		0.00	%		75.21	%		99.99	%	LEASING
Santander Mediación Operador de Banca-Seguros Vinculado, S.A.	Spain		21.00	%		75.96	%		100.00	%	INSURANCE BROKERAGE
Santander Merchant S.A.	Argentina		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Microcrédito Assessoria Financeira S.A.	Brazil		0.00	%		75.21	%		100.00	%	FINANCIAL SERVICES
Santander Operaciones Retail, S.A.	Spain		0.00	%		100.00	%		100.00	%	SERVICES
Santander Overseas Bank, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%	BANKING
Santander Participações S.A.	Brazil		0.00	%		75.21	%		100.00	%	HOLDING COMPANY
Santander PB UK (Holdings) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Santander Pensiones, S.A., E.G.F.P.	Spain		21.20	%		78.80	%		100.00	%	PENSION FUND MANAGEMENT COMPANY
Santander Pensões - Sociedade Gestora de Fundos de Pensões, S.A.	Portugal		0.00	%		99.76	%		100.00	%	PENSION FUND MANAGEMENT COMPANY
Santander Perpetual, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE
Santander Portfolio Management UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Santander Private Banking s.p.a.	Italy		100.00	%		0.00	%		100.00	%	BANKING
Santander Private Banking UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY
Santander Private Equity, S.A., S.G.E.C.R.	Spain		90.00	%		9.98	%		100.00	%	VENTURE CAPITAL MANAGEMENT COMPANY
Santander Private Real Estate Advisory, S.A. Sole-Shareholder Company	Spain		99.98	%		0.02	%		100.00	%	PROPERTY
Santander Real Estate, S.G.I.I.C., S.A.	Spain		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Río Asset Management Gerente de Fondos Comunes de Inversión S.A.	Argentina		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Río Servicios S.A.	Argentina		0.00	%		99.97	%		100.00	%	ADVISORY SERVICES
Santander Río Sociedad de Bolsa S.A.	Argentina		0.00	%		99.34	%		100.00	%	BROKER-DEALER
Santander Río Trust S.A.	Argentina		0.00	%		99.97	%		100.00	%	SERVICES
Santander S.A. - Serviços Técnicos, Administrativos e de Corretagem de Seguros	Brazil		0.00	%		84.97	%		100.00	%	INSURANCE BROKER
Santander S.A. Corredores de Bolsa	Chile		0.00	%		83.18	%		100.00	%	BROKER-DEALER
Santander S.A. Sociedad Securitizadora	Chile		0.00	%		67.13	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Secretariat Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Securities LLC	Puerto Rico		0.00	%		100.00	%		100.00	%	BROKER-DEALER
Santander Seguros y Reaseguros, Compañía Aseguradora, S.A.	Spain		0.00	%		100.00	%		100.00	%	INSURANCE
Santander Service GmbH	Germany		0.00	%		100.00	%		100.00	%	SERVICES
Santander Servicios Corporativos, S.A. de C.V.	Mexico		0.00	%		75.11	%		100.00	%	SERVICES
Santander Servicios de Recaudación y Pagos Limitada	Chile		0.00	%		67.01	%		100.00	%	SERVICES
Santander Servicios Especializados, S.A. de C.V.	Mexico		0.00	%		75.11	%		100.00	%	FINANCIAL SERVICES
Santander Tecnología y Operaciones A.E.I.E.	Spain		—				(a)		—		SERVICES
Santander Totta Seguros, Companhia de Seguros de Vida, S.A.	Portugal		0.00	%		99.87	%		100.00	%	INSURANCE
Santander Totta, SGPS, S.A.	Portugal		0.00	%		99.87	%		99.87	%	HOLDING COMPANY
Santander Trade Services Limited	Hong-Kong		0.00	%		100.00	%		100.00	%	SERVICES
Santander UK Foundation Limited	United Kingdom		—				(a)		—		SECURITIZATION
Santander UK Investments	United Kingdom		100.00	%		0.00	%		100.00	%	FINANCE
Santander UK plc	United Kingdom		77.67	%		22.33	%		100.00	%	BANKING
Santander Unit Trust Managers UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGER
Santander US Debt, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE
Santander Venezuela Sociedad Administradora de Entidades de Inversión Colectiva, C.A.	-Venezuela		0.00	%		90.00	%		100.00	%	FUND MANAGEMENT COMPANY

F-316

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
Santander Vida Seguros y Reaseguros, S.A.	Spain		0.00	%		100.00	%		100.00	%	INSURANCE
Santos Energia Participações S.A.	Brazil		0.00	%		75.21	%		99.99	%	HOLDING COMPANY
Santotta-Internacional, SGPS, Sociedade Unipessoal, Lda.	Portugal		0.00	%		99.76	%		100.00	%	HOLDING COMPANY
Santusa Holding, S.L.	Spain		69.76	%		30.24	%		100.00	%	HOLDING COMPANY
Saturn Japan II Sub C.V.	The Netherlands		0.00	%		69.30	%		0.00	%	HOLDING COMPANY
Saturn Japan III Sub C.V.	The Netherlands		0.00	%		72.71	%		0.00	%	HOLDING COMPANY
SC Germany Auto 06 plc	Ireland		—				(a)		—		SECURITIZATION
SC Germany Auto 08-2 Limited (b)	Ireland		—				(a)		—		SECURITIZATION
SC Germany Auto 2009-1 Limited	Ireland		—				(a)		—		SECURITIZATION
SC Germany Auto 2010-1 UG (haftungsbeschränkt)	Germany		—				(a)		—		SECURITIZATION
SC Germany Auto 2011-1 UG (haftungsbeschränkt)	Germany		—				(a)		—		SECURITIZATION
SC Germany Auto 2011-2 UG (haftungsbeschränkt)	Germany		—				(a)		—		SECURITIZATION
SC Germany Consumer 08-1 Limited (b)	Ireland		—				(a)		—		SECURITIZATION
SC Germany Consumer 09-1 Limited (b)	Ireland		—				(a)		—		SECURITIZATION
SC Germany Consumer 10-1 Limited	Ireland		—				(a)		—		SECURITIZATION
SC Germany Consumer 11 -1 Limited	Ireland		—				(a)		—		SECURITIZATION
SC Private Cars 2010-1 Limited	Ireland		—				(a)		—		SECURITIZATION
SCF Ajoneurohallinto Limited	Ireland		—				(a)		—		SECURITIZATION
SCF Rahoituspalvelut Limited	Ireland		—				(a)		—		SECURITIZATION
SCI BANBY PRO	France		0.00	%		90.00	%		100.00	%	PROPERTY
Scottish Mutual Pensions Limited	United Kingdom		0.00	%		100.00	%		100.00	%	INSURANCE
Serfin International Bank and Trust, Limited	Cayman Islands		0.00	%		99.76	%		100.00	%	BANKING
Services and Promotions Delaware Corporation	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Services and Promotions Miami LLC	United States		0.00	%		100.00	%		100.00	%	PROPERTY
Servicio de Alarmas Controladas por Ordenador, S.A.	Spain		99.99	%		0.01	%		100.00	%	SECURITY
Servicios Administrativos y Financieros Ltda.	Chile		0.00	%		100.00	%		100.00	%	SERVICES
Servicios Corporativos Seguros Serfin, S.A. de C.V. (b)	Mexico		0.00	%		100.00	%		100.00	%	SERVICES
Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	FINANCE
Servicios de Cobranzas Fiscalex Ltda.	Chile		0.00	%		99.54	%		100.00	%	SERVICES
Servicios Universia Venezuela S.U.V., S.A. (b)	Venezuela		0.00	%		82.99	%		82.99	%	INTERNET
Sheppards Moneybrokers Limited	United Kingdom		0.00	%		99.99	%		100.00	%	ADVISORY SERVICES
Shiloh III Wind Project, LLC	United States		0.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Silk Finance No. 3 Limited	Ireland		—				(a)		—		SECURITIZATION
Sinvest Inversiones y Asesorías Limitada	Chile		0.00	%		100.00	%		100.00	%	FINANCE
Sistema 4B, S.A. (consolidated)	Spain		52.79	%		13.33	%		67.67	%	CARDS
Sociedad Integral de Valoraciones Automatizadas, S.A.	Spain		100.00	%		0.00	%		100.00	%	APPRAISALS
Socur, S.A.	Uruguay		100.00	%		0.00	%		100.00	%	FINANCE
Sodepro, S.A.	Spain		0.00	%		89.65	%		100.00	%	FINANCE
Solarlaser Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY
SOV APEX LLC	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Sovereign Bank, National Association	United States		0.00	%		100.00	%		100.00	%	BANKING
Sovereign Capital Trust IV	United States		0.00	%		100.00	%		100.00	%	FINANCE
Sovereign Capital Trust IX	United States		0.00	%		100.00	%		100.00	%	FINANCE
Sovereign Capital Trust V	United States		0.00	%		100.00	%		100.00	%	FINANCE
Sovereign Capital Trust VI	United States		0.00	%		100.00	%		100.00	%	FINANCE
Sovereign Community Development Company	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY

F-317

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
Sovereign Delaware Investment Corporation	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Sovereign Lease Holdings, LLC	United States		0.00	%		100.00	%		100.00	%	FINANCIAL SERVICES
Sovereign Leasing, LLC	United States		0.00	%		100.00	%		100.00	%	LEASING
Sovereign Precious Metals, LLC	United States		0.00	%		100.00	%		100.00	%	PURCHASE AND SALE OF PRECIOUS METALS
Sovereign REIT Holdings, Inc.	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Sovereign Securities Corporation, LLC	United States		0.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Sovereign Spirit Limited (f)	Bermuda		0.00	%		100.00	%		100.00	%	LEASING
Sterrebeeck B.V.	The Netherlands		100.00	%		0.00	%		100.00	%	HOLDING COMPANY
Suleyado 2003, S.L.	Spain		0.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Suzuki Servicios Financieros, S.L.	Spain		0.00	%		51.00	%		51.00	%	INTERMEDIATION
Svensk Autofinans 1 Limited	Ireland		—				(a)		—		SECURITIZATION
Swesant SA	Switzerland		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Synergy Abstract, LP	United States		0.00	%		70.00	%		70.00	%	INSURANCE
Taralga Holding Land Trust	Australia		0.00	%		90.00	%		90.00	%	ELECTRICITY PRODUCTION
Taralga Holding Nominees 1 PTY Limited	Australia		0.00	%		90.00	%		90.00	%	ELECTRICITY PRODUCTION
Taralga Holding Nominees 2 PTY Limited	Australia		0.00	%		90.00	%		90.00	%	ELECTRICITY PRODUCTION
Taralga Holding Operating Trust	Australia		0.00	%		90.00	%		90.00	%	ELECTRICITY PRODUCTION
Task Moraza, S.L.	Spain		0.00	%		73.22	%		73.22	%	HOLDING COMPANY
Taxagest Sociedade Gestora de Participações Sociais, S.A.	Portugal		0.00	%		99.76	%		100.00	%	HOLDING COMPANY
Teatinos Siglo XXI Inversiones S.A.	Chile		50.00	%		50.00	%		100.00	%	HOLDING COMPANY
Teylada, S.A. in liquidation (b)	Spain		11.11	%		88.89	%		100.00	%	SECURITIES INVESTMENT
The Alliance & Leicester Corporation Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY
The HSH AIV 4 Trust	United States		0.00	%		69.83	%		4.99	%	HOLDING COMPANY
The JCF HRE AIV II-A Trust (b)	United States		0.00	%		73.70	%		4.99	%	HOLDING COMPANY
The National & Provincial Building Society Pension Fund Trustees Limited	United Kingdom		—				(a)		—		ASSET MANAGEMENT COMPANY
The Prepaid Card Company Limited	United Kingdom		0.00	%		80.00	%		80.00	%	FINANCE
Time Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SERVICES
Time Retail Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SERVICES
Títulos de Renta Fija, S.A.	Spain		100.00	%		0.00	%		100.00	%	SECURITIES INVESTMENT
Tonopah Solar I LLC	United States		0.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Tornquist Asesores de Seguros S.A. (b)	Argentina		0.00	%		99.99	%		99.99	%	ADVISORY SERVICES
Totta & Açores Inc. Newark	United States		0.00	%		99.76	%		100.00	%	BANKING
Totta (Ireland), PLC	Ireland		0.00	%		99.76	%		100.00	%	FINANCE
Totta Consumer No.1	Portugal		—				(a)		—		SECURITIZATION
Totta Urbe - Empresa de Administração e Construções, S.A.	Portugal		0.00	%		99.76	%		100.00	%	PROPERTY
Turyocio Viajes y Fidelización, S.A.	Spain		0.00	%		65.06	%		65.06	%	TRAVEL
Tuttle & Son Limited	United Kingdom		0.00	%		100.00	%		100.00	%	COLLECTION AND PAYMENT SERVICES
UNIFIN S.p.A.	Italy		0.00	%		100.00	%		100.00	%	FINANCE
Universal Support, S.A.	Spain		0.00	%		51.86	%		100.00	%	TELEMARKETING
Universia Brasil S.A.	Brazil		0.00	%		100.00	%		100.00	%	INTERNET
Universia Chile S.A.	Chile		0.00	%		84.39	%		84.39	%	INTERNET
Universia Colombia S.A.S.	Colombia		0.00	%		100.00	%		100.00	%	INTERNET
Universia Holding, S.L.	Spain		99.99	%		0.01	%		100.00	%	HOLDING COMPANY
Universia México, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	INTERNET

F-318

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (c)			Line of business
Universia Perú, S.A.	Peru		0.00	%		84.45	%		84.45	%	INTERNET
Universia Puerto Rico, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%	INTERNET
Valores Santander Casa de Bolsa, C.A.	Venezuela		0.00	%		90.00	%		90.00	%	BROKER-DEALER
Viking Collection Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE
Vista Capital de Expansión, S.A. SGECR	Spain		0.00	%		50.00	%		50.00	%	VENTURE CAPITAL MANAGEMENT COMPANY
Vista Desarrollo, S.A. SCR de Régimen Simplificado	Spain		100.00	%		0.00	%		100.00	%	VENTURE CAPITAL COMPANY
W.N.P.H. Gestão e Investimentos Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Wallcesa, S.A.	Spain		100.00	%		0.00	%		100.00	%	SECURITIES INVESTMENT
Waypoint Insurance Group, Inc.	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Webmotors S.A.	Brazil		0.00	%		84.97	%		100.00	%	SERVICES
Whitewick Limited	Jersey		0.00	%		100.00	%		100.00	%	INACTIVE
WIM Servicios Corporativos, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES
Żagiel Spólka Akcyjna	Poland		0.00	%		70.00	%		100.00	%	FINANCE

(a) Companies over which effective control is exercised.

(b) Company in liquidation at December 31, 2012.

(c) 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 persons acting in their own name but on behalf of Group companies was added to the voting power directly held by the Parent. For these purposes, 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.

(d) Company in merger process with another Group company. Awaiting registration at Mercantile Registry.

(e) See note 2.b.v.

(f) Company resident in the UK for tax purposes.

(1) The preference share issuer companies are detailed in Appendix III, together with other relevant information.

F-319

Exhibit II

Companies in which Santander Group has ownership interests of more than 5% (b), associates of Santander Group and jointly controlled entities

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (a)			Line of business
26 Rue Villiot S.A.S.	France		0.00	%		35.00	%		50.00	%	PROPERTY
Administrador Financiero de Transantiago S.A.	Chile		0.00	%		13.40	%		20.00	%	PAYMENT AND COLLECTION SERVICES
Affirmative Insurance Holdings Inc. (consolidated)	United States		0.00	%		5.03	%		0.00	%	INSURANCE
Affirmative Investment LLC	United States		0.00	%		5.03	%		4.99	%	HOLDING COMPANY
Agres, Agrupación Restauradores, S.L.	Spain		0.00	%		38.56	%		43.01	%	RESTAURANTS
Aguas de Fuensanta, S.A.	Spain		0.00	%		37.84	%		42.21	%	FOOD
Alcover AG	Switzerland		27.91	%		0.00	%		27.91	%	INSURANCE
Allfunds Bank, S.A.	Spain		50.00	%		0.00	%		50.00	%	BANKING
Allfunds International S.A.	Luxembourg		0.00	%		50.00	%		50.00	%	FINANCIAL SERVICES
Allfunds International Schweiz AG	Switzerland		0.00	%		50.00	%		50.00	%	SERVICES
Allfunds Nominee Limited	United Kingdom		0.00	%		50.00	%		50.00	%	HOLDING COMPANY
Anekis, S.A.	Spain		24.75	%		24.75	%		49.50	%	ADVERTISING
Arena Communications Network, S.L.	Spain		20.00	%		0.00	%		20.00	%	ADVERTISING
Attijari Factoring Maroc, S.A.	Morocco		0.00	%		28.99	%		28.99	%	FACTORING
Attijariwafa Bank Société Anonyme (consolidated)	Morocco		0.00	%		5.32	%		5.32	%	BANKING
Autopistas del Sol S.A.	Argentina		0.00	%		14.17.	%		14.17.	%	MOTORWAY CONCESSIONS
Aviva Powszechne Towarzystwo Emerytalne Aviva BZ WBK S.A.	Poland		0.00	%		9.42.	%		10.00.	%	PENSION FUND MANAGEMENT COMPANY
Aviva Towarzystwo Ubezpieczeń na Życie S.A.	Poland		0.00	%		9.42.	%		10.00.	%	INSURANCE
Banco Caixa Geral Totta de Angola, S.A.	Angola		0.00	%		24.93	%		24.99	%	BANKING
Banco Internacional da Guiné-Bissau, S.A. (d)	Guinea Bissau		0.00	%		48.88	%		49.00	%	BANKING
Bee Cave (TX) - HC Apartments Syndicated Holdings, LLC	United States		0.00	%		33.33	%		33.33	%	PROPERTY
Benim - Sociedade Imobiliária, S.A. (consolidated)	Portugal		0.00	%		25.75	%		25.81	%	PROPERTY
BZ WBK - Aviva Towarzystwo Ubezpieczeń na Życie S.A.	Poland		0.00	%		47.12	%		50.00	%	INSURANCE
BZ WBK - Aviva Towarzystwo Ubezpieczeń Ogólnych S.A.	Poland		0.00	%		47.12	%		50.00	%	INSURANCE
Cantabria Capital, SGECR, S.A.	Spain		50.00	%		0.00	%		50.00	%	VENTURE CAPITAL MANAGEMENT COMPANY
Carnes Estellés, S.A.	Spain		0.00	%		19.19	%		21.41	%	FOOD
Cartera del Norte, S.A.	Spain		0.00	%		32.36	%		36.10	%	FINANCE
CCPT - ComprarCasa, Rede Serviços Imobiliários, S.A.	Portugal		0.00	%		47.56	%		47.56	%	PROPERTY SERVICES
Centro de Compensación Automatizado S.A.	Chile		0.00	%		22.34	%		33.33	%	PAYMENT AND COLLECTION SERVICES
Centro para el Desarrollo, Investigación y Aplicación de Nuevas Tecnologías, S.A.	Spain		0.00	%		49.00	%		49.00	%	TECHNOLOGY
Charta Leasing No.1 Limited	United Kingdom		0.00	%		50.00	%		50.00	%	LEASING
Charta Leasing No.2 Limited	United Kingdom		0.00	%		50.00	%		50.00	%	LEASING
Companhia de Arrendamento Mercantil RCI Brasil	Brazil		0.00	%		30.00	%		39.90	%	LEASING
Companhia de Crédito, Financiamento e Investimento RCI Brasil	Brazil		0.00	%		30.00	%		39.90	%	FINANCE
Companhia Promotora UCI	Brazil		0.00	%		25.00	%		25.00	%	FINANCIAL SERVICES

F-320

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (a)			Line of business
Compañía Española de Seguros de Crédito a la Exportación, S.A.	Spain		13.95	%		6.45	%		21.08	%	CREDIT INSURANCE
Comprarcasa Servicios Inmobiliarios, S.A.	Spain		0.00	%		47.50	%		47.50	%	PROPERTY SERVICES
Desarrollos Eólicos Mexicanos de Oaxaca 2, S.A.P.I. de C.V.	Mexico		0.00	%		26.00	%		26.00	%	ELECTRICITY PRODUCTION
Dirgenfin, S.L.	Spain		0.00	%		39.19	%		40.00	%	REAL ESTATE DEVELOPMENT
FC2Egestión, S.L.	Spain		0.00	%		50.00	%		50.00	%	ENVIRONMENTAL MANAGEMENT
Federal Home Loan Bank of Pittsburgh	United States		0.00	%		21.01	%		21.01	%	BANKING
Federal Reserve Bank of Boston	United States		0.00	%		40.18	%		40.18	%	BANKING
Fondo de Titulización de Activos UCI 11	Spain		—				(c)		—		SECURITIZATION
Fondo de Titulización de Activos UCI 14	Spain		—				(c)		—		SECURITIZATION
Fondo de Titulización de Activos UCI 15	Spain		—				(c)		—		SECURITIZATION
Fondo de Titulización de Activos UCI 16	Spain		—				(c)		—		SECURITIZATION
Fondo de Titulización de Activos UCI 17	Spain		—				(c)		—		SECURITIZATION
Fondo de Titulización de Activos UCI 18	Spain		—				(c)		—		SECURITIZATION
Fondo de Titulización Hipotecaria UCI 10	Spain		—				(c)		—		SECURITIZATION
Fondo de Titulización Hipotecaria UCI 12	Spain		—				(c)		—		SECURITIZATION
Friedrichstrasse, S.L.	Spain		0.00	%		35.00	%		35.00	%	PROPERTY
Gire S.A.	Argentina		0.00	%		57.92	%		58.33	%	PAYMENT AND COLLECTION SERVICES
Grupo Alimentario de Exclusivas, S.A.	Spain		0.00	%		42.34	%		47.23	%	FOOD
Helican Desarrollo Eólico, S.L.	Spain		0.00	%		46.00	%		46.00	%	ELECTRICITY PRODUCTION
HLC - Centrais de Cogeração, S.A.	Portugal		0.00	%		24.46	%		24.49	%	ELECTRICITY PRODUCTION
Hyundai Capital Germany GmbH	Germany		0.00	%		49.99	%		49.99	%	SERVICES
Hyundai Capital UK Limited	United Kingdom		0.00	%		50.01	%		50.01	%	FINANCE
Imperial Holding S.C.A.	Luxembourg		0.00	%		36.36	%		36.36	%	SECURITIES INVESTMENT
Indice Iberoamericano de Investigación y Conocimiento, A.I.E.	Spain		0.00	%		51.00	%		51.00	%	INFORMATION SYSTEM
Inmo Alemania Gestión de Activos Inmobiliarios, S.A.	Spain		0.00	%		20.00	%		20.00	%	HOLDING COMPANY
Inversiones ZS América Dos Ltda	Chile		0.00	%		49.00	%		49.00	%	SECURITIES AND REAL ESTATE INVESTMENT
Inversiones ZS América SpA	Chile		0.00	%		49.00	%		49.00	%	SECURITIES AND REAL ESTATE INVESTMENT
Invico S.A.	Poland		0.00	%		19.87	%		12.21	%	COMMERCE
J.C. Flowers I L.P.	United States		0.00	%		10.60	%		4.99	%	HOLDING COMPANY
JC Flowers AIV P L.P.	Canada		0.00	%		7.67	%		4.99	%	HOLDING COMPANY
Kassadesign 2005, S.L.	Spain		0.00	%		44.82	%		50.00	%	PROPERTY
Krynicki Recykling S.A.	Poland		0.00	%		23.13	%		24.54	%	WASTE MANAGEMENT
Luri 3, S.A.	Spain		0.00	%		9.63	%		10.00	%	PROPERTY
Metrohouse & Partnerzy S.A.	Poland		0.00	%		20.01	%		21.23	%	PROPERTY
Metrovacesa, S.A. (consolidated)	Spain		22.60	%		11.00	%		34.87	%	PROPERTY
Neoen, SGPS, S.A.	Portugal		0.00	%		50.00	%		50.00	%	ELECTRICITY PRODUCTION
Nevis Power Limited	United Kingdom		0.00	%		50.00	%		50.00	%	ELECTRICITY PRODUCTION
New PEL S.a.r.l.	Luxembourg		0.00	%		7.67	%		0.00	%	HOLDING COMPANY
Norchem Holdings e Negócios S.A.	Brazil		0.00	%		16.36	%		29.00	%	HOLDING COMPANY
Norchem Participações e Consultoria S.A.	Brazil		0.00	%		37.61	%		50.00	%	BROKER-DEALER
NPG Wealth Management S.àr.l (consolidated)	Luxembourg		0.00	%		7.63	%		0.00	%	HOLDING COMPANY
Olivant Investments Switzerland S.A.	Luxembourg		0.00	%		35.18	%		35.18	%	HOLDING COMPANY
Olivant Limited (consolidated)	Guernsey		0.00	%		10.39	%		10.39	%	HOLDING COMPANY
Omega Financial Services GmbH	Germany		0.00	%		50.00	%		50.00	%	SERVICES

F-321

		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (a)			Line of business
Operadora de Activos Alfa, S.A. de C.V.	Mexico		0.00	%		49.98	%		49.98	%	FINANCE
Operadora de Activos Beta, S.A. de C.V.	Mexico		0.00	%		49.99	%		49.99	%	FINANCE
Parque Eólico Dominica, S.A.P.I. de C.V.	Mexico		0.00	%		50.00	%		50.00	%	ELECTRICITY PRODUCTION
Parque Eólico el Mezquite, S.A.P.I. de C.V.	Mexico		0.00	%		50.00	%		50.00	%	ELECTRICITY PRODUCTION
Parque Eólico la Carabina I, S.A.P.I. de C.V.	Mexico		0.00	%		50.00	%		50.00	%	ELECTRICITY PRODUCTION
Parque Eólico la Carabina II, S.A.P.I. de C.V.	Mexico		0.00	%		50.00	%		50.00	%	ELECTRICITY PRODUCTION
Parque Solar Afortunado, S.L.	Spain		0.00	%		87.85	%		25.00	%	ELECTRICITY PRODUCTION
Parque Solar la Robla, S.L.	Spain		0.00	%		85.16	%		25.00	%	ELECTRICITY PRODUCTION
Parque Solar Páramo, S.L.	Spain		0.00	%		82.48	%		25.00	%	ELECTRICITY PRODUCTION
Parque Solar Saelices, S.L.	Spain		0.00	%		85.16	%		25.00	%	ELECTRICITY PRODUCTION
Partang, SGPS, S.A.	Portugal		0.00	%		48.88	%		49.00	%	HOLDING COMPANY
POLFUND - Fundusz Poręczeń Kredytowych S.A.	Poland		0.00	%		47.12	%		50.00	%	MANAGEMENT COMPANY
Prodesur Mediterráneo, S.L.	Spain		0.00	%		44.82	%		50.00	%	PROPERTY
Proinsur Mediterráneo, S.L.	Spain		0.00	%		44.82	%		50.00	%	PROPERTY
Promoreras Desarrollo de Activos, S.L.	Spain		0.00	%		34.27	%		34.98	%	PROPERTY
PSA Finance PLC	United Kingdom		0.00	%		50.00	%		50.00	%	LEASING
Q 205 Real Estate GmbH	Germany		0.00	%		17.50	%		17.50	%	PROPERTY
Queenford, S.L.	Spain		0.00	%		48.01	%		49.00	%	PROPERTY
Redbanc S.A.	Chile		0.00	%		22.40	%		33.43	%	SERVICES
Redbanc, S.A.	Uruguay		0.00	%		20.00	%		20.00	%	SERVICES
Redsys Servicios de Procesamiento, S.L.U.	Spain		12.74	%		3.19	%		16.29	%	CARDS
Retama Real Estate, S.L.	Spain		0.00	%		50.00	%		50.00	%	SERVICES
Santander Ahorro Inmobiliario 1, S.I.I., S.A.	Spain		28.75	%		0.01	%		28.77	%	PROPERTY
Santander Consumer USA Inc. (consolidated)	United States		0.00	%		64.97	%		64.97	%	FINANCE
Santander Río Seguros S.A.	Argentina		0.00	%		49.00	%		49.00	%	INSURANCE
Santander Seguros, S.A.	Uruguay		0.00	%		49.00	%		49.00	%	INSURANCE
Saudi Hollandi Bank (consolidated)	Saudi Arabia		0.00	%		11.16	%		11.16	%	BANKING
Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria, S.A.	Spain		17.15	%		0.00	%		17.15	%	FINANCIAL SERVICES
Sociedad Interbancaria de Depósitos de Valores S.A.	Chile		0.00	%		19.63	%		29.29	%	SECURITIES DEPOSITORY SERVICES
Sociedad Promotora Bilbao Plaza Financiera, S.A.	Spain		7.74	%		24.99	%		33.90	%	ADVISORY SERVICES
Solar Energy Capital Europe S.à.r.l.	Luxembourg		0.00	%		33.33	%		33.33	%	HOLDING COMPANY
Tecnologia Bancária S.A.	Brazil		0.00	%		20.82	%		20.82	%	ATMs
Teka Industrial, S.A. (consolidated)	Spain		0.00	%		9.42	%		9.42	%	DOMESTIC APPLIANCES
Torre de Miguel Solar, S.L.	Spain		0.00	%		50.00	%		50.00	%	ELECTRICITY PRODUCTION
Trabajando.com Chile S.A.	Chile		0.00	%		33.33	%		33.33	%	SERVICES
Transbank S.A.	Chile		0.00	%		16.75	%		25.00	%	CARDS
Transolver Finance EFC, S.A.	Spain		0.00	%		50.00	%		50.00	%	LEASING
U.C.I., S.A.	Spain		50.00	%		0.00	%		50.00	%	HOLDING COMPANY
UCI Holding Brasil Ltda	Brazil		0.00	%		50.00	%		50.00	%	HOLDING COMPANY
UCI Mediação de Seguros Unipessoal, Lda.	Portugal		0.00	%		50.00	%		50.00	%	INSURANCE BROKER
Unicre-Instituição Financeira de Crédito, S.A.	Portugal		0.00	%		21.45	%		21.50	%	FINANCE
Unión de Créditos Inmobiliarios, S.A., EFC	Spain		0.00	%		50.00	%		50.00	%	MORTGAGE LOAN COMPANY
Vector Software Factory, S.L.	Spain		0.00	%		45.00	%		45.00	%	IT
Viking Consortium Holdings Limited (consolidated)	United Kingdom		0.00	%		24.99	%		24.99	%	HOLDING COMPANY
Zurich Santander Brasil Seguros e Previdência S.A.	Brazil		0.00	%		49.00	%		49.00	%	INSURANCE

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		% of ownership held by the Bank
Company	Location	Direct			Indirect			% of voting power (a)			Line of business
Zurich Santander Brasil Seguros S.A.	Brazil		0.00	%		49.00	%		49.00	%	INSURANCE
Zurich Santander Holding (Spain), S.L.	Spain		0.00	%		49.00	%		49.00	%	HOLDING COMPANY
Zurich Santander Holding Dos (Spain), S.L.	Spain		0.00	%		49.00	%		49.00	%	HOLDING COMPANY
Zurich Santander Insurance América, S.L.	Spain		49.00	%		0.00	%		49.00	%	COMPANY MANAGEMENT
Zurich Santander Seguros de Vida Chile S.A.	Chile		0.00	%		49.00	%		49.00	%	INSURANCE
Zurich Santander Seguros Generales Chile S.A.	Chile		0.00	%		49.00	%		49.00	%	INSURANCE
Zurich Santander Seguros México, S.A.	Mexico		0.00	%		49.00	%		49.00	%	INSURANCE

(a) 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 persons acting in their own name but on behalf of Group companies was added to the voting power directly held by the Parent. For these purposes, 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.

(b) Excluding the Group companies listed in Appendix I and those of negligible interest 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)).

(c) Companies over which the Group’s investee exercises effective control.

(d) Company in liquidation at December 31, 2012.

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Exhibit III

Preference share issuer subsidiaries

		% of ownership held by the Bank
Company	Location	Direct			Indirect			Line of business
Abbey National Capital Trust I	United States		—				(a)	FINANCE
Banesto Holdings, Ltd.	Guernsey		0.00	%		89.65	%	SECURITIES INVESTMENT
Santander Emisora 150, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE
Santander Finance Capital, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE
Santander Finance Preferred, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE
Santander International Preferred, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE
Santander PR Capital Trust I	Puerto Rico		0.00	%		100.00	%	FINANCE
Sovereign Real Estate Investment Trust	United States		0.00	%		100.00	%	FINANCE
Totta & Açores Financing, Limited	Cayman Islands		0.00	%		99.76	%	FINANCE

(a) Company over which effective control is exercised.

F-324

Exhibit IV

Notifications of acquisitions and disposals of investments in 2012

(Article 155 of the Spanish Limited Liability Companies Law and Article 53 of Securities Market Law 24/1998).

On January 26, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in FERROVIAL, S.A. had fallen below 3% on January 18, 2012.

On April 13, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER, S.A. had exceeded 3% on April 3, 2012.

On April 13, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BANKINTER, S.A. had fallen below 3% on April 5, 2012.

On May 7, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BOLSAS Y MERCADOS ESPAÑOLES, SOCIEDAD HOLDING DE MERCADOS Y SISTEMAS FINANCIEROS, S.A. had exceeded 3% on April 26, 2012.

On May 7, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BOLSAS Y MERCADOS ESPAÑOLES, SOCIEDAD HOLDING DE MERCADOS Y SISTEMAS FINANCIEROS, S.A. had fallen below 3% on April 27, 2012.

On May 22, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in FERROVIAL, S.A. had exceeded 3% on May 14, 2012.

On June 6, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in FERROVIAL, S.A. had fallen below 3% on May 29, 2012.

On December 13, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in FERROVIAL, S.A. had exceeded 3% on December 6, 2012.

On December 13, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in FERROVIAL, S.A. had fallen below 3% on December 7, 2012.

On December 20, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in FERROVIAL, S.A. had exceeded 3% on December 12, 2012.

On December 27, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in FERROVIAL, S.A. had fallen below 3% on December 20, 2012.

F-325

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 161,340,446,502 ordinary shares and 137,878,383,715 preference shares through Banco Santander S.A. and 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. At 2012 year-end the bank’s treasury shares consisted of 568,882,490 ordinary shares and 517,165,900 preference shares, with a total of 1,086,048,390 shares.

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 entity or company to determine the economic value of the company.

e) Amendments and repeals of bylaw provisions that change any of the requirements stipulated in point 4.1 of the Level 2 Best Practices on Corporate Governance of the Brazilian Securities Commodities and Futures Exchange (BM&FBOVESPA), although these voting rights will prevail upon the entry into force of the Agreement for the Adoption of the Level 2 Best Practices on Corporate Governance.

The General Assembly may, at any moment, decide to convert the preference shares into ordinary shares, establishing a reason 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.

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c) Participation, on the same terms as ordinary shares, in capital increases resulting from the capitalization of reserves and profits and in the distribution of bonus shares arising from the capitalization of retained earnings, reserves or any other funds.

d) Priority in the reimbursement of capital in the event of the dissolution of the company.

e) In the event of a public offering due to a change in control of the company, the holders of 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 of control, i.e. they are treated the same as shareholders with voting rights.

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the general 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).

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 Spanish Public Limited Liability Companies Law, which establishes that before being allocated to any other purpose, 5% of profits must be transferred to the 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) Quoted equity instruments

All the shares are listed on the Brazilian Securities, Commodities and Futures Exchange (BM&FBOVESPA) and the share deposit certificates (units) are listed on the New York Stock Exchange (NYSE).

F-327

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, 2012, the Parent and its subsidiaries held 88.997% of the share capital (611,757,016 ordinary shares), of which Banco Santander, S.A. held 606,345,555 shares (88.21%) and Cántabro Catalana de Inversiones, S.A. held 5,411,461 shares (0.787%). At that date the Banesto Group held 4,982,936 treasury shares previously acquired under authorization of the general meeting, within the limits set forth in Articles 144 et seq of the Spanish Limited Liability Companies Law.

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the general meeting

The annual general meeting of Banco Español de Crédito, S.A. held at first call on July 6, 2012 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 a maximum amount EUR 271,517,785.21, 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, 2012, no securities 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.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

All the shares are listed on the Spanish Stock Exchanges.

F-328

3) Banco Santander Totta, S.A. (Totta)

a) Number of equity instruments held by the Group

The Group holds 655,988,104 ordinary shares through its subsidiaries: Santander Totta, SGPS, S.A. with 641,269,620 shares, Taxagest Sociedade Gestora de Participações Sociais, S.A. with 14,593,315 shares, and Banco Santander Totta, S.A. with 125,169 treasury shares, all of which have a par value of EUR 1 each and identical voting and dividend rights and are subscribed and paid in full.

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the general meeting

Not applicable.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

At December 31, 2012, no securities 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) Quoted equity instruments

Totta’s shares are not listed.

4) Banco Santander-Chile

a) Number of equity instruments held by the Group

The Group holds 126,593,017,845 ordinary shares through its subsidiaries: Santander Chile Holding S.A. with 66,822,519,695 ordinary shares, Teatinos Siglo XXI Inversiones Limitada, now known as Teatinos Siglo XXI Inversiones S. A., with 59,770,481,573 ordinary shares and Santander Inversiones Limitada with 16,577 ordinary shares, all of which have no par value, are fully subscribed and paid and carry the same voting and dividend rights.

F-329

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the general meeting

Share capital at December 31, 2012 amounted to CLP 891,302,881,691. The shareholders at the annual general meeting each year must approve the financial statements at December 31, of the preceding year.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

At December 31, 2012, no securities 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) Quoted 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 México.

a) Number of equity instruments held by the Group

At December 31, 2012, the Group held 80,848,258,165 ordinary shares through Grupo Financiero Santander, S.A. B de C.V. and Santander Global Facilities, S.A. de C.V. (México), representing 99.99% of the share capital of Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México.

b) Capital increases in progress

At December 31, 2012 there were no approved capital increases in progress.

c) Capital authorized by the shareholders at the general meeting

The shareholders at the general meeting held on February 22, 2012 resolved to increase the authorized share capital of Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander to MXN 8,085,540,380.30, represented by a total of 80,855,403,803 fully subscribed and paid shares of MXN 0.10 par value each.

F-330

d) Rights on founder’s shares, bonds or debt issues, convertible debentures and similar securities or rights

The shareholders at the general meeting held on May 14, 2012 ratified the resolution adopted by the shareholders at the extraordinary general meeting held on March 17, 2009, which approved the arrangement of a collective loan from the shareholders for USD 1,000,000,000 through the placement of unsecured subordinated non-preference debentures not convertible into shares. This issue had not yet been launched at the reporting date.

At the board of directors meeting held on January 27, 2011 the directors approved the general terms and conditions for the issue of senior debt in international markets. This issue of USD 500 and USD 1,000 million at a 5 to 10 year term was authorized on October 18, 2012. The issue was approved in order to obtain resources to finance the increase of business assets and the management of the Bank’s liquidity. As a result of these resolutions adopted by the board of directors, on November 9, 2012, debt amounting to USD 1,000 million was issued.

e) Specific circumstances that restrict the availability of reserves

Pursuant to the Mexican Credit Institutions Law and the general provisions applicable to credit institutions, the Mexican Companies Law and the institutions’ own Bylaws, universal banking institutions are required to constitute or increase capital reserves for the purposes of ensuring solvency and protecting payment systems and savers.

The bank increases its legal reserve annually directly from the profit obtained in the year.

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) Quoted equity instruments

The company does not have any equity instruments quoted on a stock exchange.

6) Santander UK plc

a) Number of financial equity instruments held by the Group

The Group holds ordinary shares amounting to GBP 3,105,176,886.60 through Banco Santander, S.A. (24,117,268,865 shares with a par value of GBP 0.10 each), Cántabro Catalana de Inversiones, S.A. (1 share with a par value of GBP 0.10) and Santusa Holding S.L. (6,934,500,000 shares with a par value of GBP 0.10 each).

F-331

On October 23, 1995 and February 13, 1996, 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. The exchange may be performed on any interest payment date provided that shareholders receive between 30 and 60 days’ notice. The Group holds 63,913,355 securities through Santander Financial Exchanges Limited.

On June 9, 1997, 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 with a par value of GBP 1 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) Repurchases of share capital authorized by the shareholders at the general meeting

The shareholders at the annual general meeting held on March 30, 2012 resolved to unconditionally authorize the company to carry out the following repurchases of share capital.

1. The repurchase of its own 8.625% yield preference shares, subject to the following conditions:

(a) The company may repurchase up to 125,000,000 of the 8.625% yield preference shares;

(b) The lowest price that the company may pay for the 8.625% yield preference shares will be 75% of the average market price of the preference shares for the five days prior to the purchase; and

(c) The highest price (excluding costs) that the company may pay for each 8.625% yield preference share will be 125% of the average market price of the preference shares for the five days prior to the purchase.

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 enter into an agreement on the repurchase of its 8.625% yield preference shares even if the purchase is finalized after this authorization expires.

2. The repurchase of its own 10.375% yield preference shares, subject to the following conditions:

(a) The company may repurchase up to 200,000,000 of the 10.375% yield preference shares;

(b) The lowest price that the company may pay for the 10.375% yield preference shares will be 75% of the average market price of the preference shares for the five days prior to the purchase; and

(c) The highest price (excluding costs) that the company may pay for each 10.375% yield preference share will be 125% of the average market price of the preference shares for the five days prior to the purchase.

F-332

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 enter into an agreement on the repurchase of its 10.375% yield preference shares even if the purchase is finalized after this authorization expires.

3. The repurchase of its own fixed/floating rate series A non-cumulative preference shares subject to the following conditions:

(a) The company may repurchase up to 300,002 redeemable fixed/floating rate series A non-cumulative preference shares;

(b) The lowest price that the company may pay for the redeemable fixed/floating rate series A non-cumulative preference shares will be 75% of the average market price of the preference shares for the five days prior to the purchase; and

(c) The highest price (excluding costs) that the company may pay for each redeemable fixed/floating rate series A non-cumulative preference shares will be 125% of the average market price of the preference shares for the five days prior to the purchase.

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 enter into an agreement on the repurchase of its redeemable fixed/floating rate series A non-cumulative preference shares even if the purchase is finalized after this authorization expires.

However, prior to such expiry, the Company may submit bids or adopt resolutions that could require the allocation of shares and the directors may allocate shares in accordance with any bid or resolution, notwithstanding the expiry of the authorization granted in this resolution.

In accordance with this resolution, any previous authorizations granted to the directors and not exercised for the allocation of shares are hereby revoked and substituted, notwithstanding any allocation of shares or grant of rights already completed, 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) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

Not applicable.

F-333

7) Santander Holdings USA, Inc.

a) Number of financial equity instruments held by the Group

At December 31, 2012, the Group held 520,307,043 ordinary shares, all of which carry the same voting and dividend acquisition rights.

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the 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

Not applicable.

e) Specific circumstances that restrict the availability of reserves

Not applicable.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

Class C preference shares are listed on the New York Stock Exchange (NYSE).

8) Banco Zachodni WBK S.A.

a) Number of financial equity instruments held by the Group

At December 31, 2012, Banco Santander, S.A. held 70,334,512 ordinary shares with a par value of PLN 10 each, all of which carry the same voting rights.

b) Capital increases in progress

Two capital increases were approved by the shareholders at general meetings in 2012. On May 10, 2012, the shareholders at the annual general meeting resolved to increase the share capital by PLN 15,616,180 (the increase was made effective on August 9, 2012). On July 30, 2012, the shareholders at the extraordinary general meeting approved the merger with Kredyt Bank S.A., thereby resolving to increase the share capital by PLN 189,074,580 (the increase was made effective January 4, 2013).

F-334

c) Capital authorized by the shareholders at the general meeting

Not applicable.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

At the general meeting held on April 20, 2011, the shareholders resolved to approve the “Incentive Scheme IV” as an initiative to attract, motivate and retain the bank’s employees. Delivery of the shares is tied to the achievement of certain targets in the years from 2011 to 2013. The bank considers that the exercise of these rights might give rise to the issuance of more than 400,000 shares.

e) Specific circumstances that restrict the availability of reserves

Not applicable.

f) Entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

All the shares of Bank Zachodni WBK S.A. are listed on the local stock exchange in Warsaw known as Giełda Papierów Wartościowych S.A.

9) Banco Santander Río S.A.

a) Number of equity instruments held by the Group

At December 31, 2012, Banco Santander, S.A. held 141,911,008 class A shares, 293,971,417 class B shares and 635,447,536 preference shares of Banco Santander Río S.A., representing 99.30% of the share capital, through Administración de Bancos Latinoamericanos Santander S.L., BRS Investment S.A. and Santander Overseas Bank, Inc.

b) Capital increases in progress

At the general meeting of the bank held on March 16, 2011, the shareholders resolved to approve a capital increase for public subscription in the sum of up to ARP 145,000,000 through the issue of up to 145,000,000 registered class B ordinary shares with a par value of ARP 1 each, with a voting right per share and the right to receive dividends from the year in which they were subscribed. The shareholders at the general meeting authorized the directors to increase the share capital of Banco Santander Río S.A. At the reporting date the authorized share capital increase had not been carried out.

c) Capital authorized by the shareholders at the general meeting

The authorized share capital of Banco Santander Río S.A. amounts to ARP 1,078,875,015, represented by a total of 1,078,875,015 fully subscribed and paid shares with a par value of ARP 1 each.

F-335

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

Financial institutions must recognize the legal reserve required by Article 33 of Argentine Law 21,526. The reserve must be recognized by transferring 20% of net profit for each year, including the adjustments to prior years’ results recognized in the year and any accumulated loss recognized at the previous year-end. This proportion must be applied irrespective of the ratio of the legal reserve balance to the company’s share capital.

With respect to the distribution of profit, the Central Bank of the Republic of Argentina (BCRA) has ruled that the total minimum capital of companies wishing to distribute dividends must not be lower than the sum of the capital requirements for credit risk, interest rate risk, market risk and operational risk, increased by 75%.

Also, the distribution of profit must be expressly authorized by the Argentine Financial and Exchange Institutions Authority, which must check that the procedures required by legislation for the distribution of profits have been complied with.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

The shares have been listed on the Buenos Aires Stock Exchange (BCBA) since 1997, and on Latibex (the market for Latin-American stocks in euros) in Spain since 1999.

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Exhibit VI

(Millions of Euros)	Year end December 31,
	2012				2011				2010				2009						2008
IFRS:	Including interest on deposits		Excluding interest on deposits		Including interest on deposits		Excluding interest on deposits		Including interest on deposits		Excluding interest on deposits		Including interest on deposits			Excluding interest on deposits			Including interest on deposits		Excluding interest on deposits
FIXED CHARGES:
Fixed charges and preferred stock dividends		28.475		11.903		29.636		12.590		23.209		9.476		26.392			10.540			37.041		17.757
Preferred dividends		132		132		99		99		61		61		92			92			37		37
Fixed charges		28.343		11.771		29.537		12.491		23.148		9.415		26.300			10.448			37.004		17.720
EARNINGS:
Income from continuing operations before taxes and extraordinary items		3.549		3.549		7.940		7.940		12.052		12.052		10.588			10.588			10.849		10.849
Less: Earnings from associated companies		427		427		57		57		17		17		(6	)		(6	)		696		696
Fixed charges		28.343		11.771		29.537		12.491		23.148		9.415		26.300			10.448			37.004		17.720
Total earnings		31.465		14.893		37.420		20.374		35.183		21.450		36.894			21.042			47.157		27.873
Ratio of earnings to fixed charges		1,11		1,27		1,27		1,63		1,52		2,28		1,40			2,01			1,27		1,57
Ratio of earnings to combined fixed charges and preferred stock dividends		1,11		1,25		1,26		1,62		1,52		2,26		1,40			2,01			1,27		1,57

F-337